The Law and Business Administration in Canada, 14th Edition Instructors Manual _Copy by Ace Test Banks

The Law and Business Administration in Canada, 14 th Edition By J.E. Smyth, Dan Soberman, Alex Easson Shelley McGill

INSTRUCTOR’S RESOURCE MANUAL Barbara Cox

THE LAW AND BUSINESS ADMINISTRATION IN CANADA Fourteen Edition J.E. Smyth University of Toronto D.A. Soberman Queen’s University A.J. Easson Queen’s University S.A. McGill Wilfrid Laurier University

Toronto

CONTENTS Introduction Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28 Chapter 29 Chapter 30 Chapter 31 Chapter 32

Law, Society, and Business The Machinery of Justice Government Regulation of Business The Law of Torts Professional Liability: The Legal Challenges Formation of a Contract: Offer and Acceptance Formation of a Contract: Consideration and Intention Formation of a Contract: Capacity to Contract and Legality of Object Grounds Upon Which a Contract May Be Set Aside: Mistake and Misrepresentation Writing and Interpretation Privity of Contract and the Assignment of Contractual Rights The Discharge of Contracts Breach of Contract and Its Remedies Sale of Goods and Consumer Contracts Bailment and Leasing Insurance and Guarantee Agency and Franchising The Contract of Employment Negotiable Instruments Intellectual Property Interests in Land and Their Transfer Landlord and Tenant Mortgages of Land and Real Estate Transactions Sole Proprietorships and Partnerships The Nature of a Corporation and Its Formation Corporate Governance: The Internal Affairs of Corporations Corporate Governance: External Responsibilities Secured Transactions Creditors’ Rights International Business Transactions Electronic Commerce Privacy

Introduction The changes to this fourteenth edition of The Law and Business Administration in Canada are largely organizational. This new edition has combined Chapters 9 and 10 of the thirteenth edition into Chapter 10; the other major change was a reorganization of Chapter 3, moving the discussion on Government Regulation of Business from Chapter 30, to become Chapter 3. Updates in the law have been set out in the Prefax, under “Summary of Changes to This Edition.” Here you will find details of any significant changes to the law that are discussed in the fourteenth edition. There is reduced content in Chapter 14 on the Sale of Goods Act, and in Chapter 19 on Negotiable Instruments. There is a new ongoing business application case in the EOC material for every chapter from Chapter 2 onwards and video links have been added to most chapters. For business students the most practical and useful addition has been the section in each Chapter on Strategies to Manage the Legal Risks. These are quick useful summaries that students can refer to for each section of the course to help determine an appropriate Legal Risk Management Plan (as described in Chapter 1).

Applications of the Text The 14e remains a comprehensive description of the most important business law principles and is most appropriate for a doctrinal survey course in business law. However, the changes made to the 13e allow instructors to easily adapt the Smyth text to other types of courses such as: - Legal environment courses, - Law and ethics courses, - Selected legal topic electives. Role of the Instructor’s Manual 14th Edition The manual fills two roles: (1) a resource book for the material in the text – it provides further explanation of text content, case summaries and answers to questions, problems and cases; – it also provides supplemental material for background and currency by referring the instructor to additional cases, articles and web material not referenced in the text (some cases were decided since the text went to press, others offer depth beyond that of the text). (2) a teaching aid – it recommends strategies to teach particular material; – it provides a consistent template to deal with ethical theme boxes;

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– it assists the instructor in adapting the text to a variety of legal courses.

Form and Content of the Manual Naturally substantive changes to the manual mirror the changes made to the text. The format of the manual is familiar and largely unchanged from previous editions. Each chapter contains general commentary under headings corresponding to the headings within the text chapter, suggested approaches and question answers are provided for each of the issue boxes (ethical, international, and contemporary where appropriate), there are answers to questions, problems and cases and finally case summaries. General Commentary: This section is not merely a summary of what is explained in the text book. The commentary identifies the complexity of key issues from the text and identifies strategies to teach them (teaching aid component). This is also where instructors will find referral to other resources, examples, and additional cases. Ethical Issue: A consistent approach to the ethical content is important to the students and for the purposes of demonstrating embedded ethical content during program accreditation (for example AACSB). Therefore, the commentary under Law and Business Ethics in Chapter 1 of the manual describes 6 key values to be used as the template for discussion of each of the ethical issues in subsequent chapters. It is recommended that instructors review the commentary in Chapter 1 even if this chapter is not assigned reading for students. In each subsequent chapter, the manual identifies (in bold font) the relevant ethical values presented in the issues box. International Issue: These boxes take two different forms. One type involves a factual situation that crosses a jurisdictional boarder and students consider the conflict of laws scenario to determine which laws should be applicable. The other type involves comparing the law from two jurisdictions to evaluate the different strategic approaches taken. Most often the foreign jurisdiction is the United States as this is still Canada’s major trading partner. For the first type, the manual provides contextual background to the fact situation. For the second type, the manual may provide additional information on the law of the foreign jurisdictions. In both cases, the manual answers the questions posed and identifies key points that should be elicited during class discussion. Contemporary Issue: Most of these boxes were removed in favour of ethical and international boxes. However in a very few chapters they are retained to deal with an especially important topic (for example Chapter 27 – One Federal Securities Regulator) or because no ethical or international issues box was applicable. For example, Chapter 30 is an entire chapter on International Business Transactions. It seemed redundant to place an international issues box here so a contemporary issues box was retained. Similarly in Chapter 1 there is a section on Law and Business Ethics, so an ethical issues box was rejected in favour of a contemporary issues box.

Answers to Questions, Problems and Cases: The questions require students to describe a particular legal rule or principle and therefore the answer includes a specific page reference to the description of that rule in the text. Problems and Cases require students to apply legal principles to fact situations and therefore specific page references are less relevant. Instead, instructors are referred to the case that inspired the question (where applicable). Case Summaries: The case summaries provide a brief description of the cases referred to in the footnotes of the text. Major cases that are described in detail in the text are not repeated in the manual. If the case has already been summarized in a previous chapter, the instructor will be referred to that chapter. Possible Configurations for Other Course Types Legal environment courses tend to emphasize the processes and resources involved in the legal system as well as the underlying policy considerations behind various legal principles (in combination with some substantive legal content). Law and Ethics courses examine both standards of behavior. The issue boxes in the 13th edition compliment both of these types of courses. By approaching the chapter from the perspective of the theme boxes the instructor can change the emphasis of the book to meet the course goals. Lawyers have always recognized the huge overlap between law and business, but business schools are only now beginning to combine business and legal education. Many schools offer additional electives in law beyond the core compulsory course. There is a void of text material for specific electives at the business school level. Therefore, instructors teach from custom course packages. In the Smyth text, each chapter stands largely independent of previous chapters and the text need not be read from cover to cover or in sequence. This makes it ideal for customized applications. Students could start with a base of 4 or 5 chapters and thereafter be referred to specific cases and articles. Instructors may find the additional resources referred to in the general commentary of the manual appropriate to round out the course package.

CHAPTER 1 LAW, SOCIETY, AND BUSINESS Chapter 1 emphasizes the important and integrated relationship among law, business and ethics. This chapter justifies the placement of a law course in the business program. Often students do not understand why they must take this course. It is helpful to open the course with a series of questions: 

Why should business students study law?

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If law represents society’s standard of desirable behaviour, why are laws hotly debated, changed or disobeyed?

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Which laws do students frequently disobey and which laws would they never consider breaking?

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Why do they comply with a law: because they agree with it, because they fear the consequences of non-compliance, or for some other reason?

When teaching this material, it is worth keeping in mind that many students have preconceived ideas about the nature of "law." It is a theme of this and subsequent chapters that most laws do not originate simply as rules in the minds of those in power; they represent the values of the public at large. The categories of legal liability (criminal, regulatory, and civil) may be presented as tools to encourage compliance with the law and indicators of society’s opinion of the behaviours. The main purpose of the chapter is to generate class discussion of some of the concepts introduced. It may be useful to take one of the illustrations—such as 1.2 (Source p. 4)— and trace the history of the law. The legal treatment of possession of marijuana demonstrates the struggle to balance issues of generational attitudes, enforceability, and fairness. Comparisons to alcohol and prohibition are relevant. Key dates in the Development of the Law of Possession 1923 – possession introduced as criminal hybrid offence 1961 – possession changes to strictly indictable criminal offence 1968 – possession returned to a hybrid criminal offence 1974 – attempt to make possession exclusively summary offence fails 1996 – possession is changed to a summary offence only 2000 – R v. Parker (2000) 49 O, R. (3d) 481 Ontario Court of Appeal declares prohibition on possession for medical use unconstitutional (s. 7 of Charter). The result is the Marijuana Medical Access Regulations. 2003 – Supreme Court upholds prohibition against personal use. It does not violate the Charter (s. 7, 12): R. v. Malmo-Levine, 2003 SCC 74 R. v. Caine and R. v. Clay, 2003 75

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2004 – Bill C-17 (proposing removal of possession of small amounts from criminal process in favor of a regulatory offence ($150/100 fine)) not implemented 2008 – Bill C-26 (proposing mandatory minimum sentences for trafficking and production) not implemented Available resources include the Senate Special Committee on Illegal Drugs Cannabis: Summary Report, September 2002 <http://www.parl.gc.ca/37/1/parlbus/senate/com-e/ille-e/summary-e.pdf>, this includes a discussion on public opinion), Bill C-17 38th Parliament, 1st Session (backgrounder discusses decriminalization vs. legalization)

Illustration 1.2 also demonstrates the combined roles of courts and legislatures in the formation and development of law. Some students may argue that in a system of parliamentary democracy, it is not for the courts to make the law, but only to apply it. Although this argument seems logical, it is unrealistic as a description of what actually happens in formulating judicial opinions. Some of the most eminent judges have acknowledged that courts frequently make law when, in the course of choosing from available principles they select those that may reflect their own values. When judges are asked to determine what is “justified in a free and democratic society” (s.1 of the Charter of Rights and Freedom) it is inevitable that their values and the values of society as a whole shape the development of the law. As background for class discussion about what qualities "law" should have to make it a respected and accepted institution in any society see The Morality of Law (rev. ed.), Yale Univ. Press, 1969. Professor Fuller suggested eight principles for making laws that satisfy the expectations of citizens: 

Generality: The law should provide guidance for all kinds of human conduct without directing our every action.

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Promulgation: Individuals are presumed to know the law. Therefore people must have access to the laws' contents. The type of law and the nature of the group to which it applies determine the way the law should be publicized. Discussion can focus on the Statutory Instruments Act, Canada Gazette and case databases (free and fee based).

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Lack of Retroactivity: To punish someone today for doing yesterday what was then lawful conduct would be a pernicious form of law. Given a legal system of prospective laws, is there ever any justification for a retroactive law?

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Clarity: If laws are obscure, confusing or incoherent, then people cannot be expected to conform to them.

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Non-Contradiction: It is absurd to sanction or even compel certain conduct under one rule and then to punish a person for it under another rule.

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Impossibility: Laws should not require the impossible.

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Constancy: When laws change frequently, confusion results and the effectiveness of the legal system is impaired.

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Congruence between Official Action and Existing Law: Failure to enforce laws, or their sporadic enforcement, will call into serious question the validity of the rules themselves as well as of the enforcement procedure. Moreover, lawgivers must abide by the same laws that they make for others. In summary, the legal system is a two-way process that involves a set of mutual expectations. The lawgiver expects that the rules will be observed by those individuals subject to the rules. Individuals, on the other hand, have expectations of the lawgiver—a set of principles that Fuller has called the "Internal morality" of law. The more closely the rules conform to these requirements, the more effective will be the legal system.

LEGAL RISK MANAGEMENT (Source p. 5) This section identifies how legal compliance is incorporated into every day business decision making. Instructors should ensure students recognize the need to comprehend legal principles in order to complete particular components of a legal risk management plan. Even when legal advice is being sought, it will be much more valuable (less expensive and more easily understood) if the business person understands basic legal principles. THE LEGAL PROFESSION (Source p. 7) This section outlines the various titles given to those who practice law in England, the United States and Canada. It also briefly discusses the standards expected of members of the profession, breaches of which could, if very serious, result in a lawyer in Canada being disbarred, meaning that the lawyer is expelled from the applicable provincial law society so is no longer able to practice law. The use of paralegals, now regulated and licensed in certain provinces, is set out and relates that paralegals provide many useful services, including cost-saving measures for the public and businesses in such areas as incorporations, uncontested divorces, and simple wills. An interesting discussion would be the law relating to solicitor-privilege, as set out in this section. BUSINESS AND THE LEGAL PROFESSION (Sourse p. 7) In organizing a risk management plan, the use of in-house counsel versus designated lawyers within an outside law firm should be discussed. Key factors include the size of the business and risks which are present, as well as the need for legal advisors who are aware of all aspects of the business which may be affected. Often, companies that have inhouse counsel find these lawyers to be a valuable asset within the management team, as well as a cost-efficient and expedient way to manage legal issues as they arise or through prevention before they arise.

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LAW AND BUSINESS ETHICS (Source p. 9) The subject of ethics raises the question of whether merely abiding by the law is an adequate standard of conduct for businesses: should businesses be expected to do more? We discuss two aspects of this question—the personal moral or ethical code of those who manage the affairs of the enterprise, and the more pragmatic view that ethical behaviour will result in a more successful business. The emergence of “Corporate Social Responsibility” as a societal expectation should be identified as a demonstration of the increased importance of ethical business decision making. The inter-related nature of business decision making may be expanded upon using Figure 1.1 and the “Three Domain Approach” described by Professors Schwartz and Carroll (Source p. 9). Ethics are no longer an after thought considered once legal compliance and profit have been achieved (as early pyramid style models suggested). Students should be asked to describe the fundamental values they include in the concept of “ethics”. Professor Schwartz identifies the following six values:*

Trustworthiness: (honesty, integrity, reliability, and loyalty) Respect (consideration for the rights of others) Fairness (balancing the interests of all other stakeholders) Responsibility (accountability for ones actions and the actions of others) Caring (avoid unnecessary harm) Citizenship (honourable member of society, obeying the law) *As discussed in three articles: Schwartz, M. S.: 2001, “The Nature and Relationship between Corporate Codes of Ethics and Behavior”, Journal of Business Ethics 32: 247 – 262 Schwartz, M. S.: 2002, “A Code of Ethics for Corporate Codes of Ethics”, Journal of Business Ethics 41: 27-43 Schwartz, M. S.: 2004, “Effective Corporate Codes of Ethics: Perceptions of Code Users”, Journal of Business Ethics 55: 323 – 343

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It should be noted that obeying the law is an ethical value and may have been the response given by some students to the earlier question about reasons for compliance. These six values may be used in each of the following chapters as criteria for assessment of the issues presented in the “Ethical Issues” theme boxes. Most often the issue of fairness (balancing the rights of others) will be involved because the theme boxes try to present a dilemma where two or more values conflict. Finally, some comment should be made about how best to achieve ethical decision making. Can ethics be legislated? Consider recent initiatives in corporate governance. The role of the voluntary code of conduct is discussed in the text and the above described Schwartz articles. THE COURTS AND LEGISLATION (Source p. 11) Federalism and the Constitution The main significance of the Constitution Act, 1867 for business law lies in the division of powers it prescribes for the federal and provincial governments. For example, s. 91 of the Act assigns legislation over "trade and commerce" to federal jurisdiction while s. 92 gives the provinces legislative prerogative over "property and civil rights." Since each level of government is jealous of its prerogative, the Supreme Court of Canada has frequently had to interpret the meaning of these terms in relation to proposed legislation and to determine which level of government has the relevant authority. This is the time to show students that businesses use these arguments strategically, in order to defeat unwanted business regulation. Case 1.1 (Source p. 12) illustrates the delicate role of the courts in maintaining a fair and workable balance between the two levels of government. If the courts were to insist that every federal statute precluded the provinces from legislating in an area that otherwise would fall concurrently within their jurisdiction, the provinces would be severely limited in exercising powers in their legitimate interests. On the other hand, the courts must not ignore the need for uniformity across Canada in areas where federal responsibility is considered more important. As set out in the text, the courts try to use a two-step process in determining whether an area of law is within federal or provincial powers. The Supreme Court of Canada is the final arbiter of conflicts over the substance of a law. The two-step process first looks at what the law actually does and why and then what delegated power, federal or provincial, would be responsible for this law? Of course the courts must also determine if there are concurrent powers, allowing botht the federal and provincial government to legislate in the area, or whether the principle of federal paramountcy should apply. Here are some interesting examples for discussion: (a) Who should regulate the stock markets—the federal government under the “trade and commerce” power, or the provinces under “property and civil rights”?

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(b) Who should regulate highways—the provinces that build and maintain highways as “local works and undertakings” under s. 92 (10), or the federal government under s. 92 (10) (c), since highways almost invariably are part of a network that crosses provincial borders? If the instructor wishes to use the same-sex marriage issue as an example, a very useful summary of the history of same-sex marriage has been prepared by Steve Beattie (Tracing the steps towards same-sex union and marriage in Canada, April 2004) and is available at samesexmarriage.ca, in the documents section. Those who draft our statutes do not do so by sitting in the legislature, listening to the debate on a given subject, and then retiring to express their recollection of the will of the legislature in the form of a statute. Instead, the drafters—civil servants who specialize in the task drafting and often seek expert legal assistance—present the legislature with a draft of proposed legislation in the form of a "bill". It is debated, amended, presented again for a further "reading" by the elected members of the legislature, redrafted to incorporate required amendments and then presented for a final revision or "third reading" (the legislature's approval of it), followed by the signature of the head of state (the Governor General or Lieutenant Governor), who turns the bill into a statute. Sometimes, as an integral part of this method of law-making, a "select committee" is appointed from members of the legislature, to invite briefs on a draft bill from interested members of the public and to hold public hearings; this function may also be performed by a standing committee. The process, while conscientious and democratic, is far from perfect and words sometimes appear in the final draft which prove to be ambiguous or contradictory. THE CHARTER OF RIGHTS AND FREEDOMS (Source p. 13) The Charter is a very important topic in Chapter 1, its significance for business seen in both regulations and legislation affecting business and in its’ effect on the retail environment. An intereting discussion might revolve around the ways in which the Charter has affected business—i.e., hiring practices, employees’ rights to certain days off, Sunday openings, mandatory retirement. As part of the discussion, it is necessary to articulate that the Charter only applies to government, excluding hospitals and universities. The McKinney v. University of Guelph case (page 14 n.13) is an interesting review of this aspect of the law. As well, Case 1.2, (page 16) reviews the Lord’s Day Act and the Charter. Another topic necessary to discuss is that the Charter is not absolute—s. 33 allows for legislation which overrides the Charter as long as the legislation states that it violates specific Charter sections. However, any such legislation will expire within five years, and referred to as a sunset clause. S. 1 also allows for legislation that violates the Charter, based on the preamble that states that all laws are “subject to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society.” S. 1 allows for rights of search and seizure and extradition treaties, which would otherwise offend the Charter.

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Another important discussion topic is the process used to review a statute that may offend the Charter and the method the courts use when determining if a statute violates the Charter. Some questions for consideration: 

Does the Charter apply to the situation; that is, is it a government or governmental activity?

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In this situation, were rights under the Charter infringed upon?

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Can the infringement be justified under s. 1 of the Charter; that is, is the legislation necessary in a free and democratic society?

In examining how the Charter is reviewed, key provisions of the Charter can be discussed, including fundamental freedoms, legal rights, and equality rights, as set out in the text. Of interest are the two aspects of s. 15, under equality rights, which allow for “affirmative actions” and for the requirement that the Charter apply equally to male and female persons. CHALLENGING THE VALIDITY OF A STATUTE (Source p. 16) The courts will examine the substance of a statue; that is, what it does rather than what it purports to do, when considering if a statute is valid. What is its purpose and effect? The courts will determine if the subject matter is outside the constitutional jurisdiction of the government, also whether or not the statute itself violates the Charter—illustration 1.6 (p.16) is an example of this. Furthermore, as set out in the text, the interpretation of the statute may affect its applicability. A narrow interpretation may limit the functionality of a statute, until Parliament is able to introduce an amendment to the statute to enable its application. CONTEMPORARY ISSUE (Source p. 18) The Role of Judges The essence of jurisdictional and Charter challenges involve value judgments that can be viewed as highly subjective and biased by those who disagree with a decision reached by a court. Question 1 - We have seen that a court may narrow or restrict the application of a particular provision to make it comply with the constitutional limits. Is this really different from striking the provision down? Question 2 - Students should note that some – but not all – provisions in the Charter may be over-ridden if a statute expressly states that it is to operate “notwithstanding” those provisions. Why is it that the “notwithstanding” clause is so rarely used? What inhibits governments from employing it? Question 3 – The purpose of this question is to illustrate to students just how difficult it is even to formulate an amendment on this subject, even if one or more of them might agree

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that a change should be made, and whether such an amendment could be free of political bias. Question 4 - This question focuses on the practice of public confirmation hearings for United States Supreme Court justices which often involve disclosure of personal positions on controversial issues such as abortion, affirmative action and gay rights. In 2004 the Standing Committee on Justice, Human Rights, Public Safety and Emergency Preparedness tabled a report proposing reform to the Canadian appointment process which involved the creation of an advisory committee. (See Report 1- Improving the Supreme Court of Canada Appointments Process, 37th Parliament, 3rd Session, available online in the publications section at parl.gc.ca. The Federal Government favoured an alternative process that preserved the wide discretion of the Prime Minister and the Minister of Justice. Neither proposal included public hearings prior to appointment. This question can be considered with the International Issue in Chapter 2 which discusses the American practice of electing judges. Question 5 – The suspension of a ruling, allowing the government to strategize, may allow for fewer laws to be struck down, and for less dire consequences if the courts must interpret existing laws in a way that could affect components of our society in an adverse way – a good question as it speaks to compromise between the courts and the legislature.

QUESTIONS FOR REVIEW 1. Law: (a) influences and controls the behaviour of individuals in society (public law); (b) empowers, influences, and controls the actions of government; and (c) provides a framework for interaction between individuals (private law). (Source p. 4) 2. A reliable and predictable legal framework permits businesses to enter into longerterm arrangements; to take calculated investment risks based on the prospective value of a project without fear of unlawful interference. This security is a significant incentive for business development and globalization. (Source pp. 4-5) 3. Legal liability assigns responsibility for the consequences of breaking the law. The consequences that follow may take a number of forms depending upon the type of legal liability: criminal liability, quasi-criminal liability, or civil liability. (Source p. 4) 4. Criminal liability arises from the most serious breaches of public law. The government enforces penalties for these breaches on behalf of society as a whole. Civil liability arises from disputes of a private nature between individuals and the aggrieved party (not the government); it is responsible for enforcing the law and and for enabling injured persons to seek compensation. (Source p. 4) 5. Law and ethics are distinct but related concepts. Law sets the minimum acceptable standard for behaviour that individuals must comply with in an organized society while ethics often reflect a “higher” standard of desirable conduct that is not compulsory. Still most law is based on a moral principle and in this way ethics often inform and shape the development of law. (Source pp. 2-3)

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6. A legal risk management plan has the following components: 

Identify potential legal risks

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Assess and prioritize each legal risk according to degree of likeliness and magnitude of damage

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Develop strategies to address each risk from both proactive and reactive perspectives

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Implement the plan

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Regularly review and update the plan. (Source p. 6)

7. Businesses adopt codes often to reflect the moral values of their managers and in response to public criticism. Codes of conduct may also improve relations with their employees, with consumers and the public generally. Sometimes, government regulations require businesses to adopt codes of conduct, for example privacy policies. Professional and industry associations also require their members to adopt or comply with common codes of conduct. (Source p. 6) 8. In a federal country, the court plays the role of constitutional umpire. When the two levels of government disagree about the extent of their powers and pass legislation that may be in conflict, it falls to the courts to determine which level is correct; it finds the legislation of the other level beyond its powers—ultra vires. (Source p. 11) 9. Residual powers are those that fall within federal jurisdiction in Canada because they are not expressly allocated to the provinces. Concurrent powers are overlapping powers of both levels to regulate the same activities. (Source p. 12) 10. When the Supreme Court finds a statute to be beyond the powers of a legislature, the legislature cannot override the Court. Only by obtaining an amendment to the Constitution through the amending process set out in the Constitution itself can such a statute be made valid. (Source pp.16-17) 11. Business use four different strategies (often in combination) in order to manage legal risk. The strategies are to avoid risk (discontinue the activity), reduce risk (tight quality control on the activity), transfer risk (distribute the risk to others), and absorb the risk (budget for the cost of the risk). (Source pp. 6-7) This discussion may also include the hiring of in-house counsel as a “watchdog” of the risks. (Source p.8) 12. Public law regulates the conduct of government and the relationship between government and private persons. Private law regulates the relations between private persons and entities. (Source p. 2) 13. Sections 91 and 92 set out the powers, respectively, of the federal Parliament and the provincial legislatures. As previously noted in Question 9, if power over an activity cannot be found in either section, it falls into the residual powers of the federal government. The problems these sections raise are partly described in Question 8, above—when there is uncertainty about which level of government has the power to regulate particular activities. (Source p. 12)

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14. A statute is presumed to be valid and initially it is not the task of the government to defend it; instead, the onus is on the citizen to show that the Charter applies to the situation and that one of his constitutionally guaranteed rights has been infringed by a provision in the statute. Only if the court agrees that there is an infringement must the government then defend it by showing it to be “demonstrably justified” under section 1. (Source p. 14) 15. The Charter applies to governments and their activities but not to private sector activities by private entities. (Source p. 15) See also McKinney v Guelph University (Source p. 13) 16. Human interaction involves conflicts and disputes. Legal institutions are required to minimize conflicts and to resolve disputes when they arise. It is a paradox that the realization of liberty for everyone requires that individuals be subject to constraints requiring respect for the rights of others. (Source p. 3)

CASE SUMMARIES

Bank of Montreal v. Hall, [1990] 1 S.C.R. 121. The doctrine of paramountcy comes into effect when it is impossible for dual compliance with both a provincial and federal statute. Canada (Attorney General) v. Bedford, 2013 S.C.C 72. This case is important because the court found that the bawdy house law violates sex workers’ constitutionally protected right to security, under s. 7 of the Charter, so it struck down the law, but more importantly, the court allowed the government one year to amend the unconstitutional laws. Canada (Attorney General) v. Downtown Eastside Sex Workers United Against Violence, 2012 S.C.C 46. This case involved the issue of public interest standing, which arose from a case involving a constitutional challenge to adult prostitution, with the court originally ruling that the plaintiffs did not have standing to bring a lawsuit. The issue went to the Supreme Court of Canada, who held that when looking at granting public standing, a factor to be considered is “whether the proposed suit is, in all of the circumstances, a reasonable and effective means of bringing the matter before the court.” Greater Toronto Airports Authority v. City of Mississauga (2000), 192 D.L.R. (4th) 443. The issue here involved an ongoing dispute involving jurisdiction over the redevelopment of the Pearson Airport. The Court ruled that the federal Parliament’s exclusive jurisdiction over aeronautics, federal undertakings and property belonging to the federal

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Crown prevented the city of Mississauga from regulating construction at the airport, including the application for building permits and payment of both provincial and municipal fees. Halpern v. Attorney General of Ontario et. al., (2003), 65 O.R. (3d) 161 (Ontario Court of Appeal). Several same-sex couples unsuccessfully sought marriage licences from the City of Toronto. They initiated a court application which was joined with an application by the Metropolitan Community Church of Toronto seeking registration of religious marriage ceremonies performed for same-sex couples. The Divisional Court found that the historic common law definition of marriage as a marriage between a man and a woman (found in Hyde v. Hyde and Woodman see {L.R.] 1 P.& D. 130 (U. K.)) violated the Charter of Rights and Freedoms, in particular the equality rights of 15(1). The Court held that discrimination based on sexual orientation was not justified under s. 1. The Court of Appeal unanimously held that the common law definition of marriage violated the equality provisions of the Charter. It held that the cases addressed the legal not religious definition of marriage and the Attorney General had failed to show a pressing and substantial objective to be achieved by denying same-sex couples the right to marry (R. v. Oakes [1986] 1 S.C.R. 950). It specifically rejected “encouragement of procreation” as such an objective. It declared the “man and a woman” portion of the definition of marriage invalid. Importantly, (for the purpose of the above described Reference), the Attorney General did not appeal.

Irwin Toy Ltd. v. Quebec (Attorney General), [1989] 1 S.C.R. 927 at 964 (Supreme Court of Canada). The Quebec Consumer Protection Act prohibited advertising aimed at persons under the age of thirteen years. Irwin Toy Ltd. challenged the validity of the statute as being ultra vires the powers of the province as the power to legislate for radio and television lay within the power of the federal government. The court held that the statute was not void as it the purpose of the legislation was to protect children and that the effect on television advertising was incidental. McKinney v. University of Guelph [1990] 3 S.C.R. 229 (Supreme Court of Canada). The Ontario Council of University Faculty Associations brought an action on behalf of eight professors who claimed that their universities’ mandatory retirement provisions amounted to age discrimination. At the time the Ontario Human Rights Code defined age as eighteen to sixty-four, thereby allowing age discrimination in the form of mandatory retirement at age sixty-five. The applicants claimed that this definition of age offended the Charter. First, the Supreme Court upheld the lower court’s finding that the Charter did not apply to universities directly. The Charter applies to government actions only and universities were held to be non-government bodies despite their large degree of public

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funding, public purpose and statutory creation. They are not subject to government or exercise government authority. The Court upheld the definition of age in the Ontario Human Rights Code. Mandatory retirement was justifiable age discrimination in the context of s. 1 of the Charter. It was the least offensive way of promoting youth employment, faculty renewal and facilitating pension management.

Multiple Access v. McCutcheon, [1982] 2 S.C.R. 161. The issue here was whether both the provincial Ontario Securities Act and the federal legislation, which almost duplicated the provincial legislation, could both operate; that is, did the Double Aspect doctrine apply? The court ruled that both statutes were operative as validity turns on classification and that paramountcy did not apply. Newfoundland (Treasury Board) v. N.A.P.E., (2004) D.L.R. (4th) 294 (Supreme Court of Canada). In 1991 the Newfoundland government enacted legislation that wiped out arrears owing to its female public service employees for pay equity compensation. The union grieved and an arbitrator held that the legislation violated s. 15 of the Charter. On appeal the motions judge, the Court of Appeal and the Supreme Court of Canada all held that the legislation was justified under s. 1 of the Charter because its objective was to respond to a severe provincial financial crisis. This was a pressing and substantial legislative objective although the courts will remain skeptical of general budgetary constraints as a rational for violating the Charter.

Reference Re. Assisted Human Reproduction Act, [2010] S.C.J. No. 61 at para. 19 (S.C.C.). The issue here was that certain prohibitions were fine while others were considered an attempt to regulate medical malpractice and research related to reproduction, with the court holding that the provisions were valid under the federal government’s criminal law power. Reference re: Same Sex Marriage, (2004) 246 D.L.R. (4th) 193 (Supreme Court of Canada). Following the Halpern decision (below n. 19) the federal government referred proposed legislation defining marriage as a “lawful union of two persons” (without reference to gender) or its opinion of four questions. In accordance with s. 53 of the Supreme Court of Canada Act, the Court offered an opinion on three of the four questions. It said: (1) The proposed legislation was within the legislative power of the federal government; (2) The proposed definition was consistent with the Charter; and (3) The Charter would protect religious official from having to marry same-sex couples. The fourth question

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asked whether the previous “man and woman” definition was consistent with the Charter and the Supreme Court refused to answer this question saying that since the government had not appealed the Halpern (and other) decisions, commenting on this issue now had the potential to put the law into a state of confusion. R. v. Big M Drug Mart Ltd. (1985), 18 D.L.R. (4th) 321 (Supreme Court of Canada). See Case 1.2 at p. 16 in the text. The Lord’s Day Act, a federal statute prohibited anyone from selling any goods or carrying on any “ordinary” business for gain on Sundays. Big M had been convicted of being open to the public for business and selling goods on Sunday. Big M challenged the validity of the Act on the basis that it infringed the freedom of conscience and religion guaranteed in s. 2(a) of the Charter of Rights and Freedoms. The court agreed that the “primary purpose” of the Act was “compulsion of sabbatical [Sunday] observance,” and struck down the legislation. Source p. 14, n. 12 R. v. Van Kessel Estate, 2013 BCCA 221. The appellant contested the forfeiture provisions of the Controlled Drugs and Substances Act, stating that the provisions of the Act were ultra vires the federal government as they concerned provincial powers being property and civil rights, even where enforced due to a conviction for the production of marijuana. The British Columbia Court of Appeal ruled that while provincial powers were encroached, this was incidental to the dominant purpose of the objectives of the Act in relation to combating illicit drug trade. Rothmans, Benson & Hedges Inc. v. Saskatchewan, [2005] 1 S.C.R. 188. This is another case dealing with both federal and provincial legislation, here being the federal Tobacco Act and the Saskatchewan Tobacco Control Act. The court held that the provincial legislation was not sufficiently inconsistent with the federal legislation so that dual compliance was possible and both the federal and provincial legislation were valid. Vriend et al. v. The Queen in the Right of Alberta et al. (1998), 156 D.L.R. (4th) 385 (Supreme Court of Canada). Vriend was employed as a laboratory coordinator by King’s College in Edmonton, and was given a permanent, full-time position in 1988. He received positive evaluations, salary increases and promotions for his work performance. In 1990, in response to an inquiry by the president of the college, Vriend disclosed that he was homosexual. In early 1991, the college's board of governors adopted a position statement on homosexuality, and soon after, the president requested Vriend’s resignation. When he declined to resign, he was dismissed. The sole reason given was his non-compliance with the college's policy on homosexual practice. Vriend was refused reinstatement and then tried to file a complaint with the Alberta Human Rights Commission on the grounds of discrimination based on his sexual orientation. The Commission rejected his complaint under the

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Individual's Rights Protection Act (Alberta’s human rights act), because it did not include sexual orientation as a protected ground. Vriend then appealed to the courts. The trial judge found that the omission in the Act of protection against discrimination on the basis of sexual orientation was an unjustified violation of s. 15 of the Canadian Charter. She ordered that the words "sexual orientation" be read into the Act as a prohibited ground of discrimination. The majority of the Court of Appeal allowed the Alberta government's appeal, but the Supreme Court disagreed and upheld the trial judge’s position. Accordingly, sexual orientation was read into the Alberta Act and gave Vriend the right to make his case before the Alberta Human Rights Commission.

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CHAPTER 2 THE MACHINERY OF JUSTICE The parts of this chapter that describe the various courts and levels of courts in Canada, the United States and England are useful background. They are reference material that students should not be expected to memorize. The machinery of justice or procedural law contrasts nicely with the rest of the text which contains almost entirely substantive law. Procedural law covers the form or the organization of a legal system and its methods of conducting trials. For business purposes, procedural law has a substantive component. Businesses must decide whether to sue or simply to accept a loss; to defend an action or to settle out of court. Legal risk management plans often approach the litigation process in a strategic way; they may settle most claims in order to reduce costs or they may prefer to litigate everything to discourage frivolous claims. An awareness of the related costs and risks is necessary to make these decisions, as well as any necessary limitation periods. Since students receive a great deal of American information from literature and the media, they may well have ideas about court costs and contingency fees that are incorrect as far as Canadian procedural law is concerned. For example, the Canadian (and English) practice of awarding costs to the winning side means that a business person contemplating litigation faces a greater risk in the event of failure than does a counterpart in the United States. Hence, litigation strategy is often different in the two countries. See International Issue – The System of Courts in the United States (Source p. 30) THE NEED FOR CONSISTENCY AND PREDICTABILITY (Source p. 23) Unpredictability is one litigation risk that is common to all countries. The legal system is a social institution comprised of fallible human beings and the machinery of justice is not so perfect that it can avoid unpredictable results. Courts must obtain their facts from documents and other exhibits, and from oral testimony given under oath by witnesses subjected to cross-examination. In the process there may be "many a slip 'twixt the cup and the lip." When conflicting evidence is given by two or more witnesses, the choice of which set of facts to accept depends on the judge's personal assessment of the credibility of the witnesses. Some people who should have been called as witnesses are never requested to appear. As a result of this list of possibilities for error—and there may well be others—business people are almost always faced with uncertainty when they undertake litigation. As noted, there are substantial costs associated even with winning. Party and party costs do not reimburse the successful litigant for the time, lost productivity, effort, and nervous exhaustion involved in litigation. COMMON LAW: THE THEORY OF PRECEDENT (Source p. 24) Class discussion on the meaning of the theory of precedent, as expressed in the doctrine of stare decisis, is worthwhile at this stage. Some students are surprised to learn how

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much scope for discretion is reserved for a court within the concept of stare decisis. Others are surprised that judges are not completely free to do whatever they want. A legal system which relies exclusively on precedent would seem to provide greater certainty (although even that statement can be questioned), but it would be tied to the past, incapable of adapting to social changes. A legal system that ignored the authority of existing law (including that of decided cases) might be readily adaptable to change, but would provide almost no guidelines for conduct. The very term stare decisis ("let the decision stand") implies a preference for the objective of certainty, but courts have interpreted their terms of reference to import a considerable amount of flexibility while still formally accepting the authority of their earlier decisions. As in so many things, it is a question of balance. Two important limitations on the theory of precedent should be highlighted. First, the jurisdictional limits of stare decisis mean that a lower court is bound by a decision of a superior court in the same jurisdiction, but the decision will only have persuasive value in other provinces. The matter can be resolved only by a decision of the Supreme Court of Canada; its decision is binding on all other courts in Canada. Second, factual limitations mean lower courts are only required to follow a decision when the facts of a case before them substantially coincide with (are not "distinguishably different" from) the facts of the earlier Supreme Court decision. Therefore, they still have considerable scope to "distinguish" the earlier case on the basis of its facts. Most decisions by trial courts and provincial appellate courts are not appealed. While the decision of a lower court is not a binding authority on other courts, the facts of the case may still be of wide general interest, and the reasons for judgment so lucid that the decision may have considerable influence and even be "followed" in other, later cases-unless and until the Supreme Court of Canada has an opportunity to rule finally on the matter and comes to a contrary decision. Decisions of respected English and American judges as well as those from other common law countries may similarly influence the decisions of Canadian courts. THE SYSTEM OF COURTS IN CANADA (Source p. 27) The text sets out the structure of the courts in Canada, noting that the provinces have jurisdiction over the court systems, although judges in the superior trial courts and the provincial courts of appeal, and of course the Supreme Court of Canada, are all federally appointed. The court structure is like a pyramid, and while the names of the courts may vary from province to province, the function and jurisdiction of the courts are similar. It is noted as to how matters are appealed, with a final appeal being to the Supreme Court of Canada, but only with leave of the court in a private matter. A good classroom activity might be to set out a few “instances” and have students discuss what court a matter would start in, and where a final appeal would be heard. For example, a criminal case for assault would start in a provincial inferior court, a court of first instance, be appealed to a superior trial court of first instance, then to a provincial court of appeal, and if of national importance, it could be appealed to the Supreme Court of Canada.

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INTERNATIONAL ISSUE (Source p. 30) The System of Courts in the United States This theme box compares the Canadian and American court systems. The first key difference is in the level of integration of courts within the two countries. State courts in the United States stand independent of the federal courts, unlike provincial courts in Canada which all flow into the federal Supreme Court of Canada. The second key difference lies in the American practice of election rather than appointment of judges. All four questions in this section are designed to identify the following points: Question 1 - Elected judges are directly accountable to the public and may be removed from office relatively easily if the public is dissatisfied with the performance of the judge. Question 2 - As a result of the points made in Question 1, judges may be tempted to make publicly popular decisions rather than unpopular, but legally sound ones. If you teach in an area that receives American television commercials, invite students to pay attention to the ads for judicial election. They often describe a “tough on crime” position, how many criminals they have sent to jail, what other lawyers think of them, etc. Question 3 - Alternatively, life appointments free judges from the wrath of public opinion and arguably allow them to make legally sound decisions without fear of losing their jobs. Still critics argue that this makes a judge accountable to no one and substandard judges are nearly impossible to remove. Here the instructor may want to mention judicial complaints processes in place to monitor inappropriate judicial behavior and distinguish between errors in the law (which are designed to be handled by appeals) and misconduct (which may be the subject of discipline). In addition, the selection of judicial appointments can become a form of political patronage rather than a symbol of excellence, and the instructor may want to discuss the judicial appointments advisory boards now commonly used as part of the appointments process. Recent, reforms discussed for Supreme Court appointments are also relevant here. Question 4 - The same-sex marriage issue is a specific example of a “political hot potato” that parliament left to the courts rather than addressing themselves. Fear of electorate retaliation may be the reason. Students should be asked to consider whether elected judges might have felt the same way as the politicians. Refer to the decisions of the Ontario Court of Appeal and the Supreme Court described in Chapter 1. Reference re: Same-Sex Marriage, (2004) 246 D.L.R. (4th) 193; Halpern v. Attorney General of Ontario et al., (2003), 65 O.R. (3d) 161 (C.A.) Helpful information to advance the discussion includes the polling data on public opinion in 2002 (45% in favour vs. 47% against) by CBC/EKOS (November 10, 2002). A very useful summary of the history of same -sex marriage has been prepared by Steve Beattie (Tracing the steps towards same-sex union and marriage in Canada, April 2004) and is available at samesexmarriage.ca.

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PROCEDURAL LAW: USING THE COURTS (Source p. 31) Topics covered in this section include: 

Who May Sue



Standing to Sue



Class Actions



Procedure Before Trial



The Trial



Appeals



Costs -Who Provides Funds for the Court System? - Solicitor-Client Fees - Party and Party Costs -Total Costs of Litigation



The Economics of Civil Litigation



Contingent Fees -Origins in the United States - The Use of Contingency Fees in Canada



Settlement Out of Court -

Advantages

Growing Delay in the Court System

The rules of court procedure, as set out in the text, vary slightly as the function of the courts is a provincial matter. Students can still grasp a good understanding of the procedures followed through a review of the materials presented. The costs of a legal action and the economics of civil litigation, the discussion on class actions and settlement options are important topics for business. (Source pp. 31- 36) ALTERNATIVE DISPUTE RESOLUTION (Source p.39) Alternatives to traditional lawsuits come in many forms. Simplified procedures (for small claims) are an alternative to the long, complicated, and expensive litigation process. Class actions are an alternative to multiple individual lawsuits dealing with common issues. Finally, private-sector ADR providers of arbitration and mediation offer an alternative to the publicly funded judicial system. The pros and cons of ADR should be discussed in class, with attention focused on the aspects critical to business, including the choice of a knowledgeable arbitrator or mediator, and the ability to keep proceedings confidential. In the Ethical Issues box, students are asked to address how each of these alternatives impact

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access to justice. Instructors may want to discuss the new “Apology Legislation” adopted (or considered) by various provinces (British Columbia, Manitoba, Saskatchewan, and Ontario), for example Apology Act, S.O. 2009, c. 3. This legislation prohibits an apology from being used as an “admission against interest” in subsequent litigation. (See Ellen Desmond “Saying Sorry: Apology legislation makes it a lot easier” Lawyers Weekly, Vol. 28, No. 33, March 28, 2008)

ETHICAL ISSUE (Source p. 49) Access to Justice Question 1 – This question addresses the role of class actions. When small claims are combined in a class action, lawyers tend to be more willing to accept a contingency fee. Critics argue that this encourages frivolous lawsuits that would not otherwise be processed. Supporters suggest that without class actions monetarily small claims go unaddressed and undesirable business conduct is not deterred. Key cases on the role of Class Actions are: Western Canadian Shopping Centres v. Dutton [2001] 2 S.C.R. 534 (The Supreme Court created a process for establishing class actions even before Alberta passed legislation.) Bisaillon v. Concordia University [2006] 1 S.C.R. 666 (The Supreme Court characterized class actions as procedural rather than substantive in nature despite a clear social dimension.) Kerr v. Danier Leather 2007 SCC 44 (The Supreme Court makes interesting comments about the role of costs in class actions) Question 2 - This question asks students to consider forced ADR – this can be in the form of mandatory mediation in court annexed programs or binding pre-dispute arbitration clauses: see Dell Computers v. Union des Consommateurs and Rogers Wireless Inc. v. Murroff in the Case Summaries) Question 3 – This question asks students to consider whether we should extend legal aid to include private litigation or not. This issue involves fairness and respect for the interests and rights of many stakeholders – plaintiffs, defendants, society as a whole. Invite students to consider the following questions: 

Is access to justice a human right?



Is access to justice the same as access to the courts?

The cost of litigation is high, but so is the cost of legal aid. Should taxpayers bear the cost and therefore the risk of a private legal dispute? Can government afford another public service when costs are already so high and the economy uncertain?

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While there is no doubt that the cost of court litigation has increased rapidly and has limited access to the justice system, access to other forms of dispute resolution is now more widely available and less costly. As for decreasing the costs of a full trial, the availability of class actions (Source p. 37) and contingency fees (Source p. 45) greatly reduce the costs to litigants. For contrasting views on the value of class actions and arbitration clause enforcement see: Shelley McGill, “Consumer Arbitration and Class Actions: The Impact of Dell Computer Corp. v. Union des Consommateurs” Canadian Business Law Journal 45: 334-355. Andrew D. Little, “Canadian Arbitration Law after Dell Computer Corp. Union des Consommateurs” Canadian Business Law Journal 45: 356- 381.

QUESTIONS FOR REVIEW 1. The common law system originated in feudal times in England and covers most of the English-speaking world. It is based on recorded reasons given by judges and adapted by judges in later cases. The civil law system has its roots in Roman law and is used in most of Western Europe (apart from England) and those parts of the world colonized by those countries using that system. It is based on codes setting out the general principles needed to decide cases. (Source pp. 23-24) 2. It is the need for consistency that explains the theory of precedent. Parties need to be able to rely on the law and predictable outcomes if they are to enter into arrangements with others and be reasonably secure about the result. (Source p. 24) 3. The strictness in the early period of common law courts led to rigid and often unfair decisions. First the king himself, then his chancellor, began responding to petitions for justice. The chancellor eventually set up a court to hear such petitions. Known first as the court of chancery it became the court of equity, where remedies were created to fill gaps in the common law system. (Source pp. 25-26) 4. When an important area of the law becomes very complicated because so many cases have arisen, the legislature may appoint a committee to codify the law in a statute—to summarize the law and create general principles in the area to provide guidance. Two prime examples are the Sale of Goods Act and the Partnership Act. (Source p. 42) 5. The increasing complexity of society, primarily in economic matters, makes it difficult, if not impossible, for Parliament to enact very detailed regulations in specific areas. Accordingly, Parliament enacts legislation establishing administrative agencies with powers to issue detailed rules to execute and promote the general provisions and purposes of the legislation. (Source pp. 43-44) 6. No witnesses are called and no new evidence is submitted. The complete record of the trial proceedings is available. Usually, only questions of law are argued. A number of judges hear the appeal as a panel. (Source p. 31)

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7. Surprise witnesses or confessions, used frequently in movies and on television for their dramatic effect, are rare in fact. Pre-trial procedure is designed to apprise each side of the nature of the opponent's case to minimize the element of surprise, to ensure an orderly trial and often to encourage settlement before trial. (Source pp. 3233) 8. In the United States, a three-tiered system of federal courts operates throughout the country to handle all litigation that falls within the federal jurisdiction. Each state has its own system of state courts to hear cases falling under state law. Cases heard under either court system may be appealed to the United States Supreme Court only with leave. In Canada, by contrast, provincial courts decide cases involving federal law with the exception of a few matters, such as taxation, reserved to the Federal Courts. In the United States, all judges of the Supreme Court are appointed by the president with a public confirmation process through the senate. The state court judges are usually elected, but it differs from state to state. While in Canada, all district and superior court judges of the provincial courts are appointed by the federal government. (Source p. 30) 9. The advantages to the parties of settlement are: it is fast, definite, and less expensive; it avoids the risk of losing at trial; compromise between the parties is more likely to maintain an amicable relationship than is a court battle; the public nature of a trial is avoided. (Source pp. 38-39) 10. Appellant

the party who petitions for an appeal (Source p. 27)

Respondent

the party who defends on an appeal (Source p. 27)

Counterclaim

a claim by the defendant arising from the same facts as the original action by the plaintiff to be tried along with that action. (Source p. 33)

Counsel

lawyer representing a plaintiff or defendant (Source p. 33)

Bench

the judge or panel of judges (Source pp. 31-32)

Writ

legal process which commences an action; a formal document setting out the plaintiff's claim which is served on the defendant. The writ has been replaced in a number of provinces by the "statement of claim" (Source p. 39); or an ancient form required in order to take a grievance to court. (Source p. 32)

Settlement

an out-of-court procedure by which one of the parties agrees to pay a sum of money or perform an act in return for a waiver by the other party of all rights arising from the grievance (Source p. 38)

Pleadings

documents filed by each party to an action providing information it intends to prove in court (Source p. 33)

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Party and party costs

an award that shifts some of the costs of litigation to the losing side according to a published scale of fees (Source p. 43)

Res judicata

a case that has already been decided by a court and cannot be brought before a court again (Source p. 32)

11. A class action is one in which an individual represents a group having the same cause of action; and where the judgment decides the matter for all members of the class at once. Class actions are used when there are numerous claims for small amounts that would not be worth litigating individually as they would clog up the courts and not be cost effective. (Source p. 31-32) 12. A judge will apply generalized legal principles and logic to the case and she will reason by analogy from other cases. Other sources available to the judge include trade practice, local customs, other systems of law and sometimes the opinions of experts in the field. (Source p. 34 and Chapter 1) 13. Each province has exclusive jurisdiction in certain fields and legislation may, and quite often does, differ from province to province. (Source p. 22 and Chapter 1) 14. The publication of the decision and reasons for judgment will inform other members of the business community what the result is likely to be in similar circumstances. Accordingly, business people can learn from the judgment and settle their own disputes without going to trial; also they can order their own affairs in the future to avoid disputes. (Source p. 38) 15. Even when a successful litigant is awarded costs, it will usually be only party and party costs, and not the larger solicitor and client fee that she actually has to pay her own lawyer. (Source p. 35) 16. A contingent fee is paid to a lawyer for services only if the action is successful and the client receives an award of damages. The fee is usually a percentage of the damages awarded. In Canada, so as not to encourage unnecessary litigation, contingent fees are subject to court supervision. (Source pp. 36-37) 17. The primary advantages of ADR are: speed, low cost, the ability to choose the adjudicator or mediator (expertise), confidentiality, and the possibility of preserving ongoing relations between the parties (since ADR tends to be less adversarial). (Source pp. 39-41)

CASE SUMMARIES Buck Bros. Ltd. v. Frontenac Builder [1994] O.J. No. 37 (Ontario Court of Justice – General Division) Two companies entered into a joint venture; the venture was to be a 50/50 split with each partner contributing $2,400,000. The Frontenac group was unable to come up with the

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funds, and so the other party, the Newport Group loaned the Frontenac group the money to continue the project. The loan was not paid. Some eleven years later, the Frontenac Group attempted to obtain further financing from a bank, however, the bank required the Newport Group to guarantee the debt, effectively making them liable for 200% of their investment. Not surprisingly, Newport declined to guarantee the debt. An arbitration agreement was eventually reached stating that the Frontenac Group would obtain financing and repay the capital contributed by the Newport Group, as well as the loan from the project. The issue before the Court was whether the arbitrator had the power to determine its own jurisdiction in making a decision regarding a disagreement over interpretation of the arbitration agreement. The Court held that s. 17(1) of the Arbitration Act conferred such power on the arbitrators. Canada (Minister of Justice) v. Borowski (1981), 130 D.L.R. (3d) 588 (Supreme Court of Canada) Borowski brought an action against the federal Ministers of Justice and Finance for a declaration that the provision of the Criminal Code, S.C. 1974-74-76, c. 93, allowing therapeutic abortion was inoperative under the Canadian Bill of Rights on the ground that it denied the fetus as an individual its right to life. The Supreme Court of Canada considered the preliminary issue of his standing to sue. It held that Borowski must show that he had a genuine interest as a citizen in the validity of the legislation and that there was no other reasonable and effective manner in which the issue might be brought before the courts. The majority held that Borowski met this test, because there was no else directly affected by the legislation who would have cause to attack it. There was a dissenting opinion to the effect that Borowski failed to show a judicially recognizable interest in the matter since there were other groups directly affected, such as husbands whose wives were seeking abortions, who might challenge the legislation. The case went to the Supreme Court of Canada on its substantive merits, but was moot and his appeal was dismissed on that ground. See R. v. Morgentaler (1988), 44 D.L.R (4th) 385 (S.C.C.) and Borowski v. Canada (Attorney General), [1989] 1 S.C.R. 342. Canadian Council of Churches v. Canada, [1992] 1 S.C.R. 236 (Supreme Court of Canada) The appellant Council of Churches represented a large number of member churches who dealt with refugees. The Council brought an action to have the Immigration Act declared unconstitutional as violating the Charter of Rights and Freedoms. The issue of standing was raised. The Supreme Court held that the appellant did not have standing. They laid out the test as follows: (1) serious issue of invalidity of the legislation in question; (2) genuine interest on the part of the plaintiff; and (3) other better options to bring the issue before the court. The court held that in this case, the individual refugees were already bringing claims before the court and that, therefore, there were other more reasonable ways to bring the matter before the court. Standing was denied.

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Canadian National Railway Co. v. Lovat Tunnel Equipment Inc. (1999), 174 D.L.R. (4th) 385 (Ontario Court of Appeal) The parties entered into a contract for the purchase of a tunnel boring machine. The plaintiffs brought an action in damages alleging the machine was defective. The defendant brought a motion to have the matter referred to arbitration as per the contract. The Court of Appeal held that as per the contract the defendant had the choice of acquiescing to the litigation or electing for binding arbitration; the matter was referred to arbitration. Dell Computers v. Union des consummateurs 2007 SCC 34 (Supreme Court of Canada) Approximately three hundred consumers purchased Dell computers online at a time when the website displayed an erroneous low price. Dell refused to supply the computers and Union commenced a class action on behalf of the consumers. Dell brought a motion to stay the action under the Quebec arbitration legislation because the online contract contained a mandatory arbitration clause. Both the motions judge and the Court of Appeal found the arbitration clause unenforceable against the consumer but the Supreme Court of Canada upheld the consumer arbitration clause and stayed the action. Deluce Holdings Inc. v. Air Canada [1992] O.J. No. 2382 (Ontario Court – General Division) Air Canada acquired shares in Air Ontario and entered into a unanimous shareholder agreement with the other major shareholder, the Deluce family. Air Canada originally agreed to allow the Deluce family to continue the day-to-day operations of Air Ontario without interference. At some point in 1991 Air Canada decided to acquire 100% interest in its connectors. One of the provisions in the USA allowed Air Canada to acquire the remaining shares when the two remaining Deluce members were no longer employed. The plaintiffs brought a motion in the oppression remedy alleging that Air Canada improperly exercised its majority control of directors by not renewing the employment contracts of the Deluces in order to buy out the minority interest of the Deluces. Air Canada argued that under the terms of the USA it is entitled to obtain the shares, and further, that any disputes are subject to arbitration. The Court held that the plaintiffs had demonstrated a prima facie case that Air Canada’s actions were oppressive and therefore, Air Canada could not rely on the agreement for the purpose it had in mind. Diamond & Diamond v. Srebrolow, [2003] O.J. No. 4004 (Ontario Court of Appeal) The defendants were lawyers, formerly with the plaintiff firm. When the defendants left a dispute arose, and in the minutes of settlement the parties agreed to binding arbitration in the case of a breach of the settlement. When the plaintiff brought the suit, the defendants brought a motion to have the matter referred to arbitration. The Court held that the arbitration clause of the settlement agreement was too broad and did not contemplate the dispute now before the court and could therefore, not be referred to arbitration, but could only be decided by a court. The Court of Appeal upheld the decision.

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Finlay v. Minister of Finance, [1986] 2 S.C.R. 607 (Supreme Court of Canada) Mr. Finlay brought an action for a declaration that certain federal cost-sharing payments are illegal and an injunction to stop them. The issue of whether Mr. Finlay had standing to bring such an action was raised. The Supreme Court held that he did not have sufficient direct personal interest in the matter to have standing, but that under Thorson v. Attorney General of Canada, [1975] 1 S.C.R. 138,Nova Scotia Board of Censors v. McNeil (1975), 55 D.L.R. (3d) 632 and Canada (Minister of Justice) v. Borowski,[1981] 2 S.C.R. 575 he did have public interest standing to bring his action.

Household Realty Corp., v. Liu (2005), 261 (4th) 679 (Ontario Court of Appeal) Ms. Chan, spouse of the property owner Lui, registered a fraudulent power of attorney and then used that power of attorney to mortgage the property first to CIBC, and second to Household Realty without Mr. Lui’s knowledge. The mortgages secured lines of credit used by Ms. Chan to finance her gambling addiction. When both mortgages fell into arrears, the mortgagees sought possession and sale of the property. The argument that the fraudulent mortgages were void failed before the Court of Appeal. The Land Titles Act validated the mortgages and Lui was dispossessed. (Overruled by Lawrence) Kanitz v. Rogers Cable Inc. (2002) 58 O.R. (3d) 299 (Ontario Superior Court) During the first year of Rogers’ high speed internet service Kanitz experienced frequent and prolonged interruptions to his service and he sued for recovery of the $200.00 service fee. The paper contract under which the service was installed contained an amending clause. Under this authority, Rogers added a mandatory arbitration clause to the terms. No specific notice of the new clause was given to consumers; it was displayed on the Rogers’ website as part of the terms and conditions. Under the Ontario arbitration legislation, Rogers successfully obtained a stay of the Kanitz action. This decision of the Ontario Superior Court is cited by the Supreme Court in Rogers v. Murroff 2007 SCC 35. Lawrence v. Maple Trust Co., et al. (2007), 84 O.R. (3d) 94 (0ntario Court of Appeal) An imposter assumed Mrs. Lawrence’s identity and conveyed her property to a fictitious purchaser. The fake purchaser mortgaged the property to Maple Trust and absconded with the proceeds. The mortgage soon went into default and Maple Trust tried to extinguish the interest of Mrs. Lawrence. The Court of Appeal held that Maple Trust had the opportunity to avoid the fraud if they had been more vigilant and Mrs. Lawrence’s interest was preserved. The Court expressly overruled its previous 2005 decision in Household Realty Corp. saying it was wrongly decided. Nova Scotia Board of Censors v. MacNeil (1975), 55 D.L.R. (3d) 632 (Supreme Court of Canada)

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The Nova Scotia Board of Censors banned a film from being played in Nova Scotia theatres. Mr. McNeil brought an action to have the Nova Scotia act declared unconstitutional. The question of whether a private citizen had the standing to bring this action was appealed to the Supreme Court of Canada. The court held that as members of the public were directly affected by the legislation this was sufficient to grant the respondent standing in this matter. Onex Corp. v. Ball Corp (1994), 12 B.L.R. (2nd) 151 (Ontario Court of Justice – General Division) The applicant and respondent companies were involved in a joint venture and had a very complex joint venture agreement drawn up. The applicant brought an application to enforce a certain “put” clause in the agreement; the respondents requested a stay of proceedings based on a clause of the agreement requiring mandatory arbitration. The Court referred the parties to arbitration as per the joint venture agreement. Ontario Hydro v. Denison Mines Ltd., [1992] O.R. No. 2948 (Ontario Court of Justice – General Division) The parties had a dispute under an agreement for the supply of uranium; the agreement contained an arbitration clause. The court granted a stay of the court action pursuant to the provisions of what was then a new domestic arbitration statute. The decision represents a change in approach to the enforcement of arbitration clauses as stated at paragraph 8: …. sections of the new Act also confirm a legislative directive in favour of arbitration over litigation, where the parties have so provided by agreement. Thus, the new Act provides a forceful statement from the Legislature signaling a shift in policy and attitude towards the resolution of disputes in civil matters through consensual dispute resolution

R. v. Binus, [1968] 1 C.C.C. 227 (Supreme Court of Canada) Binus was charged with dangerous driving under the Criminal Code, S.C. 1960-61, c. 43, and was convicted. He appealed on the ground that a previous decision of the Supreme Court of Canada meant that the prosecution had to establish more than civil negligence in order to obtain a conviction, an onus that the judge had not made clear to the jury in his address to them. The Supreme Court of Canada upheld the trial judge’s charge to the jury. In the course of the decision, the Court said that it could depart from its own previous decisions but only for compelling reasons. Seidel v. TELUS Communications, 2011 SCC 15 (Supreme Court of Canada) The plaintiff brought an action against the defendant for breach of the British Columbia consumer protection legislation. The defendant counterclaimed requesting a stay of proceedings as the contract between the parties included an arbitration clause. The Supreme Court held (in a 5-4 decision) that the stay of proceedings should be lifted in

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part as the consumer protection legislation should be interpreted generously in favour of consumers and that Seidel should be allowed to bring her action to court. The alternative complaints of the plaintiff were still subject to arbitration. The dissenting opinion stated that all of the claims by the plaintiff should first be submitted to arbitration; that access to justice is fully preserved by arbitration. Smith v. National Money Mart 2010 ONSC 1334 (CanLII) (Ontario Superior Court of Justice) See Case 2.1 at p. 46 in the text. A class action law suit was brought to declare that the defendant’s cash advances contravened s. 347 of the Criminal Code, R.S.C. 1985, c.46, and it charged a criminal rate of interest. A settlement agreement was reached between the parties whereby the defendant would pay $120 million broken down as $30 million cash payment, $58 million in debt forgiveness, $30 million in transaction credits, and $2 million in defendant’s costs. The lawyers’ fees amounted to $27.5 million. The court held that the settlement of the parties did not amount to a $120 million cash payment by the defendants. The $58 million in transaction credits were not cash as they only purchased more of the defendant’s products and, therefore could not be categorized as “cash.” The court reduced the lawyer’s fees to $14.5 million. Smith v. National Money Mart [2011] O.J. No. 1321 (Ontario Court of Appeal) Affirming the lower court’s decision (above), the Ontario Court of Appeal found the reduced fee of $14.5 million to be fair and reasonable.

Western Canadian Shopping Centres v. Dutton, [2001] 2 S.C.R. 534 (Supreme Court of Canada) Investors brought a class action against Western Canadian Shopping Centres for mismanagement of funds. The defendants brought an application to have the claim of the plaintiffs representing a class of two hundred and thirty-one investors struck. The application was denied. On appeal to the Supreme Court, the decision was affirmed and the appeal denied. The court lays out the test for when a class action should be allowed to proceed: (1) the class must be capable of clear definition; (2) there must be issues of fact or law common to all members of the class; (3) with regard to the common issues, success for one class member must mean success for all; and (4) the class representative must adequately represent the class.

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CHAPTER 3 GOVERNMENT REGULATION OF BUSINESS THE POWER TO REGULATE BUSINESS The aim of this chapter is to review some of the more important restrictions imposed by legislation upon business. To begin with, the text re-examines the division of powers, as they relate to business, between the federal government and the provinces; as well as, the role of law in reviewing and limiting the scope of governmental action. Students should be aware of the law relating to the application of regulations to business through administrative tribunals, and that decisions should be made fairly and reasonably, as set out on page 52. The section on judicial review of government regulation is important, as it discusses challenging administrative decisions where they were made without proper authority, through procedural irregularity, or with procedural unfairness. A Checklist on page 54 provides four strategies to prevent of limit government regulation. The remainder of the chapter is concerned with specific aspects of government regulation of business—competition, consumer protection and environmental protection.

COMPETITION The federal Competition Act, an act with far-reaching criminal and civil sanctions, is discussed. The Competition Act controls conspiracies, monopolizing and mergers, topics essential to trade and commerce. A Checklist on page 59 sets out what can amount to “restricting competition”, and should be discussed due to the impact the Competition Act can have on a business. This section of the text is exceptionally suited to discussions on the effect of mergers on competition, and how businesses can affect competition through distribution practices and abuse of a dominant position, as set out on page 58. Instructors should also be aware that amendments to the Competition Act were enacted in March 2009. Some of the amendments deal with the areas of deceptive marketing, price maintenance and price discrimination provisions as criminal offences, introducing significant administrative monetary penalties for abuse of dominance, and increasing the administrative monetary penalties for misleading advertising. For more details see the Competition Bureau website at competitionbureau.gc.ca. CONSUMER PROTECTION This section contains law many students will be unfamiliar with, including the new federal Canada Consumer Product Safety Act brought in as part of the Consumer Protection Action Plan. Particularly important for business is the new regulatory and criminal liability for corporate directors and officers. The section also covers the

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regulation of misleading advertising, the regulation of quality standards and the regulation of high risk industries that deal with the public. Students will enjoy discussing the law relating to misleading advertising, as set out on page 63. It is an offence which may be handled as a regulatory offence, or as a criminal offence, which carries a maximum fine of 25 million dollars, 14 years’ imprisonment, or both. The Ethical Issue on page 64 covers Corporate Social Responsibility and SelfRegulation of Advertising. The Questions to Consider may be answered as follows: Question 1 - Compliance with the ASC Code of Advertising Standards is a demonstration of corporate responsibility for a number of reasons. At a minimum, students should raise the idea that, by adhering to a voluntary set of standards – standards that, in fact, set the bar of acceptable behaviour arguably higher than does the law - businesses demonstrate to the public that they are socially responsible and trustworthy, by having undertaken not to mislead the public in their advertising. Adhering to the Code also means that those advertisers have undertaken not to demean others in comparative advertising, or target minors, thereby respecting others interests and avoiding unnecessary harm (caring). Question 2 - The arguments in favour of endorsing the ASC Code are those discussed in the answer to question one – it is good business practice to be visibly involved and compliant with the ASC Code. Arguments against endorsing the Code are that it lacks teeth; as a voluntary set of standards, enforcement is limited to having the media state that an advertisement does not comply with the Code. As such, it can often seem to be more of a public relations exercise than a true demonstration of Corporate Social Responsibility. Another deficiency is that the Code only applies to Canadian advertising; therefore, foreign advertising, which many Canadians see, does not fall under the ASC’s jurisdiction. It could also be argued that the ASC Code imposes stricter restrictions on advertising than the misleading advertising provisions under the Competition Act. For example, comparative advertising that might be demeaning to others would likely not contravene the Competition Act as long as what is claimed is true. However, the same advertisement might contravene Article 14 of the ASC Code (see answer to question 3). Instructors might want to use this question as a jumping off point for a discussion about what constitutes Corporate Social Responsibility: does it matter that the ASC Code amounts to little more than a PR exercise? Is it a demonstration of responsibility to adhere, or does something like the ASC Code actually retard Corporate Social Responsibility by allowing businesses to adhere to a code with no enforcement capability at the expense of more useful and progressive standards? Question 3 - Article 14 of the Code provides: Advertisements shall not: (a) condone any form of personal discrimination, including that based upon race, national origin, religion, sex or age; (b) appear in a realistic manner to exploit, condone or incite violence; nor appear to condone, or directly encourage, bullying; nor directly encourage, or exhibit obvious indifference to, unlawful behaviour;

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(c) demean, denigrate or disparage any identifiable person, group of persons, firm, organization, industrial or commercial activity, profession, product or service or attempt to bring it or them into public contempt or ridicule; (d) undermine human dignity; or display obvious indifference to, or encourage, gratuitously and without merit, conduct or attitudes that offend the standards of public decency prevailing among a significant segment of the population. Instructors should prompt students to consider the above points: are these useful and enforceable guidelines? This section concludes with a Checklist summarizing relevant consumer protection legislation touched on in the text (Source p. 786). ENVIRONMENTAL PROTECTION (Source p. 793) Environmental protection was discussed in Chapter 27, in the context of the public liability of corporations and their directors and officers. In this chapter we look more at the public law aspects of the subject. The most important federal legislation is discussed – the Canadian Environmental Protection Act. A discussion of the Castonguay Blasting Ltd. V Ontario (Environment) 2013 SCC 52 case would alert students to the requirement of the Act to report any abnormal environmental event, and to take remedial action. A contravention of the Act is a criminal offence with a maximum fine of $1,000,000, 3 years imprisonment or both. As well, the need for required environmental impact assessment review processes is discussed, at page 69, which is another necessity for certain projects. And, where there are environmental breaches, statutes now provide for punishment of corporate directors and officers. The onerous requirements under environmental protection are set out for discussion. INTERNATIONAL ISSUE (Source p.70) Bribery of Foreign Officials Question 1 - This is another question that could be the basis for an interesting class discussion. Most undergraduate business students have grown up in what has been, or is quickly becoming, a borderless world: global capital can move freely wherever it likes, with little in the way of restrictions, as governments tear down trade barriers in order to create the most inviting environment for capital investment and job creation. This question could be used to prompt students to consider the role of government in the global economy – not just whether extending domestic standards extra-territorially is a good idea, but to consider how this could work in practice. Can government ever hope to enforce such standards beyond its own borders? Should it? Question 2 - The fact that “facilitation” payments are exempt from CFPOA is recognition that Canada, as a nation, often has much higher standards of conduct and a greater respect for the rule of law than other countries. If “facilitation” payments weren’t exempt from

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the CFPOA there are numerous foreign jurisdictions that Canadian businesses would be shut out of indefinitely. QUESTIONS FOR REVIEW 1. Strategies to prevent or limit the application of government regulation are: challenge the validity of the legislation on the basis of constitutional jurisdiction; challenge the validity of the legislation because it violates the Charter of Rights and Freedoms; appeal the decision of the administrative decision-maker on one of the grounds set out in the legislation; seek judicial review of the administrative decision because it was outside the scope of the legislation or the process was flawed. (Source p.48) 2. The Constitution divides the power to regulate business mainly through sections 91 (which sets out the areas assigned to the federal Parliament) and section 92 (which assigns jurisdiction to the provinces). (Source p. 49) 3. Concurrent powers are matters in which both the federal and provincial governments have the power to regulate. The principle of paramountcy applies when there is a conflict between the provincial and federal laws, in which case the federal law prevails over a contrary provincial law. (Source p. 50) 4. The Supreme Court of Canada has ruled, on a number of occasions that “commercial speech” is protected under section 2(b). The freedom of association, protected by section 2(d) of the Charter, may also have some applications to business situations. (Source p. 50) 5. Changes in the business environment that have strengthened the need for consumer protection legislation are: tendency towards larger business enterprises; increasingly complicated goods in which only the manufacturer can detect and remedy flaws, often in sealed packaging; high profile advertising that influences consumers; expanded use of credit for large items, which usually involve sophisticated borrowing terms; expanded use of Internet contracts with detailed terms and conditions that consumers are often unaware of. (Source p. 61) 6. Consumer protection standards are enforced by government agencies and consumers are given civil remedies to void contracts and claim damages. (Source p. 61) 7. The principal forms of misleading advertising prohibited by the Competition Act are bait-and-switch advertising, making performance claims that are not substantiated, and making misleading savings claims. Misleading advertising is a dual offence and may constitute a regulatory or criminal offence, depending on the severity of the noncompliance. Potential penalties for a regulatory offence include up to one year imprisonment and $200,000 in fines. Potential penalties for a criminal offence can be up to fourteen years’ imprisonment, a substantial fine, or both. For non-compliance of regulations that attract only a regulatory offence, the Competition Tribunal can order that the offender refrain from such conduct for up to ten years, and fines of up to $100,000. (Source p. 63) Copyright © 2016 Pearson Canada Inc.

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8. The purpose of a “cooling-off period” is to allow a buyer to reconsider a contract and to terminate it during that period by giving written notice to a seller. (no longer covered in this chapter) 9. The rules seek to prevent fraudulent telemarketing by requiring agents to disclose the name of the company they represent, the purpose of the call, the kind and value of the product or service being promoted, the terms or restrictions relating to delivery of the product to customers, and other specified information. (no longer covered in this chapter) 10. A conspiracy is an agreement or arrangement between competitors to lessen competition in their industry. Section 45 of the Competition Act categorizes conspiracies as two or more persons conspiring to: (a) fix, maintain, increase, or control the price for the supply of a product; (b) to allocate sales, territories, customers, or markets for the production or supply of a product; or (c) to fix, maintain, control, prevent, lessen, or eliminate the production or supply of a product. (Source p. 56) 11. Courts have interpreted an “unduly” lessening of competition to mean that there must be a serious or significant reduction in competition. In order to determine the seriousness of the effect, the relevant market must be defined, with regard to both the product and geographical scope. The court must then determine whether the accused parties possessed a sufficiently large share of the market (“market power”) to injure competition. Factors relevant to the determination that an agreement lessens competition include the impact of foreign competitors and the availability of substitute products. (Source p. 55) 12. Examples of types of abuse of dominant position include: (1) discriminatory pricing, where a company grants special privileges to some but not all customers; and (2) predatory pricing, where products are sold for unreasonably low prices with the aim of driving competitors out of business. Other abuses include resale price maintenance, exclusive dealerships, “tied” selling arrangements, and marketing restrictions. (Source p. 58) 13. It is thought necessary for governments to control mergers to prevent monopolies from coming into existence. (Source p. 59) 14. Horizontal mergers are more likely to affect competition than other types of merger as they are mergers between already competing firms and thus the number of competitors is effectively reduced when one such firm obtains control over another. (Source p. 60) 15. The determination of the relevant “market” is essential in order to determine the applicability of s. 79 of the Competition Act; the commissioner must show that the firm against which the order is sought, is in substantial control of a particular business sector and has engaged in an anti-competitive practice that has prevented, or is likely to prevent or substantially lessen competition. (Source p. 58)

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16. The purpose of environmental impact assessment review is to examine proposed major projects that are likely to have an impact on the environment before they are undertaken (rather than to try to remedy any harm after it injury has occurred). (Source p. 69)

PROBLEMS 1. What O’Brien’s Food Service is doing is called tied selling, (Source p.58) where a seller refuses to sell goods to a buyer unless they only buy goods from that seller, if the seller deals in that type of product. However, for a firm that has a monopoly to do so constitutes a reviewable practice under s.77 of the Competition Act, and Steve’s may bring a complaint and ask the Director to apply to the Tribunal for an order prohibiting Red Square from refusing to supply Steve’s and from attaching conditions to the supply. 2. This case raises the issue of the possible conflict between the individual right of free speech and the right of professional bodies to regulate their members—and in particular to regulate advertising by their members. The case is based on Carmichael v. Provincial Dental Board of Nova Scotia (1998), 169 N.S.R. (2d) 294, a decision of the Nova Scotia Supreme Court. In that case, the dental board did not dispute that their advertising standards limited the applicant's freedom of commercial expression under s. 2(b) of the Charter of Rights and Freedoms. However, the board claimed that the restrictions on advertising were necessary to protect the general public. The court ruled that an announcement of a change of location was not something that the public needed to be protected from. The dental board’s rules impaired their members’ freedom of expression far more than was necessary to protect the public interest and the dignity and ethics of the profession. The court consequently ordered that the disciplinary proceedings be stayed. 3. Red Square, by virtue of its sole right to import and distribute the Russian firm’s discs into Canada, would seem to enjoy a monopoly position. Unless a dealer is willing to go to the trouble and expense of importing from another country, it has no choice but to purchase its stock from Red Square. Generally, a supplier is free to choose its customers, and it is not unlawful for Red Square to make it a condition of supplying Steve’s that it does not obtain supplies of the other label from another supplier. However, for a firm that has a monopoly to do so constitutes a reviewable practice under s.77 of the Competition Act, and Steve’s may bring a complaint and ask the Director to apply to the Tribunal for an order prohibiting Red Square from refusing to supply Steve’s and from attaching conditions to the supply. Red Square might claim that it does not have a monopoly, since the discs can readily be obtained from the U.S. However, on the basis of the Director of Investigation and Research v. NutraSweet Co. (1990), 32 C.P.R. (3d) 1 (Source p. 792, Case 30.8) it is likely that the relevant market would be held to be Canada. 4. This case is based on Canada (Director of Investigation and Research, Competition Act) v. Southam Inc. [1997] 1 S.C.R. 748, a decision of the Supreme Court of Canada. A complaint was made to the Director of Investigation who, having made an investigation, Copyright © 2016 Pearson Canada Inc.

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concluded that the concentration of these publications in the hands of one publisher was likely to lessen competition substantially in the retail print advertising and real estate print advertising markets in the Lower Mainland. The Director applied to the Competition Tribunal for an order requiring Southam to divest itself of several of the publications. The Tribunal found a substantial lessening in competition and ordered Southam to divest itself, at its option, of one or other of the two main publications. [NOTE: Southam’s appeal was allowed in part, on procedural grounds.]

CASE SUMMARIES Archibald v. Canada (2000), 188 D.L.R. (4th) 538 (Supreme Court of Canada) An action was brought by a number of grain farmers for a declaration that the Canadian Wheat Board Act breached their rights under the Charter, by imposing a compulsory marketing scheme and requiring them to sell their grain only to the Canadian Wheat Board. They argued that the scheme contravened their right to equality (because farmers outside the designated areas were free to sell their grain abroad), their right to freedom of association (because they are forced into a relationship with the board), and their right to pursue their livelihood in a province. The trial judge dismissed the action, holding that the Act did not breach the Charter, or that if it did, the breaches were justified under s. 1 of the Charter. He also took the view that the Charter does not protect purely economic or commercial rights. The Supreme Court of Canada agreed, and stated that it is unlikely that a Charter claim based solely on economic grounds could succeed, although a claim is not disqualified merely because there is an economic aspect to it. Further, because of s. 32(1) of the Charter, an enactment of Parliament, although intra vires, is not immune from scrutiny. The court agreed with the trial judge that the plaintiffs’ Charter rights were not infringed or that, if they were, the limits imposed on those rights were reasonable limits under s. 1 of the Charter. Canada (Competition Bureau) v. Yellow Pages Marketing B.V. 2013ONCA 71 An individual was fined $500,000 under the civil misleading advertising provisions of the Competition Act for sending deceptive faxes designed to mislead recipients into signing two-year online directory contracts with significant fees. On appeal, the court found there was no error in the amount of fine levied, and that the Act could consider a number of relevant factors in setting the amount of the fine, including the vulnerability of those affected. Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., [1997] 1 S.C.R. 748 at paras 14–20 (Supreme Court of Canada) Vancouver’s two daily newspapers were owned by the defendant corporation. The newspapers were not as successful as other daily papers in other Canadian cities. The

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Vancouver area had a number of small community newspapers produced two or three times per week and provided free of charge. The defendant started purchasing many of these community papers and the plaintiff applied for an order requiring the plaintiff to divest itself of these community papers as it was likely to lessen competition. The Tribunal held that the daily newspaper and the community papers serve different retail print advertising markets and concluded that the two kinds of newspapers were not in the same relevant market, and therefore the acquisitions by the defendant did not lessen competition. The Tribunal did hold however, that the acquisition of various real estate newspapers did substantially lessen competition and ordered the defendant to divest itself of these properties. The Supreme Court upheld the Tribunal’s decision. Canadian Egg Marketing Agency v. Richardson, [1998] 3 S.C.R. 157 (Supreme Court of Canada) The respondents, Richardson, operating as Northern Poultry, and Pineview Poultry Products Ltd., were the North-West Territories’ only egg producers. Since 1972, the Canadian egg market has been regulated through a federal-provincial scheme of laws and regulations regulating the interprovincial trade in eggs and allocating federal egg quotas to each of the ten provinces, but not to either territory. The effect of the exclusion of the NWT from the various regulations was that no eggs produced in the NWT may lawfully be marketed inter-provincially or exported. Richardson argued that this infringed ss. 2(d), 6(2)(b) and 15(1) of the Canadian Charter of Rights and Freedoms, and could not be saved by s. 1. The Supreme Court of Canada held that the egg marketing scheme did not violate the Charter. Carmichael v. Provincial Dental Board of Nova Scotia (1998), 169 N.S.R. (2d) 294 (Supreme Court of Nova Scotia) The plaintiff was a dentist in Nova Scotia. He practiced dentistry at the same location for a number of years and then decided to move to a new location. He placed an ad in the local paper advising of his move. The ad conformed to the requirements of the provincial regulations governing dentists and advertising. The newspaper mistakenly misprinted the plaintiff’s telephone number in the ad. A reporter from the paper contacted the plaintiff and explained what had happened and that the paper wished to do a human interest story on the plaintiff by way of apology. The plaintiff pointed out to the reporter, that the article would have to comply with the legislation and that he should probably review it prior to printing. The article was printed without the plaintiff ever seeing it beforehand, and further, the article also included testimonials, and a photograph of the plaintiff’s grand opening. The plaintiff was charged with violating the Provincial Dental Board’s regulations. The plaintiff brought an action to have the regulations declared invalid as they violated his rights under the Charter. The Court held that the regulations were neither a minimal impairment of the freedom of expression nor a limitation proportional to the objective of public protection and professional integrity. Castonguay Blasting Ltd. v Ontario (Environment), 2013 SCC 52

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See Case 3.10 at p. 68 in the text. City National Leasing Ltd. v. General Motors of Canada, [1989] 1 S.C.R. 641 (Supreme Court of Canada) The respondent corporation, CNL, carried on the business of leasing fleets of cars and trucks. It bought its vehicles from franchised GM dealers. CNL alleged that GM had been paying preferential interest rate support to competitors of CNL and that this constituted price discrimination, contrary to s.34 of the (federal) Combines Investigation Act. The defence raised two constitutional issues: (1) was the Act intra vires the Parliament; and (2) was s. 31.1 of the Act, which provided for a civil action in the case of breach, within the legislative competence of Parliament? The court dismissed both defences. The Act was a valid exercise of the federal trade and commerce power. As for s. 31.1, although civil actions are normally within the provincial power, the provision was valid, being functionally related to the Act as a whole. Citizen’s Insurance Co. v. Parsons (1881), 7 App. Cas. 96 (Judicial Committee of the Privy Council) Parsons claimed from Citizen’s Insurance on an insurance policy, in respect of a fire at his business premises. The company denied liability on the ground that parsons had not disclosed that he stored gunpowder on his premises. An Ontario statute (39 Vict. c. 24) set out various implied conditions that were to apply (unless expressly excluded) to all fire insurance policies, one of which required disclosure of explosive substances. Parsons argued that the Ontario statute was invalid, since a federal statute (38 Vict. c. 20) regulated insurance throughout Canada, and required all insurance companies to obtain a licence. The Privy Council held that the Ontario statute was not inconsistent with the federal law. The provinces have the power to regulate insurance business within their boundaries, under the property and civil rights power. The federal trade and commerce power is restricted to matters of international and interprovincial trade. Commissioner of Competition v. Superior Propane Inc. (2001), 199 D.L.R. (4th) 130 (Federal Court of Appeal) The Commissioner of Competition applied for an order to dissolve the merger of two corporations that were in the business of marketing propane. The Competition Tribunal dismissed the application. It agreed that the merger would substantially lessen competition, but concluded that the “efficiency defence” saved the merger. The Commissioner appealed. The Federal Court of Appeal allowed the appeal and sent the case back to the Tribunal for re-consideration. The case is important for the discussion, by the court, of the proper test to apply in weighing the loss resulting from reduced competition against the benefits derived from increased efficiency.

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Costco Wholesale Canada Ltd. v. British Columbia (1998), 157 D.L.R. (4th) 725 (Supreme Court of British Columbia) See Case 3.3 at p. 51 in the text. Culhane v. ATP Aero Training Products Inc. (2004), 238 D.L.R. (4th) 112 (Federal Court) The plaintiff was an author who published practice exam guides for students who were preparing for a pilot’s licence. The defendants, who also published pilots’ exam guides, started to offer them free over the Internet. They presumably anticipated that this would promote their general business of selling aviation-related products. The plaintiff claimed that this amounted to predatory pricing. The court held that there was no evidence of any intention, on the part of the defendants, to harm the plaintiff’s business, to lessen competition, or to eliminate a competitor. Director of Investigation and Research v. NutraSweet Co. (1990), 32 C.P.R. (3d) 1 (Competition Tribunal) See Case 3.5 at p. 58 in the text. Dore v Barreau du Quebec 2012 SCC 12 Dore, a practicing lawyer, was disciplined for the contents of a letter he wrote to a judge who had been highly critical of Dore’s performance in his courtroom. The issue raised was whether the Discipline council’s decision was contrary to Dore’s right under s. 2(b) of the Charter, freedom of expression. The court dismissed Dore’s appeal, stating that the statutory discretion used by the committee was appropriate, and that there was a need for the committee to insure lawyers behaved with “objectivity, moderation and dignity” balancing this with lawyers’ expressive rights. Dunsmuir v. New Brunswick, 2008 SCC 9 Dunsmuir was dismissed as an office holder “at pleasure” and his firing became the subject of adjudication and was appealed through the court system to the Supreme Court of Canada. The final decision set out the need to simplify the standards of review, those being whether there was reasonableness and correctness. Also of importance is that the court held that where there is an employment contract, procedural fairness, that is, the public law duty of fairness, does not apply. What is of concern is whether the employment contract in terms of notice or pay in lieu of notice was complied with. Griffin v. College of Dental Surgeons of British Columbia, (1989), 64 D.L.R. (4th) 652 (British Columbia Court of Appeal) The appellant challenged provisions of s. 71 of the British Columbia Dentists Act regulations and code of ethics which regulated advertising by dentists. On appeal the Copyright © 2016 Pearson Canada Inc.

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British Columbia Court of Appeal held that commercial speech was protected by s. 2(b) of Charter and that the provisions regulating advertising violated section 2(b). However, the provisions were enacted for an overriding public objective; that is, to maintain professional standards and ethics of the dental profession. Further, the regulations impaired freedom of expression as little as possible and were rationally connected to their objective. They were a demonstrably justified limitation under s. 1 of Charter. Interprovincial Corp. Ltd. v. R., [1976] S.C.R. 477 (Supreme Court of Canada) See Case 3.9 at p. 67 in the text. Irwin Toy Ltd. v. Quebec (1989), 58 D.L.R. (4th) 577 (Supreme Court of Canada) The Quebec Consumer Protection Act, s. 364, which overrode the Charter, was enacted in 1982 and ceased to have effect after five years, pursuant to Charter s. 33(3), and was not re-enacted in 1987; Quebec Consumer Protection Act, ss. 248 and 249 were thereafter subject to the Charter. Irwin Toy challenged Quebec legislation limiting advertising directed at children. The Supreme Court of Canada held that advertising directed at children was within scope of the Charter s. 2(b) and that the restrictions on such advertising in the Quebec Consumer Protection Act, ss. 248 and 249 were limits prescribed by law which evidence showed were reasonably justifiable in a free and democratic society. The Court further held that s. 7 (the right to life, liberty and security of property) only applies to human persons and thus cannot be used by corporations. Labatt Breweries v. Attorney-General of Canada, [1980] 1 S.C.R. 914 (Supreme Court of Canada) Labatt’s began marketing a new brand of beer, labelled “Labatt’s Special Lite” with an alcoholic strength of 4.0%. They were charged with an offence under the federal Food and Drugs Act, since regulations adopted under that Act required that “light beer” contain no more than 2.5% alcohol. Labatt’s argued (1) that they did not violate the regulations, since the beer-drinking public was not likely to confuse “lite” beer with “light” beer; and (2) that the regulations were invalid and the provisions of the Act imposing penalties were ultra vires Parliament. The court dismissed the first argument, but agreed that the provisions imposing penalties were invalid and lay outside the federal power. The regulations could not be regarded as relating to criminal law, to the protection of health, or to interprovincial trade and commerce. Longley v. Canada (2000), 184 D.L.R. (4th) 590 (British Columbia Court of Appeal) The plaintiff sought to take advantage of an apparent loophole in the Income Tax Act, by claiming a tax deduction for a contribution to the Rhinoceros Party. Revenue Canada wrongly disallowed the deduction and was found liable for misfeasance in public office, awarding the plaintiff compensatory damages of $5,000 for loss of reputation and

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$50,000 in punitive damages. However, the plaintiff’s claim that his rights under the Charter were infringed was dismissed. He appealed this dismissal, and claimed punitive damages of $99 billion! In dismissing his claim, the appellate court expressed the view that purely economic rights are not protected under the Charter. J .Y.I. MacDonald Corp. v. Canada (2002), 102 C.R.R. (2d) 189 (Superior Court of Quebec) See Case 3.2 at p. 51 in the text. MacDonald v. Vapour Canada, [1977] 2 S.C.R. 134 (Supreme Court of Canada) MacDonald had formerly been employed by Vapour Canada. After ceasing to work for them he set up his own company. Vapour claimed that he had made use of confidential information, contrary to s. 7(e) of the Trade Marks Act, R.S.C. c. T-10. The Supreme Court of Canada held that s. 7(e) was ultra vires the federal parliament, because it constituted legislation concerned with property and civil rights. Reference Re Assisted Human Reproduction Act, [2010] S.C.J. No. 61 at para 19 (Supreme Court of Canada) In 2004 the federal government enacted the Assisted Human Reproduction Act, S.C. 2004, c. 2. The Attorney General of Quebec brought this reference challenging the validity of several sections of the Act, claiming that the intent was to regulate the medical profession and was thus ultra vires the power of the federal government. The Supreme Court acknowledged that assisted human reproduction fell under overlapping jurisdiction between the federal and provincial governments. The Court held that come of the provisions of the Act were valid, in that they fell under the criminal law power, while others were invalid as they fell within the provincial power over hospitals, property and civil rights, and matters of a local nature. R . v. Armco Canada Ltd. (1976), 70 D.L.R. (3d) 287 (Ontario Court of Appeal) See Case 3.4 at p. 56 in the text. R . v. Benlolo (2006), 81 O.R. (3d) 440 (Ontario Court of Appeal) See Case 3.8 at p. 63 in the text. R. v. Big M Drug Mart, [1985] 1 S.C.R. 295 (Supreme Court of Canada) See Case 30.1 at p. 773 in the text. The Lord’s Day Act, a federal statute prohibited anyone from selling any goods, or carrying on any “ordinary” business for gain on Sundays. Big M had been convicted of being open to the public for business and selling goods on Sunday. Big M challenged the validity of the Act on the basis that infringed the

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freedom of conscience and religion guaranteed in s. 2(a) of the Charter of Rights and Freedoms. The court agreed that the “primary purpose” of the Act was “compulsion of sabbatical [Sunday] observance”, and struck down the legislation.

R. v. Edwards Books and Art, [1986] 2 S.C.R. 713 (Supreme Court of Canada) Several stores in Ontario were charged with violating the Retail Business Holidays Act by opening on Sundays. The defendants challenged the validity of the statute as violating their rights under the Charter. The issues before the Court were whether the Act was within the provincial government’s legislative power and whether the provisions violated the Charter. The Court held that the Act was within the power of the provincial government. It further held that the purpose of the act was not to encourage religious worship, but rather for the secular purpose of providing uniform holidays for employees. The Act provided alternatives for Saturday religious observers to close on that day instead of Sunday, and therefore met the requirements to establish the limitations as reasonable and demonstrably justified in a free and democratic society. . R.v. Guignard (2002), 209 D.L.R. (4th) 549 (Supreme Court of Canada) The appellant had a dispute with an insurance company over the payment on a claim, and placed a sign on one of his buildings expressing his dissatisfaction with the company. The municipality claimed that it was an advertising sign which contravened the municipality's zoning by-law (the by-law prohibited advertising signs except those located in industrial zones) and required him to remove it. He refused to do so. The Supreme Court of Canada held that the by-law infringed his freedom of expression, and was not justified under s. 1 of the Charter. Freedom of expression plays a critical role in the development of society. For citizens, expressing their dissatisfaction by means of signs is often the most effective method of communication. By restricting the right to post signs except in industrial zones and on the site where the commercial activity is carried on, the by-law impacted directly on the freedom of expression of a person who does not have substantial financial resources.

R . v. Hoffman-LaRoche Ltd. (1980), 28 O.R. (2d) 151, aff ’d [1981] O.J. No. 3075 (Ontario Court of Appeal) The defendant company was accused of violating ss. 33 and 34(1)(c) of the Combines Investigation Act for predatory pricing by selling drugs at an unreasonably low price so as to lessen competition. The Court held that by donating valium to hospitals for a one year period at no cost was considered predatory pricing. And further that the conduct was designed to have the effect of lessening competition or eliminating a competitor, and therefore the accused was found guilty.

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RJR-MacDonald Inc. v. Canada (1995), 127 D.L.R. (4th) 1 (Supreme Court of Canada) See Case 3.2 at p. 51 in the text. Rocket v. Royal College of Dental Surgeons of Ontario, (1990), 71 D.L.R. (4th) 68 (Supreme Court of Canada) The Supreme Court of Canada held that section 37(39) of Regulation 447 under the Ontario Health Disciplines Act was excessively broad legislation. It held that the section limited commercial speech, which is protected under s. 2(b) of the Charter, since it restricted the provision of useful information and could not be justified under s. 1 of the Charter as a reasonable limit as prescribed in a free and democratic society. The appropriate remedy in this case was for the court to strike out the offending provision. Rothmans, Benson & Hedges Inc. v. Saskatchewan, [2005] 1 S.C.R. 188 (Supreme Court of Canada) The plaintiff brought an action seeking a declaration that provincial legislation banning retailers from advertising tobacco products was invalid by virtue of the doctrine of paramountcy as the federal legislation allowed the advertising. The Supreme Court held that the provincial legislation was not invalid as there was no inconsistency between the two legislations. . UL Canada Inc. v. Attorney General of Quebec (2003), 234 D.L.R. (4th) 398 (Quebec Court of Appeal) The Dairy Products and Dairy Products Substitutes Act, R.S.Q., c. P-30, authorized the Quebec government to make regulations with respect to the colour of margarine, and a regulation adopted under that Act prohibited the sale of yellow-coloured margarine in Quebec. The applicant, a manufacturer of margarine, sought to have the regulation declared unconstitutional. The court held that the regulation did not relate to trade and commerce, a matter falling under federal jurisdiction, but was concerned with property and civil rights in the province and was therefore within the powers of the provincial government. There had been no violation of freedom of expression under s. 2 of the Charter and even if there had been a violation, it was a minor one that was justified for the protection of Quebec’s dairy industry. United States v. Microsoft, 87 F. Supp. 2d 30 (D.D.C. 2000) (United States District Court for the District of Columbia) See Illustration 3.1 at p. 57 in the text. Urban Outdoor Trans Ad v. City of Scarborough (2001), 196 D.L.R. (4th) 304 (Ontario Court of Appeal)

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The City of Scarborough enacted a sign by-law, imposing an annual fee for fixed advertising signs and a limit on the total number of signs, and of new signs, permitted in the municipality. The applicants brought an application to have the by-law declared invalid, on the grounds (inter alia) that the limit on the number of signs infringed their freedom of expression guaranteed by the Charter. Their appeal was dismissed. The overall and annual limits on the number of signs did violate the freedom of expression guaranteed by the Charter, but the violation could be justified as a reasonable limit under s. 1. Vann Niagara Ltd. v. Town of Oakville (2002) 214 D.L.R. (4th) 307; (2004) 234 D.L.R. (4th) 118 (Supreme Court of Canada) A municipal by-law prohibited all billboard signs above a certain size and all ‘third party’ signs on private land. The applicant sought to have the by-law declared invalid on the ground that it infringed its freedom of expression, contrary to the Charter. The Ontario Court of Appeal held both prohibitions invalid. On appeal, the Supreme Court of Canada agreed that the ban on ‘third party’ signs was unconstitutional. However, the restriction on size, though it infringes the Charter, could be justified (for reasons of road safety and protection of the environment) since the restriction constituted only a minimal impairment of the freedom of expression.

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CHAPTER 4 THE LAW OF TORTS Most of this book is devoted to business arrangements entered into between parties on a voluntary basis, by contract, but there are important aspects of the law that impose obligations without any agreement; the law of torts is one such area. Tort law is an element of the Common Law developed to compensate victims for harm caused by the intentional or, more commonly, unintentional actions of others. In Chapter 4 we consider the scope of tort law as it has developed from a notion of strict liability to the more modern concept of requiring an element of fault on the part of the person responsible for the harm. Some strict liability torts still exist (Source p. 76), however, the majority of torts require both an element of fault and causation; that is, a person must have caused the injury and have been at fault. The element of fault can be either intentional or unintentional. The Chapter first examines a few of the intentional torts but focuses on the main area of tort law, negligence. The instructor might begin by examining the function of tort law and initiating a discussion as to its purposes. Is the objective of tort law: 

To compensate persons who suffer injury (physical or financial)?



To punish those who act wrongfully or carelessly?



To deter potentially harmful behaviour?



All of the above?

Should compensation be based solely upon the fault of some other person? How should risk be allocated in a modern society? Is tort law an efficient way of allocating risk? Compare the concept of fault with the rational behind government no fault compensation schemes and strict liability. The key issue for students is the role of tort law in a business context. It may be useful for the instructor to suggest a scenario for students to discuss in class, such as, a visitor to a business premises slips on a wet floor, falls and is seriously injured. Or perhaps, an employee is injured on the job. Businesses, just like natural persons, must take care to avoid injuries to others. Employers are also liable under the principle of vicarious liability, that is, they are liable for the torts of their employees if committed during the scope of their employment. (Source p.77) The scope of tort law is very wide: the main objective of this chapter is to give students a sound overview of the basic principles of tort law. This chapter also provides the first opportunity for students to analyze a legal problem and apply it to a factual situation. INTENTIONAL TORTS (Source p. 78)

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Sometimes students have trouble seeing the business relevance of the intentional torts. Not surprisingly, they also confuse the intentional torts with criminal offences. Instructors need to emphasize the private law element of tort; that is, to compensate the injured party, not to punish the tortfeasor. For example, the tort of assault and battery has a criminal counterpart in assault causing bodily harm (ABH). A person convicted of ABH may receive a punishment of incarceration, but this does not help the victim, who is left unable to earn a livelihood. Tort law is the system that the injured party can use to get that help. For most businesses, assault and battery, are not going to be a usual business risk; however employers must be aware that they can be held vicariously liable for the acts of their employees, when carried out in the course of business, even for intentional torts (Source p. 77). Other intentional torts that affect business more directly include such examples as: nuisance for manufacturers, or other businesses working with harmful chemicals; defamation, particularly arising out of the use of the internet; and false imprisonment may be an issue for retail businesses. Certainly, the business related torts or “economic torts” (Source pp. 81-82), have direct application in a business context. Of relevance to business is the discussion on the “responsible communication on matters of public interest” defence for defamation, which would be applicable to journalists and newspaper editors. (Source pp. 81-82). NEGLIGENCE (Source p. 83) Special emphasis should be placed on negligence - this is not only the most common and important of the torts, but the principles articulated in general negligence case law are also largely applicable to specialized forms of negligence such as professional negligence, occupiers’ liability and product liability. Establishing negligence is a threefold process: 

Does a duty of care exist? That is, did the person causing the injury owe a duty of care to the person who has been injured? This should be discussed as a two part criteria – reasonable foreseeability and proximity of the victim and policy considerations that might negate a foreseeable duty.



Was the standard of care breached? In determining the standard of care, the legal fiction of the “reasonable person” becomes important as it must be detrmined if the defendant’s actions are below the standard of care of the “reasonable person” in the circumstances. Again two criteria frame the discussion. First, an objective standard of behaviour must be determined. And secondly, the defendant’s conduct must be proven to fall below it.



Causation: was the breach of the standard of care responsible for the injury suffered? Would the plaintiff have been harmed “but for” the actions of the defendant? The issue of remoteness must be addressed at this stage, as damages must be reasonably foreseeable for compensation to be awarded.

Students who are approaching the law for the first time have a tendency to expect clear-cut answers to every problem. Since tort law is based primarily on Common

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Law rather than statute, the instructor should use the cases and illustrations provided to demonstrate that there are often no simple answers - the legal outcome often depends upon the precise factual circumstances of a particular case, and a slight change in those facts may result in a different outcome. For this reason, it is important to have a sound grasp of basic principles. For the typical business student, it is suggested that, after examining the basic principles of negligence, the main emphasis be placed upon the topics of vicarious liability – the idea that employers can be held responsible for torts committed by their employees in the course of their employment - and of product liability. These topics will surface again in the context of Employment Law (Chapter 18) and Sales of Goods (Chapter 14). As an exercise or assignment instructors may ask students to find a newspaper article that describes a fact situation in which negligence has occurred. The student can then describe the law and apply it to the facts as presented in the article, including the defendant’s position. This provides two benefits: first, the student must correctly identify the tort of negligence; and second, the student must work through the legal analysis. PRODUCT LIABILITY (Source p. 89) Instructors may wish to consider the 2008 case of Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 cited at footnote 12 (Case 3.9 at p. 71). The facts are very similar to the seminal case and the Court succinctly reviews the principles of liability and damages. Another case where the court sets out clearly the framework for defining negligence, and discusses the duty of a manufacturer is Lambert v Lastoplex [1972] S.C.R.569. The simple fact pattern and use of the negligence framework makes this case a useful teaching aid. Dangerous products, also covered in the text, is an area of concern to business given the current liability of manufacturers for products which should have a warning. The duty to warn, as discussed, is considered ongoing, as set out in the Hollis v Dow Corning (1995), 129 D.L.R. (4th) 48 case. Class discussions around various types of products and services , using the negligence framework set out on page 95, would be a useful teaching aid. Instructors should emphasize that the legal maxim “res ipsa loquitur” is now viewed as merely an application of the circumstancial evidence rule. Although there is no direct evidence that the defendant’s behaviour was responsible for the event that caused the damage, given the circumstantial evidence it is a reasonable conclusion to draw unless other evidence rebuts it.

OCCUPIER’S LIABILITY (Source p. 93) This is an important area for businesses to recognize that they are responsible for the safety of persons visiting their premises. This includes employees, clients, and other persons lawfully on the premises. The distinction between invitees and licensees has been eliminated, and even trespassers are owed a duty of care, albeit to a lesser standard. An

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occupier may not go out of his or her way to deliberately harm a trespasser. Again, reviewing the material through the use of examples within each category of visitor would be a useful exercise. Also, discussing the need to have policies in place to identify and eliminate risks is an important part of a risk management strategy for occupied premises.

REMEDIES (Source p. 95) Students tend to mix torts with criminal actions. It is important to stress that the purpose of tort law is to compensate the victim. While punitive damges are available in tort situations, it is not common. Further, if punitive damages are awarded, the award is based on the conduct of the tortfeasor and not on the amount of harm suffered. A personal injury case, with injuries, wage loss and pain and suffering could be used to explain the types of damages frequently awarded, as set out on page 96.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 97) In many ways, tort law is about evaluating and eliminating the risk of harm. The final section of this chapter raises the important issue of managing “legal risk”. Bearing in mind the types of tort risk described in the chapter, what steps can and should a business take to minimize those risks, and to minimize their loss should these risks occur? Connect this topic with the strategies described in Chapter 1. (NOTE: if the topic of Insurance is not being covered in the course, students should be reminded that the availablility of insurance is not a relevant consideration when determining tort liability and referred to in the short section on “Insurance and the Management of Legal Risk”, in Chapter 16 at p. 343)

ETHICAL ISSUE (Source p. 82) Employee Recruitment Question 1 - As is often the case, balancing the interests of the employee with those of former and future employers involves value judgments. This question asks students to think about how employers can avoid being accused of inducing breach of conduct for hiring employees that are currently working for another employer. Students will likely suggest including a clause in the new employment contract saying that the employee is bound to adhere to the notice terms in their existing employment contract and the new employer will not accept any liability for breach of contract. Whether or not a court would uphold such a clause is questionable; courts are usually reluctant to restrict the mobility of employees. Furthermore, courts have historically not enforced unreasonable restraint of trade clauses in contracts (see Chapter 8), which might be considered analogous to this situation.

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Question 2 – The competing ethical values include loyalty and confidentiality. Discussions with students will raise many more values. INTERNATIONAL ISSUE (Source p. 92) Tobacco Litigation Question 1 - The question of the potential liability of tobacco manufacturers raises two main issues. The one is related to product liability, the other to contributory negligence. Even if one accepts that tobacco manufacturers have known, for many years, of the dangers of consuming their products, and have nevertheless attempted to entice consumers by advertising, it is also true that the general public has been aware of those dangers for a long time. People choose to smoke, knowing the risks. Question 2 - One question is whether tort law is an appropriate means of providing compensation. How does a cancer patient prove that her condition is due to smoking— rather than to pollution caused by vehicles? And does the plaintiff have to prove that she only smoked the brands of the defendant(s)? Which cigarette – or brand of cigarettes -- caused the cancer? Another issue is whether governments are appropriate plaintiffs. What is the basis of a claim by a state or provincial government? Can the government claim for increased health-care costs incurred as a result of smoking? Should the taxes paid on the sales of tobacco be offset against those costs? Question 3 - A third issue concerns the legitimacy of a government enacting legislation precisely in order to enable it to bring proceedings on its own behalf in respect of actions that have already occurred. Is this a case of a plaintiff making its own rules? INTERNATIONAL ISSUE (Source p. 96) Strict Liability or Negligence? Question 1 - The first question asks students to consider whether Canada should cap the size of damage awards. Canadian courts have already, to a certain degree, capped the amount of damage awards. For example, in ter Neuzen v. Korn, 1995 CanLII 72 (S.C.C.), [1995] 3 S.C.R. 674 the court explains how juries should be instructed on caps where it is thought that the award the jury may make will exceed the cap. However, in Young v. Bella, [2006] 1 S.C.R. 108, 2006 SCC 3, the court says: We leave open for consideration in another case (where the policy considerations supporting a cap are more fully developed in evidence and argument) the issue of whether and in what circumstances the cap applies to non-pecuniary damage awards outside the catastrophic personal injury context. Legislating what those caps should be might be futile because that legislation would have to be constantly amended to account for inflation, changing medical expenses, and

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increasing wages and costs of living. On the other hand, if damages were statutorily capped, it might dissuade frivolous litigation. The argument in favour of large damage awards is that it causes change in the commercial world; businesses would alter their practices to avoid litigation for fear of having to pay out exhorbitant damages. If damages are capped at too low of a dollar amount, businesses may continue with current practices rather than effecting change as they could write-off any damage awards as cost of doing business. Likewise, cost rules already exist in Canada; the notion that the loser pays the party and party costs of the successful party. This also aids in avoiding frivolous law suits as the cost of losing helps deter pointless litigation. Question 2 - Strict liability would most likely increase the cost of goods as the manufacturer would be liable for any claims. Manufacturers would increase costs to selfinsure against possible litigation. Strict liability may bring about a positive change in safety standards of products as manufacturers would effect change to avoid the risk of litigation; however implementing more stringent precautions would likely increase costs as well. QUESTIONS FOR REVIEW 1. A tort is a wrongful act done to the person or property of another. The word derives from the French, meaning “wrong”. (Source p. 75) 2. The principal purpose of tort law is to compensate the victims of torts (and not to punish the wrongdoers). (Source p. 75) 3. Strict liability means that anyone who causes direct injury to another has to pay compensation. No inquiry is made into the reasons for the injury or whether the conduct of the injurer is justified. (Source p. 76) 4. There are a number of alternatives—the loss might be borne by the injured party, by the driver or owner of the vehicle that caused the accident, by the group that benefits from the activity (that is, by all drivers or owners of motor vehicles, through some general system of insurance), or by the community as a whole (for example, through some comprehensive government compensation scheme). (Source p. 76) 5. There are two main justifications for the principle of vicarious liability: (1) employees may have limited assets available to pay compensation for the potential harm they can cause, and (2), it is fair that the employer, who makes the profit, should also be liable for the loss. (Source p.77) 6. In establishing the right to recover compensation, a plaintiff must prove three things: (1) the defendant owed the plaintiff a duty of care; (2) the defendant breached that duty; (3) the defendant’s conduct caused injury to the plaintiff. (Source p. 83) 7. Public bodies may be held liable for the negligent performance of their statutory duties. Further, a public body may be liable even where the statute imposes no duty

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but merely confers a discretionary power on it—for example, to maintain a highway—if it is negligent in the exercise of that power. (Source p. 84) 8. The law places a general duty on every person to take reasonable care to avoid causing foreseeable injury to other persons and their property. The court must balance competing interests: on the one hand, the court considers the degree of likelihood that harm will result from the activity in question and the potential severity of the harm, and on the other, it considers the social utility of the activity and the feasibility of eliminating the risk. (Source p. 85) 9. The “but for” approach to causation does not always provide a satisfactory solution, since an injury may result from a combination of several factors, but for which it would not have occurred. (Source p. 86) 10. Economic loss refers to losses such as wages lost due to an enforced absence from work and the cost of renting a replacement car. Two types of cases may be distinguished. In the first type, economic loss is caused without there being any physical damage at all. In the second type of case there is physical damage, but not to the person or property of the plaintiff. (Source p. 85) 11. Originally, if the defendant could establish that the plaintiff contributed in some small measure to her own loss, the plaintiff would fail even if the defendant was mainly at fault. This produced unfair results and the law was changed so that in cases where the plaintiff is partly to blame, liability is apportioned according to the degree of fault. (Source pp. 87-88) 12. No. Courts do not admit evidence about the existence or amount of insurance coverage in negligence actions, because their decisions must be based strictly on the merits of the dispute being tried and be free from any suspicion that their judgement has been biased by the knowledge of the amount of insurance protection that the plaintiff has voluntarily chosen to purchase. (Source pp. 88-89) 13. Even though a product is not defective in any way, there may be dangers if the product is not properly used. Manufacturers owe a duty to consumers to give proper warning of such dangers. (Source pp. 91-92) 14. In most provinces a common duty of care is now owed by an occupier to all visitors lawfully on the premises. Essentially, the general principles of negligence now apply. A trespasser is owed only a duty of “common humanity.” (Source pp. 93-94) 15. A public nuisance is the interference with the lawful use of public amenities, for example, obstructing highways or emitting dangerous substances in public places. A private nuisance is the interference with an occupier’s use and enjoyment of his/her land. (Source pp. 78-79) 16. False imprisonment consists of intentionally and without lawful justification subjecting another to total restraint of movement by either actively causing his confinement or preventing him from exercising his privilege of leaving the place in which he is. Actual physical restraint is not necessary. (Source pp. 79-80)

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17. Libel is defamation in writing: slander is spoken defamation. There are two types of privilege. Absolute privilege provides complete immunity from liability for defamation (for example, words spoken in a parliamentary debate); qualified privilege provides immunity from liability for defamation where a person has been required to provide information, provided the statement was made in good faith. (Source p. 80) 18. Unlawful interference with economic relations is attempting by threats or other unlawful means to induce one person to discontinue business relations with another. (Source p. 81) 19. The purpose of damages is to compensate the plaintiff for actual loss; that is, to restore the injured party, so far as is possible, to the position he/she would have been in if the tort had not been committed. Punitive (or exemplary) damages may be awarded in rare cases as a punishment to the defendant (for example, for a deliberate libel, or malicious false imprisonment). (Source p. 95) 20. An injunction is an order by the court for a defendant to refrain from committing further acts of a similar nature. (Source p. 96) 21. Legal risk is reduced by following a risk management strategy: 1) increasing business awareness of potential legal problems; 2) obtaining professional legal advice before undertaking new ventures; 3) insuring against damage and liability; 4) alerting, advising, and warning potential users of identified risks so they may be considered to assume them; and 5) implementing internal quality control practices within the organization. (Source p. 97)

CASES AND PROBLEMS 1. Could Shelley sue in negligence? To sue in negligence she would have to show that there was a breach of the standard of care. If the tile saw was not easily visible, or in a place where Shelley would likely trip over it, there may be a breach of the standard of care owed to her. Who would she sue? She would likely have to sue the tiling contractor, as he is an independent contractor, so Ashley would not be vicariously liable for his actions. The tiling contractor would try to hold Shelley as contributorily negligent for not looking out for her own safety, given that it would have been obvious that work was being done on the premises. And, importantly, he would plead that she had not mitigated her loss by not seeking medical care immediately to avoid the scar. If Ashley had already leased the premises perhaps Shelley could sue as an invitee, someone who needed to be warned of any harm which might occur. 2. An innkeeper owes a duty of care to his customers; for example, in Menow v. Honsberger and Jordan House Ltd., [1974] S.C.R. 239, the Supreme Court of Canada held that an innkeeper who ejected an intoxicated customer, who was later hit by a motorist, owed a duty to the customer.

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The present case is based on the decision in Murphy v. Little Memphis Cabaret Inc., (1998) 167 D.L.R. (4th) 190, in which the Ontario Court of Appeal upheld the finding of the trial judge that the tavern was liable. The tavern owner had a duty of care towards its customers and it was clearly foreseeable that, by ejecting the plaintiff from the tavern while the other four men were likely to still be outside, they were placing him in a dangerous situation. Since the plaintiff was not responsible for the fight, there was no evidence to support a finding of contributory negligence. 3. The issues in this case are, first, whether the conduct of Maldini and Rocco amounted to false imprisonment, and second, whether Smiley was a trespasser. Although Smiley was not physically restrained, he was clearly given the impression that he would be restrained or publicly humiliated if he attempted to leave. He did not commit any offence and was therefore subject to false imprisonment. With respect to the allegation of trespass, Boulevard is in the business of selling to the public and makes an open invitation to the public to enter its premises. Smiley entered the shop lawfully with the implied consent of the owner, Maldini. That consent was withdrawn when Maldini discovered what Smiley was doing, but at that point he was prevented by Rocco from leaving. Consequently no trespass occurred, unless it can be said that the invitation to the public did not extend to competitors seeking to gain information. The facts of the case are drawn from Chaytor v. London, New York and Paris Association of Fashion Ltd. and Price (1961), 30 D.L.R. (2d) 527, in which the court held that the plaintiff was not a trespasser and that the defendants' conduct constituted false imprisonment. 4. Newman, as the owner of the building, is an "occupier" in respect of the common parts of the building such as the entrance hall and staircase. His liability to Prentice would depend, in those provinces in which the distinction is still made, on whether Prentice is an invitee or a licensee. Unlike the situation in Snitzer v. Becker Milk Co. (1976), 15 O.R. (2d) 345, a decision of the Ontario High Court of Justice, Newman obtained no benefit from Prentice's presence in the building, so Prentice seems to be a mere licensee in relation to Newman. If so, Newman's duty is to remove concealed dangers of which he is aware. Since he was not told of the defective light or the loose step, he is not liable. In provinces where liability is based upon the common duty of care, Newman would be responsible for those defects that he ought to have known about. The question would depend on whether Newman was negligent in not repairing the light and step. This would depend on how long those defects had existed and how regularly he inspected the parts of the building for which he was responsible. It is also possible that Hall is liable. She knew of the defects when she arranged to meet Prentice, but did not warn him. Prentice might be held contributorily negligent. Although he could not have known of the loose step, climbing an unfamiliar staircase in the dark is a dangerous thing to do.

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5. The case raises issues of the appropriate standard of care and of liability for economic loss. Was it negligent, in 1975, to install insulating material containing asbestos? There are three potential defendants in this case: (1) The construction firm, Fundamental, which actually installed the insulation material; (2) The architect, who prescribed the use of that particular material; and (3) The manufacturer of the material. If it was known, in 1975, that this type of material could be dangerous to health, then the architect could well be held negligent in prescribing the use of the material. Assuming the material could be used in conditions where it was not dangerous, the manufacturer should not be liable for having produced a defective product, but might be liable for a failure to warn of dangers if used in certain circumstances. The construction firm did not know that the material contained asbestos. Were they negligent in not enquiring, or were they entitled to rely upon the expert opinion of the architect? A second issue is whether Princess is entitled to claim the cost of removal of the insulation, and the lost rent, when there had been no actual damage? The facts of this case are based on Privest Properties Ltd. v. Foundation Co. of Canada Ltd.,128 D.L.R. (4th) 577 , a decision of the British Columbia Supreme Court. On the facts of that particular case, the court held that the particular product was not dangerous at all when properly used as insulating material and that none of the defendants was liable. On the question of pure economic loss, the court held that, had the material been dangerous, the plaintiffs would have been entitled to claim the cost of removing it, and other consequential losses such as rent foregone. That is consistent with the position taken by the Supreme Court of Canada in Winnipeg Condominium Corp. No.36 v. Bird Construction Co. [1995] 1 S.C.R. 85, a decision of the Supreme Court of Canada; therefore, the plaintiff does not have to wait for an injury to happen, but is entitled to take (and be compensated for) measures taken to prevent injury. 6. There are several grounds on which Taylor might base an action against the collection agency. First, there is defamation. The statements made by Kneecap are clearly defamatory—they are untrue, and were intended to prejudice Taylor’s employer against him, and they caused him actual injury since they were (presumably) the reason he lost his job. Second, Kneecap’s actions would seem to amount to unlawful interference with Taylor’s economic interests, since they used unlawful methods in order to cause the termination of his employment contract. Third, they made violent threats against Taylor, thus amounting to the tort of assault. The case is based on Tran v. Financial Debt Recovery Ltd. (2000), 193 D.L.R.(4th) 168, in which the Ontario Superior Court found in favour of the plaintiff, and awarded damages for defamation, for loss of salary and for emotional suffering. 7.

Examining each of the elements of an action in negligence:

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(1) Did Chauncey owe a duty of care to Brown? In other words, should he have foreseen that his action would cause harm to persons in Brown's situation? It is reasonably foreseeable that by driving a tall vehicle on the shoulder it might hit power lines and that, if it does so, damage might result to people in the vicinity whose homes are served by those lines. (2) Did Chauncey breach that duty of care? It was clearly negligent to drive without paying proper attention and to allow his truck to wander onto the shoulder. (3) Did Chauncey's conduct cause the damage suffered by Brown? The destruction of Brown's chicks was due to the interruption of the oxygen supply, which was the direct result of Chauncey hitting the lines. (4) Was the damage suffered by Brown too remote? It is unlikely that Chauncey could have foreseen that hitting the lines would result in the deaths of several thousand chicks. However, the interruption of the power supply was foreseeable, as was damage of that general type (for example, fire, loss of perishable goods, etc.) See Hoffer v School Division of Assiniboine South, [1973] W.W.R. 765 (Supreme Court of Canada). (5) Ought the damages to be reduced on account of Brown's contributory negligence? If Brown had had an operational failure detector the loss would probably have not occurred. (The issue here is similar to the car seatbelt issue.) The fact that about half of all chicken breeders use detectors indicates that they are widely regarded as a sensible precaution, as was clearly recognized by Brown himself. Does that make it negligent not to use one? Whether or not Brown was negligent may depend on why the detector was disconnected. Note that Brown is suing both Chauncey and his employer, who will be vicariously liable since Chauncey's act was committed in the course of his employment.

CASE SUMMARIES Al Enterprises v. Bram, 2014 SCC 12 Page 81 footnote 21 Alleslev-Krofchak v. Vlacom Linited, 2010 ONCA 557 Page 81 footnote 23 Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229 Page 96 footnote 80 Anns v Merton London Burrough Council, [1978] A.C. 728 (H.L.) Page 84 footnote 32 Antrim Centre v Ontario Transport, 2103 SCC 12 Page 79 footnote 11 Arnold v. Teno, [1978] 2 S.C.R. 287

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Page 96 footnote 80 Astley v. Verdun, 2011 ONSC 3651 Page 96 footnote 80 B.D.C. Ltd. v. Hofstrand Farms Ltd. (1986), 26 D.L.R. (4th) 1 (Supreme Court of Canada) See Case 3.4 at p. 66 in the text. The defendant courier company was engaged by a third party (the Crown) to deliver a package. Unbeknownst to the courier company the package contained a Crown grant that needed to be registered by a specific date or the plaintiff would lose a contract of sale. The courier company did not deliver the package on time and the plaintiff suffered the loss of the contract of sale. The trial judge found that there was no duty of care between the courier company and the plaintiff and so a claim of negligence failed. The Supreme Court upheld that decision and added that even if a duty of care could be established the damages were too remote. Beheyt v. Chrupalo (2004), 244 D.L.R. (4th) 688 (Manitoba Court of Appeal) The plaintiff sued the owners of residential premises after falling on an icy sidewalk on the premises. The owners’ daughter had taken full responsibility for the premises for the previous eight years and was the only one who had dealt with the tenant. It was a condition of the tenancy that the tenant was responsible for clearing snow and ice from the sidewalk. The court held that the owners were not “landlords” for the purposes of the Occupiers’ Liability Act and were not responsible for the maintenance of premises under the lease.

Bon Malhab v. Diffusion Metromedia CMR Inc., 2011 SCC 9 Page 80 footnote 14 Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd. (1997), 153 D.L.R. (4th) 385 (Supreme Court of Canada) Two oil exploration companies contracted with a ship builder for the construction of an oil drilling rig. The exploration companies then contracted to hire the rig to conduct drilling operations. Under the terms of those contracts, the exploration companies were obligated to continue to pay day rates to the rig owner in the event the rig was out of service. A heat trace system built by an independent manufacturer was specifically selected by the rig owner and installed by the ship builder. This system was defective and the rig owner and the exploration drillers brought actions for negligence and breach of contract against the builder and for negligence against the manufacturer. The owner claimed the cost of repairing the rig and consequential lost revenue while it was out of service. The exploration companies claimed for the day rates they were contractually Copyright © 2016 Pearson Canada Inc.

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obligated to pay while the rig was out of service, and for incidental expenses incurred in supplying the rig. The court held in a split decision that manufacturers and suppliers are required to warn all those who may reasonably be affected by potentially dangerous products. This duty extends to any reasonably foreseeable potential user. British Columbia Ferry Corp. v. Invicta Security Service Corp., (1998), 167 D.L.R. (4th) 193 (British Columbia Court of Appeal) The defendant was found to be vicariously liable for a fire deliberately set by its employee that caused damage to the plaintiff’s dock. The incident occurred while the employee was on duty as a security guard at the plaintiff’s premises. The court held that the nature of the business was to protect the property of the plaintiff and, therefore, it is reasonable to assert that the wilful act of the employee causing damage is within the scope of this type of employment and the defendant should be held vicariously liable. British Columbia v. Imperial Tobacco Canada Ltd., [2005] 2 S.C.R. 473, 2005 SCC 49 (Supreme Court of Canada) Various tobacco companies brought an action to have the province’s Tobacco Damages and Health Care Costs Recovery Act declared unconstitutional. The Supreme Court held that the Act was not unconstitutional by reason of extra-territoriality, nor did it violate the independence of the judiciary or implicate the rule of law in the sense that the Constitution comprehends that term. Buchan v. Ortho Pharmaceutical (Canada) Ltd. (1984), 28 C.C.L.T. 233 (Ontario Supreme Court, High Court of Justice) The plaintiff, a twenty-three year old woman, suffered a stroke that left her partially paralysed shortly after she started taking oral contraceptives manufactured and distributed by the defendant. The pills were prescribed by her doctor and she had been in excellent health prior to the stroke. Evidence established that the stroke was caused by the oral contraceptive and that the defendant was aware of the risk of stroke. The court held that the defendant had failed to adequately warn of the danger inherent in the use of its oral contraceptives and that failure caused or materially contributed to the plaintiff's injuries. The defendant was held liable in damages. Caputo v. Imperial Tobacco Limited (2004), 236 D.L.R. (4th) 348 (Ontario Superior Court of Justice) The plaintiffs brought a motion for leave to commence a class action for damages against tobacco manufacturers for injuries caused by the use of cigarettes. They sought to certify a class composed of all residents of Ontario, living or deceased, who had smoked cigarettes manufactured by the defendants. The potential class comprised between 2.4 and 15 million members and the claims arose from fact situations spanning at least fifty years.

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The motion was dismissed. The plaintiffs had not disclosed an identifiable class with common interests. Childs v. Desormeaux (2004), 239 D.L.R. (4th) 61 (Ontario Court of Appeal) The plaintiff was injured when the car in which she was riding was struck by an impaired driver. The impaired driver had come from a BYOB party at the home of the defendants. The plaintiff sued the defendants in negligence for damages. The Ontario Court of Appeal held that the defendants were “social hosts” and were not liable. They did not provide, serve or control the alcohol consumed at the party and had no statutory duty to monitor the consumption of alcohol on their premises. There was that they knew how much alcohol the impaired driver drank while at the party. Cojocaru v. British Columbia Women’s Hospital and Health Centre, 2013 SCC 30 Page 86 footnote 41

Cooper v. Hobart, [2001] 3 S.C.R. 537 (Supreme Court of Canada) A mortgage brokers’ licence was suspended by the British Columbia Registrar of Mortgage Brokers due to misuse of funds. Investors (in a class action) alleged that the Registrar breached the duty owed to them because the Registrar should have acted sooner and investors should have been notified that the broker was under investigation. The court “negated” the duty on policy grounds. This would have created an indeterminate liability and the Registrar was acting in a “quasi-judicial” function. Crooks v. Newton, 2011 SCC 47 Page 80 footnote 15 Donaghue v. Stevenson [1932] A.C. 562 (Scotland - House of Lords) See Case 3.11 at p. 74 in the text. A woman orders a beverage in a café. Her friend drinks from the beverage and becomes ill. There is a decomposed snail in the drink. The friend successfully sues the manufacturer of the beverage in spite of a lack of contractual relationship between the parties. Economy Foods & Hardware Ltd. v. Klassen (2001), 196 D.L.R. (4th) 413 (Manitoba Court of Appeal) The plaintiffs were owners of a shopping mall that was damaged by fire. The fire began through the negligent act of the first defendants, who left a candle burning in their shop. The second defendants had renovated the shop and allegedly been negligent in failing to install sprinkler protection. The fire would not have spread beyond the shop if sprinklers had been installed. The court held that both defendants were liable for the full extent of the damage.

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Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd. (1993), 107 D.L.R. (4th) 169 (Supreme Court of Canada) The plaintiff construction company won a contract to build a section of highway for the province. It suffered loss because the specifications and construction drawings prepared by the defendant firm and their engineers were faulty. The firm was held to have owed a duty of care to the plaintiff company, which had relied on the drawings and specifications. The individual engineers who prepared the drawings were not liable: the plaintiff had relied on the reputation of their firm, not on their individual expertise. Ediger v. Johnston, 2013 SCC 18 Page 86 footnote 41 El Dali v. Panjalingham, 2013 ONCA 24 Page 85 footnote 39 Ernst & Young v. Stuart (1997), 144 D.L.R. (4th) 328 (British Columbia Court of Appeal) A partner in a firm of accountants left the firm and joined a competing firm in breach of the partnership agreement requiring one year's notice and restrained competing practice. The firm brought an action against the former partner for breach of contract and against the competing firm for inducing the breach. An appeal was allowed holding that the notice clause was valid but remitted the case for an assessment of damages against both defendants. Esser v. Luoma (2004), 242 D.L.R. (4th) 112 (British Columbia Court of Appeal) The plaintiff was the joint owner of property with a man (Brown) with whom she had lived in a common law relationship. After the relationship ended, she agreed to transfer her share in the property to her former partner on condition that she be released from all outstanding mortgages. The former partner failed to obtain a release from one of the mortgagees. Some years later he arranged with a notary to transfer the property, relying in part on a forged document apparently signed by the plaintiff. Under the Land Title Act, R.S.B.C. 1996, c. 250, s. 297, once title had issued, the title was indefeasible and could not be attacked by the plaintiff on the ground of the forgery. The plaintiff sued the notary. The trial judge held that the notary should have been alert to the suspicious circumstances. The judge held that the notary owed a duty of care to the plaintiff and that she had failed to meet a reasonable standard of care. On appeal, a majority of the Court of Appeal held that, although the notary may not have met the required standard of care, she owed no duty of care to the plaintiff. There was no close and direct relationship between the notary and the plaintiff.

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Fullowka v. Pinkerton’s of Canada Limited, 2010 SCC 5 Page 83 footnote 28 Gainers Inc. v. Pocklington Holdings Inc. (2000), 194 D.L.R. (4th) 109; 81 Alta. L.R. (3d) 17 (Alberta Court of Appeal) The plaintiff corporation sought to call a loan it had transacted with the defendant corporation, but found that, a day earlier, the sole director and shareholder of the debtor corporation had transferred shares from the corporation to another of his companies at substantially less than market value. The creditor corporation had not been informed of the transaction and had not consented to it. The creditor corporation brought an action against the defendant director and shareholder for intentionally inducing the debtor corporation to breach the loan agreement, and asking for the return of the asset or for damages. The court held that the director had caused the breach of the loan agreement by transferring the shares without the consent of the creditor. The agreement required the creditor's consent for the disposition of any assets actually owned by the debtor corporation. The shares were assets, and their transfer was not in the ordinary course of business because they were sold for a nominal sum in a non-arm's length transaction when the corporation was in serious financial difficulty.

Galaske v. O’Donnell (1994), 112 D.L.R. (4th) 109 (Supreme Court of Canada) See Case 3.10 at p. 72 in the text. The plaintiff, aged eight, was riding with his father in a truck driven by the defendant, sitting between them. He was not wearing a seat-belt. The truck was struck at an intersection by another truck: the collision was in no way the fault of the defendant. The plaintiff was severely injured (and the father killed). The evidence was that both of them would have escaped serious injury if they had been wearing seatbelts. The trial judge held that the defendant was not liable. It was reasonable for him to expect the father to take responsibility for ensuring that his son was wearing his belt. On appeal, the Supreme Court of Canada held that the defendant, as driver, had a duty of care to his passengers, the precise standard of care depending on the circumstances. The court ordered a new trial to determine the measure of the defendant’s negligence, as well as the degree of blame (if any) attaching to the plaintiff and to his father. Gallant v. Roman Catholic Episcopal Corp. for Labrador (2001), 200 D.L.R. (4th) 643 (Newfoundland Court of Appeal) The plaintiff was a member of a group that met in the basement of a church. She was injured when she fell on the ice on the driveway that gave access. The plaintiff brought an action in negligence against the church. The trial judge found that the failure to sand the driveway was a failure to exercise reasonable care. However, he dismissed the action, Copyright © 2016 Pearson Canada Inc.

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holding that the plaintiff was an invitee, and that under the principles of occupiers' liability, the church was only liable for an unusual danger. On appeal, the Newfoundland Court of Appeal held that the common law of Newfoundland respecting occupiers' liability had been restated. The rule requiring unusual danger was no longer applicable, and the occupier owed a duty of care to a lawful visitor to take reasonable care. Garratt et al. v. Orillia Power Distribution Corporation, (2008) 90 O.R. (3d) 161, 171 (Ontario Court of Appeal) See Cases 3.5A and 3.5B at p. 68 in the text. The plaintiff was injured by a falling wire that struck her car on a busy highway. The defendant company had been stringing wires across the highway. The workers had left for a break, but had put in place security measures to prevent such an incident. While away from the worksite, a vandal detached the wires, causing the incident. The Court of Appeal held that, while the defendant did owe a duty of care to the plaintiff, they did not fall below the standard of care. The circumstances did not warrant further security measures in spite of falling below industry standards. The damages the plaintiff suffered by the act of the vandalism was not foreseeable to the defendant. Grant v. Australian Knitting Mills [1936] A.C. 562 (England - Privy Council) See Case 3.13 at p. 74 in the text. The plaintiff purchased undergarments manufactured by the defendant company. He wore the undergarments for a week without first washing them. He developed severe dermatitis as a result. It was found that the garments had an excess of sulphite that caused the dermatitis. The Privy Council held the defendant manufacturer liable. Grant v. Torstar Corp., 2009 SCC 61 (Supreme Court of Canada) See Case 3.2 at p. 64 in the text. The defendant newspaper printed an article about the plaintiff’s proposal to build a golf course airing the views of the nieghbours that the defendant was using political influence to push the project through. The reporter had attempted to investigate the allegations and asked for comment by the defendant. The Supreme Court held that the matter should be dismissed based on the new defence of “responsible communication.” The new test has two elements: public interest and responsibility. The test as set out by the Court is as follows: “First the publication must be on a matter of public interest. Second, the defendant must show that the publication was responsible…” [para 98]. Harbord Insurance Services Ltd. v. Insurance Corp. of British Columbia (1993), 9 B.L.R. (2d) 81 (British Columbia Supreme Court) The plaintiff corporation was one of a number of agents of the defendant government insurer. The defendant proposed to implement a new commission scale, which the plaintiff alleged would injure its business severely and result in its losing business to a competitor. In seeking an injunction to restrain the implementation of the new scale, the

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plaintiff argued that the proposed scale would be contrary to section 77 of the Competition Act, R.S.C.1985, c. C-34, and constituted an unlawful interference with the plaintiff's economic relations. The court dismissed the application. The common law permits interference with economic relations unless the defendant's conduct is unlawful. Section 77 of the Competition Act deals with matters such as exclusive dealing, market restrictions and tied selling. These practices are not unlawful, though they are reviewable and may be prohibited by the Competition Tribunal. Heller v. Martens (2002), 213 D.L.R. (4th) 124 (Alberta Court of Appeal) The plaintiff was injured when his vehicle was struck by the defendant’s car. The plaintiff was not wearing a seat belt. As a result the court held that the plaintiff was 25 percent responsible for his own injury under contributory negligence. Hill v. Hamilton-Wentworth Regional Police 2007 SCC 47 Page 83 footnote 28 Hinz v. Berry, [1970] 1 All E.R. 1074 (England—Court of Appeal) The plaintiff was happily married and had a family of four children of her own and four foster children. While she was pregnant with a fifth child, she saw the defendant's car run into the van that held her entire family. She saw her husband lying dead on the road and most of her children bloody and injured. She suffered severe mental shock as a result of witnessing the accident. The court held that the defendant was liable to her for her nervous shock. Hobbs v. Robertson (2004) 243 D.L.R. (4th) 700 (British Columbia Supreme Court) The plaintiff’s wife was a Jehovah’s Witness, who did not believe in blood transfusions for religious reasons. She agreed to undergo surgery for a hysterectomy and signed a document provided by the hospital, in which she stated that she refused to accept blood, and released the hospital and its physicians from any responsibility for consequences due to that refusal. She was advised that if there was excessive blood loss, she could die, but she agreed to undertake the surgery despite the risks. The surgery resulted in excessive bleeding and she died from loss of blood. Her husband and children brought an action for damages under the Family Compensation Act, R.S.B.C. 1996, c. 126, s. 2, which provides for compensation for death caused by wrongful act, neglect, or default. The surgeon admitted that the patient might have survived had he switched surgical procedures more promptly, but claimed that it was the inability to transfuse that resulted in the death. The court dismissed the action against the surgeon. Whatever the cause of the bleeding it could have been stopped by timely transfusion, and the negligence in this case was the omission to intervene to stop the bleeding. The death was due to the patient's refusal to permit the blood transfusion and her release was unrestricted in its application. Copyright © 2016 Pearson Canada Inc.

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Hoffer v. School Division of Assiniboine South, [1973] W.W.R. 765 (Supreme Court of Canada) A teenager negligently started his father’s snowmobile and allowed it to escape from him. The snowmobile struck a gas pipe near a school. The gas leaked in to the school and caused an explosion. The court held that, while the damage was extensive, it was foreseeable and the defendant was held liable for the full extent of the damage. Hollis v. Dow Corning Corp. (1995), 129 D.L.R. (4th) 609 (Supreme Court of Canada) The plaintiff underwent breast implant surgery on the advice of her doctor. Later she suffered pain and another doctor operated and discovered that one of the implants had ruptured. It was later discovered that the company knew that this was a risk and had failed to warn the doctor. The Supreme Court held that the duty of a manufacturer to warn is ongoing and the learned intermediary rule applied. The defendant was found liable. Housen v. Nikolaisen (2002), 211 D.L.R. (4th) 577 (Supreme Court of Canada) See Case 3.10 at p. 72 in the text. The plaintiff accepted a drive from his friend who was intoxicated. Driving conditions were not good, and the driver spun out a bend in the road. The plaintiff was rendered a quadriplegic. The municipality was named as a defendant for failing to post warning signs. The Supreme Court held that the municipality was 35 percent responsible for the accident for not posting a sign. Janiak v. Ippolito (1985), 16 D.L.R. (4th) 1 (Supreme Court of Canada) The plaintiff sustained serious back injuries in a car accident for which the defendant admitted liability. The plaintiff was advised to undergo surgery with a 70-75 percent chance of making him completely better (there was a one percent chance of quadriplegia and a 0.1 percent chance of death). He refused the surgery. The court held that he could not recover damages for loss of future earnings since he had rejected the surgery. His recovery was limited to loss of wages and general damages for the period between the accident and the date on which he would have returned to work after the surgery. Johansson v. General Motors of Canada Ltd., 2012 NSCA 120 Page 91 footnote 59 John Cambell Law Corporation v. Owners, Strata Plan 1350, 2001 BCSC 1342 Page 76 footnote 5 Jones v Tsige, 2012 ONCA 32 Page 81 footnote 20 Johnson v. BFI Canada Inc., 2010 MBCA 101 Page 81 footnote 23

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JTI-Macdonald Corp. v. British Columbia (2000), 184 D.L.R. (4th) 335 (British Columbia Supreme Court) The Province of British Columbia brought an action against manufacturers of tobacco products to recover the cost of health care benefits provided to persons who suffered disease from exposure to tobacco products. The action was brought pursuant to the Tobacco Damages Recovery Act, S.B.C. 1997, c. 41. The Act was declared ultra vires because of its extraterritorial reach, which exceeded the competence of the provincial legislature imposed by s. 92 of the Constitution Act, 1867.

Kamloops (City of) v. Nielsen [1984] 2 S.C.R. 2 (Supreme Court of Canada) The city, although aware through its building inspector of a defect in on-going construction, failed to prevent the construction of a house with defective foundations. Three years later, the original owners sold the house to Nielson. A year after that, Nielsen discovered that the foundations had subsided and sued the city and the original owners for negligence. The Court held that the city was in breach of its statutory duty in failing to protect the plaintiff against the builder's negligence. The city was held 25 percent responsible and the original owners 75 percent. Lambert v. Lastoplex Chemical Co. Ltd., [1972] S.C.R. 569 (Supreme Court of Canada) The plaintiff (an engineer) was injured by an explosion when vapour from a floor sealer was ignited by the pilot light of his furnace which was in the room next to that where he was using the sealer. The court awarded him damages on the basis that the warnings on the sealer package were not explicit enough. M. Tucci Construction Ltd. v. Lockwood [2000] O.J. No. 3192 (Ontario Superior Court of Justice); 8 B.L.R. (3d) 113 (affirmed [2002] O.J. No. 423, Ontario Court of Appeal) The owners of a motel entered a contract with the plaintiff contractor, who provided financing. The owners and contractor were both advised by the same accountant. The project fell through and the contractor lost most of the funds provided. The court held that there had been negligent misrepresentation by the accountant, who was in breach of fiduciary duty to the contractor (see further Chapter 4). However, the plaintiff contractor was 40% contributorily negligent, in failing to obtain independent advice, or to read the terms of the agreement. Matthews v. MacLaren, [1969] 2 O.R. 137 (Ontario Court of Appeal) McLaren, the defendant owned a boat called the “Ogopogo.” He took several people cruising on Lake Ontario in May. Through no fault of the defendant, one passenger fell overboard. The defendant reversed the boat instead of driving back in a circle “bow first.”

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The other passengers were unable to affect a rescue as the victim appeared unconscious. A second passenger jumped overboard to assist, but was likewise rendered unconscious quickly because of the cold. There is no legal obligation to rescue another, but once you have started a rescue attempt, you must not make the victim’s situation worse or liability will attach. The Court of Appeal held that the error in judgment on the part of the defendant in reversing the boat was only that an error in judgment and that he did not worsen the victim’s situation. As there is no liability to the first victim, there is no basis for liability toward the second. Mayfield Investments Ltd. v. Stewart (1995), 121 D.L.R. (4th) 222 (Supreme Court of Canada) The plaintiff was one of a party of people at the defendant’s restaurant. The plaintiff was a passenger in her brother’s car and was injured as a result of an accident. The brother was found to be over the legal blood-alcohol limit. The Supreme Court held that plaintiff did not establish that the defendant restaurant caused her injuries. The defendant knew that the brother was not sober, but also knew that a number of people in the party were sober. The defendant was not under an obligation to take positive steps to ensure that the brother did not drive in the circumstances; it was allowed to assume that a sober member of the party would drive. McIntyre Estate v. Ontario (2002), 218 D.L.R. (4th) 193 (Ontario Court of Appeal) The year this decision was published is erroneously listed as 2003 in the text. The deceased’s estate brought an action for wrongful death against a tobacco company. The case is noteworthy in that the Ontario Court of Appeal allowed the case to be brought on a contingency fee basis. There was no improper motive in bringing the action.

Menow v. Honsberger and Jordan House Ltd., [1974] S.C.R. 239 (Supreme Court of Canada) See Case 3.6 at p. 69 in the text. The plaintiff was drinking at the defendant’s hotel. The defendant ejected the plaintiff from the hotel because he was intoxicated. While walking along the highway the plaintiff was struck by a car. The Supreme Court upheld the judgment of the Court of Appeal, that the defendant hotel was liable as it owed its patron a duty of care, and fell below the standard of care by not insuring that the plaintiff got home safely. The court apportioned damages between the three parties, the plaintiff, the defendant and the driver of the car that struck the plaintiff. Miazga v. Kevello Estate, 2009 SCC 51, Page 80 footnote 14

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Murphy v. Little Memphis Cabaret Inc. (1998), 167 D.L.R. (4th) 190 (Ontario Court of Appeal) The defendant tavern ejected the plaintiff out of the front door of the tavern after a fight and after the other four patrons involved in the fight had been ejected out of the backdoor. The trial judge found that it was “eminently foreseeable” that the four would attack the defendant upon his ejection from the bar. On these grounds, the tavern was found liable. Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 (Supreme Court of Canada) See Case 3.9 at p. 71 in the text. The plaintiff changed a bottle of water and saw in the new bottle a dead fly and part of another fly. The incident caused him severe psychological harm. He sued the defendant water supply company. The trial judge found the defendant to be liable, but the decision was overturned. The Supreme Court held that while the standard of care was breached, the injury was not foreseeable. Such an extreme reaction was not something a person of normal fortitude would suffer and therefore it was not foreseeable. Nicholson v. John Deere Ltd. (1989), 57 D.L.R. (4th) 639 (Ontario Court of Appeal) The defendant designed and sold to the plaintiff a riding lawn mower on which the gas tank was so close to the battery that a risk of fire was created. The owner filled the gas tank in his garage and a fire started which destroyed both his garage and his home. The court held that the manufacturer was responsible for the design defect and was negligent in not warning users when it found out about the problem. OBG v. Allan, [2007] UKHL 21 Page 81 footnote 21 671122 Ontario Ltd. V. Sagaz Industries Canada Inc., (2001) 204 D.L.R (4th) 542 (Supreme Court of Canada) See Case 3.4 at p. 82 in the text. The plaintiff was a supplier to Canadian Tire. An employee of Canadian tire was approached by a consultant acting for Sagaz, the defendant. The consultant firm bribed the employee to switch suppliers from the plaintiff to Sagaz. The plaintiff sued the defendant company for vicarious liability based on the tortious act of the consultant firm. The Supreme Court overturned the Court of Appeal’s decision and found that the defendant’s were not the employer of the consultant as the consultant was an independent contractor. Vicariouly liable did not apply to an independent contractor. 1175777 Ontario Ltd. v. Magna International Inc. (2001), 200 D.L.R. (4th) 521 (Ontario Court of Appeal) The plaintiffs claimed that the defendants were liable for inducing breach of contract, for conspiracy to injure, and for intentional interference with economic relations. The court

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rejected the third part of the claim. The tort of intentional interference with economic relations requires more than intention to injure—it requires unlawful means. Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co. (The Wagon Mound No. 1), [1961] A.C. 388 (England – Privy Council) See Case 3.8 at p. 70 in the text. A ship docked at Sydney Harbour, Australia leaked oil into the harbor. Welding sparks from nearby a nearby ship being refitted lit the oil on fire a couple of days later and caused severe damage to the dock. The lower courts found that although the damage was not foreseeable, the defendant was liable in negligence. The House of Lords overturned this decision, stating that if the resulting fire was not forseeable, the defendant was not liable. Overseas Tankship (U.K.) Ltd. v. Miller Steamship Co. Pty. Ltd. (The Wagon Mound No. 2), [1967] A.C. 617 (England – Privy Council) A docked freightor ship (Wagon Mound) leaked oil into the harbour. Welding sparks lit the oil on fire and nearby ships were destroyed. The plaintiffs sued in nuisance and the question of assessment of damage focused on remoteness. The reasonable person test was applied and the magnitude of the risk was relevant in determining what type of risk a reasonable person was justified in ignoring. Plas-Tex Canada Ltd. v. Dow Chemical of Canada Ltd. (2004), 245 D.L.R. (4th) 650 (Alberta Court of Appeal) The plaintiff companies purchased polyethylene resin from the defendants for use in the construction of natural gas pipelines. The resin was defective. The defendants knew of the defect, but did not warn the plaintiffs. The pipes cracked, causing major repair costs, the loss of customers, and a destruction of the plaintiffs' business reputation. The plaintiffs belonged to a corporate group, being wholly owned subsidiaries of one company. The defendants knew of the corporate structure and working relationships between the plaintiffs and were liable for the losses of the entire group. NB: A lower court in the same jurisdiction (Alberta Court of Queen’s Bench) chose not to follow the principles in this case when deciding 376599 Alberta Inc. v. Tanshaw Products Inc., (2005), 379 A.R. 1.

R. v. Bertuzzi [2004] B.C.J. No. 2692; Moore v. Bertuzzi [2008] O.J. No. 1786 See Case 3.1 at p. 61 in the text. During a professional hockey game the defendant Bertuzzi punched Mr. Moore causing him severe injury and an end to his professional hockey career. In the criminal trial the defendant plead guilty to assault causing bodily harm. In its reasons for sentencing the court discussed the fact that Bertuzzi attempted to engage Moore in a verbal confrontation, but Moore did not respond. Then Bertuzzi grabbed Moore’s sweater and punched him. This act indicates that there was no consent to engage in a fight on the part of Moore. Therefore, Bertuzzi’s actions amounted to a

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criminal assault in spite of the general acceptance that assaults that occur in hockey usually do not. R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 Page 93 footnote 73 Rausch v. Pickering (City), 2013 ONCA 740 Page 84 footnote 34 Renaissance Leisure Group Inc. v. Frazer (2004), 242 D.L.R. (4th) 229 (Ontario Court of Appeal) The plaintiff was drinking in a bar with a group of friends. He was injured in a fight when he came to the aid of one of his friends who had become involved in an argument. The plaintiff brought an action for damages in negligence against the other person involved in the argument. He also sued the corporation that owned the bar. He did not sue his friend. The trial judge held the plaintiff 35 percent contributorily negligent and the corporation 15 percent. The corporation then sued the friend. The court held the friend also partly to blame and reduced the award against the corporation. Resurfice Corp. v. Hanke, [2007] 1 S.C.R. 333 (Supreme Court of Canada) The plaintiff was seriously injured when an ice resurfacing machine exploded. The plaintiff claimed that the machine’s water and gas tanks were confusingly too close to each other. The Supreme Court held that the injury was not caused by the defendant company. The plaintiff did not establish that “but for” the negligence of the defendant the injury would not have occurred. Reynolds v. Clarke (1726), 93 E.R. 747 (England—King’s Bench Division) Fountain asked Clarke to fix a water spout on his land. He later sold the land to Reynolds. Because of Clarke's work on the spout, water came into the yard and rotted the walls of the house. The court held that Clarke was not liable in trespass, but was liable in trespass on the case (from which the law of negligence developed). Rothfield v. Manolakos (1989), 63 D.L.R. (4th) 449 (Supreme Court of Canada) A retaining wall was built on the defendant's land and collapsed eight months later due to poor construction. The collapse of the wall caused damage to adjoining lands owned by the plaintiff. The city had not inspected the work after completion, as it was required to under a by-law, and the plaintiff sued Manolakos, the city, and the contractors. The Court held that the city was 28 percent responsible for the damages as a result of its failure to

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comply with its statutory duty. The contractors were 42 percent liable and Manolakos was 30 percent liable (and he was entitled to recover in full from the contractors). Rylands v. Fletcher (1868), L.R. 3 H.L.330 (England—House of Lords) The plaintiff was the lessee of certain mines. The defendant was the owner of a mill on land adjoining that under which the mines were worked. The defendant wanted to build a reservoir and employed competent contractors to do it. The plaintiff had by this time worked his mines up to a spot connected to disused passages that reached the surface of the land through vertical shafts. The contractors did not block these shafts and the water from the reservoir flowed down the shafts to flood the plaintiff's mines. When the plaintiff sued, the court held that where an owner of land, without wilfulness or negligence, uses the land in an ordinary manner, it will not be liable for damage caused to a neighbour. But if the owner brings onto the land anything not natural, which is in itself dangerous if not kept under proper control, the owner will be liable for any damage caused by the escape of the thing, even though there was no negligence or intent to cause harm. Saskatchewan Wheat Pool v. Canada, [1983] 1 S.C.R. 205 (Supreme Court of Canada) This case is erroneously cited as R. v. Saskatchewan Wheat Pool in the text. The Canadian Wheat Board sought to recover damages from the Saskatchewan Wheat Pool (a grain dealer that acted as an agent for the Board) for delivery of infested grain contrary to s. 86(c) of the Canada Grain Act, S.C. 1970-71-72, c. 7. The Board had had to pay for the grain to be fumigated and to compensate the owner of the vessel that had carried the grain. The Board argued that breach of statute was a tort in itself giving rise to damages under a rule of strict liability. The Court disagreed and held that proof of statutory breach, causative of damages, is only evidence of negligence. The Board did not allege negligence and its action failed. Schlink v. Blackburn (1993), 18 C.C.L.T. (2d) 173 (British Columbia Court of Appeal) The plaintiff was at home, asleep in bed, when his wife was involved in a vehicle collision, one block away, caused by the defendant’s negligence. The sound of the collision awoke the plaintiff but he was not immediately concerned. Minutes later he heard children calling out that his wife had been injured. He ran downstairs in a panic, slipped on the porch steps, and broke his foot. He claimed against the defendant for the injury to his foot and for nervous shock. Held: there was no degree of proximity between his injuries and the defendant’s negligence—claim dismissed.

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Schneider v. St. Clair Region Conservation Authority, (2008) 88 O.R. (3d) 150; Schneider v. St. Clair Region Conservation Authority [2009] O.J. No. 3667 (Ontario Court of Appeal) The plaintiff was skiing on the defendant’s land when she struck a concrete wall hidden by the snow. She suffered severe injuries. The trial court held that s. 4(4) of the Occupier’s Liability Act did not apply in this instance and under the circumstances the defendant displayed a reckless disregard for the presence of the plaintiff on the property in violation of s. 4(1) of the act. The Court of Appeal overturned the decision of the lower court based on an error of interpretation of s. 4(4) of the Act. The Court of Appeal held that s. 4(4) did apply, and that as a result the plaintiff assumed the risk of using the land. As a result the defendant was found not to be liable. Sears Canada Inc. v. Bartram, 2004 BCSC 509 Page 94 Case 4.10 Smith v. Inco Ltd.,2011 ONCA 628 Page 76 footnote 76 Moore v. Bertuzzi, 2012 ONSC 3497 (CanLII) See Case 4.1 Page 78 Ryan v. Victoria(City), [1999] 1 S.C.R. 201 Page 79 footnote 10 Snitzer v. Becker Milk Co. (1976), 15 O.R. (2d) 345 (Ontario High Court of Justice) See Case 3.15 at p. 79 in the text. The plaintiff tripped on a paving stone after shopping in the defendant’s variety store. The plaintiff successfully sued both the variety store and the shopping plaza. Students should be aware that this decision was not followed in Cress v. Beauregard Enterprises Ltd. [2000] O.J. No. 205 (Ontario Supreme Court of Justice). Thornton v. Prince George School District No. 57, [1978] 2 S.C.R. 267 Page 96 footnote 80 TMS Lighting Ltd. v. KJS Transport Inc., 2014 ONCA 1 Page 79 Case 4.2

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Waldick v. Malcolm, [1991] 2. S.C.R. 456 Page 94 footnote 77 WIC Radio Ltd. v. Simpson, 2008 SCC 40 (Supreme Court of Canada) A radio talk show host engaged in a debate with a social activist regarding homosexual lifestyle. During an editorial, the defendant later compared the plaintiff to Hitler, the Ku Klux Klan and skinheads. The plaintiff sued the radio host and station for defamation. The trial judge dismissed the action based on the defence of “fair comment.” The decision was overturned by the Court of Appeal, but restored by the Supreme Court of Canada. The Supreme Court held that the comments were defamatory but the defendant was protected by the law under the defence of fair comment. Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85 (Supreme Court of Canada) See Case 3.17 at p. 81 in the text. A developer built a building that was subsequently purchased by the plaintiff. The plaintiff became concerned about some masonry work and had it inspected. The inspector and other engineers offered the opinion that the building was structurally sound. A few years later some of the masonry collapsed. The plaintiff had the masonry repaired and replaced the remaining masonry. The plaintiff sued the various defendants for the cost of the repairs. The Supreme Court held that it was reasonably foreseeable that the remaining masonry may fall and cause injury to persons or property and that the defendants were liable.

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CHAPTER 5 PROFESSIONAL LIABILITY: THE LEGAL CHALLENGES This chapter is exceptionally important for business students. It applies the principles of tort law to professional liability in relation to the basic elements of negligence law; that is, the duty owed to the plaintiff, breach of that duty, and causation. This chapter also introduces the tort of deceit and negligent misprepresentation. However, in many of the examples discussed there is also a contractual relationship between the plaintiff (client) and defendant (professional). The duty of care that is owed in the law of torts, to a person who may foreseeably suffer injury may be reinforced by a contractual duty to take proper care in the performance of one's obligations under the contract; or it may be imposed by statute. There may also exist, in some circumstances, a fiduciary duty between professional and client. The three relationships that may therefore arise in any business relationship are: 

Contractual



Fiduciary



In tort (Source p. 102)

It is important for students to be able to examine any business relationship and determine what obligations exist. Students need to understand, as discussed on pp. 105-107, that a professional may owe a duty both in contract and in tort, and that the choice of cause of actin may affect the limitation periods and the remedies. A professional in a contractual relationship is under an obligation to provide the services, set out in the contract, in a competent manner. This obligation is implied if not specifically set out in the contract. When a contractual relationship exists, only the parties to the contract can sue for a breach. FIDUCIARY DUTY (Source p. 103) It is important to review the difference between the ordinary tort duty of care and the fiduciary duty. Students often wish to extend the fiduciary duty to ordinary situtations where it clearly does not apply. The parties must be in a fiduciary relationship. Reviewing the law set out in the Alberta v Elder case, page 103, is critical to ascertaining if a fiduciary exists. Importantly, a breach of fiduciary duty can occur without a breach of contract or negligence being present.. While some professionals are considered to be inherently fiduciaries, this does not apply to all professionals and determining whether a fiduciary duty exists will depend on the facts of each case. However, even in situations where an inherent fiduciary duty exists (for example, solicitor-client), there are times when a breach of the duty will not attach because of the facts of the case. See Galambos v. Perez 2009 SCC 48, [2009] 2 S.C.R. 678 (Case 5.3 at p. 104).

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The Strother v 3464920 Canada Inc. case, a recent case decided by the Supreme Court of Canada, is a good case for a dicusssion of fiduciary duty. Strother began a business which competed with a former client of his at a large law firm – he then left the law firm to continue the business. The court discusses Strother’s fiduciary duty and its’ concern for his law partners, explicityly stating that the fiduciary duty to the client remained in place even when the client was not longer a client of the firm. LIABILITY FOR INACCURATE STATEMENTS A misrepresentation, a false statement of a material fact which induced a party to enter into a contract, is the most likely source of tort liability for professionals. The courts have defined who a duty of care is owed to, and discussion of cases such as Hedley Byrne v. Heller and Hercules Management v. Ernst & Young is important for what they have to say about defining the boundaries of the duty of care in negligent misrepresentation actions. A more student centered example of misrepresentation can be found in Olar v. Laurentian University (2007), Carswell Ont. 3595 (Superior Court of Ontario) aff’d 2008 ONCA 699 (Ontario Court of Appeal) referenced in Chapter 31 because of its online context. The online (and hard copy) of the Laurentian University calendar stated that a student enrolled in the two year engineering program could transfer to another Ontario university to obtain a degree. When Olar attempted this, he discovered that although transfer was possible, other Ontario universities would not give full credit for the courses taken at Laurentian. The trial judge found that the calendar contained a negligent misrepresentation. Olar was awarded $115,000 for the economic loss associated with lost income due to increased time in school. Total judgment was $120,620.00. The Court of Appeal dismissed Laurentian’s appeal. Another scenario that instructors may want to consider using in the class room is employer representations to prospective employees. This was the scenario considered by the Supreme Court of Canada in Queen v. Cognos Inc. [1993] 1 S.C.R. 87. This case involved a failure to advise job applicants that the project being hired for was subject to budgetary approval. The case imposed liability on the employer, because the applicants were in a special relationship within the meaning of Hedley Byrne and that this special duty was not reserved for professionals but could be found anytime. With the intentional tort of deceit, or fraudulent misrepresentation, there must be an element of “guilty knowledge” or a “willful disregard for the falseness of the information.” (Source p. 107) Negligent misrepresentation, as discussed in more detail in the 14th edition, occurs where advice, which was relied upon, is inaccurate – was given negligently. It is the tort of negligent misrepresentation which professionals may find themselves liable for, but only if they fit within the criteria set out as”Elements of Negligent Misrepresentation”on page 109. The case of Hedley Byrne deserves attention, as it was the first case of negligent misrepresentation, holding a bank liable for negligent advice it gave, stating a duty of care

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was owed as the bank should have know their advice would be relied upon. Although the defendant was held not to be liable in the case (because of the express disclaimer of liability), the decision established the potential liability for negligent mis-statements in tort. The Supreme Court of Canada set out five requirements for proving negligent misrepresentation – this checklist, reproduced on p.109 should be brought to students’ attention. It needs to be noted that the elements of negligence are required, that is duty of care, breach of the standard of care, and causation, but with professional negligence the requirements are limited. THE DUTY OF CARE (Source p. 109) The question of setting standards for professional services is essentially one of determining when a professional is in breach of her duty of care, which in turn requires a determination of the appropriate standard of care to be expected of a professional. In the Canadian case of Hercules Management Ltd. v. Ernst & Young (1997), 146 D.L.R. (4th) 577 the Supreme Court reiterates the duty of care and adds an examination of policy considerations that may “negative or limit the scope of the duty.” The court recognized the need to avoid placing indeterminate liability on parties. The duty is owed where the information is being used for the purpose for which it was prepared or given for. The cases on pp. 110-111 will provide students with an understanding of the broad range of situations where negligent misrepresentation may occur. THE STANDARD OF CARE FOR PROFESSIONALS (Source p. 112) As discussed in Chapter 4, the standard of care is set as the ordinary, reasonably person, but in a professional context the standard is higher. The standard is that of the diligent and competent professional in that field, who possesses the same degree of skill and knowledge of a competent member of that profession. Courts will often look to codes of conduct (see below) within a profession in setting a standard, although they are not restricted to that code and will base the standard on what is normal in the industry. For business risk management, it is important that all professionals keep abreast of changes in the code of conduct of the professional body and maintain a system of continuing education. It is important for professionals to recognize that the standard of care has not been met where an omission occurs, or incomplete information given. Informed consent is a major element of consent, and time should be taken to discuss the law set out on p. 113. RELIANCE AND DETRIMENT (Source p. 113) There must also be a clear causal link, not only in fact but in law, between the breach of the duty by the defendant and the injury suffered by the plaintiff. This requirement has an interesting application in negligent misrepresentation actions. A plaintiff must have relied on the negligent misrepresentation before that misrepresentation can be said to have

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"caused" the plaintiff's loss. Therefore, reasonable reliance is an important element in these actions. To what extent, for example, do investors rely on audited financial statements of companies before they decide to buy or sell shares? The information must be used for the purpose that it was provided in order for reliance to be reasonable (See Hercules and Olar both cited above). Sometines plaintiffs have a duty to independently investigate or confirm before reliance is reasonable (Crearer v. Grande Prairie Regional College [2004] A.J. No. 1782 (Q. B.). THE ROLE OF PROFESSIONAL ORGANIZATIONS (Source p. 114) An important question to consider in this part is the extent to which a professional code of conduct may affect the civil liability of the members of that profession. Is compliance with the accepted standards of the profession a sufficient defence in a negligence action? Does breach of the code necessarily mean that a professional has been negligent? Instructors may want to examine the importance of the professional code of conduct by referring to the development of the Public Accountability Board designed to supervise public accountants. A dispute arose between the new board and the professional organization of the Certified General Accountants of Canada over whether the CMA’s current code of conduct met the board’s requirements. The requirements set by the Public Accountability Board were reviewed by the Divisional Court in Certified General Accounts Association of Canada v. Canadian Public Accountability Board, (2008) O.A.C.129, Ontario Superior Court of Justice, Divisional Court. Importantly, the Court recognized the CMA’s standing to seek court intervention on behalf of its members. STRATEGIES TO MANAGE THE LEGAL RISKS (Source pp. 118-119) Any person engaged in one of the professions, must especially consider the importance of setting out a code of conduct, as well as compliance with continuous education requirements of the governing body of the profession for all employees. Equally important is putting preventataive measures in place, such as the use of disclaimers and control mechanisms such as having more that one professional work on every file. Even businesses not engaged in the professions, should be concerned about the possibility of misrepresentation and a risk management plan should, therefore, contemplate appropriate training for employees dealing with the public. A useful exercise would be to have students prepare a strategic plan for a professional organization. ETHICAL ISSUE (Source p. 105) Lessons from Enron The “Enron Affair” raises a number of legal issues that are suitable for discussion in class. Apart from the questions of standard of care and duty of care, the case highlights the huge potential liability that professionals, such as accountants, now face.

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Question 1 - Are there any other answers, beyond the Sarbanes-Oxley Act of 2002 (SOX) legislation that would minimize conflicts of interest? Should government go further and set up independent government run auditing groups responsible for auditing all corporations. The cost of this to the general public would be enormous. Should there be a government body responsible for overseeing the internal affairs of corporations to ensure that proper procedures are followed? Would this be too much interference in the private enterprises of business? What other solutions, more or less intrusive, may be considered? Question 2 - Should the American government be allowed to enforce SOX on Canadian and other foreign corporations that trade on U.S. exchanges? The purpose of the legislation is to protect the American investor, however, should not American investors being given the choice to make educated decisions about investing in foreign corporations, knowing that the foreign corporation is not subject to SOX? If not, then should ALL U.S. legislation regarding corporations be applied to foreign corporations trading on U.S. exchanges? Question 3 - Perhaps the most disturbing feature of the case is the ethical issue associated with the conflict of interest that can arise if accounting firms provide a variety of services to their clients and the danger that such conflict of interest poses to the general public. Ethical values such as fairness, respect, integrity and accountability come into question. Some suggest that Enron represents a failure of professional self-regulation of the professions demonstrating an inability to prevent abuse. Alternatively, SOX imposes much stricter government regulation aimed at public corporations. In light of the 2008 market crisis, is stricter regulation the answer? Instructors should be prepared to discuss the professional standards imposed by the new Public Company Accounting Oversight Board (United States <www.pcaobus.org>).Some consider this organization as a hybrid (combination) of government and self regulation. The discussion should also include the broad inspection powers of the Canadian Public Accountablility Board (<www.cpabccrc.ca>). On February 29, 2008, CPAB released its fifth report describing the results of its most recent inspections. INTERNATIONAL ISSUE (Source p. 117) Solicitor-Client Privilege The international reach of SOX is mentioned under the Ethical Issue as well and students should be reminded of the jurisdictional limitations of law and sovereignty issues associated with reaching beyond national boarders. However, the ethical complexity of noisy withdrawal should form the biggest part of the class discussion. Ethical issues of loyalty and confidentiality are raised by this issue as well. Question 1 - The first question asks students to discuss why lawyers should not be reporting a corporate client’s improper activity to the Securities and Exchange Commission. Students will likely point out that doing so would not be in the client’s best interest. Consequently, a noisy withdrawal could result in a breach of the lawyer’s fiduciary duty. Reporting such activity also presents a conflict between a lawyer’s duty of confidentiality and the obligation not to assist or encourage wrongdoing. This may trigger

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professional discipline and a number of State Bar Associations announced that they would discipline any lawyer complying with noisy withdrawl. Question 2 - Are there any arguments to consider in favour of noisy withdrawals? Noisy withdrawals can protect the public from corporate wrongdoing. Also, depending on the students’ knowledge of business law, they may discuss how a corporation’s management is supposed to act in the best interest of the corporation. Lawyers owe a duty of confidentiality in the form of solicitor-client privilege but also a duty to the public and the courts not to participate in illegal activities. A natural comparison exists with a criminal lawyer’s position when representing a guilty and dangerous client. An obligation for lawyers to report ongoing illegal or unethical activity in a noisy withdrawal acts as a safeguard for shareholders and for the public more generally. The Supreme Court recently endorsed the priority of solicitor-client privilege over another societal value – privacy. In Canada (Privacy Commissioner) v. Blood Tribe 2008 SCC 44, the Court refused to allow the Privacy Commissioner to demand production of documents for which privilege was claimed. One would think that Canada would take a similar position on noisy withdrawl. Question 3 - “Optional reporting” is not much of an option. It places the lawyer in a position of choosing between breaching a fiduciary duty of confidentiality and the competing interest of safeguarding the public. The solicitor-client privilege rule was developed to allow freedom for clients to be open and honest with their lawyers. Knowing the lawyer may report wrongdoing under SOX, closes that open communication between the client and lawyer, making it difficult for a lawyer to be effective in providing appropriate advice to the client and nullifying the effect of the rule. Solicitor-client privilege and anti-money laundering legislation are the Ethical Issue discussed in Chapter 22 at p. 541. Instructors may want to link these two topics.

QUESTIONS FOR REVIEW 1. In terms of distributive justice, the benefits (or utility) gained by the plaintiff who recovers damages will exceed the losses (or reduced utility) of a professional defendant who has to pay them but who can recoup the loss by increasing fees and by purchasing insurance protection to safeguard against liability. (Source p. 102) 2. Due to the uncertainty concerning liability and the risk of heavy damages, insurance premiums have been rising. Professional fees, in turn, increase to cover insurance costs. As fees rise, clients expect more for their money, and when they are disappointed are more likely to sue. (Source p. 102) 3. Equity imposes a fiduciary duty of care where a person is in a special relationship of trust such as usually exists in professional-client relations. This fiduciary duty arises even when the professional donates services free of charge, so that no contract exists. (Source p. 103) 4. Recent court decisions have established that a plaintiff might choose to sue in either contract or in tort. The difference is that the common law duty of care is not confined to relationships that arise apart from contract; it exists independently to the duty owed

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under the contract and as such has the potential to be broader in scope. The choice may be important, since the rules governing time limits for bringing an action might make it advantageous to sue in tort. (Source p. 107) 5. The reluctance of the courts to find persons liable for negligent misstatements in the absence of direct contractual or fiduciary relationship was based on a fear that the scope of potential liability might be virtually unlimited. (Source p.108) 6. The House of Lords found that although Heller neither dealt with nor even knew the identity of Hedley Byrne, Heller should have foreseen that its information would be used by a customer of the other bank. Accordingly, it owed that customer a duty to take reasonable care in expressing an opinion about the financial state of Easipower. The courts have also added a second part to the test for duty of care and that is to determine if there are any policy reasons to negative or limit the duty of care to avoid the problem of indeterminate liability. (Source p. 108) 7. A two-part test is applied. The first part requires the court to determine whether there is a sufficiently close relationship between the plaintiff and the defendant that the defendant can reasonably foresee the possibility of damage to the plaintiff if he or she acts negligently. The second branch of the test deals with what is essentially a policy issue—would it be consistent with public policy to impose liability? (Source p. 110) 8. The fiduciary duty only applies in situations where the three part test from Alberta v Elder Advocates of Alberta Society applies. Once a fiduciary duty is established it imposes a greater range of obligations on the professional than is expressly stated in the contract or required under tort law. The professional must act honestly, in good faith, and only in the best interests of the client. (Source p. 103) 9. The test for negligent misrepresentation is a five part test. The plaintiff must demonstrate: (1) that there is a duty of care based on a “special relationship” between the representor and the representee; (2) the representation in question must be untrue, inaccurate, or misleading; (3) the representor must have acted negligently in making the misrepresentation—that is, he or she must have fallen below the requisite standard of care required of a professional making such a representation; (4) the representee must have relied, in a reasonable manner, on the negligent misrepresentation; and (5) the reliance must have been detrimental to the representee in the sense that damages resulted. (Source p. 109) 10. It is a requirement for liability for a negligent misrepresentation, that the plaintiff relied on the misrepresentation and that the reliance was reasonable. Therefore, it can be argued that, if the plaintiff was also negligent, the reliance could not have been reasonable. (The court rejected that argument in Avco v. Norman). (Source p. 114) 11. The duty to take reasonable care includes the duty to not omit essential steps in providing professional services. It embraces sins of omission as well as sins of commission where a duty to disclose is required. (Source p. 112) 12. One possible approach is simply to wait and see whether a client incurs any loss from relying on professional advice—a hindsight or ex post approach. If the client suffers

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loss, the advice must have been unsatisfactory. The danger of this approach is that it makes no allowance for mere errors of judgment. The fact that advice may have been wrong does not mean that it was given negligently. (Source p. 111) 13. The essence of causation, in professional-client relationships, is reliance. Did the client rely and act upon the advice of the professional? Would the client not have acted in that way if he had not received that advice? (Source p. 113) 14. Professional bodies have a number of special responsibilities: (a) to set educational and entrance standards for candidates wishing to become members; (b) to examine and accredit educational institutions that prepare candidates for membership; (c) to set and adjust standards of ethical conduct and professional competence; (d) to hear complaints about and administer discipline to members who fail to live up to the established standards; and (e) to defend the profession against attacks that it considers unfair, and to look after the general welfare of the profession. (Source pp. 114-115) 15. In isolated cases of negligence, governing bodies ordinarily leave the matter to the regular courts, allowing the client to seek the appropriate remedy. In cases of repeated or very serious violations of professional standards, the governing body might be expected to take disciplinary action to protect the public and the reputation of the profession as a whole. (Source p. 116) 16. Advocates of MDPs claim a number of advantages: they benefit clients whose problems cannot readily be compartmentalized into legal and non-legal; they provide a more efficient “one stop shop” for business clients who require both accounting and legal services; and by working together as a team, the quality of service provided by both professions is improved. The possible disadvantages are the possibility that professional duties and codes of conduct may conflict, and the increased size of the firm and diversity of services provided may give rise to conflicts of interest. (Source pp. 117-118)

CASES AND PROBLEMS 1. Does Ashley have a claim against Bill? Is Bill in a professional relationship with her? Probably, as he is her insurance agent, and she is in a vulnerable position when she relies on his advice, so he is in a fiduciary relationship with her. He breached his fiduciary relationship by not telling her of his relationship to Smith’s Appliance. She could bring a claim for breach of fiduciary duty against Bill. The Restaurant Association has given an opinion on the best stove – it is probably not an actionable misrepresentation. A misrepresentation is a false statement of a material fact which induces someone to enter into a contract. Did Smith’s Appliance make a misrepresentation? Perhaps, as they stated that the coolness of the induction was the basis for her choice, and it turned out that this was not correct. She must have relied upon this advice and it did not form part of the contract for there to be a misrepresentation. Copyright © 2016 Pearson Canada Inc.

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2. A problem facing Mitchell, so far as tort law is concerned, is that it may be difficult to show that Gordon’s failure to disclose Simpson’s true identity and background was actually a cause of his loss. This is especially so in the case of the investments made before Mitchell was introduced to Gordon. As to the later investments, Mitchell may be able to convince the Court that he would not have acted on Simpson’s advice if Gordon had told him of Simpson’s real identity. Was Gordon under a duty to disclose what he knew to Mitchell? This case is based upon Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639, a decision of the Ontario Court of Appeal. At trial, the judge based his decision on a breach of fiduciary duty, rather than on negligence, and held that the plaintiff had suffered personal losses following a breach of fiduciary duty owed to him by his solicitor, and awarded him substantial damages. The breach consisted of the solicitor's failing to inform the plaintiff about what he knew of the disbarred lawyer's past. The appeal court allowed the lawyer’s appeal in part and ordered a new trial. The lawyer had not been a party to the fraud, had not profited from it, and was unaware that a secret profit was being made at the plaintiff's expense. He could not be held to have caused all losses suffered by the plaintiff, and was responsible only for the direct losses suffered after the date on which he breached his fiduciary duty. [NOTE: A further problem in the Martin v. Goldfarb case was that the losses were mostly suffered by a corporation of which the plaintiff was the controlling shareholder, rather than by the plaintiff himself. This aspect of the case is considered in Chapter 25.] 3. This case is based on Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd. (1993), 107 D.L.R. (4th) 169, a decision of the Supreme Court of Canada. In that case the action was brought against the firm of engineers and against the two employees of the firm personally. No action was brought against the province, presumably because it was considered that it was protected by the disclaimer clause (that any representations made therein were "general information" only and were not guaranteed by the province). The British Columbia Supreme Court and Court of Appeal dismissed the plaintiff’s claim, holding that no duty was owed by the engineering firm, or by their employees, to those firms submitting tenders. The Supreme Court of Canada allowed the plaintiff’s appeal. The engineering firm owed a duty of care to the construction company. It had made a negligent misrepresentation and should have known that the construction company might rely on it. Given the brief tendering period, it was reasonable and to be expected that the construction company would continue to rely on the engineering firm (which could have protected itself by a disclaimer). The construction company did in fact rely on the statement, to its detriment. The contract between the province and the construction company did not limit the construction company's right of action against the engineering firm. However, the court held that the individual employees of the engineering firm did not owe a duty to the plaintiffs. (It is difficult to see why not.)

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4. The case law since Hedley Byrne clearly establishes that there may be liability for damage suffered as a result of negligent mis-statements. The two principal questions here are: (1) Did the auditors owe a duty of care to the bank; and (2) Were they negligent in performing the audits? The extent of the duty of care owed by professionals, such as auditors, is a difficult issue. It is clear that they do not owe a duty to everyone who might conceivably read and rely upon their statements. To determine whether or not a duty exists, the Supreme Court of Canada laid down a two-part test, in Hercules Managements Ltd. v. Ernst & Young (1997) 146 D.L.R. (4th) 577. First, there must be a reasonably close relationship between the plaintiff and the person making the statement, so that the latter can reasonably foresee that a negligent statement could cause loss to the plaintiff. Second, the courts must deal with a policy question. Is it in society’s interest to impose liability? The case is based upon Canadian Commercial Bank v. Crawford, Smith & Swallow (1994), 21 C.C.L.T. (2d) 89, a decision of the Ontario Court of Justice—General Division. In that case, it was held that the plaintiff had not established that a duty of care existed. The auditors should not face unlimited liability. Although the auditors could expect that persons other than the shareholders (for whom the accounts were prepared) might look at, and rely on, the accounts, they were not specifically aware that the bank was taking over the account or that the financial statements were being considered by it. This was not like the situation in Haig v. Bamford (1976), 72 D.L.R. (3d) 68 (Supreme Court of Canada), where the accountants knew that the accounts were being prepared in connection with an actual takeover offer. 5. This question is based on the facts from Queen v. Cognos Ltd. [1993] 1 S.C.R. 87. In order to rely on the misrepresentation of the employer, the plaintiff, Prince would have to to prove the five elements of negligent misrepresetantion. First, did the employer owe a duty of care to Prince? Was there a sufficient proximity of relationship between the parties that in the contemplation of the employer that carelessness on its part could cause harm to the plaintiff? Specifically, in this case, was it reasonably foreseeable that the carelessness by Paulson in describing the job could cause the plaintiff to suffer the harm that he did; that is, leaving previously secure employment (both he and his wife), and the expense of moving to Ottawa from Calgary. The second part of the duty of care test is to determine if there are any policy considerations that should negative or limit the scope of the duty. The number of job applicants would be a definable group and therefore indeterminate liability would not be applicable here. The second element of negligent misrepresentation is that the representation in question must be untrue, inaccurate or misleading. In this case the representation was “that the company would commit to significant funds to the project for the next ten years.” By making this statement Paulson negligently misrepresented the nature and existence of the job. At the time the statement was made, Paulson may have believed that it would

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become true, but the statement was not true at the time it was made, and this was later borne out by the failure of the Excutive Committee to approve the project. The third element of the test is that the person making the statement fell below the standard of care. Paulson was not careful in making the representation to Prince. He did not act with the care of the reasonable, ordinary person in the circumstances. The standard of care required by a person making representations is an objective one: it is a duty to exercise such reasonable care as the circumstances require to ensure that representations made are accurate and not misleading. The statement was not a mere puffery, but a fact regarding the terms of employment that was not true. The fourth element of misrepresentation is that the representee reasonably relied on the statement. Prince was looking for a new challenging job. If he had been informed that he would be doing the new job for only five months and then reverting to his present job, it is reasonable to assume that he would have declined the position. Under these circumstances it is demonstrable that Prince reasonably relied on the statement of a ten year commitment to the project in making his decision to quit his job, uproot his family, and move across the country. The final element of misrepresentation is that the reliance must have been detrimental to the representee. Prince suffered the loss of existing secure employment, the expense of moving, plus the loss of his wife’s income, etc. by accepting the job. Whether the disclaimers in the employment contract would apply, requires a consideration of whether the representation was made a term of the contract or not. If it was, then the plaintiff would be limited to the contractual remedies as per BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 000, rev'g in part (1990), 44 B.C.L.R. (2d) 145. However, in this case it is more likely that Prince would not be held to the contractual terms and could instead look to the common law duty under tort because there were no terms of the contract relating to the misrepresentation. In Queen v. Cognos Ltd. the Supreme Court held that the Hedley Byrne principal regarding misrepresentation was not limited to non-contractual situations. A plaintiff can sue in tort or contract depending on the circumstances of the case. 6. This case is based (rather loosely) on Schilling v. Certified General Accountants Assn. of British Columbia (1996), 135 D.L.R. (4th) 669, a decision of the British Columbia Court of Appeal. There, the plaintiffs suffered a loss by the fraudulent conduct of an accountant, and brought an action against the defendant association for negligence in permitting the accountant, a former member, to continue to represent himself as "certified" after the association had obliged him to resign. The court accepted that professional bodies do owe a duty to the public to try to ensure that their members are properly qualified. However, they are under no duty to initiate criminal proceedings against their members. Nor can they be expected to ensure that former members do not continue to practice and to hold themselves out as members.

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CASE SUMMARIES Adams-Eden Furniture Ltd. v. Kansa General Insurance Co. (1996), 141 D.L.R. (4th) 288 (Manitoba Court of Appeal) A furniture manufacturer asked an insurance broker to arrange insurance coverage for the business. The broker arranged coverage with an insurer. The broker was not fully informed about a previous claim, or about two previous fires. A loss occurred and the manufacturer made a claim against the insurer; the insurer settled the claim and claimed over against the broker for negligently failing to make full inquiry and full disclosure. The claim over failed. The insurer appealed to the Manitoba Court of Appeal who held that the broker was the agent of the insured and owed no duty of care to the insurer. The insurer's remedy, in case of non-disclosure of material facts, was to deny liability on the policy. Air Canada v. M & L Travel Ltd. (1993), 108 D.L.R. (4th) 592 (Supreme Court of Canada) Two directors of a travel agency entered an agreement to sell Air Canada tickets directly to the public. They were obliged to keep the funds in a trust account and to pay the monies to Air Canada bimonthly. The funds were put in a general account, but were paid to Air Canada until relations between the two directors broke down. The business closed for a number of days. One of the directors tried to make payments to Air Canada, but the bank refused as it had received conflicting instructions from the directors. The travel agency did not pay its bank loan and the bank exercised its right to withdraw the funds from the general account to pay off the loan. Air Canada sued the company and the directors personally for the loss. At trial, the directors were not found personally liable, but that was overturned on appeal. The Supreme Court upheld the decision of the appellate court finding that the director was in a position of trust to Air Canada and had breached that trust.

Anns v. Merton London Borough Council, [1978] A.C. 728 (England – House of Lords) This case was about faulty building construction. A series of maisonettes had been approved by the local council (Merton) with a foundation depth of three feet or deeper, with right of inspection by Merton prior to the completion of the buildings. The maisonettes were completed and sold. Several years later the buildings shifted and the cause was found to be that the foundation was inadequate, being only two feet, six inches deep instead of the required three feet or deeper. The owners of the leases to the buildings sued Merton for negligence. The court held that the test for duty of care was tow parts: (1) proximity of relationship; and (2) considerations of reasons why there should not be a duty owed.

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Avco Financial Services Realty Ltd. v. Norman (2003), 226 D.L.R. (4th) 175 (Ontario Court of Appeal) The defendant along with his wife obtained a mortgage from the plaintiff. The plaintiff sold the defendant life insurance on the mortgage as well. The defendant took a one year term on his mortagage. At the end of the term, he renewed the mortgage for a further term. At that time he was told that he must reapply for life insurance coverage. He and his wife both did this. The following year when the mortgage had to be renewed, the wife had been diagnosed with cancer; and so, the insurance company denied her coverage. After she died, the defendant was unable to support the mortgage payments and the plaintiff recovered the property under power of sale. The plaintiff sued the defendant for the shortfall and the defendant counterclaimed for negligent misrepresentation. The trial judge held that the plaintiff had made a negligent misrepresentation, but further found that the defendant had been contributorily negligent. The Court of Appeal agreed with the trial judge’s position that a finding of negligent misrepresentation did not preclude a finding of contributory negligence.

BAE—Newplan Group Ltd. v. Altius Minerals Corporation, 2010 NLTD (G) 133 (Supreme Court of Newfoundland and Labrador, Trial Division) The plaintiff entered into a contract with the various defendants to provide engineering services. The plaintiff alleges that the defendants were unable to pay for the engineering services because of mismanagement of funds by the various corporate defendants and specific directors of the corporate defendants. Four of the individual directors brought this application to have their names struck from the suit, as the pleadings revealed no cause of action against them. The plaintiff alleges that the failure to disclose relevant information amounted to a misrepresentation. The court stated at para 20 that, “it is clear that silence or inaction can become a representation but only in circumstances where the person alleged to have misrepresented owes a legal duty to a plaintiff to make the disclosure in question.” Belknap v. Meakes (1989), 64 D.L.R. (4th) 452 (British Columbia Court of Appeal) The plaintiff suffered a stroke during a surgical operation and sued the anaesthetist. The trial judge found that the most likely cause of the stroke was a drop in the plaintiff's blood pressure, and allowed the action in negligence to succeed. On appeal, the court held that the onus of proof of negligence and causation is on the plaintiff. The evidence did not establish that the drop in blood pressure caused the stroke or that the defendant had been negligent. The fact that some practitioners used a different practice was insufficient to support a finding of negligence where the defendant's practice conformed to that of a reasonable body of opinion.

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Bell v. City of Sarnia (1987), 37 D.L.R. (4th) 438 (Ontario High Court of Justicce) The plaintiff was working overseas for a number of years. He decided that he would like to quit his job and move back to Sarnia. He investigated the possibility of operating his own business. He found a property that was currently zoned for residential. He approached the city’s zoning department and received assurances that the property could be rezoned commercial and that his proposed businesses of variety store and fast-food outlet would comply with the zoning. After investing much time and money, the City refused to greant him permits with respect to the fast food outlet. He sued for negligent misrepresentation. The court held that there was negligent misrepresentation and under the Hedley Byrne principal the municipality was liable for the plaintiff’s economic losses. Black v. Law Society of Alberta, [1989] 1 S.C.R. 591 (Supreme Court of Canada) A law firm in Alberta wished to enter a partnership with a law firm in Ontario. The Law Society enacted rules that prohibited these activities, specifically prohibiting lawyers from joining in partnership with lawyers who did not normally reside in the province of Alberta and secondly, prohibiting a lawyer from belonging to more than one law firm. The Supreme Court struck down the rules as being contrary to the mobility rights and rights of association as set out in the Charter of Rights and Freedoms ss. 6(2)(b) and 2(d) , nor were they justified under s. 1 of the Charter.

Border Enterprises Ltd. v. Beazer East Inc. (2002), 216 D.L.R. (4th) 107 (British Columbia Court of Appeal) The plaintiff sued a number of defendants for losses arising from contaminated land. One of the defendants was the Federal Crown. The Crown had requested that the statement of claim against it for negligent misrepresentation be struck out. The judge agreed and the plaintiff appealed the decision. The Court of Appeal held that even if the Crown had made a negligent misrepresentation, the plaintiff was not in a position to rely upon it and even if the plaintiff could rely upon it, then it would still not pass the test for negligence as it would create indeterminate liability. The appeal was dismissed on this point.

Bruno Appliance & Furniture Inc. v Hryniak 2014 SCR 8 Page 107, footnote 8

347671 B.C. Ltd. v. Heenan Blaikie (2002), 113 A.C.W.S. (3d) 725: [2002] B.C.J.No.347 (British Columbia Court of Appeal) The plaintiffs loaned money to finance the promotion of a concert. The concert was a financial failure and they lost their investment. They claimed that they relied on a negligent misrepresentation made by the defendant law firm. The law firm did not act for the plaintiffs, but acted for the parties with whom the plaintiffs invested. The court found for the plaintiffs. The law firm owed them a duty of care even though they were not the

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firm’s clients. The plaintiffs were engaged in a commercial transaction with their client and there was a "special relationship" between the law firm and the plaintiffs. Canada (Privacy Commissioner) v. Blood Tribe Department of Health, 2008 SCC 44 (Supreme Court of Canada) An employee who had been dismissed requested her personal file from her employer as she believed that it contained information used to discredit her and have her dismissed. The employer refused to produce the file. The employee took the matter to the Privacy Commissioner. The employer turned the file over to the commissioner with the exception of documents subject to solicitor-client privilege. The employer took the matter to a judge to determine if the Commissioner was able to compel disclosure of the documents in question. The reviewing judge determined that the Commissioner was able to compel production of the documents in order to perform her investigative role. The Federal Court of Appeal vacated that decision. The Supreme Court agreed with the court of appeal and dismissed the appeal. Solicitor-client privilege is fundamental to the proper functioning of our legal system. Candler v. Crane, Christmas & Co., [1951] 2 K.B. 164 (England - House of Lords) Ogilvie was director of a mining company in Cornwall, U.K. The company needed more capital and so Ogilive placed an ad in the papers looking for investors. The plaintiff, Candler, said he might be interested in investing, if he could review the company’s accounts. Ogilvie requested that the defendant, Crane, Christmas & Co., a firm of auditors prepare the account books for Candler’s inspection. Mr. Candler inspected the books in the presence of the defendant and decided to proceed with the investment. It turns out the mining company was in bad financial straits. Ogilvie took the investment for himself and the company went bankrupt. Candler sued the defendant auditor for negligent misrepresentation. The House of Lords denied the claim as there was no cause of action for misrepresentation without a contractual relationship. This position was eventually changed in the House of Lords’ later decision: Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465

Caners v. Eli Lilly Canada Inc. (1996), 134 D.L.R. (4th) 730 (Manitoba Court of Appeal) The plaintiff farmer purchased herbicide from the defendant manufacturers. The herbicide was labelled with a warning: “To cover the possibility of injury to rotational crops, seed the crops shallow into a warm moist seedbed.” The plaintiff’s crops were damaged by the failure of the herbicide to control weeds effectively, and in the following year by the effect of the residue. The manufacturer was held liable for the breach of warranty that the herbicide was suitable for the purpose for which it was bought; in particular, the warning was held to have been insufficiently precise. The trial judge reduced the amount of damages on account of the farmer’s contributory negligence in seeding the second crop too deep. On appeal, the Manitoba Court of Appeal held that the defence of contributory Copyright © 2016 Pearson Canada Inc.

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negligence was not available. The defence was created by statute—in this case, by s.4 of the Tortfeasors and Contributory Negligence Act, R.S.M. 1987, c. T-90—which reads, in part: “contributory negligence by a plaintiff is not a bar to the recovery of damages by him and in any action for damages that is founded upon the negligence of the defendant, if negligence is found on the part of the plaintiff which contributed to the damages, the court should apportion the damages in proportion to the degree of negligence found against the plaintiff and defendant respectively.” The statute did not apply, since the plaintiff’s claim was based upon breach of contract. Capital Community Credit Union Ltd. v. BDO Dunwoody [2001] O.J. No. 4249 (Ontario Court of Appeal) A credit union hired the defendant as its auditor. The audits missed some important irregularities in the credit union’s loans. The credit union sued for negligence. The trial judge held that the auditors had been negligent, but that the credit union had been 30% contributorily negligent in not mitigating its losses. The Court of Appeal affirmed the trial judge’s findings.

Central Trust Co. v. Rafuse (1986), 31 D.L.R. (4th) 481 (Supreme Court of Canada) The defendant solicitor acted for the plaintiff trust company in connection with a mortgage loan to a corporation that operated a motel and restaurant. Both the plaintiff and the defendant knew that the loan was to be used to enable certain individuals to buy shares in the corporation, though they were unaware that such a transaction was unlawful under the Nova Scotia Companies Act. (The defendant, at least, should have known that.) In subsequent foreclosure proceedings against the corporation the mortgage was held to be void and unenforceable. The plaintiff sued the defendant for its loss, resulting from losing its security; its claim was based both in tort (negligence) and in contract (breach of an implied term that the solicitor would exercise proper care).The defendant was held liable. The court held that the common law duty of care in tort is not restricted to noncontractual situations and is independent of any contract. This was important, since the limitation period for commencing proceedings starts to run, in contract from the time of the breach of contract, whereas in tort it did not begin to run until the injury became apparent; this was (at the earliest) when the validity of the mortgage was first challenged. Thus, the plaintiff could recover in tort even though it was too late for it to recover in contract. It was further held that the plaintiff was not contributorily negligent; it had discharged its duty of care by retaining a qualified lawyer to perform the necessary legal services. [Recall the discussion in Chapter 4 of the applicability of the defence of contributory negligence in contract actions.

Chapters Inc. v. Davies, Ward & Beck LLP. [2000] O.J.No.4973 (Ontario Court of Appeal)

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A law firm sought to represent a corporation that was seeking to acquire control of the plaintiff company. One of the lawyers employed by the law firm had, five years previously, acted for the plaintiff company. The plaintiffs applied for, and the court granted, a declaration that a conflict of interest existed and that the defendant law firm should not be allowed to represent the other corporation. They were in possession of confidential information about the plaintiffs.

CIA Inspection Inc. v. Dan Lawrie Insurance Brokerss [2010] O.J. No. 3313 (Ontario Superior Court of Justice) The plaintiff was an Ontario corporation carrying on business internationally inspecting oil refinery coke drums. It used very expensive specialized equipment for this job. One of its sensors was destroyed in an accident on site in Venezuela. It claimed to its insurance company. The insurer denied the claim, stating that the insurance only covered damages to the sensor caused in transit, not while in operation at a job site. The plaintiff then sued its insurance agent. The court held that the broker had a duty to its client to obtain the correct coverage. The court further held that the plaintiff was 33 1/3% contributorily negligent in not following up with the broker.

Cooper v. Hobart (2001), 206 D.L.R. (4th) 193 (Supreme Court of Canada) The plaintiff was an investor who invested with a broker who was eventually suspended by the Registrar of Mortgage Brokers for various irregularities. The plaintiff sued the Registrar for negligence for not suspending the broker’s licence sooner and for not advising the broker’s investors about the investigation into the broker’s violations. The Supreme Court held that there was no duty of care owed by the defendant to the plaintiff.

Costco Wholesale Canada Ltd. v. British Columbia (1998), 157 D.L.R. (4th) 725 (British Columbia Supreme Court) Pursuant to the Optometrists Act, R.S.B.C. 1996, c. 342, the Board of Examiners in Optometry created rules prohibiting business associations between optometrists and nonoptometrists. Two optometrists petitioned for judicial review of the validity of the prohibitive rules. They argued that the rules violated the freedom of association guaranteed by s. 2(d) of the Canadian Charter of Rights and Freedoms, and in the alternative, that the rules were ultra vires on administrative law grounds. The court held that a business relationship between optometrists and non-optometrists was an association protected under s. 2(d). The impugned rules had the effect of prohibiting associations that fell within the scope of the guaranteed freedom and it could not be justified on the basis of section 1 of the Charter. The absolute prohibition against any business relationship between optometrists and non-optometrists was overly broad. To the extent the board saw fit to prohibit such associations, it was required to create rules that could be proven to be both rationally based and proportionately implemented. Copyright © 2016 Pearson Canada Inc.

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Crown West Steel Fabricators v. Capri Insurance Services Ltd. (2002), 214 D.L.R. (4th) 577 (British Columbia Court of Appeal) The plaintiff corporation’s building was destroyed by fire. It discovered that it was underinsured and was not fully compensated. It brought an action against its insurance broker in negligence, contract and breach of fiduciary duty, for failing to recommend adequate insurance coverage. The trial judge found that the defendants were negligent and he awarded damages for business interruption loss, but reduced the award by thirty-five percent for contributory negligence. The plaintiffs appealed against the apportionment, arguing that its claims could be made concurrently as damages for breach of contract and fiduciary duty, and that contributory negligence could not be used to reduce its damages under those causes of action. The British Columbia Court of Appeal dismissed the appeal. The provisions of the Negligence Act should apply to the liability of parties in contract where that liability is concurrent with their liability in negligence. The contributory fault of the plaintiff should result in apportionment under both causes of action. (The court also found that there was no breach of fiduciary duty.)

Fine’s Flowers Ltd. v. General Accident Assurance Co. et al. (1974), 49 D.L.R. (3d) 641; affirmed (1977), 81 D.L.R. (3d) 139 (Ontario Court of Appeal) See Case 5.9 at p. 113 in the text. The defendant was the insurance agent for the plaintiff. The plaintiff operated a greenhouse in the Ottawa area. It relied on the defendant to ensure that proper insurance was in place, particularly regarding damage due to loss of heat. The defendant provided insurance on the plaintiff’s boilers, but neglected to obtain coverage for the water pumps that were a part of the heating system. The pumps failed and the insurance company refused payment as the pumps were not insured. The plaintiff then sued the agent. The agent was found to be liable under negligence for falling below

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the standard of care; or the cause of action could be categorized as breach of a special fiduciary duty.

Edwards v. Law Society of Upper Canada (2001), 206 D.L.R. (4th) 211 (Supreme Court of Canada) The plaintiffs were part of a large group of people who were scammed into purchasing gold. They were told to pay for the gold by depositing their money into a solicitor’s trust account. There was no gold. They brought a class action against the defendant law society for negligence in not ensuring that the solicitor’s trust account was being properly maintained; or for failing to advise them that they would no longer be in a supervisory role over the trust account. The Supreme Court held that there was no duty of care owed to the plaintiffs.

Ferrar v Lorenzetti Wolfe 2012 ONCA 851 Page 107 footnote 16

Fletcher v. Manitoba Insurance Co. [1990] 3 S.C.R. 191 (Supreme Court of Canada) The plaintiffs were injured in a car accident. The other driver did not have sufficient insurance to cover their damages. The plaintiffs then applied to their own insurer, the defendant, for the shortfall. The defendant refused to pay as the plaintiffs did not have the appropriate coverage. The plaintiffs brought an action against the defendant based on negligent misrepresentation by omission for failing to inform the plaintiffs of the appropriate coverage. The trial judge held that the defendant failed in its duty to its insured by not providing them with the information they needed to make an informed decision about what risks they were preapared to accept and were therefore liable. The Court of Appeal overturned the decision. The Supreme Court allowed the appeal and restored the trial judge’s decision.

Frame v. Smith [1987] 2 S.C.R. 99 (Supreme Court of Canada) This was a family law case. The plaintiff was a husband who sued in tort to try to overcome his ex-wife’s attempts to frustrate his efforts to access their children as per a court order. The defendant brought a motion to have the statement of claim struck as not demonstrating a cause of action. The lower courts granted the application to strike the claim. The Supreme Court affirmed the lower court’s decisions as the new family law legislation eliminated the old tortious actions and so they were no longer available. In her dissent, Madam Justice Wilson discussed the fiduciary obligation. At paragraph 60 she set out the test for a fiduciary relationship.

Galambos v. Perez 2009 SCC 48, [2009] 3 S.C.R. 247 (Supreme Court of Canada)

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See Case 5.3 at p. 104 in the text. A bookkeeper for a law firm made loans to the firm without the lawyer’s knowledge. The law firm had provided legal services to the bookkeeper free of charge. The law firm eventually went bankrupt. The plaintiff sued for breach of fiduciary duty, breach of contract, and negligence. The trial judge dismissed her action stating that she was simply in a debtor-creditor relationship. The British Columbia Court of Appeal held that there was a fiduciary relationship and a breach thereof. The Supreme Court of Canada overruled the Court of Appeal and restored the trial judge’s judgment. The court held that the Court of Appeal erred in finding a fiduciary relationship existed here in spite of the per se fiduciary relationship between a lawyer and client. The circumstances of this particular case did not give rise to a fiduciary relationship. Haig v. Bamford (1976), 72 D.L.R. (3d) 68 (Supreme Court of Canada) A firm of accountants negligently prepared an audited financial statement for a corporation, knowing that the statement was intended to be shown to potential investors in the corporation. They were held liable to the plaintiff, who invested in reliance on the statement, even though his personal existence was not known to the firm. He was one of a group of persons who might be expected to rely on the statement.

Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 (England – House of Lords) See Case 5.6 at p. 108 in the text. The plaintiff company was approached by a client wishing to obtain some advertising. As the nature of the business required the plaintiff to purchase the advertising for the client on a credit basis, the plaintiff requested a credit rating by contacting its own bank who in turn contacted the client’s bank, the defendant company Heller & Partners Ltd. The defendant provided a positive credit rating, but did have a disclaimer of liability in the letter provided. The credit rating proved to be inaccurate and shortly thereafter the client went bankrupt. The plaintiff suffered a substantial financial loss as a result. The House of Lords stated that the loss was recoverable under tort although the harm suffered was purely financial. Further, the plaintiff was able to sue the defendant, despite the lack of privity of contract, under the cause of action of negligent misrepresentation as a tort. The plaintiff was, however, barred from recovery based on the disclaimer in the credit rating. Hercules Managements Ltd. v. Ernst & Young (1997), 146 D.L.R. (4th) 577 (Supreme Court of Canada) Shareholders in two corporations brought an action against a firm of accountants, alleging that audits of the corporations' financial statements had been negligently prepared; and that in consequence, they had incurred investment losses and losses in the value of their shareholdings. The accountants argued they owed no duty of care to the shareholders in tort, and that any action should have been brought in the names of the corporations. On appeal, the Supreme Court of Canada held, dismissing the appeal, that reliance by

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shareholders on a corporate audit was foreseeable, and consequently, there was a prima facie duty of care. However, the purpose of an audit was to enable the shareholders collectively to exercise control over the directors. Losses caused to shareholders as individuals were not within the scope of the accountants' duty, and any action should therefore be brought in the names of the corporation. Consequently, the prima facie duty of care was negated by policy considerations. Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41 (Supreme Court of Canada) Police arrested and charged the plaintiff with ten counts of robbery. The police did have some evidence to suggest that the culprit may have been the plaintiff including eye witnesses. The plaintiff was convicted of one count of robbery. He appealed his conviction and was acquitted. He had served twenty months in jail for a crime he did not commit. He then brought this civil action for negligent investigation. The court held that there was such a tort as negligent investigation (the police are not immune to claims of negligence); however, the police were not negligent in this case as they did not fall below the standard of care.

Hodgins v. Hydro-Electric Commission of the Township of Nepean (1975), 60 D.L.R. (3d) 1 (Ontario Court of Appeal) See Case 5.8 at p. 111 in the text. The plaintiff wished to construct a pool. He approached the defendant to determine the best source of energy to heat the pool. The defendant provided a cost estimate for electric heat. In reliance on this estimate, the plaintiff installed electric heat. The costs were much higher than anticipated by the estimate and the plaintiff sued for negligent misrepresentation. The Court of Appeal held that there was no misrepresentation. At the time the employee of the defendant produced the estimate the information was accurate. He acted with competence and diligence in producing the estimate and therefore did not fall below the standard of care at the time the estimate was made.

Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (Supreme Court of Canada) See Case 5.2 at p. 104 in the text. A stock broker looked to an expert for tax shelter advice. The expert recommended multi-unit residential buildings (MURBs) as an investment. The broker agreed. Later the broker discovered that at the time of his investment in the MURBs the expert was in fact financially involved with the builders. He sued for breach of fiduciary duty. The court held that a fiduciary duty did exist in this case and that the failure to disclose the connection between the expert and the builder was a breach of the duty.

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Hopp v. Lepp (1980), 112 D.L.R. (3d) 67 (Supreme Court of Canada) The plaintiff was due to have a back operation performed by the defendant. The defendant did not tell the plaintiff that this was his first time performing the operation since obtaining his specialist's license (although he had performed the operation many times without actual supervision in the past). The plaintiff wanted to have the operation in Calgary but the defendant convinced him to have it in Lethbridge, saying that the operation was not serious, but without disclosing that there was no medical specialist support in Lethbridge in case of an emergency. The plaintiff signed a consent form and underwent the surgery which did not go well. The plaintiff had to undergo further surgery by a neurosurgeon and was left with permanent disabilities due to nerve damage. He sued the defendant in negligence and battery, claiming his consent to the operation had been vitiated by the non-disclosures. The court held that there was no negligence in the diagnosis, the choice of surgery, the operation itself, or in the post-operative care. The court further held that the plaintiff's consent had not been vitiated. The doctor was not obliged to disclose the number of times he had performed the operation since he was fully qualified. It was a routine operation that could be performed as easily in Lethbridge as in Calgary. The doctor had fully disclosed the seriousness of the operation.

Hollis v. Dow Corning Corp. (1995), 129 D.L.R. (4th) 609 (Supreme Court of Canada) The plaintiff underwent breast implant surgery on the advice of her doctor. Later she suffered pain and another doctor operated and discovered that one of the implants had ruptured. It was later discovered that the company knew that this was a risk and had failed to warn the doctor. The Supreme Court held that the duty of a manufacturer to warn is ongoing and the learned intermediary rule applied. The defendant was found liable.

Hughes v. Sunbeam Corp. (Canada) Ltd. (2003), 219 D.L.R. (4th) 467 (Ontario Court of Appeal) The plaintiff brought a class action suit against the manufacturer of a defective smoke alarm. He included as a defendant the Underwriters’ Laboratories of Canada (the party responsible for certifying and approving the detectors). The defendants brought a motion before the judge to have claims against them struck out as the claims did not disclose a cause of action. The court of appeal upheld the trial judge’s decision to strike many of the claims (including ULC) as there was not sufficient proximity of relationship to establish a duty of care owed to the defendant, or establishing a duty of care would create a situation of indeterminate liability.

Hunt v. TD Securities Inc. (2003), 229 D.L.R. (4th) 609 (Ontario Court of Appeal)

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See Case 5.1 at p. 104 in the text. The Hunts were an older couple who had brought their mutual funds to the defendant for investment. The investment contract was nondiscretionary; that is, all transactions had to be approved by the Hunts. The defendant sold some shares owned by the Hunts. The stock prices on those shares subsequently rose in value. The Hunts sued for breach of a fiduciary duty. The Courtof Appeal held that there was no fiduciary relationship as the parties did not meet the test and therefore, no breach. However, the court did agree that there was a breach of contract.

JB Printing Ltd. v. 829085 Ontario Ltd. [2003] O.J. No. 1230, aff'd (2004) 192 O.A.C. 313 (Ontario Court of Appeal) The plaintiff wished to purchase a printing press from a broker. The defendant was the previous owner of the press. The plaintiff asked the defendant about the press and the defendant voluntarily told the plaintiff that“it’s a great press” and “there is nothing wrong with it.” The plaintiff relied on these statements and purchased the press. These statements turned out not to be true. The trial judge found as fact that a component of the press was damaged compromising its performance. The trial judge held that the defendant was liable for negligent misrepresentation. The Court of Appeal affirmed this decision.

J. Nunes Diamonds Ltd. v. Dominion Electric Protection Co. (1972), 26 D.L.R. (3d) 699 (Supreme Court of Canada). The plaintiff, a diamond merchant, had a contract for burglary protection with the defendant. The contract limited the defendant's liability for breach of contract to $50. It also contained a clause that excluded any conditions, warranties, or representations other than those written in the contract. A neighbouring merchant's business, protected by the same system, was robbed and the defendant was unable to explain how the system had been defeated. The plaintiff then asked the defendant to inspect his premises. An unidentified representative of the defendant came and made a representation about the quality of the system, saying that even its own engineers could not get through the system. Shortly thereafter, the plaintiff's business was robbed by thieves who circumvented the security system. The plaintiff's insurer paid him and exercised its right of subrogation against the defendant. The court held that the defendant was not liable for more than $50. The statement made after the contract was formed did not alter the allocation of risk as it had been made in the original contract. The representation was not actionable in negligence; liability was fully accounted for under the contract since the representation was related to performance of the contract. Kamloops (City of) v. Nielsen [1984] 2 S.C.R. 2 (Supreme Court of Canada)

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The city, although aware through its building inspector of a defect in on-going construction, failed to prevent the construction of a house with defective foundations. Three years later, the original owners sold the house to Nielson. A year after that, Nielsen discovered that the foundation had subsided and sued the city and the original owners for negligence. The Court held that the city was in breach of its statutory duty in failing to protect the plaintiff against the builder's negligence. The city was held twenty-five percent responsible and the original owners seventy-five percent. The court set out the Canadian test for negligence: (1) is there a sufficiently close relationship between the parties (the [defendant] and the person who has suffered the damage) so that, in the reasonable contemplation of the [defendant], carelessness on its part might cause damage to that person? If so, (2) are there any considerations which ought to negative or limit (a) the scope of the duty and (b) the class of persons to whom it is owed or (c) the damages to which a breach of it may give rise? (at 10 per Wilson, J.)

Kerr v. Danier Leather Inc. 2007 SCC 44 (Supreme Court of Canada) Danier included a forecast of fourth quarter results in a prospectus prepared for an initial public offering of shares. After the release of the prospectus, but before the public offering closed, Danier became aware that the forecast in the prospectus was overly optimistic and unlikely to be realized; it did not disclose this new assessment. Shareholders brought a class action for misrepresentation pursuant to s. 130 of the Securities Act and were successful at trial. The Court of Appeal overturned the trial judgment and the Supreme Court dismissed the appeal. The forecast was accurate at the time of filing. Subsequent disclosure was not required by statute because the new information did not qualify as a “material change” under s. 57 of the Securities Act. The SCC held that forecasting was a matter of business judgment but the business judgment rule could not be used to limit a statutory duty to disclose (in this case none was found). The Court also ordered costs and made interesting comments about the use of class actions by shareholders and the role of costs in class action litigation.

Kitchen v. McMullan (1989), 62 D.L.R. (4th) 481 (New Brunswick Court of Appeal) The plaintiff suffered delayed bleeding following a tooth extraction. He was diagnosed as a mild haemophiliac and a blood replacement product called cryoprecipitate was prescribed and administered. The bleeding stopped. Then another product "Hemofil" was prescribed and administered. The prescribing physician knew that this product carried a higher risk of transmitting hepatitis but did not inform the plaintiff of this. The plaintiff contracted hepatitis. Evidence was that the risk was very low and not usually disclosed. On the other hand, delayed bleeding if left uncontrolled is life threatening. The plaintiff's

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action was dismissed. The risk ought to have been disclosed, but a reasonable person in the plaintiff's position would not have refused treatment. Korz v. St. Pierre (1987), 61 O.R. (2d) 609 (Ontario Court of Appeal) The fiduciary duty of a solicitor to his/her client may last beyond the term of the retainer. The duty to avoid a conflict of interest will likewise continue, even after the relationship is over.

Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574 (Supreme Court of Canada) Junior mining company “Corona” revealed confidential information about a property to senior mining company “Lac” in the hope of establishing a joint venture. Lac used the information to buy the property. The court held that this was a breach of confidence and that a fiduciary relationship existed. The court reiterated the test for a fiduciary relationship. As well, the court stated that generally, certain types of relationships give rise to a fiduciary relationship: “director-corporation, trustee-beneficiary, solicitor-client, partners, principal-agent, and the like.”

Manufacturer’s Life Insurance Co. v. Pitblado & Hoskins, 2009 MBCA 83, [2009] 2 W.W.R. 638 (Manitoba Court of Appeal) The City of Winnipeg agreed to amend a lease with respect to some land it owned as a developer of the neighbouring lot needed financing and Manufacturer’s Life would not agree to the mortgage without the changes. Winnipeg neglected to mention another party who was also using the land as a parking lot under a different lease. Disputes arose

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between the third party and the developer. As a result the developer was unable to proceed with development of the property and went into default on its mortgage. The court held (and was affirmed by the Court of Appeal) that the City had made a negligent misrepresentation and that the mortgagee was entitled to make a Hedley Byrne claim against it. The court used the five step test as laid out in Queen v. Cognos.

Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639 (Ontario Court of Appeal) Martin was a property developer in the nursing home business. He owned substantial properties in Ontario and decided to move into the Toronto market. He purchased a property owned by Anthony, a member of the Frog Pond Group. Martin was then persuaded by FPG and particulary, Mr. Axton to purchase another property. Both of these purchases ultimately turned out to be a disaster. It turns out that Axton was a former lawyer, who had been disbarred and convicted for fraud. Axton’s lawyer was Goldfarb. After the intital two transactions, Martin became very dependent on Axton for financial advice. Goldfarb became Martin’s lawyer. Neither Martin nor Goldfarb were aware of the frauds being perpetrated by Axton and FPG against Martin although Goldfarb did know about Axton’s past and did not disclose his knowledge to Martin. Martin lost so much money that his corporations were petitioned into bankruptcy. Martin sued Goldfarb for breach of fiduciary duty. The difficulty for the court was in assessing what damages applied. The court referred to the decision in Hodgkinson v. Simms, [1994] 3 S.C.R. 377 that restitution is in order for a breach of fiduciary duty, that is, the beneficiary should be put in the position he would have been had the breach not occurred. Further, the court also noted that a plaintiff should not receive a higher award of damages simply because the action is characterized as a breach of fiduciary duty.

McLintock v. Alidina [2010] O.J. No. 49 (Ontario Superior Court of Justice) The plaintiff sued her family physician for negligence. In the year 2000 the plaintiff went to see the defendant for a physical. As part of the physical, the defendant sent the plaintiff for a mammogram. The defendant had a follow up interview with the plaintiff on September 20, 2000. Unfortunately, the mammogram result was not received by the defendant until two days later. There were some irregularities with the results and so a subsequent mammogram was scheduled. The plaintiff did not show up for the scheduled mammogram as she was not made aware of it. She continued to see this doctor for another five years. In 2005 a lump was discovered on her breast. The defendant rescheduled a mammogram and cancer was discovered. The plaintiff received treatment. The court held that the doctor did fall below the standard of care, but the plaintiff could not recover as she had suffered no damages. Had the second mammogram proceeded as scheduled, the result would have been the same and the harm suffered was not increased by the docotr’s negligence.

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McDonnell v. Richter [2010] A.J. No. 794 (Alberta Court of Queen’s Bench) McDonnell leased residential premises to Richter and his girlfriend, White; for tax purposes Richter asked to have the tenancy agreement put in the name of his corporation, NRG. Richter was the sole director, officer and shareholder of the NRG. The tenancy agreement included coverage for the tenant in case of fire. The premises were damged by fire. The court was asked to ascertain whether Richter and White could claim under the insurance policy. The court held Richter and White could claim, in spite of the tenancy being in the name of NRG because it was clear from the facts that McDonnell knew that the premises were to be occupied by Richter and White; that the premises were residential and not commercial; and further that the decisions in London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 suggested that the court look to the commercial reality of the transaction to determine who the agreement was meant to cover.

Mondesir v. Manitoba Assn. of Optometrists (1998), 163 D.L.R. (4th) 703 (Manitoba Court of Appeal) A patient of an optometrist was dissatisfied with his treatment and arranged to be examined at the offices of a second optometrist. The examination was conducted by the second optometrist's nephew and employee. After being diagnosed with glaucoma, the patient filed a complaint against the first optometrist with the provincial association of optometrists, alleging failure to make a timely diagnosis of her condition. Pursuant to the Optometry Act, R.S.M. 1987, c. O70, the complaints committee conducted a preliminary investigation, and charged the optometrist with two counts of professional misconduct, and directed the matter over to the discipline committee for hearing. The second optometrist, at whose offices the patient had attended for the second opinion, was a member of the complaints committee. The optometrist against whom the complaint had been made sought an order prohibiting the association from proceeding with the disciplinary hearing on the basis of reasonable apprehension of bias. The motions judge agreed however on appeal the Manitoba Court of Appeal held that the existence of an apprehension of bias at the investigative stage of the administrative process created by the legislation does not warrant the granting of a prohibition order. The complaints committee and the discipline committee operate independently. In the absence of evidence of a real and substantial prejudice to the optometrist, the hearing before the discipline committee was an adequate alternate remedy to the granting of a prerogative writ.

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fiduciary duty to the contractor. However, the plaintiff contractor was 40% contributorily negligent, in failing to obtain independent advice, or to read the terms of the agreement.

Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 (Supreme Court of Canada) The plaintiff changed a bottle of water and saw in the new bottle a dead fly and part of another fly. The incident caused him severe psychological harm. He sued the defendant water supply company. The trial judge found the defendant to be liable, but the decision was overturned. The Supreme Court held that while the standard of care was breached, the injury was not foreseeable. Such an extreme reaction was not something a person of normal fortitude would suffer and therefore it was not foreseeable. Nocton v. Lord Ashburton, [1914] A.C. 932 (England—House of Lords) Nocton was a solicitor employed by Ashburton. At Nocton's suggestion, and despite the warnings of Nocton's partners that Nocton had a personal interest in the deal which was not likely to be profitable, Ashburton borrowed money to give a £65,000 mortgage to two builders. Part of the property was later released by Ashburton from the security at Nocton's suggestion; the security then was insufficient to cover the mortgage. The mortgagors defaulted on payment, and Ashburton could not in turn make the payments on his loan which came due in its entirety. Ashburton sued Nocton for indemnity for breach of his fiduciary duty. The court held that a special duty between the parties arose out of their circumstances and relations. Breach of fiduciary duty was not covered by the Statute of Limitations. Ashburton was entitled to be indemnified by Nocton.

Northwest Territories (Commissioner) v. Portz, 27 C.C.L.T. (2d) 241, [1996] 3 W.W.R. 94 (Supreme Court of the Northwest Territories) The defendant, Portz, was a bank manager at TD Bank. He left his job to take over management of an agriculture start up company that was struggling. As part of a $300,000 government grant, the company had to obtain new management (Portz) and this new director had to sign a personal guarantee. Portz was told that all of the directors had signed personal guarantees. He agreed to sign a guarantee for $25,000. Once he was in his new position he learned that matters were much worse than he had known. Existing government loans were in arrears and significantly more money than the $300,000 grant would be required to keep the company going. The company went bankrupt. The government tried to collect on Portz’s guarantee, but Portz had discovered that the other directors’ guarantees had not been properly prepared and were, therefore, not valid. The government sued for recovery of the guarantee and the defendant defended that the plaintiff had neglected to disclose information that they were required to disclose; that is,it made a negligent misrepresentation by omission. The court held that the plaintiff was required to disclose the arrears of the government loan and the invalid guarantees of the other directors.

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Oz Optics Ltd., v. Timbercon, Inc. [2010] O.J. No. 1963 (Ontario Superior Court of Justice) Two companies were working together to gain a contract with a third company. They had no contract between them. The relationship between the two companies broke down and the defendant stared dealing with a competitor of the palintiff on the project. The defendant presented the third party with two bids, one from the project with the plaintiff and one from the project with the competitor. The third party selected the latter to contract with. The plaintiff sued for negligent misrepresentation among other causes of action. The defendant argued that there was no contract between itself and the plaintiff. The court held that as per Hedly Byrne the duty of care could arise in tort independently from a contract. However, the plaintiff failed on its claim as it was unable to meet the test for negligent misrepresentation as no false statement was made.

Queen v. Cognos Inc. [1993] 1 S.C.R. 87 (Supreme Court of Canada) This case involved a failure to advise a job applicant that the project being hired for was subject to budgetary approval. The plaintiff worked as an accountant in a firm in Calgary. He was actively seeking other, more challenging work. The defendant was attempting to launch a new product and was seeking an accountant to help with the development of software for an accounting program. The representative of the defendant stated to the plaintiff that the project was approved and offered the plaintiff the job. The plaintiff moved his family from Calgary to Ottawa to take the job. The employment contract contained a clause that allowed the employer to terminate the employment on one month’s notice. The funding did not go through for the project and the plaintiff was terminated.The case imposed liability on the employer for negligent misrepresentation because the parties were in a special relationship within the meaning of Hedley Byrne. The defendant breached the standard of care of the ordinary, reasonable person. The plaintiff was not restricted to contractual remedies, but was instead allowed to rely on the common law duty owed in tort. Reibl v. Hughes (1980), 114 D.L.R. (3d) 1 (Supreme Court of Canada) The plaintiff's condition was diagnosed by a doctor as hypertension (high blood pressure) that was causing headaches. The defendant neurosurgeon was consulted and discovered a partially blocked artery unrelated to the hypertension condition. He suggested that the blockage should be remedied surgically to reduce the risk of death or stroke by diminution of the blood supply to the brain. The defendant did not disclose to the plaintiff adequately that the operation would not cure the headaches, nor that there was a four percent risk of death and a ten percent risk of stroke during the surgery. The defendant merely told the plaintiff that he would be better off with the operation than without. The plaintiff signed a consent form and underwent the operation. He suffered a massive stroke as a consequence of the operation and the right side of his body was paralysed. He sued.

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The court held that the duty of disclosure had been breached since the defendant had not told the plaintiff of a material risk of stroke or death arising from the surgery. This did not vitiate consent, so no action in battery could be sustained against the doctor. However, it did amount to negligence which caused the plaintiff's loss since a reasonable person in the plaintiff's position would not have undergone the operation with full disclosure.

Roberge v. Bolduc, [1991] 1 S.C.R. 374 (Supreme Court of Canada) The respondents were two parties engaged in a purchase and sale of property. The first respondent had title searched before finalizing the deal. He went to a notary, the appellant, who stated that there was a defect with the title to the property. The notary for the second respondent argued that the defect was cured by a judge’s order making it res judicata. The appellant disagreed. The first respondent then sought advice from another notary who agreed with the appellant’s opinion. The first respondent refused to close the purchase agreement and the two parties entered into a lawsuit. The first respondent cross claimed against the appellant. At trial the court held that the appellant had been negligent as the defect was in fact res judicata and due to his negligence the sale did not go through and the parties suffered losses. The appellant appealed to the Supreme Court when the Court of Appeal refused to grant leave to appeal and the Supreme Court affirmed the decision of the trial judge.

Rogers v. Faught (2002), 212 D.L.R. (4th) 366 (Ontario Court of Appeal) The plaintiff claimed to have received injuries as a result of negligent treatment from a dental hygienist. She brought an action against the provincial college of dental surgeons, claiming that they had breached their duty of care towards her because they had not undertaken adequate risk management. (She also claimed that the colleges were liable for breaches under s. 7 of the Canadian Charter of Rights and Freedoms, due to the violation of security of her person; under s. 15, because the type of injury she suffered mostly occurred in women; and that the colleges had violated her right to equal protection of the law.) The motions judge dismissed all claims against the colleges. The plaintiff’s appeal was also dismissed. The college did not owe a duty of care to the patients of dentists and dental hygienists. The Regulated Health Professions Act, 1991, S.O. 1991, c. 18, s. 38, provided that no action for damages should be instituted against a college for an act done in good faith in the performance of a duty or exercise of a power under the Act. That provision indicated a legislative intent not to create such a duty. (The claims under the Charter also failed because the application of the Charter was confined to government action, not inaction.)

Schilling v. Certified General Accountants Assn. of British Columbia (1996), 135 D.L.R. (4th) 669 (British Columbia Court of Appeal)

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See Case 4.11 at p. 102 in the text. The plaintiffs invested large amounts of money with an investment company that was run by an accountant. The accountant maintained his designation of “certified” in spite of the fact that his membership with the Association had been withdrawn. The accountant absconded with the plaintiffs’ money. The plaintiffs brought an action against the certifying association (the defendant) for failing to prevent the accountant from using the designation “certified.” The trial judge held the Association to be liable for negligence; however, the Court of Appeal held that the defendant did not owe a duty to the plaintiffs and was therefore not liable.

Seney v. Crooks (1998), 166 D.L.R. (4th) 337 (Court of Appeal of Alberta) The plaintiff broke her wrist and was referred to the defendant as a speciailist. When she went to meet with him for the first time, her wrist was already in a cast. The doctor knew that the healing that was in progress was not going to result in a full recovery, but believed that the result would be functionally acceptable. He did not discuss this with her or any other options, such as surgery. When the cast was removed several weeks later, the plaintiff had one further visit with the defendant shortly thereafter. Sometime later, the plaintiff had corrective surgery, but the surgery was not entirely successful. The plaintiff lost some of the mobility in her wrist, but it was largely functional. The plaintiff then sued the defendant for negligence. The trial judge held that the defendant had not been negligent in his treatment. However, the defendant had breached his fiduciary duty to keep the plaintiff fully informed. The Court of Appeal overturned this decision. They agreed that there was a breach of a fiduciary obligation, but that alone did not attach liability. The plaintiff still had to demonstrate that the breach caused her injury to be worse than it would have been, had she been informed and able to take the surgery earlier. This was not the case here.

Sharbern Holding Inc. v Vancouver Airport Centre Ltd. 2011 SCC 23 Page 109 footnote 26

Silver v. IMAX Corporation et al., [2009] Nos. 5573 and 5585 (Ontario Superior Court of Justice) This case is a class action filed against IMAX for negligent misrepresentations made in its 2005 audited financial records filed with the Ontario Securities Commission and the U.S. Securities and Exchange Commission. The records did not comply with GAAP standards. The class action was commenced by shareholders who lost value on the stocks when the errors were revealed. This case involved both statutory and common law misrepresentation causes of action. The court considered the issue of indeterminate liability with respect to the common law cause of action and provided leave to the plaintiffs for fulfuilling the requirement of good faith for the statutory cause of action.

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Smith v. Jones (1999), 169 D.L.R. (4th) 385 (Supreme Court of Canada) An accused was charged with aggravated sexual assault of a prostitute. His counsel referred him to a psychiatrist for a forensic assessment. Counsel advised the accused that his conversations with the psychiatrist would be privileged. During the assessment, the psychiatrist feared the accused was dangerous and would likely commit further offences unless he received sufficient treatment. The accused pleaded guilty to aggravated assault, and the matter was put over for sentencing. When the psychiatrist learned that the sentencing judge would not be advised of his concerns, he brought an application for a declaration that he was entitled to disclose the information he had received in the interests of public safety. The Supreme Court of Canada held that solicitor-client privilege is the highest privilege recognized by the court. If a public safety exception applies to solicitor-client privilege, then by necessary implication the exception applies to all privileges and duties of confidentiality. However, the privilege is subject to certain clearly defined exceptions such as danger to public safety, if there are appropriate circumstances. The test provided by the court asks three questions: (1) is there a clear risk to an identifiable person or group of persons? (2) Is there a risk of serious bodily harm or death? (3) Is the danger imminent? If after considering all the appropriate factors it is determined that the threat to public safety outweighs the need to preserve the privilege, then the privilege must be set aside. However, the disclosure of the privileged communication should be as limited as possible.

Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177 (Supreme Court of Canada) A lawyer acting for two companies in the same competitive field became financially interested in the second company. The first company sued on the grounds of conflict of interest. The court held that there was a breach of fiduciary duty caused by the conflict of interest; that the lawyer could not zealously promote the interests of the plaintiff company, while holding a financial interest in its competitor. . Sugar v. Peat Marwick Ltd. (1988), 55 D.L.R. (4th) 230 (Ontario High Court) See Case 4.5 at p. 93 in the text. A lender learned of inaccuarcies in the account books of one of its borrowers. The lender put the borrower into receivership under its mortgage security. The plaintiff purchased the borrower’s businesss based on the borrower’s account books. The new business failed and the plaintiff sued the lender. The lender was found liable for fraudulent misrepresentation for not revealing the true state of the borrower’s finances.

ter Neuzen v. Korn (1995), 127 D.L.R. (4th) 577 (Supreme Court of Canada) The plaintiff was infected with HIV as a result of artificial insemination carried out by the defendant physician. The risk of infection in this way did not become widely known until some months later and, at the time of the insemination, no test was available in Canada Copyright © 2016 Pearson Canada Inc.

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for the detection of HIV in semen. The defendant had followed what were then the standard Canadian procedures for recruiting and screening donors. At trial, the jury found the defendant negligent and awarded damages of almost $1 million. On appeal, the finding was overturned. There was no room for a finding of negligence where the defendant had followed the standard practice of the profession, unless that standard practice was obviously inadequate.

Toromont Industrial Holdings v. Thorne, Gunn, Helliwell & Christenson (1977), 14 O.R. (2d) 87 (Ontario Court of Appeal) See Case 5.10 at p. 114 in the text. An investment company requested a financial report on a business it was considering purchasing. It requested the report from the defendant, a firm of investment analysts. The defendant provided the report; however, the plaintiff did not have time to read it. The plaintiff acted to make the purchase based on concerns that another purchaser was interested. Later it was revealed that the report was negligently produced; the value of the business was significantly less than what was stated in the report and less than what the plaintiff paid to purchase it. The plaintiff sued for negligent misrepresentation, but the court held that there was no reliance on the misrepresentation and therefore the plaintiff did not meet the test as set out in Queen v. Cognos.

Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85 (Supreme Court of Canada) A developer built a building that was subsequently purchased by the plaintiff. The plaintiff became concerned about some masonry work and had it inspected. The inspector and other engineers offered the opinion that the building was structurally sound. A few years later some of the masonry (cladding) collapsed. The plaintiff had the masonry repaired and replaced the remaining masonry. The plaintiff sued the various defendants for the cost of the repairs. The Supreme Court held that it was reasonably foreseeable that the remaining masonry may fall and cause injury to persons or property and that the defendants were liable.

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CHAPTER 6 FORMATION OF A CONTRACT: OFFER AND ACCEPTANCE The text devotes eight chapters to the law of contracts and another six to its applications, developing the topic in a much more extensive way than it does for the law of torts. For that reason, and because cases and problems are often the most effective way of explaining principles and concepts the case material at the end of each chapter may be a useful way of teaching the materials in each chapter. THE NATURE OF AN OFFER (Source p. 124) One way to get students to think about offer and acceptance is to present the class with a personal, hypothetical case: I am shopping in a supermarket. I see a package of frozen peas in the frozen food case. I reach for it and place it in my shopping cart. After I have shopped for some other items, it occurs to me that I would rather have tinned peas than frozen peas. I return to the aisle where the frozen peas are displayed and am just in the act of returning the package of frozen peas to its case when a store attendant, observing what I am about to do, approaches and says, "I'm sorry, those peas have begun to thaw and I'm afraid you've already bought them. You can't put them back now." Am I really a party to a contract of sale with the store, already formed by offer and acceptance? If not, when would such a contract have been formed? Another way of opening a class discussion on offer and acceptance is to review Carlill v. Carbolic Smoke Ball Co., [l892] 2 Q.B. 484 (see Questions l3 and 14 in the Questions for Review). Students might enjoy seeing the actual advertisement and the instructor might distribute copies of the advertisement as a basis for class discussion. Carlill is a good case for discussion of an invitation to do business vesus an offer, and also as to when advertisements can be considered offers, as set out on page 124. A more recent case regarding the principles from Carlill is the Pepsi Cola /Harrier jet example. This American case deals with a commercial Pepsi ran in 1996. If nothing else it demonstrates the applicability of Carlill to modern marketing. There are a string of reward cases that could be discussed and this is a nice connector to the topic on Standard Form Contracts because the risk management strategy adopted by business requires consumers to sign up in advance (either as a card holder or just to register points) at which time they are required to agree to certain terms and conditions. Resources - Pepsi Stuff Marketing Campaign: 1. The actual commercials are available on You Tube;

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2. Pepsi’s successful motion for summary dismissal is Leonard v. Pepsico, 88 F. Supp. 116 (S.D.N.Y. 1999) affirmed on appeal 210 F.3d 88 (2d Cir. 2000). Found at page 155, case 7.7 . STANDARD FORM CONTRACTS: THEIR RISKS AND BENEFITS (Source p. 126) A good way to start off this topic is to ask students who have bus tickets to examine them, or to ask if students who used a parking lot that day noticed any posted signs. This can lead into a discussion of the need for standard form contracts for business efficiency, and the legal principle that you are bound by all the terms. It is a good idea to return to a brief discussion of standard form contracts when teaching the Parol Evidence Rule, noting that you will be bound by what you have signed, regardless of any agreements made, in most instances. Examine Case 6.3 (Source p. 128). This case highlights that a contract term must be unusual or unexpected before a court will strike it from the contract. Many times students take the position that all Standard Form Contracts must be inherently evil and ignore the very real commercial value they provide. An instructor may wish to contrast this with the case of Tilden Rent-A-Car Co. v. Clendenning (1978), 18 O.R. (2d) 601 where the the onerous term regarding insurance was struck from the contract.

TRANSACTIONS BETWEEN PARTIES AT A DISTANCE FROM EACH OTHER (Source p. 134) The Lapse and Revocation of an Offer The various ways an offer may be revoked should be covered, and are set out in the text at p. 129. A good way to teach this material is to use the example of a student being offered a job on a Thursday, with the need to accept by the following Tuesday, so the student goes away to celebrate on the weekend and comes home to a letter delivered to his or her home, revoking the offer, prior to acceptance. The Checklist on page 133 covers off the various methods of how an offer can come to an end. Illustration 6.7, at page 135, is a good example of revocation needing to be “actually received”. JURISDICTION Where a contract is formed plays an important role in determing what law applies to a contract. The postal acceptance rule affects where and when a contract is accepted. This law can be examined by having an offer counter-offered by mail, then various counteroffers made by phone, etc, with the ultimate goal to determine the jurisdiction of the contract. INTERNET CONTRACTS

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With internet contracts, the most important factor is that the consumer is the offeree – as opposed to the usual display of goods with an invitation to do business. The current law of a province may provide for discussion, and the law in this area is rapidly developing, both in terms of consumer protection legislation and the law relating to formation of a contract. A good exercise is to examine a few standard form internet contracts. Instructors may wish to look at the case of Rudder v Microsoft Corp. 2 CPR (4th) 474, as the case discusses the use of “fine print” and also covers the requirements for a change of jurisdiction.

STRATEGIES TO MANAGE THE LEGAL RISK (Source p. 139) This section is a useful summary for students to think about the ways in which a business must consider the contracts that it is prepared to enter into. Consider setting students the task of creating a standard form contract for a fictional business. This exercise is one that can be carried forward through further chapters to incorporate new principles and rules as they arise with resprect to managing legal risk.

ETHICAL ISSUE (Source p. 133) When is There a Duty to Negotiate in Good Faith? Question 1 – This question looks at whether the law should recognize a legal duty to negotiate contracts in good faith. This question allows students to explore the various policy reasons that courts have relied on when refusing to find that a duty of care exists in the context of commercial negotiations. For example, the fact that the bilateral nature of commercial negotiations results in gains being achieved for one party at the expense of another is inconsistent with a duty to negotiate in good faith. Further, creating a new duty to negotiate in good faith could result in a multiplicity of frivolous law suits. For more policy reasons against imposing a duty to negotiate in good faith see the Martel Building Ltd. v. Canada case summary. Another question that students may discuss is whether courts are in a position to decide whether a party to a contract has negotiated in good faith or not. Question 2 - Negotiation of commercial contracts often requires a business to divulge competitive information. This question looks at how that information can be protected during negotiations. Negotiations can be conducted on a without prejudice basis, which would mean that the information a business discloses during negotiations cannot be used against the company as an admission if an agreement is not reached. Prior to disclosure of any information, prospective purchasers should sign a confidentiality and non-disclosure agreement describing the information being disclosed; the purpose or use that may be made of the information; restricting disclosure of the information; and a time period covering the agreement. Instructors may want to link this discussion with the topic on

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Agreements in Restraint of Trade in Chapter 8. Students should be made aware that carrying out negotiations on a confidential basis is not a perfect solution, because the other party will not forget what they have read or heard simply because it was said to be in confidence.

INTERNATIONAL ISSUE (Source p. 129) Jurisdiction and Internet Contracts Question 1 - This question asks whether Canadian provinces should co-ordinate their legislation to avoid international inconsistency. The United Nations claims that the Convention on the Use of Electronic Communications in International Contracts seeks to “enhance legal certainty and commercial predictability where electronic communications are used in relation to international contracts.” While co-ordinating provincial legislation may enhance certainty and predictability, it may also cause new problems. For example, if all provinces have different standards that apply to international contracts, what do you adopt for the national standard? Do you use a standard that already exists in Canada or do you have to adopt a standard from another country that is the international standard? This could result in some provinces having to lower the standards they currently have in place, which would likely face opposition. Canada has a few orgainizations that work towards uniformity among provinces. The first is the Uniform Law Conference of Canada. Most provinces have a Law Reform Commission that recommends changes to the legislature – usually after reviewing the various provincial and international positions on the matter – see for example the Manitoba Law Reform Commission. Question 2 - The second question asks how businesses can use their online contracts to ensure that foreign consumers are aware of the law that is applicable. Businesses could include a proper law of the contract clause in their contracts and program their websites so that clients must accept the terms of the contract before proceeding. However, there is always the chance that clients will not read the terms and therefore will not know what law is intended to apply to the contract. This discussion can be linked to the content in Chapters 30 and 31.

QUESTIONS FOR REVIEW 1. An offer is just a tentative or conditional promise, and is not binding and enforceable unless and until the condition or request it contains is accepted by the other party. (Source p. 124) 2. Businesses that deal with the general public often present the terms of their offers in a printed document (Standard Form Contract). As a practical matter the offeree cannot change any of the terms, but must take it or leave it. (Source p. 126)

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3. Terms in a standard form contract are only binding if the offeree has notice of them. Some types of business activities are regulated by government boards and standard terms must be approved. Otherwise the courts must decide if the offeror took adequate steps to bring the terms to the attention of the offeree. (Source pp. 126-127) 4. An offer may come to end when it lapses (the offeree fails to accept within the specified time, or within a reasonable time if none is specified), or by revocation (the offer is withdrawn before it has been accepted). (Source pp. 128) 5. A counter-offer rejects the earlier offer. (Source p. 130) 6. An offeree cannot accept an offer unless she is aware of it. She is entitled to receive an offer to do the work, which she may accept or reject. (Source p. 131) 7. An acceptance must be made in some positive form, whether in words or by conduct. Silence does not amount to acceptance unless the parties have habitually used this method. (Source p. 134) 8. An offeree may make a contract with the offeror whereby the offeree agrees to pay a sum of money and, in return, the offeror agrees: (1) to keep the offer open for a specified time; and (2) not to make contracts with other parties that would prevent it from fulfilling its offer (that is, to give the offeree the exclusive right to accept the offer). (Source pp. 129) 9. The purpose of inviting tenders may be either to obtain firm offers from the tenderers for a fixed quantity of goods and services over a stated period, or it may be to explore the market of available suppliers and develop the best terms for proceeding with a project. The bid constitutes an offer which must be accepted by the person inviting the tenders. (Source pp. 132) 10. The ordinary rule is that acceptance is complete when a properly addressed and stamped letter of acceptance is dropped in the mail. The acceptance may be by post even though the offer was not sent through the mail itself, so long as acceptance by mail is a reasonable response to the offer. (Source p. 134) 11. When instantaneous means of communication such as telephone is used, the offeror must receive the acceptance before he is bound. (Source p. 134) 12. While the delay in sending a fax or an e-mail may be small, the sender of the message cannot be certain that the intended recipient actually learns of the message so it cannot be considered instantaneous. Unlike a telephone message, where acknowledgement is immediate, a sender does not know whether the recipient is present at the other end, even if the fax or e-mail does arrive within a few minutes. (Source p. 134) 13. A unilateral contract is one in which the offer is accepted by performing an act or series of acts required by the terms of the offer. A bilateral contract is a contract where the offeror and offeree trade promises and both are bound to perform. (Source p. 135-136) 14. Unilateral. (Source p. 136)

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15. The contract is incomplete and is not binding. (Source p. 138) 16. This rule applies so that people do not have to pay for work that was done without their knowledge. An offer to do the work must first be communicated, which can then be accepted or rejected. An example of this is where someone mows your lawn, and then asks for payment. (Source p. 131) 17. As a general rule, there is no contract until acceptance is communicated. (Source p. 131) 18. At an auction, the bid constitutes the offer which the auctioneer is free to accept or to reject. A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer or in another customary manner. (Source p. 130)

CASES AND PROBLEMS 1. The issue here is whether the ad placed in the newspaper by Ashley formed the basis of an offer. In all probability it did not. Most advertisements are known as invitations to do business, in other words, an invite to the public to come in to make an offer. Advertisements such as the one here cannot be offers as the offeror would be in breach if they could not supply the goods for the number of persons who showed up that day. Ashley in fact wasn’t the waitress. Bill and Marlene were not even aware of the exact terms of what Ashley was suggesting – the ad does not say that the coffee and goodies will be free. By ordering food and accepting food Bill and Marlene have entered into a contract and would be liable to pay for what they ordered. 2. As discussed at p. 124 in the text, newspaper advertisements are generally merely invitations: does the same reasoning apply to a window ad? In Case 6.1 (Source p. 125) we also learned that goods displayed in a self-service shop do not amount to an offer. Courts are unlikely to single out window ads as more likely to create an offer unless the ad offers “to sell a fixed number of items at a fixed price to those who accept first.” (Source p. 124) Accordingly, the main issue is whether the ad in the shop window could reasonably be considered to be more than just an invitation; that is, an offer to the first five buyers who appear at Sackett’s the next morning. The ad says, “…five Whirlwind Dishwashers reduced… to $599! Shop Early!” Should these words be interpreted as being an offer to the first five in the door who say, “I’ll take one of those washers at the advertised price”? In view of today’s concerns about consumer protection, a court is likely to favour the argument made for the prospective buyer that it is indeed an offer. 3. This case provides a useful introduction to the complexity of potential disputes that may at first glance appear to be straightforward. The first question to ask is what did Heilman agree to when he said, “I accept your offer”? Students’ knowledge about real estate transactions and condominiums is likely to determine their answers.

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The simplest approach would be to argue that Heilman has made a deal to purchase the condo unit for $275,000 in cash; he isn’t interested in the mortgage arrangements proposed by Garrett but will arrange his own financing. This answer might be acceptable if the transaction were for a house standing on a separate lot (a “fee simple”, as discussed in Chapter 21). However, the status of a condominium is very different—the condominium corporation “owns” and is responsible for maintaining the property as a whole, and charges monthly fees to the owners of units. There are many other aspects to the legal and financial relationship between unit owners and the condominium corporation. See Chapter 21 for a description. It might be argued that Heilman was informed about all the condominium arrangements on October 4th, and implicitly agreed to them when he e-mailed his acceptance. Of course, upon receiving the details Heilman might realize that it contains obligations he would not agree to and might argue that his acceptance was of an incomplete offer and therefore not binding. The acceptance by Heilman appears to be both positive and unconditional. However, the terms of the agreement remain incomplete. This appears to be a case of agreement to enter a contract, something that the courts will not enforce: Brixham Investments Ltd. v. Hansink (1971), 18 D.L.R. (3d) 533; and National Bowling & Billiards Ltd. v. Double Diamond Bowling Supply Ltd. and Automatic Pinsetters Ltd. (1961), 27 D.L.R. (2d) 342. 4. This is a problem on which some time may profitably be spent seeing whether members of the class can identify the legal issue. Students need all the practice and experience they can acquire in formulating the essential legal issue in a precise way. At the same time, there is sometimes room for a difference of opinion, and it would be incorrect to insist that there is only one choice of words to describe the issue. The issue here is whether, on the special facts, the car owner's silence may be interpreted as an acceptance of the insurance agent's offer to renew the insurance contract. Having defined the issue, we need then to find any legal principles that are available to help solve the problem. Again, members of a class can be questioned about what they think those principles are. The general principle is that acceptance of an offer must take some positive, unequivocal form. Of all methods of acceptance, an offeree's silence must be the most equivocal and unsatisfactory; in most situations it could as readily mean rejection as acceptance. A related legal idea is that general principles can be qualified by special circumstances. Here, the wording of the offer has invited the very response it has received—is the insurance company to be permitted to deny the implications of its agent's offer to renew? As Chapter 16 will point out at p. 372, under the heading "Insurance against Loss or Damage", an insurance agent has authority to deliver policies and renewal certificates for automobile insurance and generally to bind the insurance company, thereby providing the insured party with protection before the payment of a premium.

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Is there any additional fact we might helpfully have been given in this problem? We do not know whether the car owner has had any past dealings for renewal of insurance on similar terms with the same agent. Perhaps she has had, in connection with another car, but we are not told. The text states, "Silence can be a sufficient mode of acceptance only if the parties have habitually used this method to communicate assent in previous transactions, or have agreed between themselves in advance that silence shall be sufficient…" (Source p. 131). One can argue that the wording of the agent's offer to renew amounts to an undertaking on his part (and, in turn on the part of his principal, the insurance company) to accept silence as acceptance until the car owner returns from vacation. The arrangement proposed by the agent is somewhat unusual as agents normally send out renewal notices well in advance of the expiry of the current policy, in order to avoid complications of this kind. The car owner might well have a good argument on the special facts of the case that the insurance coverage had been renewed by agreement until her return from vacation. However, if the accident had occurred after she had returned to the city and she had not then taken any positive steps such as making payment as suggested in Drake's letter, her argument would be very much weakened. (For an interesting recent case, see Murphy v. AXA Insurance (Canada) Inc., [1999] N.J. No. 32) 5. This case raises questions of agency (see Chapter 17), but they can be set aside because the students were clearly informed that the funding would come from the provincial government, not from the university itself. All contracts made on behalf of a government are made by agents in any event. Was it reasonable in the circumstances for the students to believe they had made contracts with the province? The court found that it was reasonable for the students, by enrolling in their programs, to believe they had accepted the offer by the government, and—so long as they met the terms of the agreement—they were entitled to the continued support promised in the original offer. This question is based on the case of Dale v. Manitoba (1997), 147 D.L.R. (4th) 604 (Manitoba Court of Appeal). 6. It is possible that a court would consider Purcell’s statement, “I need substantially more cash by way of down payment—say $125,000. Tell me how high you are willing to go” as a rejection of Quentin’s offer to pay $75,000 down. The court would conclude that Purcell said $75,000 was not enough. The issue here is whether or not Purcell’s statement: “The price and all the other terms seem fair, except that I need substantially more cash by way of down payment – say $125,000. Tell me how high you are willing to go” amounts to a rejection of Quentin’s offer or merely an inquiry as to whether the terms are the best he can expect. If the statement is merely an inquiry, then the courts would maintain that Quentin’s offer was still viable and Purcell’s subsequent acceptance binding; a contract would be formed. If Purcell’s statement is considered a rejection, then the next question is what does Quentin’s statement, “There is no way I can increase the cash payment” mean? One interpretation is that he is restating his original offer and is prepared to make a contract on

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that basis. Accordingly, Purcell’s acceptance the following day would be binding. Another interpretation would be that he is rejecting the counter-offer made by Purcell, with no further counter-offer being made. Under those circumstances, Purcell would not be able to return to Quentin’s original offer as it would be “off the table.” No contract would have been formed. 7. Students are frequently puzzled by this case, being unsure what the legal problem is from the facts as given. A few may find a clue in the footnote to Dawson v. Helicopter Exploration Co. Ltd., [1955] 5 D.L.R. 404, a decision of the Supreme Court of Canada. The facts of Dawson v. Helicopter Exploration Co. Ltd. are substantially the same as in this case. Stevens' letter of March 5th, interpreted literally, contains an offer of a promise for an act. The offeree, Daly can accept by performing the act—taking Stevens by air to the area where Daly believed mineral claims existed—but until the act is performed there is no acceptance and no contract, and the offeree is free to deal with anyone else. By this line of reasoning, Stevens has proposed the formation of a unilateral contract that is yet to be formed. Alternatively, Stevens' letter of March 5th might be regarded as an acceptance of an earlier offer made by Daly on February 28th, and as a confirmation of a final agreement between them to exchange promises; that is, Daly to identify the area in person for Stevens, and Stevens to stake the claims; to reimburse Daly for his time and expenses; and to give Daly a 10% interest in any profits from resale or development of the property. On the latter construction, a contract will have been formed by an exchange of promises (a bilateral contract). The wording of Stevens' letter of March 5th, as so often happens in business communications, is uncertain from a legal point of view. Does the phrase "and I think they warrant staking" amount to a precondition that must be satisfied before Stevens can be considered to have accepted an earlier offer by Daly? Even if it does, one can argue that the fact that Stevens actually did go ahead and stake the claims must amount to an eventual waiver of this pre-condition and that Stevens should then be prevented from denying acceptance of Daly's offer. If we interpret the exchange of letters as proposing a unilateral contract, what Stevens subsequently does in the way of staking claims in his own name does not amount to a breach of any existing contracts. However, it will be a breach if we interpret the exchange as having resulted in the formation of a bilateral contract, with promises outstanding on both sides. In Dawson v. Helicopter Exploration Co. Ltd., Mr. Justice Rand said (at 410-11): [T]his interpretation of the correspondence follows the tendency of the Courts to treat offers as calling for bilateral rather than unilateral action when the language can be fairly so construed, in order that the transaction shall have such 'business efficacy as both parties must have intended that at all events it should have' ....In

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theory ...an offer in the unilateral sense can be revoked up to the last moment before complete performance. At such a consequence many Courts have balked; and it is in part that fact that has led to a promissory construction where that can be reasonably given. What is effectuated is the real intention of both parties to close a business bargain on the strength of which they may, thereafter, plan their recourses. This reasoning, of course, leads to the conclusion that a contract had been formed and that Stevens was in breach. This case works well as a written assignment with subsequent class discussion. 8. When Margot handed the director her offer she was still the owner of her land and the city had no right to enter upon the land without her permission. If city employees entered upon her land they would be trespassing; the city has no power to take possession of Margot’s land until it has first served her with notice of its intention to exercise its powers of expropriation and had followed the correct procedures under the Act. However, under the terms of her offer, they could enter lawfully if they were accepting her offer. It is highly unlikely that a court would permit the city to take advantage of its own wrongdoing by claiming that it entered as trespassers—not as an act of acceptance—and then proceed to use the Expropriation Act to acquire the land. The concept of expropriation recognizes that there may be a legitimate public interest in acquiring private property for the general benefit of the community. On the other hand, the person whose land is expropriated is entitled to at least the fair market value of the land as well as compensation for any losses caused by involuntarily moving from the location. Of course, the owner may suffer more than financial losses; for example, suppose the owner’s family has lived on the property for generations. Here we see the conflict between the public and private interests; it helps to explain why public bodies prefer to reach a deal to buy the land rather than resort to expropriation. See Carr v. Canadian Northern Railway, [1907] W.L.R. 720.

CASE SUMMARIES Barrick v. Clark, [1950] 4 D.L.R. 529, per Estey, J., at 537 (Supreme Court of Canada) The plaintiff and defendant engaged in negotiations for the purchase of some farm land. The defendant sent an offer to the plaintiff on November 15th offering to sell the land with a closing on January 1st. The plaintiff responded on December 10th accepting the offer. The Supreme Court held that while in normal circumstances the length of time considered reasonable to accept an offer for the purchase of farm land would be longer than to purchase stocks or other commodities, in these circumstances, it was clear that timing was important. The closing was set for January 1st and therefore, almost all of the time to prepare was eaten up by December 10th. Copyright © 2016 Pearson Canada Inc.

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Blackpool and Fylde Aero Club Ltd. v. Blackpool Borough Council [1990] 1 W.L.R. 1195 (England – Court of Appeal) The defendant council asked for tenders to operate pleasure flights. The form of tender stated that, "...the council do not bind themselves to accept all or part of any tender. No tender received after the last date and time specified shall be admitted for consideration." The form required tenders be received by the Town clerk "not later than 12 o'clock noon on Thursday, 17th March 1983". The plaintiff put its tender in the Town Hall letter box at about 11 a.m. on 17th March. A notice on the letter box stated that it was emptied each day at 12 o'clock noon. The box was not emptied that day, but the next morning. Consequently, the council believed it had received the tender past the deadline and did not consider it. The council accepted another tender. The plaintiff sued in contract and tort, and succeeded in contract Despite the general rule that an invitation to tender is an invitation to treat and not an offer, the English Court of Appeal held that the council were contractually obliged to consider the plaintiffs' tender and, for breach of that obligation, they were liable in damages. Although the form of tender did not expressly state that the defendants were under a duty to consider all tenders, the court stated that such a duty was implied. Indeed, the court necessarily concluded that there was an implied contract between parties who were not otherwise in a contractual relationship. The decision imposes a further liability on withdrawing unfairly from pre-contractual negotiations. Brackenbury v. Hodgkin, 102 A. 106, 116 Me. 399 (1917) (Supreme Judicial Court of Maine - U.S.A.) The defendant wrote to her daughter and son-in-law (the plaintiffs) requesting that they move from Missouri to Maine to live with her and care for her. In exchange she would give them the use of her farm and she would leave the property to them on her death. The plaintiffs complied and moved to Maine. A short time later, a dispute arose between the parties and the defendant asked the plaintiffs to leave; she then transferred ownership of the poperty to her son. The plaintiffs sued for breach of the contract. The court held that this was a unilateral contract; beginning performance of a unilateral contract created an option contract. As soon as the plaintiffs had commenced substantial performance; that is, moved to Maine, the offer was no longer revocable. Brinkibon Ltd. v. Stahag Stahl Und Stahlwarenhandelsgesellschaft mbH [1983] 2 A.C. 34 (England – House of Lords) A seller in Vienna conveyed an offer to a buyer in London. The buyer sent acceptance of the offer by telex, a form of instantaneous communication similar to a telephone. The court concluded that the contract was formed in Vienna where the offer was received. The court explains that the justification for the postal rule exception is commercial expediency, which applies to cases where “there is bound to be a substantial interval between the time when the acceptance is sent and the time when it is received.” However,

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commercial expediency does not apply when instantaneous communications are utilized; therefore, the general rule of acceptance applies in such cases. Brixham Investments Ltd. v. Hansink (1971), 18 D.L.R. (3d) 533 (Ontario Court of Appeal) See Case 6.5 at p. 131 in the text. Both parties signed a letter providing for incorporation of a company; the letter did not list share allocations. A dispute later arose between the parties. One party sued for breach of contract. The court held that there was no contract as the terms where incomplete. The court would not construct a contract for the parties. Brown v. Toronto Auto Parks Ltd., [1954] O.W.N. 869 (Ontario High Court) Brown paid, took the ticket and put it in his pocket. A sign on the premises drew attention to conditions on the ticket and disclaimed any liability. The ticket said that charges were for rental of space only. Brown did not read the ticket or the sign, nor was his attention drawn to them. The attendant later moved the car and claimed to have left the keys under the seat of the car. When Brown returned, the car was gone. The court held that the defendant could not exempt itself from the conditions of the bailment simply by notice, especially where the conditions were not called to Brown's attention. Budget Rent-A-Car of Edmonton Ltd. v. University of Toronto, 1995 ABCA 52, (1995), 165 A.R. 236 (Alberta Court of Appeal) See Case 6.3 at p. 130 in the text. The plaintiff sued for severe damages done to a rental car. A term in the contract stated that the renter would be liable for theft if the renter was negligent. Further, the renter covenanted to keep the doors, windows, and ignition closed and locked when not in the vehicle. The car was left unlocked with the keys in the ignition while left outside of an Edmonton bar. The trial judge relied on the decision in Tilden Rent-A-Car Co. v. Clendenning (1978), 18 O.R. (2d) 601 and found the defendant not liable. The Court of Appeal overturned the decision based on the facts that in this case the contract was not difficult to read, surprising, or tricky. Further, the clauses referred to were not onerous or unexpected; they were quite reasonable in the circumstances. Carlill v. Carbolic Smoke Ball Co., [1892] 2 Q.B. 484 (England – Court of Appeal) See Case 6.4 at p. 131 in the text. The defendant placed an advertisement in a newspaper stating that anyone who used their “smoke ball” and still contracted the flu would be entitled to collect one hundred pounds sterling. The plaintiff purchased and used the device but still contracted the flu. She sued the defendant for the money promised. The Court of Appeal held that all of the elements of contract were present. The advertisement was not merely an invitation to treat, but an offer that the plaintiff accepted by performance creating a unilateral contract. Charlebois v. Baril, [1928] S.C.R. 88

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Page 134 footnote 24 Cuthing v. Lynn (1831), 109 E.R. 1130 Page 138 footnote 35 Dale v. Manitoba (1997), 147 D.L.R. (4th) 605 (Manitoba Court of Appeal) The province and the university created a four-year programme enabling members of certain disadvantaged groups to obtain post-secondary education. The province agreed in writing with the university to provide full funding for the programme. Programme administrators of the university wrote to four students offering them a position in the programme, and informing them of the level of non-repayable support they would receive. The students enrolled in the programme. In their third year, the province restructured funding, requiring the students to apply for a maximum Canada student loan before being eligible to receive programme funding. The students successfully brought an application for a declaration that the province had to continue funding their programmes on the same basis as when they had enrolled. The court found that the province had committed itself contractually to the students to pay to them the same level and character of funding during the four years of the programme. The province appealed. The Court of Appeal held that there had been a legally enforceable offer made to the students on behalf of the province which the students had accepted. Design Services Ltd. v. Canada 2008 S.C.C. 22 (Supreme Court of Canada) Public Works issued a call for tenders for the construction of a building. The contract was awarded to Westeinde Construction Ltd, who submitted a non-compliant bid. The contract should have been awarded to Olympic, who submitted a bid that complied with the tendering process. Olympic brought an action against Public Works alleging that Public Works breached a duty of care owed by the owner to the subcontractors in a tendering process. The court found that Olympic’s claim did not fit into the pre-existing categories of duty of care and refused to create a new duty of care between owners and subcontractors. This decision was based on the existence of policy reasons, that is, creating this new duty of care would allow parties to claim, after the fact, when they have no cause of action under another contract; recognizing such a duty could lead to “a multiplicity of lawsuits in tort;” and there is an indeterminacy of the class of plaintiffs in a construction context. Dickinson v. Dodds, [1876] 2 Ch. D. 463 (England – Court of Appeal) Dodds made an offer on Wednesday, June 10th to sell some property to Dickinson, stating that the offer would remain open until 9:00 a.m. Friday, June 12th. Although Dickinson decided to accept the offer on Thursday morning, he did not immediately get in touch with Dodds. Thursday afternoon, Dickinson heard that Dodds was negotiating with

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another party over the property. At 7:30 p.m. on Thursday, Dickinson left a written acceptance with Dodds' mother-in-law who forgot to give the acceptance to Dodds. At 7:00 a.m. on Friday, Dickinson's agent handed a written acceptance to Dodds who said that he had already sold the property to another party. A few minutes later, Dickinson himself tried to give a written acceptance to Dodds who said that he had entered into a contract for sale of the property with another party on Thursday. The court held that an offer may be withdrawn without formal notice to the offeree; the sale to a third party coming to the attention of the offeree effectively revokes the offer. Dodds could have avoided this litigation by informing Dickinson promptly that he had withdrawn his offer.

D.J. Provencher Ltd. v. Tyco Investments of Canada Ltd. (1997), 42 B.L.R. (2nd) 45 (Manitoba Court of Appeal) The plaintiff owned a warehouse in Winnipeg. An employee of the plaintiff discovered that the sprinkler sytem in the warehouse had frozen due to a failure of the furnace. The plaintiff hired the defendant to effect repairs. A representative of the defendant turned off the valves to the water system, but did not check them for damage; nor did he request the City to turn off the exterior valve. The defendant then explained that no further work could be done until the heat was restored. At that time an invoice was given to the plaintiff describing the work done. The invoice had a limitation clause on it. Once the heat was restored, the broken valve burst and the warehouse was flooded causing extensive damage. The trial judge held that the limitation clause had no effect as it was not brought to the attention of the plaintiff until after the work was done. The Court of Appeal upheld the decision.

Eastern Power Ltd. v. Azienda Communale Energia & Ambiente (1999), 178 D.L.R. (4th) 409 (Ontario Court of Appeal) Eastern Power is a company located in Ontario; Azienda is a company located in Italy. An agreement was drafted, which Azienda signed in Italy and faxed to Ontario. Eastern Power then signed the agreement and faxed it back to Azienda. Azienda later sought to terminate the agreement and consequently Eastern Power billed Azienda for their expenses. Azienda initiated a court action in Italy; Eastern Power initiated an action in Ontario. Where the contract was formed was one factor considered by the court in determining which jurisdiction was most appropriate. The court found that acceptance of an offer by facsimile, an instantaneous form of communication, should follow the general rule of acceptance as opposed to the postal rule exception. Therefore, a contract is formed “when and where acceptance is received by the offeror,” which in this case was in Italy. Empress Towers Ltd. v. Bank of Nova Scotia (1990), 73 D.L.R. (4th) 400 (British Columbia Court of Appeal) Empress Towers owned a building in Vancouver and leased a portion of it to the Bank. The lease contained a renewal clause that provided if the Landlord and Tenant did not agree upon the renewal rate within two months of the Tenant exercising the renewal

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option, then the agreement could be terminated by either party. The parties were unable to agree upon a renewal rate and consequently Empress Towers notified the Bank they would be terminating the agreement. The Bank brought an action against Empress Towers alleging that the lease contained an implied term to negotiate the renewal in good faith. The court refused to find that the lease implied a duty to negotiate in good faith: “the presence or absence of "good faith" in such circumstances is simply a subjective judgment by one party of the other's negotiating tactics. It does not afford a sound basis upon which to construe contractual obligations and privileges.”

Entores, Ltd. v. Miles Far East Corporation, [1955] 2 Q.B. 327 (England - House of Lords) The plaintiff, a London based company sent an offer by way of telex to the defendant, a company in Amsterdam. The defendant accepted the offer by way of telex as well. The contract was not fulfilled, and so the plaintiff sought to bring legal action. The defendant was controlled by a company based in the United States. Under English law, the plaintiff could only bring the action in the U.S. if it could demonstrate that the contract had been formed in London, not Amsterdam. The House of Lords held that the rules surrounding formation of a contract relating to acceptance by postal service could not apply with the new, faster methods of communication. The court held that formation did occur in London, as that was where communication of acceptance was received. Errington v. Errington, [1952] 1 All E.R. 149 (England – Court of Appeal) Mr. Errington bought a house for his son and daughter-in-law to live in. He made the deposit, took transfer of the house, and arranged to mortgage it in his own name. He told the daughter-in-law that the house was a present but that she and his son were responsible for the mortgage payments. He gave her the mortgage book and he said the property would be theirs when the mortgage was paid. He also said he would put the house in their name when he retired. The couple made regular mortgage payments. When Mr. Errington died, his widow tried to eject the couple from the house. The court held that Mr. Errington impliedly promised that once the couple began to fulfill their part of the bargain by paying the mortgage, he would not revoke his offer. Accordingly, the couple was allowed to retain possession of the house so long as they continued to make regular payments. Grant v. Prov. Of New Brunswick (1973), 35 D.L.R. (3d) 141 (New Brunswick Court of Appeal) The government announced a scheme for the purchase of farmers’ excess potatoes, setting out certain terms and conditions to qualify. The plaintiff met the conditions, but the government refused to purchase the potatoes. The court held that it is a reasonable inference that one who fulfills the terms and conditions will be entitled to the benefits of the scheme. As such the court found that the announcement constituted an offer to all eligible persons and the government was contractually bound. The court awarded judgement in favour of the plaintiff for the potatoes that qualified. Copyright © 2016 Pearson Canada Inc.

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Hefefron v. Imperial Parking Co. Ltd. (1974), 46 D.L.R. (3d) 642 (Ontario Court of Appeal) Heffron received a ticket containing a clause exempting the lot from any liability. There were also three signs to this effect posted at the lot. When Mr. Heffron returned (after the lot had closed), his car was gone. The car was discovered three days later, abandoned in a damaged condition. It was normal practice for the lot attendant to leave the car keys in the kiosk across the street after the lot closed, but the keys were neither there nor in the lot office. The court read the exemption clause strictly against the offeror as not applying to bailment situations. Henthorn v. Fraser, [1892] 2 Ch. 27 (England – Court of Appeal) Henthorn called at the office of the defendant to discuss the purchase of some property. The defendant's agent signed, and handed Henthorn a note giving him the option to purchase the property within fourteen days. The next day, the agent mailed to Henthorn a withdrawal of the offer. Before it reached Henthorn, he posted an unconditional acceptance which arrived at the defendant's office the next morning. The court held that the post was in the parties' contemplation as a reasonable means of communicating offer and acceptance. Withdrawal of an offer is of no effect until it reaches the knowledge of the offeree unlike an acceptance it is not effective at the time it is posted. Therefore a binding contract was made when Henthorn mailed his acceptance. Hughes v. Gyratron Developments Ltd., [1988] B.C.J. No. 1598 Page 129 footnote 14 IPC Investment Corporation v. Sawaged, [2010] O.J. No. 5510 (Ontario Superior Court of Justice) The defendant was an investment advisor for a company called Avalon. The plaintiff company purchased Avalon. While still employed by Avalon the defendant dealt with a pair of clients. These clients mortgaged their home to invest in the stock market. Investments did well for the first eighteen months, but ultimately the clients lost all. The clients sued the plaintiff company who settled with the clients for $75,000. The plaintiff then sued the defendant under an indemnity clause in the contract of employment. The court held that the indemnity clause did not apply to pre-contractual situations. The defendant dealt with these clients prior to the plaintiff acquiring Avalon. The plaintiff also tried to sue in tort. The court followed the decision in Martel and denied the suit. Loft v. Physicians’ Services Inc. (1966), 56 D.L.R. (2d) 481 Page 134 footnote 24

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Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860 (Supreme Court of Canada) Martel owned a building in Ottawa that was leased to the National Capital Region Division of the Department of Public Works (the Division). Before the lease was to expire, the Division told Martel that they would be calling for tenders, but might be interested in renewing the lease. Martel presented proposed rental rates for the lease renewal, but the rates did not fall within the market range suggested by an appraisal obtained by the Division. Martel was told that if they met a $220/m2 rental rate, they would likely renew the lease. Martel agreed to meet the rate, but the Division still proceeded with the tendering process. Martel submitted a bid that was not accepted, which led to an action against the Division for allegedly breaching a duty to negotiate in good faith. The court applied the Ann’s test and concluded that the first stage of the test was satisfied and therefore the Division owed a duty of care to Martel. However, the second stage of the test was not satisfied as there are policy considerations that preclude extending the tort of negligence to commercial negotiations. The policy considerations cited by the court were: “the very object of negotiation works against recovery;” to “extend a duty of care to pre-contractual commercial negotiations could deter socially and economically useful conduct;” imposing a duty of care in commercial negotiations would “interject tort law as after-the-fact insurance against failures to act with due diligence;” imposing such a duty of care could “introduce the courts to a significant regulatory function, scrutinizing the minutiae of pre-contractual conduct;” and “to extend negligence into the conduct of negotiations could encourage a multiplicity of lawsuits.” Mellco developments Ltd. v. Portage Le Prairie (City), (2002) 222 D.L.R. (4th) 67 (Manitoba Court of Appeal) The City of Portage issued a request for proposals for the sale and development of city owned land. Mellco submitted a proposal that met the City’s specifications. The only other company to submit a proposal was Lions; it was granted the contract even though their proposal did not comply with the terms of the request for proposals. Mellco brought an action against the City claiming that their conforming proposal should have been accepted pursuant to the terms of the request for proposals. After analyzing the terms of the request for proposals, the court concluded that it was an expression of the City’s intention to negotiate, not an intention to create a binding contractual relationship as in a call for tenders.

M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. et al, [1999] 1 S.C.R. 619 (Supreme Court of Canada) The defendant invited tenders for a contract. The tender included a “privilege clause” stating that the contract may not go to lowest bidder. Four companies offered tenders. However, the winning tender violated the terms of the tender. The plaintiff sued claiming the winning tender should have been disqualified, and that its tender should have won the contract as it had the next lowest bid. The Supreme Court held that there are two

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contracts in the tendering process. The first contract is for the tender itself and the second contract is what the tenderers are bidding for. Under the first contract, the defendant breached its obligations to the plaintiff and the other tenderers by accepting a non – compliant bid. Montreal Gas Company v. Vasey, [1900] A.C. 595 (Privy Council) The company entered into a contract with Vasey to sell him all the ammoniacal liquor they produced over a period of five years. Five days after the contract was executed, the company wrote to Vasey saying that they would favourably consider an application by him to renew the contract if they were satisfied with him as a customer. When the contract expired, the company refused Vasey's application for renewal and he sought damages for breach of contract. The court held that the promise was of such a vague nature that it did not impose a legal obligation on the company to grant the application. National Bowling & Billiards Ltd. v. Double Diamond Bowling Supply Ltd. and Automatic Pinsetters Ltd. (1961), 27 D.L.R. (2d) 342 (British Columbia Supreme Court) The plaintiff was appointed by the defendant as an exclusive sales agent and distributor of the defendant's products. The conditions of the offer were contained in a letter sent to the plaintiff outlining the agreement. It did not specify the duration of the plaintiff's appointment, and the defendant later terminated the relationship without notice. The court held that the contract was too vague to be enforceable as it left too much to future negotiations. Here again, the agreement was really one to enter into a contract. Olivieri v. Sherman (2007), 86 O.R. (3d) 778 at paras 45–51 (Ontario Court of Appeal) The plaintiff was a doctor at Sick Children’s Hospital in Toronto. She was engaged in clinical research. She felt there was some disturbing results from her research and publicly stated so. The funding for the research was provided by the defendants. The two parties engaged in disparaging comments to each other. The plaintiff sued for defamation and the defendants cross-claimed for the same. The two parties participated in mandatory mediation. During the mediation offers to settle were made. The defendants made a counter-offer that was eventually accepted by the plaintiff. Sometime later, the defendant stated that there was no settlement agreement, only a negotiation. The agreement as drafted was too vague. The trial judge held that as there was no meeting of the minds with respect to the agreement that it did not constitute a valid contract. The Court of Appeal overturned this decision, stating that the test was objective not subjective. The judge should not have considered the state of mind of the defendants. Their belief that further clarification of the agreement terms was necessary was not communicated to the plaintiff. On an objective standard a contract existed. Olley v. Marlborough Court, Ltd., [1949] 1 AU E.R. 127 (England – Court of Appeal)

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The plaintiff, a guest of the defendant hotel locked her room and left the key on a rack in the reception office. On her return, she found the key missing and various articles stolen from her room. A sign was posted in the office limiting the hotel's liability under the Innkeepers Liability Act, 1863, but the exact terms of liability were posted in the bedroom. The court held that the hotel lost the protection of the Act when it negligently failed to protect the keys. Further, the terms of the notice in the bedroom were not part of the contract because the plaintiff could not have seen them before she agreed to the contract for the room. 978011 Ontario Ltd. v. Cornell Engineering Co. (2001), 12 B.L.R. (3d) 240 (Ontario Court of Appeal) The defendant, Cornell unilaterally terminated a contract for the services of Glenn MacDonald an employee of the plaintiff company. The plaintiff sued to enforce a clause in the contract requiring the defendant to provide compensation in the case of a unilateral termination. The trial judge held that the plaintiff owed a duty to the respondent to point out this clause, and as it did not do so, the clause was struck from the contract. As a result the trial judge dismissed the plaintiff’s action in its entirety. The Court of Appeal held that there was no duty to draw the termination clause to the attention of the defendant. There was a relationship of trust, but the defendant was in the position of ascendancy with respect to the plaintiff; if a duty existed, the plaintiff discharged it by telling the defendant to read the contract. Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd., [1952] 2 All E.R. 456 (England – Court of Appeal) See Case 5.1 at p. 114 in the text. The defendant operated a self serve pharmacy. The plaintiff sued based on an alleged violation of s. 17 of the Pharmacy and Poisons Act, 1933. The plaintiff alleged that by placing certain restricted drugs on a shelf was tantamount to an offer to sell them to the public in contravention of the Act. The court held that the placement of the drugs on the shelf was merely an invitation to the customer to make an offer to purchase them. The final sale was supervised by the pharmacist, and therefore did not violate the act. Powder Mountain Resorts Ltd. v. British Columbia, [2001] 11 W.W.R. 488 (British Columbia Court of Appeal) The Province issued an “expression of interest” for the development of a ski resort in the Powder Mountain area of BC. Powder Mount Resorts (PMR) submitted the only bid the Province received, but PMR was not awarded the contract. PMR brought an action against the Province alleging that the Province breached a duty to negotiate fairly and in good faith. The court found that the “expression of interest” was not the same as an invitation to tender and consequently the Province was not bound by contract simply by receiving a bid. Re Pigeon and Titley, Pigeon, Lavoie Ltd. (1972), 30 D.L.R. (3d) 132 (Ontario High Court) Copyright © 2016 Pearson Canada Inc.

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Pigeon leased a building to the company of which he was part owner. The lease stated that the rent "may be reviewed and adjusted once yearly." After Pigeon died, his estate wanted to raise the rent but the company refused to negotiate. The court held that because of the close relationship between the parties, they did not envisage any disagreement when they executed the original lease. The clause in question was too vague and indefinite to be interpreted as creating any rights or imposing any liabilities when a disagreement arose. Thus the lease continued in force but the rent review clause was of no effect. R. v. Weymouth Sea Products Ltd (1983), 149 D.L.R. (3d) 637 Page 134 footnote 25 Ron Engineering & Construction Eastern Ltd. v. Ontario, [1981] 1 S.C.R. 111 (Supreme Court of Canada) In response to a call for tenders, Ron Engineering submitted a bid accompanied by a $150,000 deposit to the Water Resources Commission (the Commission). After submitting the bid, Ron Engineering realized that they had made a mistake in the proposal and requested that their bid be withdrawn. The bid was not withdrawn and, even though the Commission was aware of the error, the contract was awarded to Ron Engineering. Ron Engineering refused to enter into the contract, so the Commission retained the deposit and awarded the contract to another tender. Ron Engineering brought an action against the Commission to recover the deposit. The Court of Appeal ordered that the deposit be returned to Ron Engineering. However, the Supreme Court of Canada found that the matter was to be decided based on contract law and since the original contract (the call for tenders) provided for the retention of the deposit, the Commission was entitled to retain the deposit. Samuel Smith & Sons Ltd. v. Silverman (1961), 29 D.L.R. (2d) 98 (Ontario Court of Appeal) A clause exempting the lot from all liability for damage "however caused" was printed in large bold type on the ticket and on four signs posted in the lot. Although the lot was closed when Silverman returned, he took his car, later discovering that it had been damaged while on the lot. The court held that the lot owner had done what was reasonable to bring the conditions of the bailment to the attention of Silverman. He ought reasonably to have been aware of the exonerating condition and thus was bound by it. Seidel v TELUS Communications, 2011 SCC15 Page 126 footnote 6 Sibtac Corporation Ltd. v. Soo, Lienster Investments Ltd., Third Party (1978), 18 O.R. (2d) 395 (Ontario High Court).

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Sibtac took over a lease for property owned by Soo. The lease contained no provision for renewal. The parties reached an oral agreement to extend the term of the lease for another five years, and on December 10, 1972 Soo signed a written option to that effect that had to be exercised by Sibtac by November 1, 1973. Sibtac maintained that on July 10, 1973 they mailed to Soo a notice of intention to exercise their option. Claiming never to have received the notice, Soo subsequently tried to eject Sibtac from the premises in favour of another tenant. The court found as a fact that Sibtac had indeed mailed the notice. While generally acceptance of an offer must be communicated to the offeror, where it is reasonable to expect that the mail might be used as a means of communication, acceptance is binding when it is mailed although never received by the offeror. Use of the mail was reasonable in these circumstances. Sail Labrador v. Challenge One (The) [1999] 1 S.C.R. 265 Page 137 Case 6.5 Tilden Rent-A-Car Co. v. Clendenning (1978), 18 O.R. (2d) 601 (Ontario Court of Appeal) Clendenning signed a written contract with Tilden to rent a car He opted for additional insurance coverage as suggested by the rental agent to exempt him from any liability. He did not read the conditions of the contract nor was he given notice of the conditions. He was in an accident with the rental car, as a result of which he pleaded guilty to impaired driving. Tilden sued for the damage done to the car, claiming that Clendenning had breached one of the terms of the rental contract; that is, the customer would not operate the vehicle after having consumed any amount of intoxicating liquor. The court accepted Clendenning's evidence that he had not been intoxicated while operating the vehicle, despite his guilty plea under the impaired driving charge. Further, the court held that even where a party has signed a contract, that party will not be bound by surprising or unreasonable terms if sufficient notice was not given of the terms. In this case, the court found that the term in question was unreasonable and that Clendenning had not received sufficient notice Von Hatzfeldt-Wildenburg v. Alexander, [1912] 1 Ch. 284 (England – Chancery Division) The parties, through their agents, exchanged letters about the sale of a property. The purchaser claimed that the exchange did not amount to a contract and failed to complete the transaction; the vendor sued. The court held the first letter was a firm offer to sell, but that the reply offered to buy the land on different terms, thus amounting to a counter-offer and a rejection of the first offer. The vendor then sent a third letter accepting the counteroffer. Unhappily for the vendor, the counter-offer stated that the agreement was subject to signing a more formal contract. Therefore the exchange of letters really amounted only to an agreement contemplating the execution of a further contract and was not enforceable.

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Watkins v. Rymill (1883), 10 Q.B.D. 178 (England – Queen’s Bench Division) Rymill sold horses and carriages on consignment. Watkins left a wagonette with Rymill to be sold, and received a receipt for it containing the words "Subject to the conditions as exhibited on the premises." Watkins did not read the slip or the conditions. One of the conditions was that Rymill could sell any property left over one month with expenses unpaid. He exercised this right of sale and sold Watkins' wagonette. Watkins sued to recover damages. The court held that the transaction was of such a nature that Watkins should reasonably have concluded that special terms would be in order. Rymill had taken reasonable means to give notice of the conditions to Watkins who was then bound by them when he accepted them without objection, whether or not he had taken the trouble to inform himself of the terms. * In the following three cases, owners left their keys in their parked cars at the request of a parking lot attendant. In each case, the court held that a bailment had been created (bailment is discussed in Chapter 15 of the text). Westcom TV Group Ltd. v. CanWest Global Broadcasting Inc., [1997] 1 W.W.R. 761 (761) (British Columbia Supreme Court) Westcom was licensed to broadcast television shows in Alberta whereas CanWest was not. CanWest entered into a number of short term contracts with Westcom where CanWest sold television shows they broadcast in other provinces to Westcom. Westcom then sold the shows to companies that were licensed to broadcast television shows in Alberta. Westcom and CanWest negotiated a long term contract and arrived at a ten year $80 million agreement. The agreement was dependant on receiving approval from the chair of the CanWest board; CanWest indicated that they would seek approval as soon as possible. The agreement was never approved by the chair of CanWest and Westcom brought an action against CanWest for breaching a duty of negotiating in good faith. This claim was based on the fact that at the time the two parties were negotiating the agreement, CanWest had already decided to apply for a license to broadcast television shows in Alberta. Consequently, CanWest would not need to sell their shows to Westcom, nor did they need to conclude the agreement or seek approval from the chair. The Court found that representations “made in the course of arm's length negotiations, cannot of themselves give rise to a liability.”

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CHAPTER 7 FORMATION OF A CONTRACT: CONSIDERATION AND INTENTION The law contained in this chapter is important in that students need to grasp that both consideration and intention are required, in order for a contract to be binding. Placing the requirement of consideration in its historical setting should help to explain the criticisms made of its sometimes rigid application in modern situations. To require consideration in order to make an agreement legally binding is to insist that it must have the qualities of a bargain. The emphasis on the need for a bargain has its roots in nineteenth century England. Consideration was viewed as central to bargains and as encouraging commerce by providing a sure legal test for binding commercial relationships. The definition of consideration illustrates this emphasis: the price paid (or the sacrifice made) by the promisee in return for the promise of the promisor. (Source p. 144) CONSIDERATION In order to have an enforceable contract, the contract must contain consideration. One area needing discussion is the requirement of consideration to make charitable donations binding. The discussion of the need for an implied or explicit request from the promisor that a charity undertake a specific project as a result of a pledge, as set out on pp 145-146, is an area students often find confusing. Using as examples their business school or other named building may assist as an example of where funds have been donated to allow a project to proceed. A common situation where the requirement of consideration is questioned arises when one party proposes, and the other party agrees, to a change in an existing contract. The change imposes an added burden on the other party without the first party offering any new consideration for it. Can such a change ever be binding, and if so, under what circumstances? United States courts have been prepared to waive the requirement of consideration where the change appears to be acceptable and fair to the party agreeing to an increased obligation. English and Canadian courts have been more reluctant to recognize post agreement changes without consideration.

The three topics of gratuitous promise, past consideration and existing legal duty can best be taught using examples. Simple examples tend to explain the law in a way students can remember it, such as: Gratuitous promise – offering to give someone your old computer when your new one comes Past consideration – mowing someone’s lawn and not being able to enforce their offer to pay you afterwards Existing legal duty – a painting company saying they had underestimated the time it would take to paint a house, and agreeing to pay more for the job to be finished without any new consideration such as the fence being painted or the job being done sooner The law of gratuitous reduction of a debt, as set out in Foakes v. Beer, is, as described in the textbook, unrealistic, but importantly this law has been altered by statute in most

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provinces. An example students tend to understand is to discuss making an arrangement with a credit card company to pay only a portion of a debt owed, in full satisfaction of the debt. It can then be discussed whether Foakes v. Beer would apply if a parent paid the partial sum – see p.149. Students find it interesting that the adequacy of consideration will not be reviewed by the courts, unless fraud, duress or undue influence may be present. A good example of this is paying an inflated price for a pair of jeans with a particular label, while the identical jeans may be purchased at a lesser price elsewhere. EQUITABLE ESTOPPEL This topic usually requires explanation. The Hughes case, case 7.4 is a good example. A relevant discussion of how equitable estoppel would apply if a student were negotiating their rent with a landlord, so had not given notice of wishing to renew the lease, and the landlord then tried to say that notice had been necessary, often explains the law, with the understanding too of injurious reliance which is not the law in Canada. It must be made clear that in Canada equitable or promissory estoppel may only be used as a shield not a sword, so not to bring an action but to defend against an action. The list on page 151 is an important list of criteria for equitable estoppel to apply. THE USE OF A SEAL Do any of the students wear a signet ring? If so, this can lead to a discussion of how signing a document under seal was originally performed. It is important to confirm that while a document signed under seal is irrevocable, the use of a seal does not replace the other requirements to form a binding contract, and that the seal must be present at the time the document is signed. INTENTION While intention is only covered briefly, it is a required element to form a binding contract. It is easily explained by referring to the Carlill case, discussed in Chapter 7. The law presumes intention, but this presumption is less clear for family members or close friends. Where presumption is in issue, the test of the reasonable man is used – would an outside party looking at the conduct of the parties presume they intended to enter into a legal contract? In referring to Carlill, the court did say that the conduct of the bank, in depositing the 1000 pounds, and the conduct of Mrs. Carlill, in using the smokeball, did indicate intention. . It is often good to create fictional situations where the principle applies. For example, a woman is the owner of a successful business. Her mother asks her to get her brother a job. The woman “hires” her brother to do some menial task around her business and pays him a small stipend each week. Is there a contract of employment? Was there an intention to create legal relations? Compare that to the similar situation where the woman of the successful business is looking for a web designer and hires her brother as a qualified candidate; places him on the payroll; and supplies him with office space to work. Copyright © 2016 Pearson Canada Inc.

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STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 156) This part looks at how businesses are specifically dealing with some of the legal concerns surrounding consideration and the intention to create legally binding relationships. ETHICAL ISSUE (Source p. 146) Promises Question 1 - This question asks students to consider what difficulties may arise when evaluating a motive. Motives are subjective, which could be very difficult to prove. Further, even if there is proof of the motive, who is to say whether a motive is good or bad? Value judgments are subjective. Judges may be hesitant to make such determinations. Another aspect to consider is how would a court determine the motive of a corporation? Is it the motive of the shareholders? The board of directors or the directing mind? Question 2 - This question asks whether moral cause will generate fairer outcomes than the standard of consideration. One could argue that it is not an appropriate standard as a result of the difficulties that arise in determining what the motive is and whether it is appropriate. On the other hand, it could be argued that consideration as a standard is arbitrary since courts do not assess any assessment of the adequacy of the consideration. It does not even attempt to determine if the deal is fair. INTERNATIONAL ISSUE (Source p. 152) Will Injurious Reliance Be Adopted by the Canadian Courts? Question 1 - This issue provides an opportunity to discuss the respective merits and demerits of the traditional Anglo-Canadian position on consideration and injurious reliance as opposed to the more radical American view. Neither system allows for the enforcement of a gratuitous promise as such. The American position does allow a promisee to sue if he has relied on the promise and has done so to his own detriment. In one sense, the promise can be said to have been the cause of the loss. (There is some similarity here with the liability in tort for a negligent misstatement.) By contrast, Canadian courts restrict the injurious reliance principle to cases where a legal relationship already exists between the parties. The principle of equitable estoppel can be used only as a defence by the promisee. In Hepburn v. Jannock Limited an employee sought to enforce a promise to provide a thirty-six month pension benefit that was not included in the written employment agreement. The court rectified the agreement to add the term but went on to say that it would have allowed the claim in any event based on promissory estoppel. Although clearly obiter, it appears to fly in the face of the “only a defence” principle.

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Most students would probably agree with the outcome of the Hughes case (Case 7.4 at p. 150) but should the courts go further? Is a person entitled to rely on a gratuitous promise, as opposed to a binding contract? Does he take a risk upon himself if he changes his position as a result? The Canadian courts are likely reluctant to adopt the principle of injurious reliance as it would make almost all promises binding on the promisor regardless of intent or any consideration to the promisor. Question 2 – Students need to analyze the comparisons between the two systems and consider the merits of each position. Fairness is a principle of equity, but in each case there is unfairness to either party. Should the person who relied on a gratuitous promise suffer a loss as a result? Or should the person who makes a casual promise bear a loss, because the other party chose to rely on it?

QUESTIONS FOR REVIEW 1. The requirement is that the promisee give something in return, not that the promisor receive a benefit. The example at Illustration 7.1 shows that where the promisee refrains from suing a third person provides the needed consideration for the promisor’s undertaking to pay the debt. (Source p. 144) 2. The charity may have agreed to undertake some new activity or to incur some expense in return for the promise of a donation. If so, it has given consideration. (Source p. 144) 3. The consideration given for the promise must have some value, but the court does not inquire as to the adequacy of that consideration. In the absence of fraud, the promise to pay one penny is sufficient to make the contract valid. (Source p. 145) 4. When one party, A gives up its right to sue in exchange for a payment from the other party, B, both are bound by the settlement. As a matter of public policy it does not matter that A would likely have lost in court; it is important to encourage such settlements and decrease the burden on the courts. (Source p. 145) 5. The promisor’s reason for making the promise is irrelevant – whether it be gratitude, affection, or a sense of moral obligation. (Source p. 146) 6. A creditor may actually find it advantageous to offer to settle a debt for a lesser sum than is legally due, but since the debtor provides no new consideration, the creditor is not bound by the promise to settle for less. This rule is avoided when: (1) the debtor delivers an item of nominal value to the creditor in return for the creditor's promise; or (2) the creditor makes its promise to accept the lesser sum under its seal; (3) the lesser payment is made by a third party; or (4) the legislature enacts a statute stating that the debt is extinguished once the lesser sum is paid. (Source pp. 148-149) 7. The rule in Foakes v. Beer has been modified by statute in five provinces. Under any of those acts, if a creditor agrees to accept part performance (that is, a lesser sum of

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money) in settlement of a debt, it is bound once it has accepted this part performance. (Source p. 149) 8. “Injurious reliance” places the emphasis on the reasonableness of the promisee’s conduct; that is, if he relied reasonably on the promise and suffered a loss as a result the court concentrates on the unfairness of denying him a remedy. In contrast, “equitable estoppel” appears more concerned with the conduct of the promisor— rather than the harm it caused to the other party. (Source p. 151) 9. The Hughes case illustrates the classic situation in which equitable estoppel arises: (1) some form of legal relationship already exists between the parties (2) one of the parties promises (perhaps by implication only) to release the other from some or all of the other’s legal duties to him; and (3) the other party in reliance on that promise alters his conduct in a way that would make it a real hardship if the promisor could renege on his promise. (Source p. 151) 10. It remains uncertain how far our Canadian courts will go. In Conwest, there was a prior existing relationship under the option agreement. Suppose instead there had only been a promise to extend an offer for a week; A had relied heavily on the extension investing money in a project, but had not paid for an option. Thus far it is very uncertain that our courts will find such a promise binding. (Source p. 152) 11. When one person requests the services of another and the other performs those services, the law implies a promise to pay. Such a promise is implied between strangers or even between friends, if the services are rendered in a customary business transaction. But a promise to pay is not usually implied when the services are performed between members of a family or close friends. (Source p. 155) 12. A seal represents a formal act, an act of “deliberation” in making a promise that makes it binding without consideration being given in return. There must be physical evidence on a document that represents that act of deliberation. (Source p. 153-154) 13. Offer and acceptance (Chapter 6), consideration (Chapter 7) and intention of create legal relations (Chapter 7). 14. The public accountants have no contract with their clients because of a lack of consideration. They do, however, have a special relationship out of which a duty of care arises. Breach of that voluntary duty exposes them to liability in negligence or for breach of fiduciary duty. (Chapter 5) 15. There is a presumption that an intention to contract exists. The presumption is strong in dealings between strangers and in commerce generally. Otherwise, it is the reasonable bystander test that is used to determine if an intention to create legal relations exists. (Source p. 155) 16. No. Early payment is good consideration for the discount. (Source p. 148)

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CASES AND PROBLEMS 1. This question raises the issue of equitable or promissory estoppel. (Source p. 150) Here Ashley relied upon her landlord agreeing that she could pay 50% of her rent for the next six months. The criteria for equitable estoppel is that the parties are in an existing legal relationship, one of the parties promises to release the other from certain obligations or legal duties, and the party released relies on this promise to their detriment. That is what happened here. The landlord made a promise which Ashley relied upon and then went back on his word. However, Ashley has not lived up to her part of the agreement either, as she has not paid the 50% as promised, so she may not be able to use equitable estoppel as a defence to a claim by her landlord. 2. The main question is whether the parties intended to create a legal relationship, rather than providing friendly advice. Since a court cannot discover what was actually present in the minds of Burkowski and Adams, their intention must be inferred from all the circumstances, including their relationship. Having a late-night coffee together is rather different from Burkowski going to Adams’ office for a meeting. The American humorist, Will Rogers, is said to have been invited by a prominent Hollywood socialite to attend a party she was giving. Afterwards he sent her a bill for professional services (his presence had made the party a successful occasion). She protested that he had been invited only as a guest. He is reported to have replied that when he was invited anywhere out of pure hospitality, his host usually invited his wife as well. The problem may also be used to show, if the point has not already come up, that when there is a serious intent to create legal relations, consideration need not be agreed upon expressly. When Burkowski asked where she might get investment advice, was she expecting to pay for it? Very likely, she would have, if she went to a third person. Did Adams’ suggestion for coffee together imply that, at least initially, he would offer his advice as a friend? In any event, if Burkowski believes Adam’s fee is too high, at most she impliedly agreed to pay Adams a reasonable price for the advice and his claim for a fee would be on a quantum meruit basis. The test to determine whether an intention to create legal relations exists is the reasonable bystander test. Would a reasonable bystander have understood the meeting between the parties to have intended to create legal relations? 3. This case is based on Governors of Dalhousie College v. Boutilier, [1934] 3 D.L.R. 593. When a person agrees to subscribe a sum of money for the general and undefined purposes of a charitable organization, the situation does not ordinarily suggest that there is any consideration moving from the promisee (charity). Here however, Autotech did make its promise for a specific project, the construction of the Millennium Centre, but we are not told that the project is already underway, or whether the town has signed a contract with a construction company. Further, Autotech’s pledge is conditional upon matching pledges being received by the town. As a result it is highly unlikely that a court would find Autotech bound to contribute the full $9,000,000. However, with respect to the request by Autotech for the return of the money pledged, it would have no

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cause of action; once a gift has been voluntarily made, it is no longer the donor’s property, and the donor has no control over it. 4(a) This case demonstrates a situation that often arises in the day-to-day business world and a case that many business students enjoy discussing. The facts of the case are those of Roche v. Marston, [1951] 3 D.L.R. 433 and the judgment in that case is in the summaries at the end of this chapter. Students should consider whether any benefit had been conferred on Matsui in response to his request for Robert's services. If that is so, then the law will imply a promise to pay for the services rendered. Matsui requested the services and although no price was set, Roche was entitled to quantum meruit. Students sometimes contend that a case like this is frustrating because they are faced with an irresolvable conflict of evidence. It should be pointed out that it is one of the major functions of the judge or the jury as the trier of fact to sort out the facts when conflicts of evidence arise. Students are therefore entitled to accept as one of the facts of this case that the parties had not agreed that Matsui's obligation to pay a commission would be contingent upon his decision actually to make a purchase. The facts then establish a valid quantum meruit claim on Roberts' part. Students should understand that there is nothing retroactive about the quantum meruit claim; Matsui's obligation to pay a reasonable price arises at the time he requests Roberts' services. What happens later between the parties may provide evidence about what the reasonable amount should be. Matsui's later "promise" to pay Roberts $50,000 and Roberts' consent provide evidence that they had fixed the dollar value of the work, and a court will hold the agreed value as binding on both parties. (b) This case turns upon the fact that since Roberts and Matsui had agreed upon $50,000 as the appropriate fee; therefore, Roberts was entitled to that amount and no more under the contract for the services he performed. In these circumstances, Matsui's promise to pay an additional $10,000 was a promise based on a past consideration and therefore was merely a gratuitous promise. 5. The question here is one of waiver by a party to a contract of his strict rights under that contract. Throughout 2009 the parties were on friendly terms and Dealer tacitly acquiesced in Wheeler's failure to make timely payments. Did Dealer thereby waive, or tacitly promise, not to insist upon his strict legal rights in the future? If so, can Dealer unilaterally and without notice withdraw that implied promise? Although Dealer's implied promise is gratuitous and unenforceable by Wheeler, there would appear to be an element of undue hardship if Dealer were now permitted to revert to his strict contractual rights without first giving Wheeler notice of his intention to do so. It may be argued that Dealer had lulled Wheeler into a false sense of security by not insisting on prompt payment. Wheeler could argue promissory estoppel by pointing out that she relied on Dealer's tacit waiver of his right to insist on prompt payment and that the waiver should not now be withdrawn with serious retroactive effect. Wheeler should be permitted to withdraw only after giving Dealer notice of his intention to do so. In response to this argument Dealer could claim that although the 2009 payments were Copyright © 2016 Pearson Canada Inc.

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late, they were not made thirty-five days late as was the January 1, 2010 payment. Accordingly, while he may be taken to have tacitly promised not to demand the full amount if payments were made ten or fifteen days late, he cannot be taken to have promised to permit Wheeler to be thirty-five days late in making payments. Another view of this dispute would be that wherever possible, contracts should, in the interest of administrative planning and business confidence, be accorded binding force and effect by the courts. Debtors have a recognized obligation to seek out their creditors and are not entitled readily to draw inferences from past indulgences. The facts in this case have been drawn from those in John Burrows Ltd. v. Subsurface Surveys (1968), 68 D.L.R. (2d) 354 (S.C.C.), where the creditor's action eventually succeeded. In that case, the trial court rejected the debtor's defence of equitable estoppel. On appeal by the debtor, the court reversed the trial judgment and accepted that the principle of equitable estoppel governed. On further appeal by the creditor to the Supreme Court of Canada, the decision of the trial court was restored. Cogent arguments can be made on either side. However, because of the emphasis given to equitable estoppel in the text, most students are likely to conclude that equitable estoppel should prevail. It is of particular interest, therefore, to consider the reasons for judgment of the Supreme Court of Canada (as delivered by Ritchie, J., at 360-62): It seems clear to me that this type of equitable defence cannot be invoked unless there is some evidence that one of the parties entered into a course of negotiation which had the effect of leading the other to suppose that the strict rights under the contract would not be enforced, and I think that this implies that there must be evidence from which it can be inferred that the first party intended that the legal relations created by the contract would be altered as a result of the negotiations. It is not enough to show that one party has taken advantage of indulgences granted to him by the other for if this were so in relation to commercial transactions, such as promissory notes, it would mean that holders of such notes would be required to insist on the very letter being enforced in all cases for fear that any indulgences granted and acted upon could be translated into a waiver of their rights to enforce the contract according to its terms... It does not appear that the evidence warrants the inference that the appellant entered into any negotiations with the respondents which had the effect of leading them to suppose that the appellant had agreed to disregard or hold in suspense or abeyance that part of the contract. It is possible, of course, that one may come to the same conclusion as the Supreme Court of Canada (that the creditor's action should succeed) but for the reason that the creditor's past indulgences (accepting interest payments just a few more than ten days overdue) could create no inference of an implied promise to accept payments as much as thirty-five days overdue. Insofar as the defence of equitable estoppel is concerned, one should note that the debtor, Wheeler, wisely paid the arrears of interest immediately upon receipt of the creditor's (Dealer's) letter of February 5. Any further delay in payment of interest would not be protected by equitable estoppel. The "acceleration clause", making the entire principal sum come due upon default in interest payments, would become binding upon the debtor as soon as the creditor made clear his intention to revert to his

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original legal rights. An instructor may wish to point out a parallel with the High Trees decision (see Case 2, above) where notice at once restored the promisor's original legal rights as they pertained to the future. 6. Susan would likely have a difficult time in bringing a lawsuit in this case. The case of Carlill v. Carbolic Smoke Ball Co., [1892] 2 Q.B. 484 would suggest that an advertisement can create a legitimate offer; however, this case more closely resembles that of Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116 (States District Court for the Southern District of New York), aff’d 210 F.3d 88 (2d Cir. 2000). In that case the court held that the advertisement to cash in seven million “Pepsi points” for a harrier jet could not be construed as an offer. It further stated that the seriousness of the intention of the advertisement was subject to the objective standard of the reasonable person. In that case, a reasonable person would have known that PepsiCo did not intend to give away a twenty-three million dollar airplane for the equivalent of $700,000 in points. In Susan’s case, Waymart would argue that there was no serious intent to sell a hot tub, a product that they do not carry, and that this would be obvious to a reasonable person. Susan may have other causes of action under misrepresentation (Chapter 8) and consumer protection (Chapter 30). To protect itself from legal risk, Waymart should have included a disclaimer in the advertisement explaining that the items displayed were not redeemable with points; PepsiCo added the phrase “just kidding” to its advertisement regarding the harrier jet to avoid further lawsuits.

CASE SUMMARIES Brantford General Hospital Foundation v. Marquis Estate (2003), 67 O.R. (3d) 432 (Ontario Superior Court of Justice) See Case 6.1 at p. 136 in the text. Mrs. Marquis pledged a donation to the plaintiff for $1 million over a five year period. She made the first payment of $200,000, but then died. Her estate refused to honour the pledge. The plaintiff brought suit to collect the outstanding $800,000 although they had already received a bequest of $800,000 under the deceased’s will. The plaintiff argued that they had relied on the promise to their detriment; that is, they had commenced construction on a critical care unit. Further, they had provided consideration for the pledge in that they had suggested naming the unit after the deceased. The court held that there was no contract. They had received funds under the will and could have used that money toward the unit. Further, the promise to name the unit was not consideration as that was the plaintiff’s suggestion and it had not yet been approved. Canadian Imperial Bank of Commerce v. Dene Mat Construction Ltd. and others, [1988] 4 W.W.R. 344 (Supreme Court of the North West Territories)

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The plaintiff bank sued the defendant, Matchiuk for payment under a guarantee. The guarantee was signed by the defendant, but no wafer was affixed as a seal. The court held that the document had the words “Given under seal” printed at its foot. Further, there is a preprinted “scrolled indication of a seal” next to where the defendant signed. The court held that these were sufficient indications that the document was signed under seal; therefore, no consideration was necessary. Carlill v. Carbolic Smoke Ball Co., [1892] 2 Q.B. 484 (England – Court of Appeal) The defendant placed an advertisement in a newspaper stating that anyone who used their “smoke ball” and still contracted the flu would be entitled to collect one hundred pounds sterling. The plaintiff purchased and used the device but still contracted the flu. She sued the defendant for the money promised. The Court of Appeal held that all of the elements of contract were present. The advertisement was not merely an invitation to treat, but an offer that the plaintiff accepted by performance creating a unilateral contract. Central London Property Trust, Ltd. v. High Trees House, Ltd., [1947] K.B. 130 (England – High Court) The defendant leased a block of flats from the plaintiff. During WWII the occupancy rates were drastically reduced and so the two parties agreed that the defendant would only have to pay half of the rent; no stipulation was made for how long this agreement would continue. By 1945 the occupancy of the flats was back to full capacity. The plaintiff sued for the full amount of the rents from 1945 forward and the Court agreed; however, in obiter the Court commented that if the plaintiff had requested the full rents from 1940 when the reduction began it would have been denied. This comment was based on the premise that if one party leads the other party to believe that the first party will not enforce its strict legal rights, then the courts will not allow it to do so later; this was the doctrine of promissory estoppel. Conwest Exploration Co. v. Letain, [1964] S.C.R. 20 (Supreme Court of Canada) See Case 6.5 at p. 144 in the text. Letain gave Conwest an option to purchase certain mining claims that could be exercised if, on or before a specified date, Conwest incorporated a company to hold the claims and alloted at least 50,000 shares in the company to Letain. With Letain's co-operation, Conwest filed the papers to incorporate the company with the appropriate government office before the specified deadline, but the formal completion occurred almost three weeks late. Letain rejected Conwest's attempt to exercise its option. The Supreme Court of Canada held that Conwest had complied with the option requirements by filing the papers on time, but the Court also said that Letain was estopped from from insisting on strict performance of the condition in the option, because he had participated in the incorporation process in a manner that induced Conwest to believe that he would not require strict adherence to the deadline. Crabb v. Arun District Council, [1976] Ch. 179 (England – Court of Appeal) Copyright © 2016 Pearson Canada Inc.

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Crabb owned a narrow piece of land that fronted onto a main road. He wished to sell the front portion but then would have no access to the back portion which he wished to retain. Luckily the Council was building a new road along the side of Crabb's property. He learned that although he did not have a right of access to the new road, he could apply to the Council for permission to build a new entrance for a fee. After being assured by the Council that he would have no difficulty obtaining approval, and relying on that assurance, Crabb sold the front portion of his property and built a new entrance from the back portion to the side road. Shortly afterwards, the Council removed his new gate and fenced in the entrance. Crabb was landlocked and had no right of access to his property. He sued for a declaration that he was entitled to the entrance and the court supported his claim. The Council had encouraged Crabb to act to his detriment, and his reliance was not reversible; there was no way he could undo what he had done since he had sold the front pan of his lot to an innocent third person and could not recover it. Crabb was entitled to regain his entrance on paying the normal fee. This case is remarkable because it is the only English decision granting an unconditional remedy based on promissory estoppel rather than merely giving additional time. Some of the judges called it an exception known as "property estoppel". Doef’s Iron Works Ltd. v. MCCI, [2004] O.J. No. 4358 (Ontario Court of Appeal) The plaintiff sought to have a mortgage declared void on grounds or promissory estoppel; that is, that the defendant made a representation that the plaintiff relied on to its detriment. The trial judge declared the mortgage void. The defendant appealed. The Court of Appeal held that promissory estoppel could only be used as a shield and not a sword. It was open to the plaintiff to assert its rights through other means, such as a lack of consideration. The court held that the trial judge erred in applying the doctrine of promissory estoppel and ordered a new trial. Eastwood v. Kenyon 1 (1840), 113 E.R. 482 (England – Queen’s Bench) See Case 6.2 at p. 138 in the text. The plaintiff had been guardian to the defendant’s wife when she was a child. He had borrowed money to pay for her education and to support the estate to which she was sole heir. Both she and then later her husband made a promise to repay the monies the plaintiff had expended on her behalf. The plaintiff sued the husband on his promise. The court held there was no legal obligation to make good on the promise as there was no present consideration on the part of the defendant; past consideration is no consideration. Fairgrief v. Ellis, [1935] 2 D.L.R. 806 (British Columbia Supreme Court) The elderly defendant, who was separated from his wife, made an oral agreement with the plaintiffs that if they would act as his housekeepers and take charge of his home during his lifetime, the home would be theirs upon his death. Subsequently, his wife decided to return home and the defendant agreed with the plaintiffs that if they would

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surrender their rights under the oral agreement and leave his home, he would pay them $1,000. They left the house and when ultimately the defendant refused to pay, they sued him for the $1,000. The court held that even though the first contract was unenforceable under the Statute of Frauds, the second contract could be enforced because when the plaintiffs gave up their rights under the first contract, they believed that those rights were legally enforceable. Therefore there was valid consideration for the defendant's promise to pay the $1,000. Famous Foods Ltd. v. Liddle, [1941] 3 D.L.R. 525 (British Columbia Court of Appeal) Liddle purchased flour from a scoundrel, Oldaker, and gave Oldaker a bill of exchange in payment. Famous Foods then in turn sold flour to Oldaker, taking in payment from him the bill of exchange signed by Liddle. None of the parties noticed that changes made to the bill when it was signed over to Famous Foods made it unenforceable against Liddle. Oldaker, the "middle man", absconded without delivering all the flour to Liddle and Liddle protested at having to pay the balance due on the bill to Famous Foods. When Famous Foods threatened to sue, Liddle gave Famous Foods a new note in return for deferring the suit. The court held that Famous Foods' forbearance to sue on the original bill, in the honest belief that it had a good cause of action, constituted good consideration for the new note. Foakes v. Beer (1884), 9 App. Cas. 605 (England - House of Lords) See Case 6.3 at p. 141 in the text. The plaintiff was a creditor of the defendant. The defendant was in a position where he was unable to repay the debt. The creditor agreed to accept the principal and waive the interest owing. After the defendant paid the principal, the creditor sued for the interest. The court held that there was no new consideration for the reduction in debt and the defendant was liable to the creditor for the interest. Friedmann Equity Developments Inc. v. Final Note Ltd., [2000] 1 S.C.R. 842 at para 36 (Supreme Court of Canada) This is a case of a corporation acting as a trustee for beneficial owners of a property. A mortgage was obtained on the property and payments went into default. The mortgagee commenced an action against the beneficial owners. The beneficial owners brought a motion to have the action dismissed against them as they were undisclosed principals who could not be sued on an indenture executed by their agent under seal. The Supreme Court agreed and held that the action should be dismissed. Gilbert Steel Ltd. v. University Construction Ltd. (1976), 67 D.L.R. (3d) 606 (Ontario Court of Appeal) The plaintiff supplies steel bars to the defendant construction company. Due to increases in the price of steel, the plaintiff and defendant renegotiated the price for the steel bars,

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part way through the construction project. Both parties agree to an increased price orally, but not in writing. The trial judge found that the defendant did agree to the higher price. The question then became one of whether or not there was consideration for the increase in price. The trial judge held that the oral agreement was an agreement to vary the contract; not to replace the contract with a new one. Therefore, the variation had no new consideration for the promise of the increase in price and the plaintiff could not succeed. The Court of Appeal upheld this decision. Glasbrook Brothers v. Glamorgan County Council [1925] A.C. 270 (England - House of Lords) During a coal miners’ strike, hostilities broke out between the strikers and the “safety men” set to guard the mines from damage. The owners of the mines, offered to pay the local police if they would protect the mines. After, peace had been restored, the owners refused to pay the fees. The Court held that there was no consideration for the protection of the mines as it was an existing legal duty on the part of the police. Governors of Dalhousie College v. Boutilier, [1934] 3 D.L.R. 593 (Supreme Court of Canada) Boutilier signed a form pledging $5000 towards the Dalhousie College Campaign Fund (1920), a fund to increase the general resources of the institution. Subsequently, he met with financial setbacks that kept him from honouring the pledge. In response to a letter of inquiry from the President of the University, Boutilier wrote in April of 1926 that he intended to keep his pledge when he was able. Boutilier died in 1928 without honouring the pledge and the University sued his estate. The court held that the purpose of the fund (the general improvement of the institution) did not constitute consideration in the form of a promise by the University and that no contract had been created. The court also held that promissory estoppel would not lie against the estate because the University was unable to show any injurious reliance on Boutilier's pledge. Greater Fredericton Airport Authority Inc. v. NAV Canada (2008), 290 D.L.R. (4th) 405 Page 147 footnote 11 Haigh v. Brooks (1839), 113 E.R. 119 (England – King’s Bench) Brooks promised in writing to guarantee payment of £10,000 loan by the plaintiff to a third party. The facts are rather complicated, but later Brooks bargained for the return of his guarantee by giving a new guarantee for the payment of certain bills of exchange for £9,600 drawn on the third party debtor. The plaintiff agreed and returned the original guarantee. The third party debtor then defaulted and Brooks refused to honour his new guarantee. The plaintiff sued Brooks, who claimed that:

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i. the first guarantee was invalid because the written memorandum did not satisfy the Statute of Frauds (see Requirement of Writing in Chapter 9); ii. accordingly, he had not been legally indebted to the plaintiff; and iii. therefore, the plaintiff had given no new consideration for the second promise to pay, but had merely returned a worthless piece of paper. However, the court held that the plaintiff, by abandoning what he honestly believed to be a legally enforceable guarantee, had given valid consideration for Brooks' second promise. Hirachand Punamchand v. Temple, [1911] 2 K.B. 330 (England – Court of Appeal) The plaintiffs lent money to the defendant in return for a promissory note. When the defendant defaulted on payment, the plaintiffs wrote to his father who offered an amount less than that of the debt in full settlement and enclosed payment. The plaintiffs retained the proceeds and afterwards brought an action against the defendant for the balance of the debt. The court held that the creditors must be taken to have accepted the money from the third party, who was under no duty to pay the amount received by them, on the terms upon which the amount was offered. The payment amounted to a full settlement, so that the plaintiffs could not maintain an action against the defendant. Hongkong Bank of Canada v. New Age Graphic Design Inc., [1996] B.C.J. No.; 1996 CanLII 1898 (Supreme Court of British Columbia) The plaintiff sued the defendant, Chronister for payment under a guarantee. The guarantee was signed by the defendant, but no wafer was affixed as a seal. Following the decision in Canadian Imperial Bank of Commerce v. Dene Mat Construction Ltd. and others, [1988] 4 W.W.R. 344 (above), the court held that the printing of the words “Given under seal” printed on the form was sufficient and no consideration was necessary. Hughes v. Metropolitan Railway Co. (1877), 2 App. Cas. 439 (England – House of Lords) See Case 6.4 at p. 143 in the text. The plaintiff brought action against the defendant for breach of a contract term that required the defendant to effect repairs to a property it leased from the plaintiff. The defendant had commenced repairs, but then ceased when it began negotiations with the plaintiff to buy back the lease. After several months, the negotiations fell through. The plaintiff then commenced the action as the six month deadline to complete the repairs had passed. The plaintiff sought to recover the property under the terms of the contract. The Court held that the parties negotiated in good faith and that the plaintiff impliedly undertook not to enforce the contract during that time. The plaintiff was estopped from claiming breach of contract under the circumstances; the defendant had six months in which to make the repairs from the time the negotiations broke down.

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Kanitz v. Rogers (2002), 58 O.R. (3d) 299 (Ontario Superior Court of Justice) During the first year of Rogers’ high speed internet service Kanitz experienced frequent and prolonged interruptions to his service and he sued for recovery of the $200.00 service fee. The paper contract under which the service was installed contained an amending clause. Under this authority, Rogers added a mandatory arbitration clause to the terms. No specific notice of the new clause was given to consumers; it was displayed on the Rogers’ website as part of the terms and conditions. Under the Ontario arbitration legislation, Rogers successfully obtained a stay of the Kanitz action. This decision of the Ontario Superior Court is cited by the Supreme Court in Rogers v. Murroff 2007 SCC 35. Lampleigh v. Braithwait (1615), 80 E.R. 255 (England – King’s Bench) The defendant murdered Patrick Mahume and instantly asked the plaintiff to do his best to obtain the King's Pardon for the defendant. The plaintiff gave his best efforts and afterwards the defendant promised to pay the plaintiff a certain sum. When the defendant failed to pay, the plaintiff sued. The court held that if an act is done at the request of a party, a subsequent promise by that party to pay for the act is binding. Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116 (United States District Court for the Southern District of New York), aff’d 210 F.3d 88 (2d Cir. 2000) See Case 6.7 at p. 149 in the text. The defendant ran an advertisement offering consumers a chance to redeem points collected from purchasing the defendant’s product for various merchandise. At the end of the television commercial the defendant showed an AV-8 Harrier II jump jet with the words “Harrier Fighter 7,000,000 Pepsi Points.” The plaintiff abided by the rules of the contest and sent in a request to redeem the equivalent of 7,000,000 points for the jet. When the jet was not forthcoming, the plaintiff sued for breach of contract and fraud. The court held that there was no contract; the advertisement did not constitute an offer; and if it did, no reasonable person could have believed that the company intended to convey a jet; and the value of the prize meant that a contract would have had to have been in writing as per the Statute of Frauds. Lindsey v. Heron & Co. (1921) 64 D.L.R. 92, 98–9 (Ontario Court of Appeal) The plaintiff asked the defendant if he would be interested in buying shares of Eastern Cafeterias of Canada. The defendant looked into prices and then offered the plaintiff $10.50 per share for the “Eastern Cafeteria” shares. The plaintiff agreed and delivered the shares. The defendant paid by cheque. The defendant then realized that Eastern Cafeterias Ltd. and Eastern Cafeterias of Canada Ltd. were different companies; he stopped payment on his cheque. The plaintiff sued. The defendant argued that his offer to buy was ambiguous, as he could have meant either company. The court held that the “words used by the defendant manifested an intention to offer the named price for the thing that the plaintiff was selling.” The plaintiff did not use ambiguous language in describing the shares for sale; the ambiguous language of the defendant then, could only refer to that which the plaintiff was selling.

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N.M v. A.T.A., 2003 BCCA 297 (British Columbia Court of Appeal) The plaintiff claimed that the defendant had promised her that he would pay off her mortgage on her property in England, if she would quit her job and move to Vancouver to live with him. She did this and he failed to pay off her mortgage (but did give her $100,000 which she used to pay down her mortgage). Shortly thereafter, he asked her to move out. She was unable to find employment in either Canada or England. The plaintiff sued for her reliance on the promise of the defendant to her detriment. The trial judge declined to adopt the doctrine of promissory estoppel because there was on legal relationship existing between the parties at the time of the promise. The Court of Appeal held that the defendant’s failure to keep his promise was neither unconscionable nor unjust; a necessary element of promissory estoppel is the promisee’s assumption or expectation of a legal relationship. There was no evidence that the defendant intended his promise to have binding effect.

Olivieri v. Sherman (2007), 86 O.R. (3d) 778 at paras 45–51 (Ontario Court of Appeal) The plaintiff was a doctor at Sick Children’s Hospital in Toronto. She was engaged in clinical research. She felt there was some disturbing results from her research and publicly stated so. The funding for the research was provided by the defendants. The two parties engaged in disparaging comments to each other. The plaintiff sued for defamation and the defendants cross-claimed for the same. The two parties participated in mandatory mediation. During the mediation offers to settle were made. The defendants made a counter-offer that was eventually accepted by the plaintiff. Sometime later, the defendant stated that there was no settlement agreement, only a negotiation. The agreement as drafted was too vague. The trial judge held that as there was no meeting of the minds with respect to the agreement that it did not constitute a valid contract. The Court of Appeal overturned this decision, stating that the test was objective not subjective. The judge should not have considered the state of mind of the defendants. Their belief that further clarification of the agreement terms was necessary was not communicated to the plaintiff. On an objective standard a contract existed. Pao On v. Lau Yiu Long, [1979] 3 W.L.R. 435 (Privy Council) The plaintiffs, owners of shares in a private company, contracted to sell their shares to a public company in return for a new issue of shares in the public company. The defendants, who were majority shareholders in the public company, were worried that a quick sale of the new issue might push down the market price of the public company's shares. They persuaded the plaintiffs to agree not to sell sixty percent of their newly acquired shares for over a year. Subsequently, at the plaintiffs' request, the defendants agreed orally to indemnify the plaintiffs for any losses they might suffer from retaining the shares. Later the parties had a disagreement and the plaintiffs refused to complete the share exchange contract with

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the public company unless the defendants promised in writing to indemnify them for any losses. The defendants so agreed, the main transaction was completed and the plaintiff retained the shares as originally promised. The shares lost value while the plaintiffs retained them, but the defendants refused to indemnify the plaintiffs for the loss, claiming that their promise to do so was gratuitous and not binding. The court held that the plaintiffs' promise to retain the shares, although made before the defendants' agreed to give a guarantee, was valid consideration if: (a) done at the defendants' request; (b) the parties understood that the act of retaining the shares was expected to be "paid for" (that is, was not a "gift"); and (c) the guarantee, had it been bargained for in advance, would have been a binding arrangement. The court found that the promise to retain the shares met these requirements and thus was sufficient to bind the defendants to their guarantee. Paul v. Lam, 2011 BCSC 980 Page 151 footnote 21 Process Automation Inc. v. Norsteam Intertec Inc. & Arroyave 2010 ONSC 3987 Page 148 footnote 15 Reclamation Systems Inc. v. The Honourable Bob Rae 1996 CanLII 7950, (1996), 27 O.R. (3d) 419 (Ontario Supreme Court) The plaintiff sued the defendant for statements made while he was in office. The statements were with regard to a proposal to build a reclamation plant near Acton. Eventually, Bill 62 was passed and the plaintiff was unable to proceed with its plans. Among other causes of action, the plaintiff pleaded promissory estoppel; the plaintiff relied on the statements to its detriment in expending monies on the project. The court confirmed that in order for promissory estoppel to apply there had to be a pre-existing contractual relationship between the parties which was not the case here. Further, the court reiterated that the doctrine cannot be used as a sword, but only a shield. Re Tudale Exploration Ltd. and Bruce (1978), 20 O.R. (2d) 593 (Ontario Divisional Court) The plaintiff paid for an option agreement from Tudale, with respect to mining claims, to expire in three years. Shortly before the expiry date, Tudale orally gave the plaintiff an extension of "sufficient time" to comply with the terms of the option, without requiring further payment. The plaintiff relied on that extension and tried to exercise the option after the original option period had expired, but Tudale claimed that the option agreement was terminated. The court held that because the plaintiff had reasonably and honestly

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relied on the extension, Tudale could not treat the option as terminated and had to afford the other party a reasonable amount of time within which to comply with the agreement. Ricketts v. Scothorn 77 N.W. 365 (1898) (U.S.A. - Supreme Court of Nebraska) Ricketts, the grandfather of Scothorn, gave a promissory note for a certain sum plus annual interest to Scothorn so that she would no longer have to work. Scothorn claimed that in consideration for the note, she agreed to give up working as a bookkeeper for a living. Relying on the note as a means of support, she gave up her employment. Ricketts died and his estate refused to pay according to the note. The court found that the note was given gratuitously and was not dependent on the fulfilment of any promise that Scothorn no longer work. However, Ricketts' estate could not resist payment on the ground of no consideration because Ricketts intentionally influenced the plaintiff to alter her position to her detriment in reliance on the note. Remind students that this is an American case and that there is no Canadian equivalent. Rose and Frank v. Crompton, [1925] A.C. 445 (England – House of Lords) Crompton (an English firm) made Rose and Frank (an American firm) its sole agent for sales in the United States and Canada. After the term of the original agreement expired, the parties entered into a written agreement to extend the period of the arrangement: one term contained in the document was that the agreement was not legally enforceable. Disputes arose between the parties and Crompton ended the relationship without notice. The court held that the arrangement to extend the period of agency was not a legally binding contract because the parties had expressly agreed to that effect.

Ryan in Trust v. Kaukab, 2011ONSC 6826 Page 154 footnote 32 Sanitary Refuse Collectors Inc. v. Ottawa, [1972] 1 O.R. 296 (Ontario High Court) The city called for tenders for garbage collection: the tenders were required to be sealed and accompanied by a deposit of $60,000. The plaintiff submitted the deposit and a sealed tender which was accepted by the city. The tender had been made on the basis of information given by the city about the current collection contract and about labour costs: this information proved to be false and the plaintiff withdrew the tender and sued for the return of the deposit. The court held that the sealed tender formed an irrevocable contract between the plaintiff and the city. However, since the plaintiff was induced to make the tender based on material misrepresentations made by the city, the plaintiff could resile without obligation and recover its full deposit. Scotson v. Pegg (1861), 158 E.R. 121 (Exchequer Court) A coal merchant sold coal to the defendant buyer and then paid the plaintiff, a carrier, to deliver it. In discussions about arrangements for delivery, the defendant said that if the

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coal was delivered at a particular location at a specified time, he would unload it at a rate that could allow the plaintiff to complete the job quickly. The plaintiffs delivered the coal but the defendant waited five days before unloading it. The defendant claimed that there had been no consideration for the promise to unload since the plaintiffs were already bound to the third party (the seller) to deliver the coal. The court disagreed: it held that the plaintiffs' promise to the defendant to do something they were already bound to a third party to do was valid consideration for the defendant's promise because if the plaintiff had defaulted, then both the seller and the defendant buyer could have sued him. Shadwell v. Shadwell (1860), 142 E.R. 62 (England – Chancery) The plaintiff and Ellen Nicholl agreed to marry each other. The defendant (the plaintiff's uncle), knowing of the planned wedding, promised in writing to pay the plaintiff a yearly income for a certain period if the plaintiff would marry Ellen. The wedding took place but the defendant died before having made all the payments. The plaintiff sued his uncle's estate for the balance. The court held that the plaintiff's promising the defendant he would marry Ellen was good consideration for the defendant's promise to pay, even though the plaintiff had already promised Ellen that he would marry her. Stilk v. Myrick (1809), 70 E.R. 1168 (England – High Court) This was an action brought by a sailor against the captain of a ship. During the course of the voyage, many of the seamen deserted ship. The captain promised those who remained an increase in wages if they would continue the voyage. The captain refused to pay the increase in wages. The court held that the plaintiff was already under a legal duty to perform the contract. There was no further consideration for the increase in wages. Turner v. Owen (1862), 6 E.R. 79 (England – High Court) Another seafarer case – this time the ship was damaged and the captain made promises for more money to the sailors to agree to continue the voyage. Because the ship was no longer considered seaworthy and this is an implied term of the original contract, the agreement to continue the voyage did amount to consideration for the increase in wages. Wallace v. Allen (2007), 85 O.R. (3d) 88 appeal allowed (2009), 93 O.R. (3d) 723 (Ontario Court of Appeal) See Case 6.6 at p. 149 in the text. The defendant owned a business and mentioned to his friend, the plaintiff that he was thinking of selling it. The plaintiff expressed interest in purchasing the business. After weeks of negotiation, the parties signed a letter of intent for the share purchase of the companies. The parties then worked with their solicitors to draft a Share Purchase Agreement. A target date of December 29, 2004 was set for closing; the defendant and his solicitor were prepared to close the transaction at that time. The plaintiff did not show up as he was in Florida, with the defendant’s knowledge and consent. When the plaintiff did not appear, the defendant treated the transaction as at an

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end. The plaintiff sued for specific performance. The Court of Appeal held that the letter of intent acted as evidence of the intention to create legal relations and that the parties were legally bound. The court deemed that damages were sufficient in the circumstances and would not order specific performance. Williams v. Roffey Brothers & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512 (England – Court of Appeal) This case was a classic situation of a building contractor who could not finish a construction project on time for the agreed price. The two parties made an oral agreement to increase the payments above the original contract price, and the contractor completed the project. The defendant refused to pay the increase in price, and the contractor sued for the additional sum, claiming that the second agreement was unenforceable for want of consideration. The English Court of Appeal found that in the circumstances of this case, the promise to pay a higher price was enforceable because it was in the interests of the defendant and there was no economic duress. It stated that performance by A of his preexisting contractual obligation to B may be good consideration for a promise by B to pay A an additional sum for the performance of those contractual obligations. Glidewell L.J. summarized view of the present state of English law in the following propositions: (1) If A contracts with B to do work for, or to supply goods or services to, B in return for payment by B; and (2) Before A has completely performed his obligations B has reason to doubt that A will, or will be able to, complete his side of the bargain; and (3) B promises A an additional sum in return for A's promise to perform his contractual obligations on time; and (4) As a result of giving his promise B obtains a practical benefit, or obviates a disbenefit; and (5) B's promise is not given as a result of economic duress or fraud on the part of A; then (6) The benefit to B is can be consideration for B's promise, so that the promise will be legally binding (at 521-2). Glidewell, L.J. did not go so far as to overrule Stilk v. Myrick; rather it was his view that "the propositions above ...refine and limit the application of… [the principle in Stilk v. Myrick], but they leave the principle unscathed, eg., [sic] where B secures no benefit by his promise." This decision goes considerably further than do Canadian decisions; it can be argued that Glidewell transforms injurious reliance into consideration. (See Halyk's commentary cited in the footnote.)

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CHAPTER 8 FORMATION OF A CONTRACT: CAPACITY TO CONTRACT AND LEGALITY OF OBJECT THE DISTINCTION BETWEEN VOIDABLE AND VOID CONTRACTS It is important for students to understand the essential distinction between void and voidable contracts as it applies to questions of capacity and legality. Voidable contracts may be terminated by one or perhaps either of the parties, but are nevertheless binding contracts that remain in force unless and until one party acts to bring the contract to an end. Void contracts are a nullity from their inception and cannot be enforced by either party – it is as though a void contract never existed at all. However, the courts will endeavor to return the parties to their pre-contract positions to the extent that it is feasible to do so. Voidable contracts may or may not become void. Void contracts will be treated in a manner consistent with no agreement having ever been formed. MINORS (OR INFANTS) (Source p. 164) The courts have always recognized that minors have less bargaining power than adults. As a general rule, therefore, contracts made by minors cannot be enforced against them but are nonetheless enforceable by them: minors have the option of avoiding contracts without liability, although contracts not binding at common law may be enforceable understtutes such as the Canada Student Loans Act. Two aspects of this rule should be examined: (a) the exceptions for beneficial contracts of service, and for the provision of necessaries, and; (b) the consequences when a minor repudiates a contract under which there has already been part or full performance by the other party. When a minor comes of age she may become liable for obligations that could not have been enforced against her when she was a minor. To avoid liability, contracts concerning an interest of a permanent, continuous nature must be repudiated promptly upon the minor coming of age. Contracts not creating interests of a continuous nature are not binding upon a minor unless she expressly ratifies (usually, in writing) the agreement after coming of age. Instructors should stress the absurdity of this distinction and acknowledge that repudiation of all contracts is always the best risk management strategy. The law regarding repudiation and ratification of infants’ contracts has been clarified by statute in some provinces. Importantly, students should be aware that although infants have limited liability in contract, an infant is liable for torts, including negligence. OTHER PERSONS OF DIMINISHED CONTRACTUAL CAPACITY (Source p. 164)

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The law protects other persons of diminished contractual capacity in the same way as a minor. However, unlike the law relating to minors, a court requires a person of diminished contractual capacity to demonstrate that the other party to the contract knew of their diminished capacity at the time of the agreement; this can be a difficult evidentiary burden to meet. The party seeking to avoid a contract must do so promptly upon emerging from their state of diminished capacity. A person will also be denied the ability to repudiate if, after regaining sanity or sobriety, they accept the benefits of the contract. Corporations (Source p. 165) Corporations are “legal fictions”: law gives corporations the capacity to make any contract or enter into any obligation in the same fashion as a natural person. The law relating to principal and agent determines whether the person or persons claiming to act on behalf of a corporation have the power to bind it in contracts (see Chapter 17 for a complete discuss of the principal-agent relationship and Chapter 25 on the capacity of a corporation). Labour Unions (Source p. 165) The limited status of a labour union can be demonstrated to students by using the concept of ratification. Unions must bring a “tentative” deal to the membership for approval before it is binding. A corporation has not such obligation with its shareholders. THE ROLE OF LEGALITY IN THE FORMATION OF A CONTRACT (Source p. 167) The object or purpose of a contract must be legal, that is, its purpose must not offend the public good (be contrary to public policy) or violate a statute. In the absence of evidence to the contrary, the law will presume the objects of a contract to be legal. THE DIFFERENCE BETWEEN A VOID AND AN ILLEGAL CONTRACT (Source p. 167) If the parties to a void contract partially performed their promises the courts will do their best, taking into account all the circumstances, to restore the parties to their preagreement positions. Additionally, a court may find that only one or two terms of a contract are void, but that the rest of the contract is valid. If the void term can be severed from the contract without doing harm to either of the parties, a court will do so, and uphold the remainder of the contract – essentially, the court will treat the contract as though the void terms were not included. An illegal contract, by contrast, is void and unenforceable. The courts will refuse to come to the aid of someone who knowingly entered into an illegal contract. Void contracts are a nullity from their inception. As a matter of public policy, courts are reluctant to allow a legal term of an otherwise illegal contract to be severed and the balance enforced. A severance clause is often included in standard form contracts to allow for such a possibility.

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Instructors may want to introduce a standard form contract (or set of online terms and conditions) from a credit card company, cell phone provider, or fitness club to illustrate a form of severance clause. It may be helpful to identify the standard exemption clause at this time as well. This same template could be retained to show how standard form contracts address misrepresentation (Chapter 8), implied terms (Chapter 10), assignment (Chapter 11), and frustration (Chapter 12). The students could also be asked to examine the standard form lease they signed for student housing in order to identify these typical clauses. In the alternative, students could draft clauses which are illegal, and then attempt to adapt the clause to be enforceable. CONTRACTS AFFECTED BY STATUTE (Source p. 168) Contracts Void by Statute Particular types of contract may be prevented by statute from having any legal effect. Agreements contrary to the purposes of legislation are void (for example, terms in a lease that violate provisions of the Ontario Residential Tenancies Act are void). Legislation such as the Bankruptcy and Insolvency Act and workers’ compensation legislation specifically provides that contracts which are contract to the legislation set out are void. Statutes Affecting Public Policy The Criminal Code makes certain betting activities illegal. As such, promises to pay betting debts are generally unenforceable. They are also against public policy. There are certain contracts that, at first glance, appear to be wagers – contracts for insurance, stock transactions, and contracts for the future delivery of goods fall into this category. While each of these types of contracts involve varying degrees of speculation, they are not considered wagers; insurance contracts revolve around insurable interests in life or property, stock transactions are primarily about the sale of goods/assets, as are contracts for the future delivery of goods. These types of contracts are exempt from the general prohibition against gambling. Instructors may want to look at how excessive interest rates are addressed by Payday Loan legislation dealt with in the International Issue in Chapter 9 at p. 198 in the text. Insurance contracts are invlaid unless the insured has an insurable interest in the property or life insured, that is, they have a financial interest in the continuing existence of the life or object insured, or will suffer a loss or detriment if it no longer exists. Agreements Illegal by Statute If the object of a contract is illegal, or involves illegal conduct, the contract is illegal. Statutes may set out the requirement of licensing and a contract by someone not licensed or registered as required may be considered illegal. However, the courts have been flexible when deciding if a contract is illegal due to a lack of licensing, and have not declared it so when the licensing requirement is for an administrative purpose rather than to protect the public from unqualified persons.

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CONTRACTS ILLEGAL BY THE COMMON LAW AND PUBLIC POLICY ( Source p. 173) The Common Law A contract that contemplates the commission of a tort is illegal. Examples that can be discussed in class include inducing breach of contract and slander and defamation. A review of the torts set out in Chapter 4 would be an interesting discussion. Public Policy Contracts that are against public policy may be declared illegal. Students often have difficulty with this category of illegal contracts, as no tort or illegal act has to be committed, rather, it is a contract which may offend the values of society, so may be based on a value judgment by the court. Agreements in Restraint of Trade Agreements in restraint of trade are presumed unenforceable. A court may sever an offending term, or the party adversely affected may try to rebut the presumption. Rebutting the presumbpition is possible when the courts recognize the legitimate interest of an employer to be protected from an employee who might leave to start a business in competition with the employer or when there is an agreement between a vendor and purchaser of a business to protect the goodwill of the business in question. Where the covenant is a reasonable arrangement and not against public interests the courts will allow the covenant to be enforced. This discussion can be linked with the Ethical Issue in Chapter 4 on Employee Recruitment and the Ethical Issue on Confidentiality Clauses and Public Policy in this chapter. A discussion of this topic can also be found in Chapter 30 Government Regulation of Business. Instructors should be aware of the 2009 Supreme Court of Canada case dealing with the enforceability of restrictive covenants in restraint of trade: Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6. In this employment case the Court overturns the British Columbia Court of Appeal’s interpretation of the geographic limit “Metropolitan City of Vancouver” finding it ambiguous and therefore unreasonable. The Court: 

Confirms that agreements in restraint of trade are presumed against public policy and unenforceable unless proven to be reasonable as to time, activity and geography by the party seeking to enforce it;



Proclaims that clauses will not be found reasonable if they are ambiguous (which the subject clause was found to be).



Identifies that buyer and sellers of a business may have wider latitude than do employers and employees (employment covenants are subject to greater scrutiny);



Declares that notional severance (re-writing or reading down a contractual term) is not appropriate for restrictive covenants.

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Students generally enjoy examining what types of covenants would be allowed, and discussion often goes back to the recipe for Coca-Cola, The Checklist on p. 179 provides a helpful guideline for this exercise. An important are to discuss is agreements between employees and employers, as set out on pp. 178-179. The distinction between a non-competition clause and a non-solicitation clause, and applicable cases, should be reviewed. A good case for reviewing the law is Phoenix Restorations Ltd. v Brownlee , 2010 BCSC 1749. INTERNATIONAL ISSUE (Source p. 170) Internet Gambling Question 1 - The first discussion question asks students to consider whether internet gambling should be illegal. Some may argue that internet gambling is addictive and can be destructive to a person; for this reason alone, it may be desirable to prohibit internet gambling. However, even if internet gambling were illegal in Canada, users would be able to find internet sites based in countries where internet gambling is not prohibited. It could be argued that if people are going to gamble over the internet anyway that the Canadian government should regulate this activity and subsequently generate revenue through taxes. There is the contrasting argument that if Canada were to make internet gambling illegal, there would be fewer sites available – this point is contingent on the assumption that the majority of internet gamblers are using Canadian sites. Another element to consider is whether such a prohibition would even be enforceable – would the high number of offenders make the cost of enforcement impractical? Would privacy law prevent the government from finding evidence against online gamblers? Unenforceable laws aren’t really laws, just strongly worded suggestions. Accepting that the police would likely not be able to obtain users’ identifications from Internet Service Providers, how can such a law be enforced? Is it worth the effort and resources that would be required for even a modest level of enforcement? How serious would the penalty need to be inorder to deter the activity? Question 2 - The second question asks whether the Criminal Code should be amended to apply to offshore gambling sites. For the reasons mentioned in the answer to the first question, it may be desirable to make internet gambling illegal. Again, it is questionable how such a prohibition would be enforceable. Would such a measure even be feasible or desirable? (This may be a good place to discuss the issue of extra-legality of such U.S. acts as Helms-Burton which imposes penalties on companies doing business with Cuba, regardless of where they are incorporated, provided they conduct some business in the U.S.) As such, extending Canadian legislation to offshore gambling sites raises questions of jurisdictional authority. ETHICAL ISSUE (Source p. 175) Confidentiality Clauses and Public Policy Question 1 - The Olivieri/Apotex controversy illustrates graphically the competing interests that arise, on one side, in protecting the legitimate interests of businesses and Copyright © 2016 Pearson Canada Inc.

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encouraging research and development, and on the other protecting the health and safety of the public. Pharmaceutical companies are at the forefront of this conflict, since successful development of new drugs benefits society. Nevertheless, the primary concern of public policy must be the health and safety of the people. So how should we strike a workable balance? We may say that if a substance, or the treatment procedure in which it is used, raises a reasonable concern—in the opinion of a qualified researcher—that it might endanger the health of a patient, then that researcher has a legal duty to disclose the risks to the patient. (The matter of a physician’s duty to disclose risks of treatment to a patient has been discussed in Chapter 4.) Since failure to disclose is a breach of duty owed to the patient, it follows that any confidentiality clause that prohibits disclosure in these circumstances is also a breach of duty and it is void because it is against public policy. On this basis, the central issue in this case is whether Dr. Olivieri had any reasonable basis for her concerns about patient safety. If other knowledgeable researchers found that her concerns were wildly unreal, then she would likely be found in breach of her contractual obligations. But even though some might disagree with her, they might still agree that there was a legitimate basis for her concern: the Apotex restriction then would not bind her. Question 2 - Legislation does not seem necessary to render the agreement unenforceable but without it there will be situational variation in the rules application. Recent legislation initiatives protecting whistleblowers from retaliation (in the form of firing) have been undertaken in corporate governance of public companies and employment environme ofnts. Protection is triggered by the reporting illegal or unethical behaviour of the company to appropriate authorities within and outside the company. Instructors may want to introduce the Criminal Code s. 425.1 and and contrast it with relevant labour legislation - Employment Standards Act, R.S.B.C. 1996, c. 113, s. 83; Employment Standards Code, R.S.A. 2000, c. E-9, s. 125; The Employment Standards Code, S.M. 1998, c. 29, s. 133; Employment Standards Act, 2000, S.O. 2000, c. 41, s. 74; An Act respecting labour standards, R.S.Q., c. N-1.1, s. 122; Employment Standards Act, S.N.B. 1982, c. E-7.2, s. 28; Employment Standards Act, R.S.P.E.I. 1988, c. E-6.2, s. 35; Labour Standards Code, R.S.N.S. 1989, c. 246, s. 30; Labour Standards Act, R.S.N.L. 1990, c. L-2, s. 78; Labour Standards Act, R.S.N.W.T. 1988, c. L-1, s. 67.1; Labour Standards Act (Nunavut), R.S.N.W.T. 1988, c. L-1, s. 67.1; Labour Standards Act, R.S.S. 1978, c. L-1, s. 74; Employment Standards Act, R.S.Y. 2002, c. 72, s. 108. See also Merk v. International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers, Local 771, [2005] 3 S.C.R. 425 and followup proceedings 2006] 11 W.W.R. 759. The Oliveri situation does involve an employment situation and the report but report went beyond the relevant authorities to wide publication. A short opinion piece at the students’ level is: Ronn Goldberg, “Opinions: The Whistle-Blower in Healthcare” Healthcare Quarterly, 10(2) 2007: 10-10, available online at:

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<http://www.longwoods.com/product.php?productid=18792&cat=481&page=1>. Strategies to Manage the Legal Risk (Source p. 180) The strategies set out here provide guidelines for avoiding issues with capacity and legality, relevant to the law set out in Chapter 8.

QUESTIONS FOR REVIEW 1. A minor is bound to pay for the necessaries she buys, but since she may not have the judgment to negotiate a fair contract, she is bound to pay only a reasonable price. (Source p. 156) 2. The contract must be beneficial and not exploitative. (Source p. 156) 3. A minor may always repudiate a contract for non-necessaries, but if she repudiates and if the goods are still in her possession, she is required to return them to the seller in whatever condition they may be at the time. The policy reasons for this rule are well illustrated by an example provided by Chief Justice Meredith: “If that were not so, a man might buy a farm for a large sum of money, give a mortgage upon it shortly before coming of age, then repudiate the contract, and insist upon holding the property. (Source p. 156) 4. No. There are two voidable types of contract - see the discussion for Question 5. (Source p. 158) 5. The first type occurs when a minor acquires “an interest of a permanent, continuous nature;” she must repudiate the contract promptly upon coming of age, or she will be liable on it just as if she had entered into it after coming of age. The second type of voidable contract does not create an interest of a continuous nature and is not binding upon a minor unless she expressly ratifies (often in writing) the contract after attaining majority; that is, she must acknowledge the contract and promise again to perform. (Source p. 158) 6. The law protects a person of unsound mind or incapacitated through drink or drugs in the same way as a minor; that is, he is bound to pay a reasonable price for necessaries. Other contracts are voidable at his option, but enforceable by him against the other contracting party. The special problem for a person who wishes to deny responsibility on the basis of diminished capacity is that he also has the burden of showing that the other party was aware of his condition. (Source p. 159) 7. The party seeking to avoid the contract must act promptly upon emerging from his or her state of incapacity. If repudiation does not occur within a reasonable time, the

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privilege is lost. It is also too late to repudiate if, after regaining a sound mind, the afflicted person accepts the benefits of the contract. (Source p. 159) 8. The legal status of labour unions is unclear, and most provinces have statutes that determine the circumstances in which unions can sue and be sued. (Source p. 160) 9. (a) No. The stereo is not a “necessary.” (Source p. 156) (b) Probably not. Since this is not an ongoing or continuous contract, ratification (and not simply a failure to repudiate) is required when Jones attains the age of majority. (Source p. 158) (c) Maybe not. Some provinces require ratification to be in writing. (Source p. 158) 10. A representative action is important for labour unions. (Source p. 160) 11. Courts will not assist a party to an illegal contract to recover money previously paid to another party unless she can establish that she was unaware of the illegality when she made the contract. If the contract was simply void, and not also illegal, the courts would generally attempt to restore the parties to their original position. (Source p. 162) 12. For the most part, statutes do not consider the consequence to a contract that coflicts with it; it is left for the courts to decide based on public policy. However, some statutes will state that contracts contemplating a breach of the statute will be considered void. Other times the statute will go so far as to state that a contract would be illegal, unlawful, or unenforceable. (Source pp. 162-163) 13. “Wagering” contracts are agreements between two persons in which each has some probability of winning or losing. The Gaming Control Act inhibits wagering contracts by making all bets void and unenforceable, but they are not necessarily illegal. (Source p. 164) 14. An insurance contract is void unless the insured has an insurable interest in the person or thing insured. (Source p. 164) 15. Stock Exchange transactions may have an element of wagering incidental to the main purpose of the transaction. However, the main purpose of the contract is an actual sale of personal property. (Source p. 165) 16. A restrictive covenant is a term in restraint of trade. Often good will is key to a purchase of a business and the vendor can only realize this value in sale if she makes a binding promise to the purchaser that she will do nothing to diminish the value of what she is selling—usually a promise not to compete. (Source pp. 171-172) 17. The principal exceptions relate to insurance contracts – for example automobile insurance indemnifies the insured against the consequences of his or her negligent driving. (Source p. 169)

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18. The two types of restrictive covenants in an employment contract are: (1) those in which the employee promises not to compete directly or indirectly while he remains in the service of the employer; and (2) those in which she promises not to compete after she leaves her present employment. The first type is usually valid and binding, but covenants that restrict the future economic freedom of the employee may be found unreasonable and in restraint of trade if they are too broad. (Source p. 172) 19. The courts more readily accept as reasonable certain restraints placed upon an employee who has access to valuable trade secrets or knowledge of secret processes in her employment or who has acted as the personal representative of the employer in dealings with the customers of the business. (Source p. 172)

CASES AND PROBLEMS

1. This question concerns putting a restrictive covenant on employees which will restrict their employment after they leave her employment. Restrictive covenants are considered a restraint of trade, and are presumed void, albeit rebuttable if in the interests of the parties. The onus is on the party trying to enforce the restriction. In order to be enforceable the terms must be reasonable in terms of the industry norms and need to be reasonable in terms of what they restrict, the length of time of the restriction, and the restricted geographical area. An enforceable restrictive covenant might say” x may not work for a competing business nor open a competing business of his own for the term of 2 years and within 15 miles of any of Ashley’s current locations. Partners can be restricted in their employment when they leave a partnership. 2. In order for Mrs. Foy's insanity to render the contract unenforceable, her daughters would have to show that Harrison was aware of her condition at the time of the agreement. This would be strictly a finding of fact based upon a balance of probabilities after a thorough review of all of the evidence and circumstances, including the fairness of the bargain. Since a lot of time could be spent in class discussion disputing the conclusion to be drawn from the facts, this case may be more suitable for written assignment. The facts in this case are substantially the same as those in Hardman v. Falk, [1955] 3 D.L.R. 129 (B.C.C.A.). In that case, the court held that the agent of the company had no knowledge of the old woman's insanity although he knew she was physically infirm. The court held further that $1 was adequate consideration for the option to buy the property since both parties to the option agreement knew that the purchase price was generous. 3. The issue in this case is whether or not the contract signed by Tilson while he was a minor would be considered a beneficial contract of service. If not, it is voidable as long as Tilson repudiates directly upon attaining the age of majority. The onus is on the hockey club to show that the agreement, when made, was for the minor's benefit and was not exploitative. The court will consider Tilson's apparent exceptional ability and the somewhat onerous terms of the contract.

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The facts of this case are substantially similar to those of Toronto Marlboro Major Junior "A" Hockey Club v. Tonelli (1979), 23 O.R. (2d) 193 (Ontario Court of Appeal). 4. The Broncos might claim that the promise to end the contract prematurely was gratuitous (assuming the signed agreement following majority was not under seal). Tilson gave no consideration to the hockey club in return for the promise to end the earlier contract prematurely. The earlier contract became binding when Tilson continued to play under it after attaining majority. As we saw in Chapter 6 on Consideration, Tilson's promise to do something he was already legally bound to do does not constitute consideration. On the other hand, Tilson's giving up his legal right to lawfully repudiate the contract is a sacrifice that could constitute consideration. This extension of Problem 3 above also invites a discussion of whether Tilson could use promissory estoppel if the Broncos, having acquiesced in Tilson's playing in the playoffs, were then to try to go back on their promise to release Tilson from the balance of his contract. Tilson relied on the Broncos' promise to his detriment and did not repudiate his contract of service with them as he might legally have done. Remember that the law is unclear in Canada about whether promissory estoppel may be used as a cause of action. Although Tilson may not be able to sue the Broncos for a declaration that his original contract has expired, he may be able to use promissory estoppel to defend against a suit by them if he ignores the original agreement and goes to the Pan-American Hockey Conference. 5. This case is based on Kocotis v. D'Angelo (1958), 13 D.L.R. (2d) 69, a decision of the Ontario Court of Appeal (See Case 7.5 at p. 167 in the text). The roofing contractor probably would not succeed in recovering the fee for his services: "When a person sues to collect for services provided, the defendant may raise as a defence that the plaintiff has not been properly registered for his trade." In what sense is the licensing of a trade such as roofing contractors required by the public interest? If a court were to permit an unlicensed contractor to recover his fee, would its decision be consistent with the public interest in the licensing by-law? On the other hand, would the penalty be too severe if the contractor could not recover the cost of the materials he purchased and used in doing the work? (See Monticchio v. Torcema Construction Ltd. (1980), 26 O.R. (2d) 305) 6. Flanders & Co. may offer the defence that the object of the contract for the chartering of the ship was illegal and that the ship's owners should therefore be unable to sue on such a contract; Flanders' position as defendant is the stronger. The case raises the question of how a party's motive relates to the formation of contracts with illegal objects. Neither of the parties—the owner of the ship nor its charterer— intended to break any law in forming their contract. Only hindsight can establish that the object of the contract was illegal. The maxim about the position of the defendant being the stronger is qualified by the clause, "where the parties are equally in the wrong," and it is arguable here that neither party was "in the wrong" at the time the contract was formed. In addition, Swan Ltd. (the plaintiff could claim that as a carrier it would have neither the knowledge, nor any reason to suspect, that the wine was a prohibited product. If anyone

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should have known, it was the defendant wine importer. Thus the plaintiff might argue that it was less in the wrong. Further, as per the decision in Re Still and Minister of National Revenue (1997), 154 D.L.R. (4th) 229 (See Case 7.6 at p. 167 in the text), the court preferred a more general principle, where it would be contrary to public policy. To allow the claim of the plaintiff would not offend the purpose of the act and the plaintiff acted in good faith, unaware of the illegality of its cargo. If either of these arguments prevails, the plaintiff should be able to recover the additional $25,000 as the measure of its loss. Problem 6 is similar to the case of Waugh v. Morris (1873), L.R. 8 Q.B. 202. In that case, an Order in Council, made under the Contagious Diseases Act, 1869, prohibited the importing of hay from France into England. The defendant's agent in France chartered the plaintiff's ship to load a cargo of pressed hay at Trouville, France and deliver the hay to London, England where it would be unloaded alongside (that is, from one ship to another). Neither party knew of the Order in Council when the contract was formed. The master of the ship later agreed orally to unload the cargo onto a specified dock but on arrival, the hay could not be unloaded because of the Order in Council. After a delay of eighteen days, the defendant received the hay alongside the plaintiff's ship into another vessel and exported it. The plaintiff sued for damages for the detention of his ship; the defendant claimed that the contract was for illegal purposes and therefore void. The court held that since the contract was not made with the intention of violating the law and since it could lawfully be carried out (as it eventually was), the contract was not void and the defendant was therefore liable. 7. Under the Criminal Code, R.S.C. 1985, c. C46, s. 383, a wager about what the price of a particular stock will be at a specified future time, without an actual purchase or sale of stocks, is illegal. Therefore, Karl cannot recover the $2000 he has already paid John. Neither can John enforce payment of the $2000 still owed to him by Karl in the form of the third cheque. However, Grace Bukowsky is an innocent third party who purchased the second cheque for valuable consideration (the used car) and she may be able to enforce payment against Karl (See Chapter 11).

CASE SUMMARIES Allen v. Hearn (1875), 1 T.R. 56 (England – House of Lords) This case involved persons betting on the outcome of an election. The court held that it was illegal on grounds of public policy. Attwood v. Lamont, [1920] 3 K.B. 571 (England – King’s Bench) The plaintiff carried on business as a draper, tailor and general outfitter. The defendant asked the plaintiff to employ him and the plaintiff did on the condition that the defendant would not anytime thereafter, “either on his own account or on that of any wife of his or

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in partnership with or as assistant, servant, or agent to any other person, persons or company carrying on business in any way directly or indirectly concerned in any of the following trades or businesses: tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman’s, ladies’, or children’s outfitter at any place within ten miles of the plaintiff’s business. The defendant set up his business outside the ten mile limit but took orders from within the restricted area. The court found that the covenant was a restraint of trade. Bonazza v. Forensic Investigations Canada Inc., [2009] O.J. No. 2626 para 13-15 (Ontario Superior Court of Justice) This case dealt with a restrictive convenant in an employment contract. The plaintiff was employed by the defendant and left that employment. Shortly before leaving his employment with the defendant, he incorporated a company with himself as sole director and officer. The court examined the temporal and geographic restrictions of the covenant. The court cited the cases of Canadian American Financial Corp. v. King (1989), 60 D.L.R. (4th) 293 and Shafron v. KRG Insurance Brokers Western Inc., 2009 S.C.C.6, [2009] 1 S.C.R. 157 in citing that an ambiguity in a covenant cannot be corrected by severance. Canadian American Financial Corp. v. King (1989), 60 D.L.R. (4th) 293 (British Columbia Court of Appeal) The plaintiff marketed registered scholarship savings plans. The first defendant worked with the plaintiff and at that time signed a non-competition clause, which restrained him from engaging in similar work in Canada or Bermuda for two years after the expiration of the agreement. The first defendant resigned and accepted a position with a competing firm. The court refused to grant an interlocutory injunction restraining the defendant from competing as the court found the geographic scope of the clause excessive and the clause itself excessive as it was not obtained when the defendant was a senior executive with access to confidential material but rather when first hired in a lower position. .Chung v. Idan [2006] O.J. No. 299, paras 52-53 (Ontario Superior Court of Justice) The plaintiffs were home renovators suing for unpaid services. The defendants were the home-owners who counterclaimned for $50,000 in damges for deficiencies in workmanship and quality of materials supplied. Further, the contractor was not licensed as an electrician, plumber, or gas fitter. The court stated at para. 53: Following the lead of appellate and other courts, the recent cases adopt a sophisticated approach to illegality that considers such factors as: (a) the purpose of the statute; (b) the enforcement mechanisms within the statute; (c) whether the statute makes the contract inherently illegal or only illegal if performed without compliance with the provisions of the statute; (d) whether the violation of the statute was only a technical non-compliance because the

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party intended to comply with the statute and could have done so; and (e) whether the illegality can be severed from the balance of the contract In this case, there was no effort made by the contractor to comply, and therefore could not charge for these items as they were tainted with illegality. The court held in favour of the defendants and allowed their counterclaim. Consolidated Exploration and Finance Co. v. Musgrave, [1900] 1 Ch. 37 (England – Chancery Division) Ainsworth and Jordan, two representatives of the plaintiff company, were charged with fraud. Musgrave agreed with Ainsworth to post bail for Ainsworth and Jordan if Ainsworth would transfer some shares owned by the plaintiff company into Musgrave's name a security. Musgrave posted the bail. The facts of the case are somewhat complicated, but Ainsworth somehow managed to get the plaintiff company to transfer its shares to Musgrave without letting the company know what the real purpose of the transfer was. When Jordan absconded, Musgrave refused to return the shares to the plaintiff company which sued. The court held that the contract between Musgrave and Ainsworth was illegal and void. Since the plaintiff company was not a participant in any illegality, however, it was entitled to the return of its shares. Delgamuuk v. BC [1997] 3 S.C.R. 1010 p. 167 footnote 28 Ellesmere v. Wallace, [1929] 2 Ch. 1 (England – Court of Appeal) Wallace bet on a horse in two races at the invitation of a stakeholder. The terms of the bet were that Wallace would pay a certain fee if the horse entered the races, and a lesser sum even if the horse did not run. The horse did not run in either race and the stakeholder claimed the lesser fee. When Wallace refused to pay, the stakeholder sued. The court held that to form a wagering contract, either party must risk either winning or losing. Since the stakeholder could not lose, the contracts were not wagering contracts under the Gaming Act, 1845 and were not void. The stakeholder was therefore entitled to recover the lesser fee, which was to be turned over to the winner of the stakes. Fabbi et al. v. Jones (1972), 28 D.L.R. (3d) 224 (Supreme Court of Canada) Jones entered into contracts with some milk producers to transport milk to a dairy. The dairy itself was interested in taking over the transport of the milk and the producers knew this when they renewed their contracts with Jones. The contracts between Jones and the producers required ratification by the Public Utilities Commission. Before the P.U.C. gave approval, the dairy announced its intention to take over the milk transporting itself and entered into discussions with the producers who then wrote to Jones repudiating their agreements. The P.U.C. meanwhile gave its approval to the agreements with Jones. Jones

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sued the dairy for inducing breach of contract. The court held that the contracts between Jones and the producers were valid even though they were subject to approval and that the dairy was liable to Jones for inducing breach of the producers' contracts. Fitch v. Dewes, [1921] 2 A.C. 158 (England) A life-long restraint on a solicitor’s clerk not to work within seven miles of the the town where the solicitor was located was held to be a reasonable restraint in the circumstances. First Charter Financial Corp.v. Musclow (1974), 49 D.L.R. (3d) 138 (British Columbia Supreme Court) The infant defendant purchased a car. In this case the court held that the car was not considered a necessary and the infant was not bound to the contract. Gilbert v. Sykes (1812), 16 East 150 at 162 (England) The court strongly condemned the time expended in court on “idle wagers;” and that the subject matter has a “tendency injurious to the interests of mankind …” Goldsoll v. Goldman, [1915] 1 Ch. 292 (England – Court of Appeal) The plaintiff and the defendant each carried on a similar business as a dealer in imitation jewellery, one in Old Bond Street, the other in New Bond Street, London. In order to avoid competition the defendant sold his business to the plaintiff and covenanted not compete for two years. The defendant breached the covenant. The court held that the part of the covenant restricting the defendant from selling jewellery in the United Kingdom, Ireland, the United States, Russia and Spain among other countries was too wide in area. The court reduced this area to just include the United Kingdom and limited the prohibition from selling jewellery so that the defendant could just not sell imitation jewellery Helps v. Clayron (1864), 144 E.R. 222 (England – Chancery) The plaintiffs provided legal services to the infant defendant by preparing her marriage settlement. In defence to a claim by the plaintiffs for payment, Mrs. Clayton pleaded infancy. The court held that the services were necessary in her circumstances and gave judgment for the plaintiffs. Herman v. Jeuchner (1885), 15 Q.B.D. 561 (England – Court of Appeal) The plaintiff was convicted of keeping a disorderly house and was ordered to find two people to post bail for him for his good behaviour for a period of two years. Since he could only find one person, he was imprisoned. The defendant then agreed to post bail if the plaintiff would give the amount of the bail to the defendant as security. When the plaintiff was released from jail on the defendant's bail, he gave the money to the

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defendant. Before the two years expired, the plaintiff sued to recover his money from the defendant. The court held that the contract was illegal because it defeated the purpose of the bail which was to provide the person who posted it with incentive to monitor the convicted person's behaviour. Because the contract was illegal, the plaintiff was not entitled to the return of his money. Jennings v. Rundall (1799), 101 E.R. 1419 (England – House of Lords) See Case 7.2 at p. 158 in the text. J .G. Collins Insurance Agencies Ltd. v. Elsley, [1978] 2 S.C.R. 916 at 926 (Supreme Court of Canada) The plaintiff purchased a competitor’s insurance business. The defendant vendor agreed not to carry on business in the insurance field for ten years. The defendant was hired by the plaintiff, but his employment contract stipulated that he would not carry on business in the area of insurance for five years after termination of his employment with the plaintiff. The plaintiff worked for the defendant for seventeen years and then left to set up his own insurance business. Each contract had a liquidated damages clause. The Supreme Court upheld the lower courts decisions. The restrictive covenant was not in restraint of trade as it was not too broad. The restriction on the sale of the business had expired. The plaintiff was entitled to enforce the employment contract. Keir v. Leeman (1846), 115 E.R. 1315 (England) The defendants owed the plaintiff, Keir, money on goods. When Keir sent a constable to recover the goods, the defendants assaulted the constable and Keir started proceedings to prosecute the defendants for the assault. The defendants agreed to pay Keir the balance they owed him and the costs of the prosecution to date if he agreed not to prosecute them any further. Keir agreed and the defendants were acquitted but then refused to pay him. When Keir sued for his money, the court held that the consideration for the promise to pay was illegal and that the plaintiff could not recover under the void agreement. Kocotis v. D’Angelo (1957), 13 D.L.R. (2d) 69 (Ontario Court of Appeal) See case 7.5 at p. 167 in the text. Koo v. 5220459 Manitoba Inc., (2010) 254 Man. R. (2d) 62 (Manitoba Court of Queen’s Bench) The plaintiff was a citizen of South Korea and reesiding there. The defendant owned a restaurant in Winnipeg. The defendant offered a job to the plaintiff as a sushi chef. The defendant provided the plaintiff with a Labour Market Opinion (LMO) for submission by him in support of an application for a work permit. The LMO listed a wage of $14.50 per hour. The defendant paid the plaintiff less than that. The plaintiff argued that the LMO created a contract and that by paying less was illegal. The court held that the LMO did not Copyright © 2016 Pearson Canada Inc.

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constitute a contract between the parties. Further, the court held that there was no statutory or common law illegality. Louden Manufacturing Co. v. Milmine (1907), 15 O.L.R. 53 (Ontario District Court) Upon attaining majority, the defendant gave the plaintiff a letter ratifying a contract for goods delivered when the defendant was still a minor but then refused to pay. When the defendant pleaded infancy, the plaintiff replied that the defendant had ratified the agreement. However, the court held that the letter did not satisfy the requirements for ratification. In the alternative, the plaintiff argued that the defendant should be required to return the goods in his possession since he had repudiated the contract by refusing to pay. Judgment was entered for the plaintiff for the sum of the value of the goods, assessed at $75. Lyons v. Multari (2000), 50 O.R. (3d) 526 (Ontario Court of Appeal) The defendant was an oral surgeon who agreed to work with the plaintiff in Windsor, Ontario. The parties signed a short, hand-written contract stating what the defendant’s remuneration would be, the requirement to give six months notice upon leaving the employ of the plaintiff, and a non-competition clause stating only: “3 yrs. – 5 mi.” The defendant worked with the plaintiff for approximately seventeen months. He gave his six months notice and set up his own practice more than five miles away. Less than six months after that the defendant opened a practice with another oral surgeon less than four miles from the plaintiff. The plaintiff sued for breach of the non-competition clause. The Court of Appeal held that the non-competition clause was too broad of a restriction; that a non-solicitation clause would have been sufficient. As a result the defendant was not liable as the non-competition clause was not enforceable. Mason v. Provident Clothing & Supply Co. Ltd., [1913] A.C. 724 (England) The defendant was a canvasser who previously worked for the plaintiff. The Court held that the restriction on the canvasser was void as the area of restraint (twenty-five miles of London) was one thousand times greater than the area of employment had been. McDiarmid Lumber Ltd. v. God’s Lake First Nation [2006] 2 S.C.R. 846 (Supreme Court of Canada) See Case 7.3 at p. 161 in the text. McGaw v. Fisk (1908), 38 N.B.R. 354 (New Brunswick Supreme Court, Appeal Division) The minor plaintiff purchased a carriage from the defendant and paid by giving promissory notes. Although the plaintiff took possession at once, the parties agreed that

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title to the wagon would not pass until the notes were fully paid. The plaintiff made only a few payments. The defendant eventually went onto the plaintiff's property and repossessed the carriage. The plaintiff sued for trespass. The court held that although the defendant could not have enforced payment of the purchase price, he had acted within his rights to repossess the carriage because the minor had repudiated the contract by failing to pay. Mercantile Union Guarantee Co., Ltd. v. Ball, [19371 2 K.B. 498 (England – Court of Appeal) Ball, a minor, carried on a business as a haulage contractor. He entered into a "lease-toown" agreement for the purchase of a truck for his business. He fell on hard times and could not afford to make the payments on the truck. The plaintiff vendor sued for the arrears and Ball pleaded infancy. The court held that the contract was not for a necessary nor was it beneficial to Ball; the plaintiff's claim was dismissed. Millar v. Smith & Co. [1925] 2 W.W.R. 360 at 377 (Saskatchewan Court of Appeal) This case involved an infant plaintiff who was injured during the course of his employment. The defendants were both found to be negligent. The court award more than $10,000 in damages. The defendant employer claimed that that the plaintiff had signed a contract of employment that contained a limitation clause, limiting any claims for personal injury to $1,500. The Court of Appeal held that, while a contract of employment is binding on an infant, the contract must be to the infant’s benefit. The limitation clause was not to the plaintiff’s benefit and so the entire contract was voidable at his option. The defendant employer could not rely on the limitation clause. In the course of his reasons, Martin, J.A., stated at para. 54: An infant may bind himself to pay for his necessary meat, drink, clothing, medicine and likewise for his teaching or instruction. It is also desirable that infants should be employed, and prima facie a contract of employment is binding upon as infant, unless it can be shown that the contract is not for his benefit. Monticchio v. Torcema Construction Ltd. (1979), 26 O.R. (2d) 305 (Ontario Supreme Court - High Court of Justice) Monticchio was an unlicensed drain contractor who entered into a written contract with Torcema to supply material and to work on drains. Monticchio sued for the amount owed to him under the contract, and made an alternative claim for quantum meruit. The court held that the contract was illegal since Monticchio was not licensed, but that this was a defence only against money owing by Torcema for Monticchio's labour, not for the supply of materials. The court also held that a claim in quantum meruit might succeed even if the contract was void.

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Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. [1894] A.C. 535 (England – House of Lords) See Case 7.10 at p. 173 in the text. Payette v. Guay Inc. 2013 SCC 45 p. 176 footnote 57 R. v. Starnet Communications International Inc. (August 17, 2001) Vancouver 125795-1 (British Columbia Supreme Court) Starnet was a company incorporated in Delaware, U.S.A. Through subsidiaries it operated from various locations, including Vancouver, B.C. The subsidiary in Vancouver employed approximately one hundred people. The company provided on-line internet gmabling services internationally. Criminal charges were laid against the corporation under s. 202(1)(b) of the Criminal Code, which made it an offence to: “keep or knowingly allow to be kept in any place under his control any device for the purpose of recoring or registering bets or selling a pool, or any machine or device for gambling or betting.” The corporation pleaded guilty to the charge. Re Still and Minister of National Revenue (1997), 154 D.L.R. (4th) 229 (Federal Court of Appeal) See Case 8.6 at p. 172 in the text. A U.S. citizen was lawfully admitted to Canada but accepted a job without a work permit as required under statute. When laid off she applied for unemployment insurance benefits, he application was denied. This was a case of statutory interpretation. The court held that there was nothing in either act (the Immigration Act or the Unemployment Insurance Act) to suggest that if there was a breach of the Immigration Act that it should deny the plaintiff of benefits under the second act.

Reliable Toy Co. and Reliable Plastics Co. Ltd.v. Collins, [1950] 4 D.L.R. 499 (Ontario High Court of Justice) This case is restraint of trade case where the plaintiff requested an order to restrain the defendant from revealing trade secrets and for damages for trade secrets already disclosed. The defendant worked as a chemist for the plaintiff toy company before being dismissed. The plaintiff claimed that the defendant had disclosed information regarding colouring plastics. The Court held that the development of the plastic industry was so rapid that the information claimed as secret by the plaintiff was in fact common knowledge in the industry. Robinson (William) & Co. Ltd. v. Heuer, [1898] 2 Ch. 451 (England)

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The covenant restricting trade had two parts. The first part was specific and the second part general; that is, “any other business whatsoever.” The Court accepted the first part and allowed it to be enforced, but the second part was severed from the contract and was rejected. Shafron v. KRG Insurance Brokers Western Inc., 2009 S.C.C.6, [2009] 1 S.C.R. 157, paras 16-17, 26 (Supreme Court of Canada) See Case 8.11 at p. 179 in the text. Sidmay Ltd. v. Wehttam Investments Ltd. (1967), 61 D.L.R. (2d) 358 (Ontario Court of Appeal) Wettham Investments Ltd., a mortgage broker, lent money to Sidmay Ltd. and took back a mortgage. Wettham was not registered as a loan company under the Loan and Trust Corporations Act, which made it an offence for an unregistered company to "undertake ...business of a loan corporation." Sidmay claimed that when Wettham gave the loan, it had contravened the Act and the mortgage was therefore void for illegality. Because of the seriously disruptive consequences of the ruling that unregistered corporations could not make loans as Wettham had done, the court read the statute strictly. It held that the statute was intended to protect members of the public who entrust their money to lending agencies and that the statute was not applicable to a business of a lender such as Wettham's. Wettham had not therefore acted in contravention of the Act. The court held further that even if the mortgage were unlawful, Wettham could recover the moneys secured by the mortgage since mortgagors were not persons for whose protection transactions of the nature in question had been made illegal. Smith v. Clinton (1908), 99 L.T. 840 (England) See Case 8.9 at p. 174 in the text. Symington v. Vancouver Breweries and Riefel [1931] 1 D.L.R. 935 See Case .9 at p. 174 in the text. Thomas v. Rio Tinto Alcan 2013 BCSC 2303 p. 167 footnote 28 Tote Investors Ltd. v. Smoker, [1968] 1 Q.B. 509 (England – Court of Appeal) Smoker placed bets on a horse totalizator board through the plaintiffs who allowed her to bet on credit. She lost the bets and did not pay. The court held that the plaintiffs contracted on behalf of the totalizator board, which could neither win nor lose; therefore

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the contract was not a wagering contract under the Gaming Act, 1845. Accordingly, the plaintiffs succeeded in their action. Transport North American Express Inc. v. New Solutions Financial Corp. [2004] 1 S.C.R. 249 (Supreme Court of Canada) See Case 7.4 at p. 166 in the text. U.S. Fidelity & Guarantee Co. v. Cruikshank and Simmons (1919), 49 D.L.R. 674 (Saskatchewan Court of Appeal) Cruikshank embezzled funds from the bank he managed. The bank discovered the embezzlement and informed the plaintiff bonding company, which had given a bond on Cruikshank in favour of the bank. (It was common practice for employers to "bond" key employees in charge of finances: if an employee absconded, the bonding company would indemnify the employer for its loss.) The plaintiff company agreed not to prosecute Cruikshank if he (and Simmons as surety) signed a promissory note in favour of the bank to be signed over to the plaintiff company. Cruikshank and Simmons performed and the company sued to recover on the note. The court held that since the consideration given for the note (not prosecuting for embezzlement) was illegal, the plaintiff could not recover on the note. Valenti v. Canali (1889), 24 Q.B.D. 166 (England – House of Lords) See Case 7.1 at p. 157 in the text. Wanderers Hockey Club v. Johnson (1913), 14 D.L.R. 42 (British Columbia Supreme Court) See Case 7.7 at p. 169 in the text.

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CHAPTER 9 GROUNDS UPON WHICH A CONTRACT MAY BE SET ASIDE: MISTAKE AND MISREPRESENTATION Students should again be reminded of the distinction between void and voidable contracts: a void contract was never really formed at all whereas a voidable contract is valid unless and until set aside, as covered with good examples on pp. 186-187. MISTAKE Courts may afford relief when a party enters into a contract under a basic misunderstanding, although not in every case. The maxim "mistake of law is no defence" applies because all parties are presumed to know the law. Furthermore, a mistake in judgment is not a basis for escaping contractual liability, for example, that a contract proves to be more onerous than anticipated will not give that party a basis on which to have the contract set aside. Remedies may be available to a party who makes a factual error, but a party cannot escape contractual obligations for all factual mistakes. Contracts negotiated on the basis of a factual mistake may be void, voidable, or, in certain cases, valid depending upon the type of mistake. A distinction is made between three types of mistake: (1) mistakes about the terms of the contract; (2) mistakes about the subject matter of the contract; and (3) mistakes as to the identity of the party – p. 186 There are three main kinds of mistakes about terms: 

Words used inadvertently



Errors in recording an agreement



Misunderstandings about the meaning of words

With errors in recording an agreement, note the conditions required for rectification of a contract improperly recorded, as set out on p. 181, and in the Sylvan Lake Golf and Tennis Club case. Mistakes about the subject matter usually involve goods which are not in existence, or about the value of the subject matter. If there is a mistake about the identity of a party to a contract, there may be an issue of fraud – see cases 9.4, 9.5 and 9.6, pp. 192. Where one or both of the parties change their position or forego an opportunity because of a mistake in a contract, the court affords relief where it can achieve results reasonably fair to both parties. Solutions may require ingenuity or imagination in the exercise of discretion. Where no remedy appears available, the loss will often be left to lie where it fell.

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MISTAKE ABOUT THE NATURE OF A SIGNED DOCUMENT (Source p. 189) Since the decision of the Supreme Court of Canada in Marvco Color Research Ltd. v. Harris, [1982] 2 S.C.R. 774, discussed in the text, a signer can avoid the consequences of a document he or she has signed only if (a) the mistake is a serious one, and (b) the signer has not been careless of his or her own interests. Blind and illiterate people and those who are unable to read the language of the document are usually protected since these people must ultimately rely on the integrity of other people. However, it is now unlikely that other people who sign documents can avoid liability to innocent third parties, except in extraordinary circumstances. MISREPRESENTATION (Source p. 190) A contract resulting from fraudulent misrepresentation is voidable at the option of the victim, who is also entitled to damages for deceit. The English decision of Derry v. Peek (1889), 14 App. Cas. 337, contains the test for whether or not a misrepresentation is fraudulent. The court stated that the test for fraud is whether or not a statement was made knowingly, without belief in its truth, or recklessly. At that time, the courts did not recognize the intermediate category of negligent misrepresentation. Negligent misrepresentation does not require intent to deceive but only a breach of the duty of care. The negligent party is liable in tort for damages covering the loss suffered by the injured party, and any contract reached on the basis of the misrepresentation is voidable. Finally, there is the category of innocent misrepresentation. Since a contract resulting from an innocent misrepresentation is voidable, the victim may repudiate the agreement provided he or she acts promptly after becoming aware of the truth and provided no innocent third party is adversely affected. Rescission is the only remedy available; a victim of an innocent, non-negligent misrepresentation is not entitled to damages. Most misrepresentations occur during the bargaining that precedes formation of a contract. However, sometimes a misrepresentation becomes incorporated into the agreement itself as a term of the contract (Source p. 194). The remedy for breach of contract is contractual damages; these may well be a more effective remedy than rescission or even than damages for deceit or negligence. (Remedies for breach of contract are discussed in Chapter 13 of the text.) Alternatively if the contract limits the damages then negligent misrepresentation may be the better choice. Consider Queen v. Cognos Inc. [1993] 1 S.C.R. 87 (discussed in Chapter 5 of the manual) where the misrepresentation took place during the recruitment of the employee but the notice provisions of the resulting employment contract effectively limited contract damages. Misrepresentation can occur by omission, where the contract is one of utmost good faith. With insurance contracts the insured has information the insurer needs to assess the risk, and failure of the insured to disclose all information relevant to the risk is a misrepresentation which will result in the insurance policy being void. The sale of securities also requires, under legislation, that promoters and directors who have details unknown to the public to reveal this information in a prospectus. Consumer legislation and the Sale of Goods Act set out the need for disclosure. To omit pertinent information

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will allow a consumer to rescind a contract, the omission or silence considered a misrepresentation. UNDUE INFLUENCE (Source p. 196) For the court to find undue influence, the mental domination of one party by the other must be of such a degree as to rob the former of her free will. A contract reached through undue influence is voidable at the option of the victim provided she acts promptly upon being freed from the domination. Undue influence is presumed if there is a special relationship between the parties such as accountant and client or teacher and student. The "stronger" party may rebut the presumption by showing that no undue influence was exerted. Cases 9.7 and 9.8 on p.197 provide for a discussion on the law of undue influence as it relates to a marital arrangement. UNCONSCIONABILITY Where one party is at a disadvantage, perhaps due to age or education, such that the bargaining power between the contracting parties is unequal, a contract may be set aside as being unconscionable. The issue of payday loans, discussed on p. 198, is an example of unconscionable contracts. DURESS (Source p. 199) Duress is the use of actual or threatened violence as a means of coercing a party to enter into a contract, conduct that may well amount to a criminal offence such as extortion or assault. As far as the contract is concerned, the agreement is voidable at the option of the victim. Here again, it is up to the injured party to repudiate the contract promptly once freed of the violence or the threat of that violence. In discussing undue influence, unconscionability, and duress, it will become apparent to students that the concepts overlap. It may be a worthwhile exercise to go through a list of common contracts, such as an elderly patient who sells a family recreational property to her family doctor for 25% of the value, or a grandchild who obtains a loan from an elderly grandparent, or an employer who threatens dismissal if an employee does not lie for him or her, and then determine if the event that took place was undue influence, unconscionability or duress. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 200) Reviewing the chapter and the risks that businesses face is important for students to bear in mind. Setting up an ongoing risk management plan is a good exercise for students. With each chapter students can add to their plan. In this chapter, students look at the importance of carefully preparing documents; ensuring the identity of the parties one is dealing with; training staff to be sure that representations made to clients are fair and accurate; recognizing special relationships and understanding the need for independent

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legal advice; and the need to familiarize oneself with the consumer protection legislation that applies to one’s business. ETHICAL ISSUE (Source p. 194) Employment Resume Question 1 - For the most, it is acceptable to omit past employment from one’s resume, particularly if it isn’t relevant to the position in question. Employers are generally only interested in past employment that can provide skills and experience relevant to the job being applied for – no one is interested in the paper route an applicant had when they were twelve years old, unless they invented a new delivery method/business model that revolutionized the paper delivery industry. If students still have ethical qualms about the notion of omitted past employment, raise the question as to whether or not adding “Recent or Relevant” to the heading “Work Experience” on their resume acts as an adequate sign to the potential employer that the information contained in the resume is only a snapshot of what the candidate considers to be relevant to the job applied for. In terms of omitting past employment an applicant was fired from, the issues of trustworthiness, respect, fairness, and responsibility certainly come into play. A job a candidate was fired from is certainly something a potential employer might want to know about. However, employers have a responsibility as well – most employers won’t rely on a resume alone – they will perform reference checks, hold an interview, etc. Significant gaps in an applicant’s resume (holes left by employment omitted) will usually raise red flags. In these cases, it is probably okay to omit past employment a candidate was fired from because the potential employer has the opportunity to ask about these gaps during an interview. Ask the students whether they think it might be a better strategy to include the employment they were fired from and take ownership of the issue, using it to demonstrate to their potential new employer that they learned from the experience, rather than trying to hide the fact and being called on it during an interview. Question 2 - If the inaccuracies are material to the decision to enter into the employment contract in the first place; that is, the candidate claimed to have skills and experience they do not possess and if these skills and experience were the reason they were hired, an employer should be able to terminate the employment contract. The really thorny issue arises when trying to determine whether these skills and experience were material to the decision to hire. Employers will likely be in a stronger position in cases where the job posting/job description specifically and clearly enumerates the skills and experience the employer is seeking. Question 3 - The way students answer this question should depend on how they’ve approached questions 1 and 2 above. Was the degree material to RadioShack’s decision to hire Mr. Edmondson? Was it even relevant? (Typically, the further away from one’s university graduation one gets, the less important the degree becomes relative to skills and experience). RadioShack clearly failed to perform due diligence to check whether Mr. Edmondson’s claim to have a degree was genuine (note: most employers to whom a degree is a material consideration will require proof during the application process that

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the degree was granted). While this question raises valid ethical concerns for Mr. Edmondson (considering the values of trustworthiness, respect, fairness, and responsibility) regarding whether he ought to accept the compensation package, it raises other issues for RadioShack; do they want to fight a long court battle with Mr. Edmondson and face further public embarrassment? In light of the discussion in question 2, would RadioShack even be able to win such an action? Students should be prompted to approach this question from both an ethical and legal perspective – based on the material in this chapter, is the “correct” ethical answer the same as the “correct” legal answer? If students come to differing outcomes they should be asked to discuss what implications situations like this might have for their ideas of “justice”. INTERNATIONAL ISSUE (Source p. 198) Regulating Payday Loans Depending of the ideological proclivities of the class, this issue might raise discussion about how far government can and should go to protect people from themselves vs. the wisdom of an economic model in which so many people have a pressing need for socalled payday loans. Any such discussion should be encouraged in order to expose students to the complexities of these issues and, hopefully, to the need for solutions that strike a pragmatic balance between these competing perspectives. Question 1 - Students should be encouraged to brainstorm in order to come up with a list of pros and cons for the idea of capping the cost of borrowing on a fixed as opposed to a percentage basis. Fixed costs provide a level of transparency and certainty for the borrower who, let’s face it, probably isn’t very good with numbers to begin with or they wouldn’t be in need of payday loans in the first place. A fixed cost allows a borrower to know exactly what their liabilities will be without resorting to calculations and independent advice. Since most payday borrowers are likely facing some form of economic duress, it also places lenders in a better position when trying to recover in cases of default. Question 2 - The rationale for the limit on the number of renewals could partially be an attempt to protect people from themselves and from unethical and predatory lenders – to basically prevent people from digging themselves a hole they can’t climb out of. Students should be prompted to discuss this issue in the larger context of the health of the North American economy more generally. If the crash of 2008 has demonstrated anything, it is that the North American economy is basically financed on credit; limiting the number of renewals can help borrowers by limiting the easy credit available to them and, perhaps, serve as a wake-up call as borrowers have to reevaluate their financial lifestyles rather than continue to live a life on the edge of financial disaster. Is it worth the short term pain that will be felt by those who rely on payday loans for the long term gain of a more robust and less precarious financial lifestyle? Question 3 - There is a balancing act here: the explosive growth of the industry indicates a clear and pressing demand for payday loan services. On the other hand, people in economic duress need to be protected from predatory and unethical lenders. Transparency is a good first step. With regard to the criminal rate of interest, payday loan companies are arguably correct; payday loan borrowers are bad credit risks, otherwise they wouldn’t

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be seeking payday loans and lenders need to be adequately compensated for assuming the risks involved with making these loans. That said, most students will probably agree that the current criminal rate of interest is already exorbitantly high, and three hundred percent is bordering on insane. Ask the students whether they think the high default rate on payday loans is a function of borrowers being bad credit risks or whether the high default rate is, in fact, a product of the insanely high rates of interest charged. How can government regulation strike a balance between the needs of the lenders (compensation high enough to keep a needed industry going) with the more pressing need to allow people to borrow when needed without indebting themselves in perpetuity: if payday loans are meant to be a short term fix for people in difficulty, what is a reasonable rate of interest that will make it profitable for lenders without these loans becoming insurmountable for borrowers? Question 4 – This question appears to be a simple one on the surface as there are few other options available for people who are in desperate need of funds. Students should be asked to look at the issue from an objective point of view. In an open market system, should the government step in to ban a commercial enterprise that fills a need in society? Are the consumers who use these types of services, so vulnerable, that they need protection from themselves? Is it the government’s place to save people from themselves? While there is a need for regulation to prevent abuses in a system where the consumer is vulnerable, is it the right decision to remove the rights of the consumer by banning a service he or she finds useful or even necessary? If Payday Loan services were banned, what other venues or opportunities would there be for persons in need of those services? Question 5 – This question relates to how businesses develop in general. Most companies will move their services to where there is a need for their product or service; where costs to provide that product or service are lowest; where rates of return are highest; and where regulation is least onerous. Onerous regulations may discourage lenders from moving into areas where their services are required.

QUESTIONS FOR REVIEW 1. Errors in judgment alone do not justify avoiding one’s obligations under a contract. To excuse performance so easily would undermine certainty in contractual arrangements. (Source p. 186) 2. A court is likely to grant a remedy when it should have been clear to one party that the other party used a term by mistake, as when the price is absurdly low or is quite unrelated to the range of prices quoted during negotiations. (Source p. 188) 3. The court will decide which meaning is the more reasonable in light of the circumstances, including those things each party ought to have known about the subject-matter of the contract and about the intentions of the other party. (Source p. 189)

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4. A court will not order rectification unless the following conditions are met: (a) the court is satisfied that there was a complete agreement between the parties, free from ambiguity and not conditional on further adjustments; (b) the parties did not engage in further negotiations to amend the contract; (c) the mistake in the written document, may have, but does not have to have, occurred as a result of fraud; (d) when the written document was signed, the defendant knew or should have known of the mistake and the plaintiff did not; and (e) any subsequent attempt to enforce the inaccurate written document would be equivalent to fraud. (Source p. 189) 5. A void contract is not a contract at all. A voidable contract is one that may be set aside. An innocent third party (for example, a person who buys goods from a fraudster who acquired the goods under a void contract) cannot obtain a good title to the goods. By contrast, an innocent third party can acquire title to goods that have passed under a voidable contract. (Source p. 187) 6. The Supreme Court of Canada has held that a car-rental company had “consented” to the rental of a car to a rogue who gave a false identity. On this basis it would seem that Klemper would have difficulty reclaiming the watch from Larry. Klemper would have likely succeeded if he could show that Larry was aware—or should have been aware—of Jameson’s fraud. (Source p. 192) 7. Innocent misrepresentation is not an action in tort, however, it does provide for the right of rescission in contract law. An innocent misrepresentation can become negligent or even fraudulent, where the party fails to correct it where in a position to do so. If the misrepresentation is made a term of the contract, then it will give rise to a breach of contract claim and much broader remedies. (Source p. 194) 8. Marital relationships often give rise to a presumption of undue influence. The bank would be wise to have the wife seek independent legal advice prior to signing the contract; that is, the wife should be sent, along with all of the relevant documents and information to an independent lawyer to be advised of the risks in agreeing to the transaction. Failing to do this, the bank runs the risk of having the mortgage declared void due to undue influence. (Source p. 197) 9. Consumers are considered a protected class of purchasers due to the inequality of bargaining power present between the parties to a transaction. Where the bargaining power is unequal, and the contract is disadvantageous to the weaker party, the contracts are considered unconscionable and are voidable. Some of the forms of protection available include: rescission in cases of undue pressure; cooling off periods; and maximum interest rates. (Source p. 198)

CASES AND PROBLEMS 1. A standard form contract excludes any outside terms – parties are bound by the terms of the contract. Here Ashley may be bound by the contract she signed. However, Copyright © 2016 Pearson Canada Inc.

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she can try to argue that a mistake was made – a unilateral mistake in that the wrong number was placed on the order. The contract could be voidable if it is obvious that the chairs are not the same price as the ones Ashley wanted. Here the company stands to benefit from the mistake. But the price of the chairs is quite different , being $100 for an order of 16-50, compared to $125 for a similar order. The price is therefore below what was stated in negotiations. Ashley may succeed in asking a court for rectification. (Source p. 189) 2. This question is somewhat similar to the case of King’s Norton Metal Co. v. Edridge (1879), 14 T.L.R. 98 (England – Court of Appeal). The legal issue in this case is who, between two innocent parties, should bear the loss. The courts have determined that it depends on whether the contract between the first two parties is considered to be void or merely voidable. If the contract is void, then there never was a contract, and therefore, no title could have passed. If the contract is deemed to be voidable, then there was a contract and title successfully passed to the fraudster and on to the second victim. In the King’s Norton case, the court held that the contract was merely voidable, as the plaintiff had meant to contract with someone and as the other party was fictitious, that someone could only be the writer of the letter. In this case, the title was passed to the innocent third party purchaser and the plaintiff had to bear the loss. In this case, the Publisher as plaintiff would have little chance of recovery from Joan. Joan would argue that the Publisher had intended to contract with someone, and if the person was fictitious, as in this case, then the “someone” must have been the writer of the email, Paul. If Joan is successful in demonstrating that the contract should be held to be voidable, then title would have successfully passed to her through Paul. If the court holds that the contract is in fact void, then Joan would have to return the book to the Publisher. Either way, the party who is not successful would still have recourse against Paul in breach of contract or fraud. 3. Who has the onus of proof when undue influence is alleged? As always, the onus begins with the plaintiff, but later it may shift to the defendant. Hull must persuade the court that the circumstances placed Smart in a dominant position and Hull relied on him. Since the relationship between Smart and Hull is that of lawyer and client, Hull can satisfy his onus as plaintiff quite easily: the courts presume that there is very likely undue influence when a lawyer makes such a contract with his client. Accordingly, the onus then shifts to the defendant, Smart to show that he did not exercise undue influence. He must persuade the court that the terms of the contract were "fair, just and reasonable"—the only circumstance in which Smart would appear not to have exercised undue influence. A finding that $8,500 was significantly below a fair market price for the boat would result in a conclusion that Smart failed to meet the onus of proof. The contract would not be fair, and Hull's action to recover the boat would succeed. 4. The facts of this case are an adaptation of those in Tilden Rent-A-Car Co. v. Clendenning (1978), 18 O.R. (2d) 601. Tilford would wish to argue that the exemption clause in the contract should stand as it was an accepted term of the contract and therefore Tilford should be allowed to recover the cost for repair from the defendant, Clemson.

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Clemson, on the other hand, would argue that the failure to point out the clause on the back of the pre-printed form was a misrepresentation by omission; as per Dubin. JA, in the Clendenning case: In modern commercial practice, many standard form printed documents are signed without being read or understood. In many cases the parties seeking to rely upon the terms of the contract know or ought to know that the signature of a party to the contract does not represent the true intention of the signer, and that the party signing is unaware of the stringent and onerous provisions which the standard form contains. Under such circumstances, I am of the opinion that the party seeking to rely on such terms should not be able to do so in the absence of first having taken reasonable measures to draw such terms to the attention of the other party, and, in the absence of such reasonable measures, it is not necessary for the party denying knowledge of such terms to prove either fraud, misrepresentation or non est factum. (at pp. 408-409) Where the maker of a standard form contract fails to point out unusual, unexpected, or onerous terms in the contract, at the time of formation, then the terms can be struck out on the grounds of misrepresentation by omission. 5. The facts of this case are drawn largely from those of a well-known case, Re Gabriel and Hamilton Tiger Cats Football Club (1975), 8 0.R. (2d) 285 (Ontario High Court of Justice). In that case, Gabriel (the football player) sought to have his salary renegotiated because of a failure on the part of the football club representatives to disclose to him all the material facts (in particular, the increase in the number of games). The court concluded that there was no special relationship of trust that would make Gabriel especially dependent upon the other party for complete disclosure of all pertinent information: the football club was entitled to assume that the length of the season was a matter of common knowledge. The court emphasized the fact that the contract did not make reference to a specific number of games and also that it contained a term entitling the Tiger Cats to trade Gabriel to the Western Football Conference, which had had a schedule of sixteen games for several seasons. As O'Leary J. wrote in his decision, "When the contract is examined, and when what transpired at the meeting...is considered...a third party would reasonably conclude that Gabriel had agreed to play all the scheduled games, no matter whether their number was fourteen or sixteen." Accordingly, the court found that the contract was binding on Gabriel. Whether, apart from the legal aspects of the problem, the football club was wise in not agreeing to some salary adjustment in the circumstances raises a matter of business practice. Relations with Gabriel could hardly have been congenial; he was subsequently traded to the Ottawa Roughriders, where he performed well. 6. In order to get out of the contract, at common law Mary would need to plead mistake, misrepresentation, undue influence or duress. The only possibility she has in this instance, is to attempt to demonstrate that the advertisement was a representation that was not true and that it was a material statement that caused her to enter the contract. The advertisement was not made a term of the contract, and so what Mary would be asking for is rescission. The problem Mary faces is in demonstrating that the statement that the

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product is “Canada’s fastest wireless network” is a material representation and the reason for entering the contract. At common law, this may not be easy to prove. Mary may also have recourse in Consumer Protection legislation. She may have a cooling off period available to her, or other options available under legislation protecting against deceptive business practices. We would need to know where Mary resides in order to determine what legislation would apply to her.

CASE SUMMARIES Armstrong v. North West Life Insurance Co. of Canada (1990), 72 D.L.R. (4th) 410 (British Columbia Court of Appeal) Armstrong obtained a life insurance policy on a person who was indebted to him. That person filled out the application form and misrepresented two of the answers; that is, he claimed that he had no other life insurance applications pending and under-reported the amount of existing life insurance in force. The court held that the insured knowingly made the misrepresentations and they were material to the risk. Also, the misrepresentations were “not so conspicuously false as to put the insurer on notice of them.” Angevarre v. McKay (1960), 25 D.L.R. (2d) 521 (Ontario Court of Appeal) Angevarre agreed to sell McKay a new Mercedes Benz for $3,842. McKay refused to accept the car that Angevarre tried to deliver. The court found as a matter of fact that McKay thought he was buying a car identical to the demonstration model he had been shown. It had white wall tires and reclining leatherette seats. Angevarre, on the other hand, thought he was selling the standard model with black wall tires and fabric upholstery; neither interpretation was more reasonable than the other, and so no contract had been formed. Bank of Montreal v. Duguid (2000), 185 D.L.R. (4th) 458 (Ontario Court of Appeal) See Case 9.8 at p. 197 in the text. Barclays Bank plc v. O’Brien, [1993] 4 All E.R. 417 (England – House of Lords) See Case 9.7 at p. 197 in the text. Brisebois v. Chamberland et al. (1990), 77 D.L.R. (4th) 583 (Ontario Court of Appeal) This case illustrates the complexity of misunderstandings and mistakes that are left for the courts to sort out, but the facts are too detailed to review in class:

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In 1949 and 1951, respectively, the respondent's uncle sold two adjacent lots, the north and south lots to a purchaser, the owner of a cheese factory situated across the street from the two lots. The purchaser went bankrupt in 1952 and a trustee in bankruptcy was appointed. The respondent agreed with the trustee to purchase her uncle's former house and property. The trustee wrote her a letter confirming the agreement to sell her the house and two lots opposite the cheese factory. As directed, she paid the purchase price to one of the bankruptcy inspectors and received a receipt stating that the estate sold her the uncle's house and the two related lots. Unfortunately, the contract of sale only referred to the south lot and not the north lot. The border of the north lot was a stream, and a letter written by the trustee to the respondent in 1954 stated that her boundary extended to the middle of the stream; this suggested that the parties assumed both lots were included in the sale. Over many years, a number of confusing and inconclusive transactions and arrangements occurred, with different parties having some awareness of the mistake but relying on their new arrangements. The respondent brought an action for a declaration that she had a right to possession of the north lot and for damages for nuisance. The trial judge granted the declaration and the damages sought, but directed a forced sale to the second appellant, because of valuable improvements to the north lot made by him. On appeal, the majority stated that a party seeking rectification of a contract must show that the parties had a common intention antecedent to the contract, that the common intention was evidenced by an outward expression of accord, that the common intention continued unchanged until the contract was signed, and that the contract did not conform to the common intention because of a mutual mistake… The correspondence and other evidence proved beyond a reasonable doubt that there was a mistake in the contract of the kind alleged by the respondent. It was clear that the trustee had actual knowledge of the mistake—and others either knew or should have known of the respondent’s claim. Bulut v. Carter, 2014 ONCA 424 p. 193 footnote 21

Campanaro v. Kim (1998), 112 O.A.C. 171 (Ontario Court of Appeal) Kim bought a vehicle and later gave it to his brother. His brother insured the vehicle claiming that he was the registered owner when his brother actually was. When he was involved in a car accident with Campanaro, State Farm claimed the insurance policy was void because it was obtained based on a misrepresentation. The court found that the misrepresentation did not result in the policy being void. Coronation Insurance Co. v. Taku Air Transport Ltd. (1991), 85 D.L.R. (4th) 609 (Supreme Court of Canada) Taku, a small commercial air carrier in northern British Columbia, obtained compulsory insurance from Coronation when it began operations in 1978. During its first year, Taku Copyright © 2016 Pearson Canada Inc.

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had three accidents and Coronation refused to renew the policy. Taku then obtained coverage from another insurer. Between 1979 and 1986 Taku was involved in six more accidents and the second insurer terminated its policy. Taku began a new search for coverage and applied again to Coronation. The name Taku apparently "rang a bell" with the agent for Coronation, who asked for a ten-year accident history from Taku. Despite the "ringing bells" the agent did not check his own company's files, but asked only that Taku disclose its record. Taku deceived the agent, reporting but one accident. Coronation calculated the risk on the basis of the false information received from Taku without checking its own records, contacting the second insurer or making inquiries at the Canadian Aviation Safety Board. Coronation drafted a policy containing a term that the policy would be void if the insured "concealed or misrepresented any material fact" (including, of course, its accidents). A crash occurred and five passengers were killed. Their families sued and Coronation refused to pay, relying upon the insured's fraudulent misrepresentation and concealment. The Supreme Court of Canada held that a reasonably competent insurer would have discovered the carrier's accident record by searching the records of the Aviation Safety Board or at least by searching its own records. Where the object of the insurance was, as here, to protect innocent third parties (the passengers) the insurer was bound to make an independent investigation of an applicant's accident record before issuing a policy and could not be excused from liability on the basis of Taku's failure to disclose its record. Surprisingly, however, the Court held that the insurer was entitled to rely on Taku's further misrepresentation that the aircraft would carry only four passengers (instead of five), because this information was available only to the insured. Accordingly, the Court held the policy to be void and the insurer was not liable. The result leaves the law in a perplexing state in terms of protecting the public—and leaves the deceased passengers' family without recovery. Cundy v. Lindsay (1878), 3 App. Cas. 459 (England – House of Lords) See Case 8.5 at p. 188 in the text. Dick Bentley Productions Ltd. v. Harold Smith Motors Ltd., [1965] 2 All E.R. 65 (England – Court of Appeal) The plaintiff bought a car from the defendant after the defendant made certain statements about the good quality of the car. The plaintiff subsequently had considerable trouble with the car and had to have the defendant service it several times. The plaintiff sued for breach of warranty. The court held that if a representation is made in the course of negotiations to induce the other party to act on it, and if the other party actually acts on it by entering into a contract, there is a prima facie ground for inferring that the representation is a warranty. However, the party who made the statements may rebut the presumption by showing that it made an innocent, non-negligent misrepresentation. In this case, the defendant did not rebut the presumption since it ought to have known the true quality of the car.

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Ennis v. Klassen, [1990] 4 W.W.R. 609 (Manitoba Court of Appeal) The plaintiff entered a contract to purchase a model 733 BMW from the defendant. Not until after the sale was completed and the monies paid, did the plaintiff realize that the car was a model 728 BMW; a model that was illegal in Canada. The plaintiff immediately requested rescission from the defendant. The Court held that this was a proper case for rescission as the defendant misrepresented the type of car. Even if the misrepresentation was innocent rather than fraudulent, it went to the root of the contract; a fundamental breach of contract gives rise to the right of rescission. Esso Petroleum Co. Ltd. v. Mardon, [1976] 2 All E.R. 5 (England – Court of Appeal) The plaintiff wished to open a gas station and found a suitable location. The plaintiff made a forecast of the estimated sales for the location and purchased the property. The planning authority, however, would not allow them to place the gas station fronting the main street. The entrance to the gas station was now off a side street. The plaintiff then sought a tenant for the station. The defendant made an offer to lease the station based on the forecast of estimated sales prepared by the plaintiff. The plaintiff did not obtain the necessary sales to pay for the gasoline supplied by the plaintiff. The plaintiff shut him off and effectively put the defendant out of business. The plaintiff then sued for possession of the station and monies owed on gasoline provided and not paid for. The defendant counterclaimed for negligent misrepresentation. The Court held that there was a negligent misrepresentation and that the defendant was entitled to recover for his losses. Garland v. Consumer’s Gas Co., [1998] 3 S.C.R. 112 (Supreme Court of Canada) The defendant charged a late fee to customers that did not pay their gas bills on time. The plaintiff sued for a declaration that the “late fee’ was an interest charge and that it exceeded the criminal rate of interest allowed to be charged. The Supreme Court agreed that the fee violated the criminal code and ordered the matter by remitted to the Ontario Court. Gold v. Rosenberg. [1997] 3 S.C.R. 767 (Supreme Court of Canada) The plaintiff and the defendant received a share of property under an estate which included commercial properties held by two companies. The plaintiff signed a power of attorney, permitting the defendant to continue managing the companies. Several years later, one of the companies wished to borrow funds. The bank agreed, however required guarantees to be signed as well as a collateral mortgage on the defendant’s property and a postponement of an earlier mortgage held by one of the estate companies. The conditions were met, and the plaintiff’s signature was obtained on the directors’ resolution. The bank advanced the loan. Subsequently, the defendant revoked the power of attorney and sued the defendant, the bank and the bank’s lawyer. The Court held that there was no undue influence; the bank did all that was appropriate and that independent legal advice

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in this case was not necessary. The plaintiff was highly educated in business and had had everything explained to him. Goldthorpe v. Logan, [1943] 2 D.L.R. 519 (Ontario Court of Appeal) The defendant placed an advertisement in the newspaper offering electrolysis and guaranteeing removal of facial hair. The plaintiff responded to the advertisement, but the treatment failed. The court held that while the general assumption is that advertisements are invitations to treat, in this case the advertisement was an offer to the public. The court looked at the surrounding circumstances and the actions of both parties in making the determination. Hepburn v. Jannock Limited (2008), 63 C.C.E.L (3d) 101 (Ontario Superior Court of Justice) Hepburn worked for Jannock for over twenty-one years. Hepburn entered into an agreement with Jannock stating that he would be paid a supplemental pension in addition to his regular pension in the event that parts of Jannock were sold and Hepburn’s employment was terminated. It was clear that this was the intention of both Hepburn and Jannock; however, the language of the contract did not clearly state that Hepburn would receive the additional pension. The court found that ordering rectification of the contract was appropriate because Hepburn was able to prove that there was a prior oral agreement that was clear, Jannock should have known of the mistake in the written agreement, the written agreement was capable of expressing the prior intention, and it would be unfair and unconscionable to enforce the written agreement. Hyrsky et al. v. Smith (1969), 5 D.L.R. (3d) 385 (Ontario High Court of Justice) The plaintiffs purchased land for future commercial development. The plaintiffs neglected to have the title of the property investigated by a professional. Sometime later, when they were ready to develop the property, they discovered that a large percentage of the property had not been owned by the vendor; the remaining parcel of land was too small to commercially develop. The plaintiffs sued to have the contract rescinded. The court held at p. 392 that, “if the mistake as to quantity is so substantial that in essence it changes the quality of the subject-matter, then a proper case of rescission may exist.” In spite of the error by the plaintiffs in not searching title, the court granted rescission; however, refused to grant costs to the plaintiff. King’s Norton Metal Co. v. Edridge (1879), 14 T.L.R. 98 (England – Court of Appeal) See Case 9.5 at p. 192 in the text. Leaf v. International Galleries, [1950] 1 All E.R.693 (England – Court of Appeal) See Case 9.3 at p.191 in the text

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Lewis v. Averay [1971] 3 All E.R. 907 (England Court of Appeal) The plaintiff had a car for sale. He sold the car to a person who claimed to be a television actor; this person had identification to support this claim. The purchaser paid by cheque. The cheque was not honoured. In the meanwhile, the purchaser resold the car to the defendant, this time claiming to be the plaintiff. The plaintiff then sued the defendant to recover the car. The court followed the case of Ingram v. Little [1964] 1 QB 31; that is, that because the transaction was made face to face, a valid contract existed and the title did in fact pass to the defendant. The appeal was allowed and judgment entered for the defendant. Lindsey v. Heron & Co. (1921) 64 D.L.R. 92, 98–9 (Ontario Court of Appeal) The plaintiff asked the defendant if he would be interested in buying shares of Eastern Cafeterias of Canada. The defendant looked into prices and then offered the plaintiff $10.50 per share for the “Eastern Cafeteria” shares. The plaintiff agreed and delivered the shares. The defendant paid by cheque. The defendant then realized that Eastern Cafeterias Ltd. and Eastern Cafeterias of Canada Ltd. were different companies; he stopped payment on his cheque. The plaintiff sued. The defendant argued that his offer to buy was ambiguous, as he could have meant either company. The court held that the “words used by the defendant manifested an intention to offer the named price for the thing that the plaintiff was selling.” The mistake on the part of the plaintiff was in using ambiguous language. The plaintiff did not use ambiguous language in describing the shares for sale; the ambiguous language of the defendant then, could only refer to that which the plaintiff was selling. Marvco Color Research Ltd. v. Harris, [1982] 2 S.C.R. 744 (Supreme Court of Canada) The defendants executed a mortgage in favour of the plaintiff as collateral security for a guarantee of $15,000 owed by Johnston to the plaintiff. The defendants did not read the document but were assured by Johnston that the mortgage was for $15,000 when in fact it was for $55,000. The plaintiff sued on the mortgage after Johnston defaulted on his debt and the defendants pleaded non est factum. Noting that Carlisle v. Bragg, which formed the basis for the majority decision in Prudential Trust Co. v. Cugnet, had been overruled in England by the House of Lords, the court followed the dissenting opinion in Prudential Trust Co. v. Cugnet. The court held that carelessness may well disentitle a signor from relying on non est factum against an innocent party. Here, the defendants had been careless and had thereby contributed to the plaintiff's risk of loss: they could not therefore rely on non est factum and were bound by their guarantee for $55,000. McLean v. McLean, 2013 ONCA 788

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p. 188 footnote 3 Mira Design v. Seascape Holdings, [1982] 1 W.W.R. 744 (British Columbia Supreme Court) The respondents purchased property from the petitioners. As a part of the purchase agreement, the petitioners provided a mortgage to the respondents to be repaid in one month’s time. The amount borrowed by the respondent’s was $84,000; the mortgage was for $100,000. It was a term of the mortgage that if the respondent’s paid the $84,000 plus interest of Royal Bank of Canada prime + 2% per annum by August 15th the mortgage would be discharged. If the mortgage was not paid by August 15th, the petitioner would be entitled to demand full payment of the mortgage plus interest; that is, $100,000 plus interest calculated at Royal Bank of Canada prime + 2% per annum. The court held that the additional $16,000 amounted to a criminal rate of interest. The court ordered that the additional payment be severed from the mortgage term. Murray v. Sperry Rand Corp. (1979), 96 D.L.R. (3d) 113 (Supreme Court of Canada) The plaintiff bought a forage harvester from a dealer. The dealer and the distributor had made representations to the plaintiff about the quality of the machine; the sales brochure of the manufacturer (Sperry Rand Corp.) also made representations about the quality of the machine. The machine never performed anywhere near the standard set by those representations, even when the dealer and the distributor tried to run it. This failure delayed the plaintiff's harvest; part of his crop was lost entirely and much of what was harvested was overripe and therefore of little value. Ultimately the plaintiff sold the harvester, gave up farming, and sued the dealer, the distributor and the manufacturer for breach of warranty. The court held that the dealer made representations to induce the plaintiff to purchase the harvester: such statements were warranties the breach of which entitled the plaintiff to damages. The manufacturer was not a party to the contract of sale but did publish the sales brochure with the intent to induce purchasers to buy its product: it too therefore had made warranties. Notwithstanding the apparent lack of a contractual relationship between the plaintiff and the manufacturer, the manufacturer was liable for breach of warranty. The court's reasoning was as follows: the manufacturer impliedly warranted the quality of its product in return for the plaintiffs buying that product from one of the manufacturer's dealers. The distributor, while liable as an agent of the manufacturer, was also directly liable to the plaintiff in the same fashion as the manufacturer for the representations it made to the plaintiff. Pao On v. Lau Yiu Long, [1980] A.C. 614 (Hong Kong – England, Privy Council) The plaintiffs, owners of shares in a private company, contracted to sell their shares to a public company in return for a new issue of shares in the public company. The defendants, who were majority shareholders in the public company, were worried that a quick sale of the new issue might push down the market price of the public company's shares. They persuaded the plaintiffs to agree not to sell sixty percent of their newly acquired shares for over a year. Copyright © 2016 Pearson Canada Inc.

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Subsequently, at the plaintiffs' request, the defendants agreed orally to indemnify the plaintiffs for any losses they might suffer from retaining the shares. Later the parties had a disagreement and the plaintiffs refused to complete the share exchange contract with the public company unless the defendants promised in writing to indemnify them for any losses. The defendants so agreed, the main transaction was completed and the plaintiff retained the shares as originally promised. The shares lost value while the plaintiffs retained them, but the defendants refused to indemnify the plaintiffs for the loss, claiming that their promise to do so was gratuitous and not binding. The court held that the plaintiffs' promise to retain the shares, although made before the defendants' agreed to give a guarantee, was valid consideration if: (a) done at the defendants' request; (b) the parties understood that the act of retaining the shares was expected to be "paid for" (that is, was not a "gift");and (c) the guarantee, had it been bargained for in advance, would have been a binding arrangement. The court found that the promise to retain the shares met these requirements and thus was sufficient to bind the defendants to their guarantee. Phillips v. Brooks [1918-19] All E.R. 246 (England) See Case 9.6 at p. 192 in the text. Raffles v. Wichelhaus (1864), 159 E.R. 375 (England –Exchequer Division) See Case 9.2 at p. 190 in the text. Rose v. Pim, [1953] 2 All E.R. 739 (England – Court of Appeal). Pim received an order from a customer for a supply of "horsebeans described here as feveroles." Pim asked Rose what feveroles were and Rose replied that feveroles and horsebeans were the same thing, not knowing that feveroles were a special medium sized variety of horsebeans. Pim then made an oral agreement with Rose for the purchase of five hundred tons of Tunisian horsebeans which was incorporated into a written contract. Pim subsequently brought an action for the rectification of the contract by the addition of the word "feveroles" after the words "Tunisian horsebeans." The court held that the oral agreement was for the sale of horsebeans. Notwithstanding the shared mistake as to the meaning of "feveroles", the written contract correctly expressed the oral agreement and could not be rectified. Royal Bank of Canada v. Hussain (1997), 37 O.R. (3d) 85 (Ontario General Division) The Royal Bank brought an action against H and his wife, A, to recover on personal guarantees signed to guarantee the indebtedness of four family companies. The Bank's claim was for $7,160,667.20. H denied liability on the grounds of misrepresentation and

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non est factum. These grounds were not made out on the facts. H was well-educated, proficient in English and an experienced and sophisticated businessman and dealt directly with the Bank's representative. A also denied liability on the grounds of misrepresentation, non est factum, and unconscionability. She was born in Iraq, her first language was Arabic and she had difficulty with both spoken and written English. She had the equivalent of a grade seven education, and had not worked outside the home. The documents that she signed were brought home by H for her signature. She testified that in her culture wives did not question their husband's authority, and she signed documents when asked to do so. She did not read the guarantees or any other documents that her husband had asked her to sign. The Court held that there should be judgment against H but the action against A should be dismissed. The court noted that the defence of non est factum is available when an individual signing a contractual document is mistaken as to the nature and character of a document. The defence, however, may not be available if the person is careless in signing the document. Whether carelessness will bar a party from the defence depends upon the circumstances. Here, given the real danger that A did not understand what she was signing, and that she could be subject to undue influence by her husband, the Bank should have inquired into her understanding at the time she signed the documents and suggested the need for independent legal advice. In the circumstances, it would be unconscionable for the Bank to enforce the personal guarantees against her. Saunders v. Anglia Building Society [1971] A.C. 1004 (England – House of Lords) The plaintiff was an elderly woman who owned a property. Her nephew was in financial difficulties and she had wished to make a gift of the property to her nephew with the proviso that she would have life tenancy. The nephew owed money to his ex-wife and so did not wish to transfer the property into his name, but he did wish to borrow against the property for his business. He concocted a scheme with his friend, Lee whereby, the property would be transferred to Lee’s name and then Lee would borrow the money and give it to the nephew. The documents were prepared and presented to the plaintiff. She did not read the document, nor did she ask her nephew to read it to her; she trusted in what Lee told her, and signed the document. Lee proceeded to borrow the funds from the defendant Building Society, but kept the money to pay down his own debts instead of giving it to the nephew as agreed. The plaintiff brought the action to have the property restored to her name, claiming non est factum. The Court held that a careless signer could not avoid liability by claiming non est factum. The plaintiff had the opportunity to read the document, or have it read to her and she chose not to. Schoff v. Royal Insurance Company of Canada, [2004] 10 W.W.R. 32 (Alberta Court of Appeal) The plaintiffs were injured in a car accident and sued the other driver’s insurance company. The defendant was the insurer of Mrs. Goyan; it was her son who injured the plaintiffs. The defendant appeals on the basis that they are allowed to deny coverage to Mrs. Goyan due to misrepresentations made by her. Mrs. Goyan claimed that she was the

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sole licensed driver in her household and would be the sole driver of the vehicle in question. She further stated that she owned three vehicles and that she had no prior insurance claims. These statements turned out to be false. At the time of her application, Mrs. Goyan lived with four of her sons; all were licensed to drive (although one did have his license suspended at the time); she owned five cars, not three; and she had had prior insurance claims. The court agreed that as an insured owed a duty of utmost good faith to her insurer, the claim could be denied. The court held that the insurance company was only liable to pay the statutory minimum required ($200,000); it was not liable for the excess claim above that amount. Sevidal v. Chopra (1987), 64 O.R. (2d) 169 (Ontario High Court of Justice) The defendants owned a home for sale. They were aware of radioactive material in the area, but did not disclose this to the purchasers. Later the defendants learned, prior to closing, that their own house was contaminated, but again did not disclose this to the purchasers. The court held that the amount of radioactive material was sufficient to pose a potential danger and such should have been disclosed to the plaintiffs. The failure to disclose acted as a misrepresentation; deceit is an established exception to caveat emptor. Shanahan v. Turning Point Restaurant Ltd. 2012 BCCA 411 p. 188 footnote 3 Staiman Steel Ltd. v. Commercial & Home Builders Ltd. (1976), 71 D.L.R. (3d) 17 (Ontario High Court of Justice) The plaintiff purchased some bulk steel at an auction. The purchaser believed that the steel purchased included some pre-fabricated building component members (“the building steel”) also in the yard. The vendor had never intended to sell the building steel as it was not the owner of that steel. This was a case of mutual mistake. The court held that there was a valid contract, but that the reasonable third party would not have included the building steel in the contract. The defendant owed the plaintiff for the nondelivery of the other bulk steel purchased, but not received. State Farm Mutual Automobile Insurance Co. v. General Accident Assurance Co. of Canada (1995), 127 D.L.R. (4th) 648 (New Brunswick Court of Appeal) A mother obtained auto insurance from General Accident claiming she owned the vehicle when her son actually owned and drove the vehicle; the son did not have a driver’s license. The son was in a car accident and injured a person insured by State Farm. General Accident claimed that they were not liable for the claim because the policy was issued as a result of a misrepresentation and was therefore void. The court found that General Accident was liable and that the policy was not void because the son was driving with the mother’s consent.

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Stott v. Merit Investment Corp. (1988), 63 O.R. (2d) 545 (Ontario Court of Appeal) See Case 9.9 at p. 199 in the text. Sylvan Lake Golf & Tennis Club Ltd. v. Performance Industries Ltd. (2002), 209 D.L.R. (4th) 318 (Supreme Court of Canada) The two parties entered into an oral agreement to develop some land near a golf course. The agreement was drafted by the lawyer of the defendant. The agreement allowed for the development of properties on an area with a width of one hundred and ten yards, but when the document was reduced to writing the measurement was changed to one hundred and ten feet. The court held that there was fraudulent misrepresentation on the part of the defendant and that the plaintiff was entitled to rectification. The Supreme Court affirmed the decision with respect to rectification. Terry v. Vancouver Motors U-Drive Ltd. and Walker, [1942]1 W.W.R. 503 (British Columbia Court of Appeal) Walker rented a car from Vancouver Motors U-Drive Ltd. using the license of a man named Hindle. While negligently driving the car, Walker injured the plaintiffs who sued Vancouver Motors. Under s. 74 of the Motor Vehicle Act, R.S.B.C. 1936, c. 195, Vancouver Motors' liability depended on whether or not Walker was driving the car with Vancouver Motors' express or implied consent. That question in turn depended on whether the rental contract between Walker and Vancouver Motors was void. The court held that even though Walker was fraudulent about his identity, the company intended to contract with the person who appeared before them. Therefore the contract was not void, Walker had been driving with Vancouver Motors' consent, and the company was liable for the injuries caused to the plaintiffs. Tilden Rent-A-Car Co. v. Clendenning (1978), 18 O.R. (2d) 601 (Ontario Court of Appeal) Clendenning signed a written contract with Tilden to rent a car He opted for additional insurance coverage as suggested by the rental agent to exempt him from any liability. He did not read the conditions of the contract nor was he given notice of the conditions. He was in an accident with the rental car, as a result of which he pleaded guilty to impaired driving. Tilden sued for the damage done to the car, claiming that Clendenning had breached one of the terms of the rental contract; that is, the customer would not operate the vehicle after having consumed any amount of intoxicating liquor. The court accepted Clendenning's evidence that he had not been intoxicated while operating the vehicle, despite his guilty plea under the impaired driving charge. Further, the court held that even where a party has signed a contract, that party will not be bound by surprising or unreasonable terms if sufficient notice was not given of the terms. In this case, the court found that the term in question was unreasonable and that Clendenning had not received sufficient notice.

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Webster v. Cecil (1861), 54 E.R. 812 (England- Chancery Division) See Case 9.1 at p. 188 in the text. Whittington v. Seale-Hayne (1900), 82 L.T. 49 (England – Chancery Division) The plaintiffs were breeders and exhibitors of valuable, prize poultry. They entered into oral negotiations with the defendant's agents for the lease of a house and premises. The plaintiffs alleged that in response to their inquiries, the defendant's agents represented that the premises were very clean and in good repair. (The defendant later denied that any such representations were made but the court found that they were made, although innocently). The plaintiffs agreed to lease the premises for twenty-one years, and the parties then executed a lease which the plaintiffs did not read. The lease made the tenants responsible for any repairs to the property required by public authority. The plaintiffs set up their manager and his family in the house, and stocked the premises with poultry. The property's water supply turned out to be poisoned; the manager and his family fell ill; the poultry died or became valueless for breeding purposes; and the local Council declared the house unfit for human habitation. The Council required that the drains be fixed and the house be made fit to live in. The plaintiffs sued for rescission of the lease and for compensation for the injuries caused by the bad water. The court held that the plaintiffs were entitled to rescission (including return of rent and taxes paid as well as the cost of the repairs) because of the innocent misrepresentations made to them, but they were not entitled to compensation for the injuries sustained because that would amount to damages, which do not flow from an innocent misrepresentation.

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CHAPTER 10 WRITING AND INTERPRETATION WRITING In order to avoid disputes and costly litigation, all important contracts should be in writing. In some cases, contracts should also be witnessed so that there can be no question about their authenticity. However, it is difficult to always put contracts in writing, and aside from the statutory requirements covered in this chapter, there is no general legal requirement that contracts be in writing in order to be binding. The Statute of Frauds (in some provinces), the Sale of Goods Act (in some provinces), and other legislation (notably consumer protection and e-commerce laws) render certain agreements unenforceable unless evidence of their terms is in writing. Instructors should refer students to parts of Chapter 32 to address the satisfaction of writing requirements when online contracting. Most provinces have legislation equating digital copies with written ones. PIPEDA may be used as an example. Students should be aware that unless certain types of contracts are in writing they are unenforceable. In most provinces the only categories of contracts required to be in writing are guarantees, land and executor’s promises. (In British Columbia both guarantees and indemnity agreements need to be in writing to be enforceable.) The requirement for land transactions can be waived if the conditions set out on p. 208 are met – Case 10.2 is a good case for opening up discussion on the three conditions. Case 10.3, involving the Gretzkys, makes clear that all essential terms must be in writing, and the documents signed must be signed by the party to be charged, that is, the person(s) denying the existence of the contract. Electronic signatures and emails are now considered as enforceable forms of evidence. The instructor should raise student awareness of the various requirements for writing beyond the Statute of Frauds in relation to the transfer of land (in title registration legislation), and the specific provisions of the Sale of Goods Act and consumer protection legislation that require writing. As with many of the legal issues in this text, the emphasis should be on providing students with enough knowledge so that they recognize situations when writing is a requirement and can seek legal advice in order to best protect their own interests and the interests of their business. The doctrine of part performance developed in response to the sometimes unjust application of the Statute of Frauds to contracts concerning interests in land. It is important to point out that the party who has partially performed her part of the bargain is not being compensated for that performance; rather, part performance renders the contract enforceable and both parties can be obligated by the courts to complete performance. This should be distinguished from cases where the plaintiff has unsuccessfully claimed part performance and in the alternative claims compensation by way of quantum meruit for the benefit she conferred on the other party (see, for example, Ross v. Ross, Jr. (1973), 33 D.L.R. (3d) 351 (Sask. Q.B.), cited at p. 207, n. 12 of the text and found in the case summaries at the end of this chapter). When a contract is considered unenforceable the court will not enforce it, even though the contract itself is still in existence. Pp. 210-211 examine five situations affecting the Copyright © 2016 Pearson Canada Inc.

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rights and obligations of the parties when a contract is unenforceable, with Illustrations 10.1, 10.2, and 10.3 able to provide topics for discussion. CONSUMER PROTECTION LEGISLATION (Source p 213) Writing should be identified as one part of a comprehensive scheme to protect the consumer form oppressive business practices. As in areas of corporate governance, disclosure is an important strategy used to protect the public and writing requirements are part of ensuring full disclosure. If the course does not include Chapter 30, instructors should refer students to the Chart on page 775 of the text identifying risks associated with modern business practices. This will help students understand the reasons for consumer protection legislation and the writing requirements as part of a larger scheme of protective measures. “Cooling off periods” may not be a term students are familiar with but it should be stressed that they do not eliminate the consumers’ obligation to read the standard form contract; they simply allow consumers to do that after signing. Some clauses will be unenforceable in any event but most will survive if writing and notice provisions are met. Class discussion is often lively if students are invited to speculate about why particular industries have been targeted. Many students have fitness club memberships and credit cards and the discussion has obvious relevance.

THE INTERPRETATION OF CONTRACTS The best advice to any business person who wishes to avoid problems in interpreting contracts is to take special care and seek advice when making a contract. Keeping in mind the old maxim, "an ounce of prevention is worth a pound of cure," think not only about what is contained in the wording of the agreement, but also about anything that should be included and is not. Often a little time taken when a contract is formed will avoid needless and expensive litigation later. Naturally, the preference to keep a contract alive rather than declaring it void for mistake about the terms encourages judges to resolve ambiguity by choosing an interpretation. The Court may use either the strict or plain-meaning approach or the liberal approach to contractual interpretation. Unless the contract in question is an insurance contract, which, as determined by the Supreme Court of Canada, has specific rules of interpretation, as set out on p. 217. Interpretation must 1. Follow the contra proferentem rule, 2. Construe coverage provisions broadly, and 3. Interpret exclusion clauses narrowly. Sometimes judges must stop short of re-writing the contract for the parties. The principle of notional severance (or reading down a contractual term) comes very close to empowering judges to re-write the contract. Instructors should be aware of the 2009 Supreme Court of Canada case dealing with the enforceability of restrictive covenants in restraint of trade: Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6. In this employment case the Court overturns the British Columbia Court of Appeal’s

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interpretation of the geographic limit “Metropolitan City of Vancouver” finding it ambiguous and therefore unreasonable. The Court: 

Proclaims that clauses will not be found reasonable if they are ambiguous (which the subject clause was found to be).



Declares that notional severance (re-writing or reading down a contractual term) is not appropriate for restrictive covenants.

THE PAROL EVIDENCE RULE (Source p. 218) The parol evidence rule appears to preclude courts from giving effect to oral terms that would add to or contradict terms in a written agreement. In order to do justice between the parties, however, courts frequently find ways to avoid the rule. Courts will allow parol evidence to be admitted to prove that: (a) the written agreement does not represent the whole of the contract between the parties; (b) the missing term is part of a subsequent oral agreement; or (c) there is a oral agreement with its own consideration that is collateral to the written contract; or (d) the parties have agreed to a condition precedent to the contract coming into force. (Source p. 218, Checklist p. 220) Instructors will need to review the exceptions to the Parol Evidence rule, as listed on pp. 219-220, including Illustrations 10.5 and10.6, and Case 10.6

IMPLIED TERMS AS A METHOD OF INTERPRETATION (Source p. 221) The interpretation of contracts through the acknowledgment of implied terms is very tricky. Courts will consider a number of factors when a party wishes to have an implied term read into a contract: the intentions of both parties; the type of contract; the custom of the trade; a course of dealing between the parties; business efficacy; and the comprehensiveness of the contract. Since courts may be reluctant to find implied terms in contracts, business people should be encouraged to make anything that is important to them an express term of the agreement. Instructors may want to refer to implied terms arising from the Sale of Goods Act (Chapter 14). RBC Dominion v. Merrill Lynch (2007), 25 B.L.R. (4th) 211, is an interesting case for discussion. The British Columbia Court of Appeal implied a contractual term not to compete unfairly with a former employer in order to assess damages for breach of contract. Only assessment of damages were varied by the Supreme Court (2008 SCC 54). STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 223) Many students will find it difficult to imagine the situation where an oral contract would exist in today’s modern world, however, combining the chapter on the requirement of writing with earlier chapters on formation of a contract may be useful. When is the Copyright © 2016 Pearson Canada Inc.

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contract actually formed? Is it only created once it has been reduced to writing and then signed? Oral contracts can arise, even if one intends to put it in writing later. In this chapter, we also note, that the forms of the contract can be oral, written, or a combination of both written and oral. In order to minimize risks, students need to recognize when the contract is formed and what contracts need to be in writing to be enforceable. This area of business law is difficult for students to grasp the legal risks. It is simple to suggest that a party make sure that its contract is complete; however, no one can anticipate everything. It should be stressed to students that this is an example where obtaining legal advice in drafting of contracts is important. Larger companies will often employ in-house counsel to take on this responsibility to minimize the risk. INTERNATIONAL ISSUE (Source pp. 211- 212) Should the Statute of Frauds Be Repealed? Question 1 - Generally speaking, businesses insist of having written (or electronic) record of every transaction or arrangement they make; otherwise they cannot keep track of their obligations and rights—and the state of their accounts. So there are practical business reasons for not relying on merely oral arrangements. Nevertheless, situations may sometimes arise in which oral arrangements are the basis for very important contracts, and normally each party expects the contract to be reduced to writing promptly. When parties have ongoing relations this rarely causes a problem, but between strangers it can create uncertainty. However, reliance on an important oral agreement with a stranger would indeed be unusual. Consequently, the Statute of Frauds does not play an important role in day-to-day business. Question 2 - There are obvious advantages in recording the terms of a contract in writing. A written record greatly reduces the risk that the parties will subsequently disagree as to what was agreed. A requirement of writing also protects consumers by necessitating full disclosure of all relevant terms of the contract. Question 3 - The Statute of Frauds is more than three hundred years old and was enacted to deal with a particular historical situation. Some of the categories of contracts for which the Statute requires writing no longer seem appropriate. That does not mean that the requirement of writing should be abolished altogether; in fact, modern legislation has frequently extended the requirement. Rather than amend the Statute, it is arguable that the whole question of requiring writing should be re-examined in the light of modern circumstances and business practices. Question 4 - E-commerce is a good example. Rather than simply applying the Statute of Frauds to e-commerce contracts, consumer protection and e-commerce acts co-exist with the Statute of Frauds; detailed rules are needed governing disclosure of terms, methods of acceptance, keeping of records, etc. and the existence of specific e-commerce legislation is a better solution to modernity than judges trying to cram the square peg of e-commerce into the round hole of the Statute of Frauds. (See Chapter 32) ETHICAL ISSUE (Source p. 215) Do Writing Requirements Protect the Consumer or the Business?

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Question 1 – Writing requirements were historically meant to protect all parties, in that it created a permanent record of the transaction as set out by both of the parties. Today however, more often than not, only one party drafts the agreement and it is presented on a take-it-or-leave-it basis. This means that a party can create contracts that are not fair to the consumer. It is certainly reasonable that a business would want to put in terms that would protect itself from a customer’s breach of contract. The question then is: does the requirement of writing under consumer protection legislation help the consumer? One would hope that a consumer would take the time to read the contract, but that is not the case in the majority of transactions. Question 2 – Providing consumers the opportunity to modify a contract would likely only be beneficial to sophisticated consumers, who presumably, are not in need of the same protections as vulnerable consumers. Likely, vulnerable consumers would either not bother to modify the contract (if they knew how to do so), or if the contract were modified, would no longer be acceptable to the business providing the goods or service and so no contract would be formed. It would be interesting to put this to an open discussion with students, to see if they would modify a contract before agreeing to it, and if they would, in what way would they modify it? Question 3 – The European solution of making unfair terms unenforceable, may be easier for the courts, however, it requires that certain terms be defined as “unfair.” It also interferes with the freedom of contract principles. If a party wishes to contract on terms that an objective party may consider “unfair,” why shouldn’t they be allowed to, as long as the party understands those terms and is willing to agree to them? This is an interesting discussion on the rights of various parties and how much government interference is desired. Question 4 – The doctrine of unconscionability has been developed over time to look at contracts where the inequality of bargaining power may have resulted in a manifestly unfair or unconscionable contract. It is an application of the law of undue influence or an extension of the duty of utmost good faith. It is a difficult issue for courts as they do not wish to upset the reliability of contracts by allowing rescission without good reason. Again, this question is about balancing competing interests and about protecting the vulnerable in society. QUESTIONS FOR REVIEW 1. A void contract is not a contract at all. A voidable contract is one that may be set aside (See Chapter 9). An unenforceable contract is a valid contract that may still affect the legal relations between the parties, but is one which the courts will not enforce. (Source p. 206) 2. Consumer protection legislation covers both goods and services, and extends protection further than either the Sale of Goods Act or the Statute of Frauds, in that it dictates not only the evidence of writing, but also the substance of what must be included in the written document. (Source p. 213)

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3. A guarantee is a conditional promise to pay only if the debtor defaults. In contrast, a promise to indemnify a creditor makes the promisor primarily liable to pay the debt. (Source p. 206) 4. Part performance is performance begun by a plaintiff in reliance on an oral contract relating to an interest in land, and is accepted by the court as evidence of the contract in place of a written memorandum. Part payment is something that is tendered by the buyer of goods and accepted by the seller after the formation of the contract, to be deducted from the price. (Source p. 208) 5. (a) An oral agreement to rescind an earlier enforceable contract will be effective even though the subject matter of the first contract falls within the Statute of Frauds. The oral contract of rescission is within the statute, but will have its intended effect on the original written contract even though it is in oral form. However, the oral contract itself cannot be sued upon. (Source p. 211) (b) The contract is not affected by the Statute since its subject matter (construction of a house) is not "an interest in land" according to judicial interpretation. However, if the project was intended by the parties to take more than a year to perform, it would be caught by the Statute. (Source p. 206) (c) The contract is affected by the Statute of Frauds since it is a contract of guarantee and not indemnity. (Source p. 207) (d) The contract is not affected by the Statute of Frauds since it is for an indefinite duration. Further, the exchange of letters provides useful evidence of the terms of employment (salary, etc.). (Source p. 211) (e) Every provincial Sale of Goods Act requires that sales over a specified amount ($30-$50, depending on the province) be in writing in order to be enforceable. A parrot comes within the definition of goods and would be caught by the Act. (Source p. 212) 6. If A repudiates a contract on the ground that it is unenforceable by reason of there being no written record, A will not at the same time be able to keep any money paid under the contract by B. (Source p. 212) 7. Most dictionary definitions give two or more meanings to a single word. A good example is found at p. 216 in Illustration 10.1. The dictionary definition of “build” does not help. (Source p. 216) 8. Words may have a special meaning in particular contexts. Thus a “day” may mean a working day. (Source p. 217) 9. The primary goal of the court in interpreting contracts is to maintain the validity of the contract where possible. To this end courts assign a definite meaning to equivocal words in order to make a contract enforceable. (Source p. 215)

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10. The parol evidence rule does not apply, or can be avoided, (1) where the question is simply one of interpretation of the contract; (2) where there is a subsequent oral agreement; (3) where there is a collateral agreement; or (4) where there was a condition precedent. (Source p. 220) 11. An implied term is a term which, in the opinion of the court, the parties took for granted as being part of the contract or which they would have included had they turned their minds to it. For example, contracts for the sale of goods contain an implied term that the goods will be suitable for the purpose for which they have been purchased when the purpose has been made known to the seller and it is in the course of the seller’s business to supply such goods. (Source p. 221) 12. A condition precedent is a set of circumstances that the parties stipulate must be satisfied before their contract takes effect. If a contract is subject to a condition precedent, then the whole of the contract is suspended. If it can be proved that a condition precedent existed and was not met, a court will declare the contract void. (Source p. 220)

CASES AND PROBLEMS 1. The Parol Evidence Rule will apply, and whatever terms were set out in the contract in regards to the price paid for chicken will be the contractual terms. The email setting out the terms may be considered part of the contract. Ashley’s father will not be responsible for the money allegedly owed, as he did not sign the contract. A guarantee must be in writing to be enforceable, and here he just gave his information for the form, he did not sign the form. Ashley did. 2. The court must settle whether or not the oral contract to pay additional rent upon completion of alterations comes within the Statute of Frauds; that is, is this a contract for an interest in land, or a contract that cannot be wholly performed within the space of a year? The facts of this case are parallel to those of Donellan v. Read (1832), 110 E.R. 330. In that case, the court held that the contract was not for an interest in land. Further, since the landlord had executed his side of the bargain completely within one year, the contract was outside the Statute of Frauds and evidence in writing was not required. Therefore the landlord was entitled to recover the additional rent. 3. The question in this case is whether the promises made by N, O and P can be considered guarantees or indemnities. This case is based on the facts in Bassie v. Melnychuk, [1993] 14 Alta. L.R. (3d) 31, a decision of the Alberta Queen’s Bench. The Court identified the difference between a guarantee and an indemnity by whether or not the defendant received a benefit from the promise. If the defendant received no benefit from the promise, then the promise was a guarantee and, therefore had to be in writing to satisfy the Statute of Frauds. If the promise provided the defendant with a benefit then the promise was an indemnity and fell outside the Statute. In Bassie the Court held that

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the defendant shareholder received a benefit from his promise to repay his share of the loan and, therefore, made an indemnity that was enforceable. 4. Can Jiffy Discount Stores successfully plead the Sale of Goods Act to prevent enforcement of the contract? The contract was arranged by telephone and there is no evidence in writing of the agreement; the goods obviously have a value exceeding the minimum price beyond which evidence in writing is required by the statute. However, if the manager's examination of one of the refrigerators on delivery constitutes "acceptance," a written memorandum would no longer be required for the contract to be enforceable. The buyer's only recourse would then be to show that the seller was guilty of a breach of the term of the contract that described the goods ordered; the facts of this problem indicate that Jiffy Discount Stores could not do this since it was proven that the refrigerators did conform to the telephone order. The facts of this case are analogous to those in Page v. Morgan (1885), 15 Q.B.D. 228. In that case, the defendant (a miller) had bought wheat from the plaintiff by sample under an oral agreement. The wheat was delivered and the miller's employees unloaded it. When the miller inspected the wheat the next day, he discovered that it did not match the quality of the sample he had seen and he ordered the wheat to be loaded back onto the barge on which it had come. The plaintiff refused to take the wheat away, and the wheat was eventually sold by order of the court and the proceeds of the sale were paid into court. The court held that there had been acceptance of the goods under the Statute of Frauds (now the Sale of Goods Act) thus rendering the agreement enforceable even though it was oral. The plaintiff was entitled to the money that had been paid into court. 5. Note that the problem asks only whether the employer can successfully plead the Statute of Frauds. It does not ask what damages the employee might obtain if he were to succeed in this action. The text discusses the latter question in Chapter 18, The Contract of Employment. The facts of this case are those of Campbell v. Business Fleets Ltd., [1954] 2.D.L.R. 263. In that case, the court held that the contract was outside the Statute of Frauds since it was of an indefinite duration and might therefore have been wholly performed within the space of one year. The employee had been wrongfully dismissed since he had not committed a breach of contract; the only ground upon which he could be dismissed under the oral agreement of employment. Another case to consider is Shaver v. Hamilton Co-operative Creameries Ltd., [1937] 1 D.L.R. 489. In that case, the plaintiffs owned Guernsey cows and the defendant dairy company agreed orally to pay the plaintiffs a special stated price for their milk if they would buy a certain amount of stock in the company. The plaintiffs purchased the stock and then received the agreed price until a "milk war" broke out. In order that the dairy might continue to compete, the plaintiffs agreed to take a lower price for their milk for the duration of the campaign. After an "armistice" was reached, the dairy refused to pay the plaintiffs anything above market price. The plaintiffs sued on the oral agreement and the dairy company pleaded the Statute of Frauds. The court held that the contract, of indefinite length, could have been wholly executed within a year and therefore fell outside the statute. The oral contract was enforceable.

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6. This case illustrates the effect of an oral agreement designed to rescind a previous, enforceable contract. The facts of this problem are roughly those of Morris v. Baron, [1918] A.C. 1 (H.L.) in which the court held that the option contained in the oral settlement agreement was unenforceable under the Sale of Goods Act since the contract was for goods with a value exceeding the minimum limit. Nonetheless, the new agreement effectively dissolved the earlier, enforceable contract. Can Baldwin Co. Ltd. claim part payment, or acceptance of the goods, in lieu of a written memorandum? No, because no money was paid to Martin Bros. nor were the goods received by Baldwin under the new option contract but only under a completely different contract (the old, dissolved agreement). 7.(a) When Mrs. Barber sues to enforce the contract she alleges to have made with John Brown, the executors of his estate will defend by claiming that the oral agreement is unenforceable under the Statute of Frauds because it was an agreement concerning an interest in land and required to be evidence in writing. Mrs. Barber may reply by arguing the doctrine of part performance. But, do her acts of living in the house, serving as housekeeper, and operating the house as a rooming house for its owner for five years suggest clearly the existence of a contract concerning an interest in the property itself? Unfortunately, for Mrs. Barber, her contract with John Brown is readily explained without any undertaking about the disposition of the house; it could be merely a contract in which Mrs. Barber agreed to provide housekeeping services in return for her own board and a small allowance for clothing. Mrs. Barber will therefore not succeed in claiming part performance as a substitute for a written memorandum to render the contract enforceable. The facts of the case are taken from Baker v. Guaranty Trust Co. of Canada (1956), 1 D.L.R. (2d) 448, a decision of the Ontario High Court of Justice, in which the court was not persuaded that the housekeeper's conduct referred unequivocally to a contract that Mr. Iversen would leave the house to her. However, Mrs. Baker was awarded relief on the basis of quantum meruit for the services she had rendered to Mr. Iversen. Another similar case is that of Maddison v. Alderson (1883), 8 A.C. 467, a decision of the House of Lords, in which Elizabeth Maddison agreed orally to act as housekeeper for Thomas Alderson if he would leave her a life interest in his land when he died. Alderson intended to do so but his will was not properly witnessed. Therefore, Maddison had to fall back on the doctrine of part performance. Unfortunately for her, the court found that her services did not unequivocally refer to a contract for the ownership of the land. See also Deglman v. Guaranty Trust, [1954] 3 D.L.R. 785, a decision of the Supreme Court of Canada. In that case, Constantineau lived with his aunt for six months during which he performed services for her. He claimed that she promised to leave him her house in return for his work, but her will did not reflect that promise. The court found that there had been an oral agreement, but that it was unenforceable under the Statute of Frauds; there was no part performance since Constantineau's services were not directed unequivocally at the ownership of the property in question. However, Constantineau was entitled to recover for his services on the basis of quantum meruit. (b) Suppose that Brown's original promise to give the house was unenforceable: does it mean that Mrs. Barber gives no consideration if she agrees to give up her rights to the

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house under the earlier agreement in return for $5,000? We saw in Chapter 6 that if a party has an honest belief in her legal right to enforce a promise, giving up that right constitutes good consideration even if it later turns out that she had no enforceable right. See, for example, Famous Foods Ltd. v. Liddle, [1941] 3 D.L.R. 525 and Fairgrief v. Ellis, [1935] 2 D.L.R. 806. Brown's defence that Mrs. Barber had not given good consideration for his promise to pay $5,000 would fail. 8. This case is based upon the decision in California Standard Co. v. Chiswell, [1955] 5 D.L.R. 119, (S.C. Alberta). To defend successfully against California Standard's action, Chenier would have to establish that the agreement that the lease would not be effective unless Chenier was successful in her action against Werner was a condition precedent to the lease and therefore admissible as an exception to the parol evidence rule. This argument was successful.

CASE SUMMARIES Bassie v. Melnychuk, [1993] 14 Alta. L.R. (3d) 31 (Alberta Queen’s Bench) The plaintiff and the three defendants were shareholders in a company that was in need of funds. The plaintiff borrowed $25,000 from MD and lent it to the company. The company did not repay the plaintiff who repaid MD. The plaintiff alleged in his statement of claim that he borrowed the money and loaned it to the company in consideration of each one of the defendants agreeing to "indemnify" him in the sum of $5,000 if the company did not repay the loan. However, there was no contradiction to the depositions of the defendants that the company was solely responsible for the loan and that the defendants' liability to repay it could only be invoked upon the company's failure to meet the obligation. The court held that a transaction was a guarantee where the defendant was totally unconnected with the loan except by means of his promise to pay the loss. It was an indemnity where he was not totally unconnected with the transaction, but was to derive some benefit therefrom. In the instant case, the parties were shareholders in the debtor company and all had an interest in the company obtaining funds required in the operation of its business. The defendants were not unconnected with the loans and their promises were indemnities. This case fell outside the Statute of Frauds. Campeau v. Desjardins Financial Security Life Assurance Co., [2005] M.J. No. 448 (Manitoba Court of Appeal) The plaintiff was employed by the defendant’s predecessor. At a time of downsizing the company, the plaintiff accepted a position as an independent contractor. The written agreement between the parties included terms that allowed the plaintiff to continue to use office space of the defendant as well as services of a secretary. The plaintiff later sued for breach of this agreement. The court held that while allowing parol evidence is not permitted in a clear and unambiguous contract, it is permitted where the contract is ambiguous and cannot be construed from the document itself, then parol evidence is allowed. Copyright © 2016 Pearson Canada Inc.

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Cooke v. CKOY Ltd. (1963), 39 D.L.R. (2d) 209 (Ontario High Court of Justice) Cooke entered into a contract with CKOY for consulting services. The contract did not state that Cooke was required to reside in Canada. Further, though the contract provided specific events upon which the contract could be terminated, there was no provision stating that the contract could be terminated upon reasonable notice. When Cooke obtained American citizenship, CKOY wrote Cooke informing him that the contract had been terminated; Cooke brought this action against CKOY for damages. CKOY asked the court to imply terms into the contract requiring Cooke to reside in Canada and to allow them to terminate the contract upon reasonable notice. The court found that residing in the United States did not affect Cooke’s ability to fulfill his duties under the contract and therefore refused to imply the residence term. The court also noted that the existence of specific clauses regarding termination of the contract indicated that no further terms for termination should be implied. The court awarded Cooke damages. Corey Developments Inc. v. Eastbridge Developments (Waterloo) Ltd. (1997), 34 O.R. (3d) 73 (Ontario General Division) This was a case involving a written agreement for the sale of land. The agreement stated that there was no representation or agreement outside of the written agreement. However, the defendant orally agreed to guarantee the vendor’s obligation to return the purchaser’s deposit if the conditions to the agreement were not met and the agreement did not close. The conditions of the agreement were ultimately not satisfied and the deposit was not returned. The court held that on the basis of the evidence the defendant had given his personal guarantee. They stated that the parol evidence rule did not prevent evidence being heard about the existence of the oral agreement, and that the presence of the “entire agreement clause” was not proof that there was no oral agreement. The court ruled in favour of the plaintiff. Erie Sand and Gravel Ltd. v. Seres’ Farms Ltd. (2009) 97 O.R. (3d) 241 at 252-65 (Ontario Superior Court of Justice) The plaintiff made an offer to purchase land owned by the defendant. The defendant had leased the subject land to a third party. Under the lease agreement, the third party had right of first refusal on a purchase of the subject property. The parties entered into an oral agreement regarding the terms of the purchase. Once agreement was reached, the plaintiff put the offer in writing and presented it to the defendant (along with a cheque for the entire purchase price $1,193,082) to take to the third party for right of first refusal. The third party did not match the agreement in that they did not match the deposit, but rather they made only a $25,000 deposit. The defendant argued that there was no contract as it was not written, and therefore violated the Statute of Frauds. The court held that there was part performance in the actions taken by the plaintiff to fulfill the requirements of the doctrine of part performance and further, that the written document prepared, was sufficient as a memorandum to satisfy s. 4 of the Statute of Frauds.

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Gallen v. Allstate Grain Co. (1984), 9 D.L.R. (4th) 496 (British Columbia Court of Appeal) The defendant was in the business of selling seeds. The plaintiff was interested in buying and growing buckwheat seeds but expressed concern about weeds. The defendant’s manager stated that the buckwheat would smother any weeds. The plaintiff bought the seeds and in doing so signed a document which stated that the defendant gives no warranty as to “the productiveness or any other matter pertaining to the seed…and will not in any way be responsible for the crop”. The seeds were planted and the crop ended up destroyed by weeds. The plaintiff sued for damages on the grounds that the defendant’s statement was a collateral warranty and succeeded at trial. The defendant appealed. The B.C. Court of Appeal held that the statement was a warranty, for it showed that the seller intended to take responsibility for problems from weeds. Hill v. Nova Scotia (Attorney General), [1997] 1 S.C.R. 69 at para 11–16 (Supreme Court of Canada) The respondent expropriated land from the appellants for the purpose of building a highway. The respondent granted an equitable interest to the appellants by allowing them to create a private access across the highway. The Department of Transport constructed gates, fences, and ramps and maintained these for over twenty-seven years. The respondent now denies the equitable interest. One of the arguments put forward by the respondent is that if such a right was granted, it violated the Statute of Frauds and other requirements of writing. The court held that the doctrine of part performance prevented the Crown from relying on the requirement of writing. Harvie and Hawryluk v. Gibbons (1980), 12 Alta. L. R. (2d) 72 (Alberta Court of Appeal) This was an appeal from a judgment awarding specific performance of an agreement for the sale of land. Prior to December 1975, the deceased B was the owner of certain land. G made an offer for the land which was accepted by B. G gave a down payment, by means of a $200 cheque, on the purchase price of $1,000. B subsequently endorsed and cashed the cheque. On June 27, 1976, B died. Her daughters were executrices of her estate. After B's death, G had several conversations with the executrices and one of the latter agreed that G would harvest the land. There were several memoranda signed by the executrices. The executrices did not want to proceed because of the surveyor's costs and they wanted more than $1,000 for the land. The court held that there was sufficient material to satisfy the Statute of Frauds. The cheque had the signature of the party to be charged and it was reasonable to connect the other memoranda into an agreement. The executrices were the lawful representatives of the testatrix and able to bind the estate. Hawrish v. Bank of Montreal, [1969] S.C.R. 515 (Supreme Court of Canada) Copyright © 2016 Pearson Canada Inc.

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See Case 10.2 at p. 232 in the text. Hillis Oil & Sales Ltd. v. Wynn’s Canada Ltd., [1986] 1 S.C.R. 57 (Supreme Court of Canada) The plaintiff was the sole distributor of the defendant’s products in the Maritime Provinces. The contract between the parties was drafted by the defendant and was not subject to negotiation. The defendant terminated the relationship pursuant to Clause 23 of the contract. However, the trial judge held that the relationship could only be terminated under Clause 23 if notice was provided; the court made this decision based on the fact that there was a second clause (Clause 20) in the agreement that stated that the defendant could give notice of termination under specific circumstances; Clause 20 was underlined in the contract. The Supreme Court agreed with the trial judge’s decision. The Court stated at para 15: If it stood alone as the only termination clause in the distributorship agreements clause 23 would have to be construed, I think, as permitting termination with or without cause by either party with immediate effect. But clause 23 cannot be regarded as standing alone; it must be construed in the light of the agreement as a whole, and in particular in the light of the other termination provision in clause 20. The general principle was stated by Estey J. in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 901, where he said that "the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract." Hunter v. Baluke (1998), 42 O.R. (3d) 553 (Ontario Superior Court of Justice) See Case 9.3 at p. 209 in the text. Johnson Investments Ltd. v. Pagritide, [1923] 2 D.L.R. 985 (Alberta Court of Appeal) The parties were about to execute a mortgage. They reached an oral agreement that if Pagritide would pay one half of the premium on his insurance policy to Johnson Investments Ltd. as collateral and also pay an extra one percent on the mortgage, Johnson Investments would not demand any payments on the principal of the mortgage for a specified period. This agreement was not contained in the mortgage but Pagritide made, and Johnson Investments accepted, payments on the basis of the oral agreement after the mortgage was executed. Johnson Investments subsequently sued Pagritide to require him to make payments on the principal of the mortgage, contrary to the oral agreement. The court held that parol evidence was admissible to explain the payments which had not been made according to the mortgage agreement. The oral agreement would not itself have been binding since it was reached before the mortgage was executed; however, the payment and acceptance of sums under the oral agreement after the mortgage had been executed confirmed and recognized the oral agreement as part of the mortgage agreement.

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Kirkham v. Marter (1819), 106 E.R. 490 (England) Young Marter wrongfully rode Kirkham's horse and the horse died as a result of Marter's handling. Kirkham threatened to sue Marter for damages; Marter's father, the defendant, promised orally to pay Kirkham the price of the horse and any bills outstanding on it if Kirkham would agree not to sue. Kirkham did not sue young Marter, whose father then refused to pay. Kirkham sued him on the oral promise. The court held that the oral contract was one made to answer for the miscarriage of another and therefore was unenforceable under the Statute of Frauds. Leoppky v. Meston, 2008 ABQB 45 (Alberta Court of Queen’s Bench) See Case 9.4 at p. 210 in the text. Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 (Supreme Court of Canada) Conlin guaranteed a mortgage for a three year term with an interest rate of 11.5% per year which his wife had provided as security for a loan from the appellant bank. Clause 34 of the agreement stated that the guarantor promised to pay the money secured by the mortgage and was to remain binding even if the terms of the mortgage were varied. The mortgage was renewed shortly before the original three year term matured at 13%. The mortgagee defaulted and the bank sued based on clause 34. The court held that the contra proferentum rule must be applied against the bank and found that the wording of Clause 34 was ambiguous as to whether it applied to renewals at all and should not be applied to bind the guarantor to a renew without notice. Morris v. Baron, [1918] A.C. 1 (England - House of Lords) Morris agreed to sell fabric to Baron on terms that were written out in order to comply with the Sale of Goods Act. Disputes arose and the parties entered into an oral agreement changing the terms of the original contract. The court held that the option contained in the oral settlement agreement was unenforceable under the Sale of Goods Act since the contract was for goods with a value exceeding the minimum limit. Nonetheless, the new agreement effectively dissolved the earlier, enforceable contract, so it too was unenforceable. Nickel Developments Ltd. v. Canada Safeway Ltd. (2001), 199 D.L.R. (4th) 629 (Manitoba Court of Appeal) See Case 10.3 at p. 235 in the text. Pearce v. Gardner, [1897]1 Q.B. 688 (England – Court of Appeal) The parties entered into an oral agreement for the sale of gravel that the plaintiff was to dig up and carry away. The defendant repudiated the contract and plaintiff sued on it, the Copyright © 2016 Pearson Canada Inc.

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defendant pleaded the Statute of Frauds. It claimed that a written memorandum was required since the contract was either for the sale of an interest in land or for the sale of goods with future delivery. The plaintiff relied on a letter containing all the terms of the agreement, signed by the defendant and addressed "Dear Sir." He also gave evidence at trial that he had received the letter in an envelope addressed to him, although he did not produce the letter. The court held that the letter and the evidence of the envelope together satisfied the requirements of the Statute of Frauds. Read v. Nash (1751), 95 E.R. 632 (England) Tuack brought an action for assault against Johnson. Just before the trial, Nash undertook orally to pay Tuack a certain sum if Tuack would withdraw the suit. Relying on this promise, Tuack withdrew the suit. When he died, the executor of his estate (Read) sued Nash on his promise to pay. The court held that Johnson was not a debtor nor guilty of default or miscarriage, since the assault had not been proved. Hence Nash's promise to pay Tuack was not a guarantee, but an original promise that did not fall within the Statute of Frauds. The estate was entitled to enforce the contract. Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252 (Supreme Court of Canada) The plaintiff was insured by the defendant. The plaintiff worked on the construction of a sewer system. The installation was faulty and the defendant paid on the insurance policy. Sometime later, further problems with the sewer were identified. The defendant refused to indemnify the plaintiff because the claim did not relate to a claim made prior to the expiry of the policy. The Supreme Court held that: In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance policies, including, but not limited to: (1) the contra proferentum rule; (2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and (3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.

Rolling v. William Investments (1989), 63 D.L.R. (4th) 760 (Ontario Court of Appeal) [From the footnote at p. 209, n. 17] The Ontario Court of Appeal decided that a facsimile transmission of acceptance of an option was a satisfactory acceptance, even though when the parties made the agreement in 1974, they “could not have anticipated delivery of a facsimile of the [accepted] offer by means of a telephone transmission. . . .” The court concluded:

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Where technological advances have been made which facilitate communications and expedite transmission of documents we see no reason why they should not be utilized. Indeed, they should be encouraged and approved. . . . [The defendant] suffered no prejudice by reason of the procedure followed. Source p. 210, n. 20 Scammel v. Ouston, [1941] 1 All E.R. 14 (England – House of Lords) Ousten wanted to trade in his old truck for a new one. The parties entered into negotiations, and agreed on the kind of new truck, its price, the rebate for the trade-in, and that the balance of the purchase price would be paid over a two-year period under a lease-to-own agreement ("on hire-purchase terms"). However, the precise terms of the lease-to-own agreement were not settled. Scammel subsequently repudiated the entire transaction on the ground that the parties had never reached a complete agreement because the lease-to-own agreement had not been settled. The court held that since the expression "on hire-purchase terms" was too vague to be given any definite meaning, the parties had never concluded a final agreement. Seidel v. TELUS Communications, 2011 SCC 15 (Supreme Court of Canada) The plaintiff brought an action against the defendant for breach of the British Columbia consumer protection legislation. The defendant counterclaimed requesting a stay of proceedings as the contract between the parties included an arbitration clause. The Supreme Court held (in a 5-4 decision) that the stay of proceedings should be lifted in part as the consumer protection legislation should be interpreted generously in favour of consumers and that Seidel should be allowed to bring her action to court. The alternative complaints of the plaintiff were still subject to arbitration. The dissenting opinion stated that all of the claims by the plaintiff should first be submitted to arbitration; that access to justice is fully preserved by arbitration. Shaw Cablesystems (Manitoba) Ltd. v. Canadian Legion Memorial Housing Foundation (Manitoba), (1997), 143 D.L.R. (4th) 193 (Manitoba Court of Appeal) This was an appeal from a dismissal of a claim for breach of contract. The appellant, Shaw, agreed to provide cable television service for residential buildings owned by the respondent, Canadian Legion. At the time the agreement was made, Shaw needed subscribers to establish its service. The parties did not negotiate over the terms of their agreement. The Legion was charged twenty-five percent of the standard cable rate. Shaw reserved the right to increase the Legion's rate up to the discount level. The agreement had a term of one year. The Legion had an option to renew the agreement. Shaw was entitled to cancel the contract for cause. The Legion complied with the contract terms. Notwithstanding, the Legion's compliance, Shaw cancelled the contract. Shaw claimed that there was an implied term permitting it to cancel the contract with notice. The trial judge found that the contract did not permit Shaw to unilaterally terminate the agreement without cause.

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The Court of Appeal held that Shaw did not have an implied right of termination. The parties entered into a standard form agreement that contemplated termination rights. The Legion did not agree to allow Shaw to have an early right of termination with notice. Sutton & Co. v. Grey, [1894] 1 Q.B. 285 (England) See Case 9.1 at p. 205 in the text.

Turner v. Visscher Holdings Inc. (1996), 23 B.C.L.R. (3d) 303 (British Columbia Court of Appeal) The plaintiff entered into three contracts with the defendant. The first two contracts were in the plaintiff’s name and the third in a business that the plaintiff owned. The third contract contained an “entire agreement clause” that excluded any other evidence to be adduced with respect to the agreement. The trial judge held that the entire agreement clause did not affect the other two oral contracts as they were completely separate and with a different party. The Court of Appeal upheld the trial judge’s and commented at para 15 per Finch J.A.: “that courts have generally equated entire agreement clauses with the parole [sic] evidence rule … However, the circumstances do not lead me to infer and intention between the parties to apply the clause to the oral bonus agreement in this case. Nor do I consider that such a conclusion would render similar clauses in other contracts meaningless.”

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CHAPTER 11 PRIVITY OF CONTRACT AND THE ASSIGNMENT OF CONTRACTUAL RIGHTS PRIVITY OF CONTRACT (SOURCE P. 229) We met the concept of privity in Chapter 4, where we observed that a consumer often does not have a contractual relationship with a manufacturer of goods and accordingly no contractual remedy against the manufacturer if the goods are defective. The decision in Donoghue v. Stevenson, [l932] A.C. 562 (House of Lords), discussed at p. 90 of Chapter 3, afforded a remedy in negligence, regardless of whether there was a contractual relationship between the parties. In Chapter 11 we deal with the concept of privity in considerable depth. It is important that students understand the concept of privity so that they will be in a better position to assess the exceptions to the rules surrounding privity which consume the balance of the chapter. As business students, they need to clearly understand when and how they will be able to enforce contractual relationships. Emphasis should be placed on the concepts of vicarious performance, trusts (in all forms: constructive, equitable, and statutory), contracts of insurance, and interests in land. ASSIGNMENT OF RIGHTS (Source p. 235) The concept of assignment of contractual rights plays a major role in modern commercial transactions. Assignment is among the most difficult concepts for students to follow and instructors should keep examples as simple as possible. The risks of an assignment should be discussed, as set out on pp. 240-241, including 

Notice of multiple assignees



As assignee taking subject to the equities, and



The right to set off

Illustration 11.9 and 11.10 are useful in explaining these areas of the law. One are of concern, due to its application in business, is the assignment of book accounts, p. 242. As many small businesses use a broker to assign their unpaid accounts to, in exchange for cash to meet the financial obligations of the business, this topic requires discussion. NEGOTIABLE INSTRUMENTS (Source p. 243) Negotiable instruments are a form of assignment, and the specific law relating to the assignment of a negotiable instrument, through either delivery if payable to bearer, or by endorsement if the party is named, should be briefly reviewed. In particular, students should be aware that notice is not necessary and the main difference of an assignee

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acquiring a better right than the assignor had. The Checklist on p. 246, Principles of Assignment, provides a concise checklist. Strategies to Manage the Legal Risks (Source p. 247) Part of a business risk management plan should consider the risks of credit and the effect of assignment of rights. Students need to have a firm grasp of these concepts when organizing a business structure as credit is an important part of modern commercial practice.

INTERNATIONAL ISSUE (Source p. 250) Has Privity of Contract Lost Its Relevance? Question 1 - When answering this question students should be encouraged to reference specific examples cited in the text where courts have chipped away at the rules surrounding the concept of privity of contract and created a de facto “third party beneficiary” rule – students should be able to cite the cases and law discussed under the heading “Constructive Trusts” (Source p. 232), exemption clauses benefitting third parties (Source p. 234), and insurance contracts (Source p. 233). Students should discuss the whole idea of privity of contract – what purpose was the requirement of privity designed to serve? Are those reasons still valid today? Instructors may wish to raise the issue of the 2008 American financial crisis; that is, the repackaging of sub-prime mortgages as “mortgage-backed securities” made possible by the concept of the assignment of legal rights (Source p. 236), and that assignment is only possible because of a loosening of the requirements surrounding privity. The result is that the original lenders (who made the questionable loans) got their money out while relatively innocent assignees are now suffering the losses. How does this fact influence the opinions of students? Question 2 - This question raises issues of where to draw the line. Generally, it is fairly easy to determine an intended beneficiary, but how does one determine an “incidental” beneficiary? Is it a person who has benefited although this was not the intention or purpose of the parties? Or does incidental speak to the value of the benefit – modest or minimal? What types of rules and guidelines would be appropriate? How much benefit is necessary to reach the threshold minimum? Value judgments in these areas will make legal liability difficult to predict and manage. If we begin to make distinctions between intended and incidental beneficiaries, don’t we just have a slightly modified version of privity rules? Question 3 - This question might be confusing to students. They should be referred back to the Chapter 6 discussion of equitable estoppel. Canadian plaintiffs are not given a cause of action based on gratuitous promises, but may use them as a defence. This seems to strike a balance by giving some, but not full legal recognition to a gratuitous promise. The question should be discussed using the following scenario:

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A residential home builder buys windows from a distributor using a written contract (A). The manufacturer of the windows supplies the windows to the distributor under a written contract (B). There is no privity of contract between the builder and the manufacturer. (i) Should the builder be able to enforce the promises in contract A (relating to delivery dates and fitness for purpose) against the manufacturer. Or should the doctrine of privity prevent this. Should the plaintiff be exempt from the requirement of privity? The argument could be made that using the concept of privity, or the lack thereof to protect the product manufacturer is unethical. However, doesn’t tort already create a cause of action to cover this situation? (ii) What if contract B contains an exemption clause that protects the manufacturer. Now the defendant wants to rely upon a clause in an agreement without privity. Should the defendant be entitled to rely upon it against the homebuilder? Employers have received this wide interpretation of exemption clauses to cover their employees who are not specifically identified in the clause. Clearly exempting the plaintiff from the requirements of privity and not the defendant creates the harshest result. The answer seems to lie in the fact that it “depends on the circumstances” and a “known intended beneficiary rule” allows courts to examine individual circumstances to assess the worthiness of an exception. Again privity provides a certainty that does not exist in the other scenarios. ETHICAL ISSUE (Source p. 242) Credit Cards Question 1 - This question raises clear issues of fairness. This question could make a good topic for a class debate – who should bear the costs imposed on stores by the credit card companies? Is it reasonable to try to police a credit card surcharge? This debate could be wide-ranging and easily expand to encompass question 2 as well. Question 2 - Is it ethical for a credit card company to be able to feather its nest from both the consumer and the retailer? This should raise issues of fairness, responsibility, and corporate citizenship. Credit card companies already make billions of dollars in profit from card fees and interest charges; should they be able to charge retailers as well? It could be argued that credit card companies are providing an essential service to retailers. When a retailer is paid by credit card, it knows it will get paid, whereas if they were paid by another instrument (personal cheque, say), they would have no such guarantee. One could also argue that the use of credit cards actually boost sales – people buy today what they will pay for tomorrow. Retailers that don’t accept credit cards, particularly those that sell more expensive items (furniture, appliances etc.) would likely have much lower sales figures. As such, maybe accepting credit cards is a service that retailers are more than willing to pay for. Instructors may want to incorporate a discussion of interest rates – some cards charge as much as 33% per annum on outstanding balances. Consider principles of illegality (Chapter 8) and unconscionability (Chapter 9). Question 3 - This is another question suitable for class discussion. The owner of the card may have been negligent in allowing it to be stolen, or in not reporting its loss promptly.

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The retailer may have been negligent in not putting policies in place to eliminate or mitigate the risk of online fraud. Convenience suggests that the card issuer is most able to bear the loss. There will always be a certain proportion of fraudulent transactions and the loss from those can be factored into the rate of interest charged. Instructors may want to reference the TJ Max / Winners security breach described in Case 33.13 at p. 886 in the text. Credit and debit card fraud led to huge civil liability for the retailer. Banks and credit card companies sued the retailed for the costs associated with issuing new cards to customers. See: Office of the Privacy Commissioner of Canada and Office of the Information and Privacy Commissioner of Alberta, Report of an Investigation Into the Security, Collection and Retention of Personal Information: TJX Companies Inc./Winners Merchant International L.P., September 25, 2007, available online at privcom.gc.ca QUESTIONS FOR REVIEW 1. The definitions are provided as follows: (i) Third party - a person who is not one of the parties to a contract, but is affected by it (Source p. 229); (ii) Assignor - a party that assigns its rights under a contract to a third party (Source p. 236); (iii) Constructive trust – a relationship that permits a third party to obtain performance of a promise included in a contract for his benefit (Source p. 232); (iv) Beneficiary – a person who is entitled to the benefits of a trust (Source p. 232); (v) Chose in action – rights to intangible property such as patents, stocks, and contracts that may be enforced in the courts (Source p. 236). 2. A manufacturer in Guelph, Ontario makes a contract with a Canadian transport company to ship goods to, Milan, Italy. It is understood by both parties, that after the goods arrive in Halifax, the remainder of the contract will be performed vicariously, not by the Canadian company’s employees, but by an ocean shipping firm and another land transport firm in Italy. (Source pp. 230-231) 3. Typically, in a contract of life insurance, a person pays a premium in exchange for a promise from the insurance company to pay a sum of money on his or her death to a specified person, a spouse, say, who is not a party to the insurance contract. (Source p. 233)

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4. Where the parties to the contract so intend, exemption clauses may extend to protect third parties. If the type of work is part of the contract performance and within the scope of the clause the exemption clause will protect the particular third party from liability. (Source p. 234) 5. Q must establish that R was acting "in the course of employment" when R damaged the equipment. Even if he did it contrary to instructions from P, P would nevertheless remain liable. However, if there was an exemption clause in P’s contract with Q, then under the principled exception rule, R would be allowed to rely on it as a defence. See Chapter 3, on Vicarious Liability. (Source p. 234) 6. Unlike usual negotiable instruments, where the holder in due course can obtain better title than the original assignor, with a consumer negotiable instrument the instrument remains subject to any defence or set off the consumer has against the original seller. (Source p. 245) 7. To be effective, notice of assignment must be given to the debtor. Until that is done, the debtor has no duty to X. X cannot claim the $750. (Source pp. 239-240) 8. If the repair work was done properly, Bartlett will have to pay Anderson. However, Gauche can only look to Anderson for payment and cannot bill Bartlett directly since Gauche is a stranger to the contract between Anderson and Bartlett. (Source p. 229) 9. Involuntary assignments take place by operation of law. On the death of a party, his representative—either his executor or administrator—replaces the deceased party to the contract. If creditors seek to put their debtor into bankruptcy and the court accepts their application, the bankrupt debtor is replaced by the trustee in bankruptcy. (Source p. 243) 10. The requirements for a statutory assignment are: (i) the assignment was absolute (unconditional and complete); (ii) it was in writing; and (iii) the promisor received notice of it in writing. (Source p. 234) 11. Assignments by operation of law occur (i) on the death; or (b) on the bankruptcy, of a party. (Source p. 243) 12. No. The promisor is liable to pay the holder of the instrument, whoever that may be. (Source p. 244)

CASES AND PROBLEMS 1. a. If Ashley accepts the terms her customers are asking, that is, being billed at the end of the month and having 30 days to pay, she will have some accounts owing money for 60 days. This could severely affect Ashley’s cash flow. If she finds it difficult to pay

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her own bills, she may have to assign the accounts owing, at a discount, to a broker, to obtain cash to put into the business. b. If Ashley decides to accept credit cards, she will need to charge all her customers more in order to cover the cost of using credit cards. Credit card companies charge between 2-10% for the use of their cards. This amount will need to be passed on to the customers. 2. This is an equitable assignment, in which the assignor, King, has assigned only a part of the amount due to him from the house owner, Harris. According to the contract of assignment, the amount assigned may fluctuate as King borrows more from, or repays more to, the moneylender. Since the amount assigned varies with the state of accounts between the assignee and the assignor, Harris needs to be sure he does not pay to Jackson money that he should have paid to King, or vice versa. Hence the assignee, Jackson, must join King in the suit if Jackson has to take legal action against Harris to recover his money. The text refers to Jones v. Humphreys, [1902] 1 K.B. 10, in which Jones was a moneylender who lent money to James Kerr, an assistant schoolmaster in Humphreys' employ. Kerr assigned to Jones such part of his salary as would be necessary to cover the loan plus interest as well as any future indebtedness incurred by Kerr to Jones. Jones notified Humphreys of the assignment and claimed his money. Humphreys disregarded the notice and paid Kerr. Jones then brought suit in his own name against Humphreys. The court held that since the assignment was not of a definite and ascertained amount, Jones could not simply sue in his own name. If King were to assign the whole amount due to him ($15,000), the assignment would be "absolute" in the sense that it would be for a fixed, already determined amount. This is referred to in the text as a statutory assignment. However, the fact that King has assigned the whole amount due to him is not in itself sufficient to dispense with the testimony of the assignor, King. The assignee, Jackson, must also be able to produce a copy of a written contract of assignment between King and himself, and proof that written notice of the assignment of the $15,000 was delivered to Harris. 3. The Dean probably has a case that can be made against Bertoff because this is clearly a situation where personal performance is required, but the Dean must show that harm has been done to his school of business or that it has faced additional costs. Good sense would require the Dean to act at once and inform all participants in the marketing strategies program by e-mail, fax, or telephone. Depending on the circumstances he might offer them a reduction in the fees or some additional benefit. In any event, Colbert should likely be paid a smaller fee than Bertoff. The question of how a promisee should act when faced with breach (to act reasonably in order to mitigate losses) is discussed in Chapter 13. More important, this case presents an opportunity to discuss situations in which more sensible options are available than suing or even threatening to sue a promisee. Unless Bertoff is arrogant and uncooperative, he probably feels somewhat guilty and would be willing to cooperate in other ways to minimize any harm to the Ashcroft Business School, perhaps offering to provide his service free at another session.

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4. Note: There is an ambiguity in the second last sentence of the problem: it states that Harkin sued the “defendant”; it should have said the “employer” was the defendant. The facts in this case are based on the facts in Bitz, Szemenyei, Ferguson & MacKenzie v. Cami Automotive Inc. (1997), 34 O.R. (3d) 566. The court held that the notice signed by the employee to the employer’s in-house lawyer was clear and unconditional; it amounted to an equitable assignment and could not be disregarded by the employer. Before paying the money to the employee’s lawyer, the employer might insist on receiving the original document, but it could not simply ignore the photocopy and pay the money directly to the employee. In other words the photocopy was effective notice of the assignment. 5. While our courts are reluctant to enforce restrictive covenants, as we have seen in Chapter 7, when a non-competition covenant is found to be reasonable and justified to enable an owner of a business to sell at reasonable price by protecting the goodwill, the court will enforce it. Thus, if the five-year covenant is valid to protect Martens, then Nelman, a purchaser of Martens’ interest, is entitled to the same protection for the remainder of five-year period. In this case Nelam should succeed. See Pivnick v. Leeder (1932), 41 O.W.N. 143, a decision of the Ontario High Court of Justice. 6. Major is a party to a transaction that is void in those provinces with statutes making all types of bets void (see Chapter 7). Major therefore has no right to enforce payment from Flatt. On the other hand, in the second scenario, the druggist has become an innocent assignee for value of Flatt's cheque by cashing it for Major. Faced with Flatt's stop-payment, the druggist may bring an action on the negotiable instrument against Flatt and recover the $50 from Flatt. 7. Instructors may find it helpful to depict the relationship between the parties graphically on the blackboard. The numbers correspond to the events as they occurred: (1) On purchasing the building, Glashov promised Brown that he would insure the building against fire and assign the insurance to Brown as security for the amount that remained owing on the purchase price. (2) Glashov contracted for fire insurance protection with Standard Insurance, but failed to advise the company of Brown's interest. (3) Glashov assigned claims to the insurance money to his trade creditors. (4) The trade creditors notified the insurance company of the assignments to them of the proceeds of the insurance claim. (5) Brown advised the insurance company of her rights to the insurance money under the contract of sale with Glashov. What is the nature of the trade creditors' argument that they should have priority over Brown in the payment of the insurance claim? They will argue that they notified the promisor, here the insurance company, first. It is not the time of assignment, but the time of notice of the assignment that establishes the assignee's rights against the promisor. What possible defences might Brown offer against the creditors' claim? First, Brown might attempt to show that the trade creditors were aware of the prior assignment of the insurance money to her, as vendor of the building. If she can convince the court that in the circumstances the creditors must have known of her rights, she will have shown them

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to be parties to Glashov's fraud in promising to assign the same claim twice. But Brown must show that the trade creditors had this knowledge at the time they took the assignment from Glashov; if they acquired that knowledge afterwards it will not prejudice their claim. Second, Brown may argue that as of the time Glashov purported to assign the insurance money to his trade creditors, there was nothing yet capable of being assigned; that is, the amount of the fire loss had not been established and the insurance company had not admitted any liability under the insurance policy. In this second argument, Brown is asking the court to think of the contending assignees as being lined up for a race to notify the promisor. If one or more of the contenders jumps the gun, they are disqualified. Brown would claim that the trade creditors are in that position. She would argue that her own notice, given at a later time when the claim was proven, is the valid one. However, Brown's argument is contradictory since she must have assumed that an assignment of future insurance claims could be valid when, at the time of the contract for sale of the land, she required Glashov to assign the interest in the policy to her; at that time she had no claim herself. The facts of this case approximate those in Gordon v Gordon, [1924] 1 W.W.R. 903 (Sask. C.A.), where Lamont, J.A. held that the concept of assignable rights embraces: not only the assignment of a debt but also the assignment of a chose in action arising under a contract. After the building had been destroyed by fire the defendant (purchaser of the building) had rights arising under his policy as against the company. These rights arose from his contract of insurance and, in my opinion, could be made the subject of an assignment. Since the creditors had notified the insurer first, their claims prevailed. 8. The relevant legal rule should already be familiar: an assignee cannot acquire any better right than that which the assignor had. The issue then becomes whether N.A.P.W., the assignor, had an enforceable, valid claim against Norton. Was there consideration for Norton's promise to pay $1,250 to N.A.P.W.; that is, did N.A.P.W. promise to purchase conservation sites and incur liability for them in return for Norton's promise? In the alternative, might N.A.P.W. successfully enforce Norton's promise based on injurious reliance? In Chapter 6 when we looked at consideration, we discussed the case of Governors of Dalhousie College v. Boutilier, [1934] 3 D.L.R. 593 (S.C.C.). That case suggests that N.A.P.W. would have difficulty proving either consideration or, in the alternative, injurious reliance, to make Norton's promise to pay enforceable. If N.A.P.W. did give consideration for Norton's promise, the right assigned to Simpson by N.A.P.W. was a valid and enforceable one, and Simpson should be able to enforce it against Norton.

CASE SUMMARIES Beswick v. Beswick, [1968] A.C. 58 (England – House of Lords)

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Peter Beswick was a coal merchant who transferred his business to his nephew. Two conditions of the transfer were that Peter would be kept on as a salaried consultant until his death, and that Peter's wife would receive an annuity of £5 every week after Peter's death. When Peter died, the nephew refused to pay the annuity. Mrs. Beswick sued both in her personal capacity and as the administratrix of her husband's estate. The court held that she could not recover for the annuity in her personal capacity since she was a stranger to the contract, and the contract had not created a trust in her favour. While she could succeed as the administratrix of her husband's estate, damages would be nominal because no benefit accrued to Peter's estate through the annuity. The court decided, however, that Mrs. Beswick could get specific performance of the annuity on the ground that otherwise, the nephew would be unjustly enriched. Brandt’s Sons & Co. v. Dunlop Rubber Co. Ltd., [1905] A.C. 454 (England – Hosue of Lords) See Case 11.5 at p. 256 in the text. Brandt's, a bank in London, financed the business of Kramrisch & Co., a rubber merchant in Liverpool. The financing arrangement was that when Kramrisch made a purchase, Brandt's had to provide the funds: by way of security, Brandt's took delivery of the goods. When Kramrisch found a purchaser approved by Brandt's, Brandt's released the goods and gave Kramrisch a delivery order. In each case, Brandt's relied on a written undertaking that the purchase price would be paid directly to it and that Kramrisch would hold the goods in trust on its behalf until it received full payment. Under this arrangement, Kramrisch bought rubber and resold it to Dunlop Rubber Co. Ltd. The original invoice requested Dunlop to pay Brandt's but the invoice was inaccurate and was sent back to Kramrisch, who issued a new invoice that did not contain the direction to pay Brandt's. Dunlop's clerk later received further notice directing payment to be made to Brandt's. However, when he sent the invoice for the cheque to be issued, he failed to make this clear. Consequently, Dunlop paid the amount to Kleinwort & Co., another bank with which Kramrisch had a similar arrangement. When Brandt's sued Dunlop to recover the amount due, the court held that there had been an equitable assignment of the debt to Brandt's with adequate notice to the purchaser (Dunlop). Brandt's recovered from Dunlop. Brown v. Belleville (City) 2013 ONCA 148 Page 233 footnote 16 Canada Trustco Mortgage Co.m v. Canada 2011 SCC 36 Page 244 footnote 38 Cummings v. Ford Motor Co. of Canada, [1984] O.J. No. 431 (Ontario High Court)

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In October 1978, the plaintiff saw a newspaper advertisement for trucks and drivers to haul "trains", consisting of two trailers in tandem, from Toronto to Calgary and Edmonton and return. The plaintiff, who had had experience in truck driving, but no experience in operating "trains", became interested and contacted the advertiser, A & H Express Lines Canada Limited. He was advised of their specifications for the truck required for this work. He then went to the premises of the defendant Edwards and spoke to the defendant Shea. He made his requirements known to Shea including the load to be hauled and the terrain and weather conditions to be anticipated. The truck was to be running approximately twenty hours a day with stops only for food and refueling and was to have sleeping accommodation for one driver while the other drove. There were certain technical details as to the type of transmission required. The plaintiff had obtained this information from A & H Express and had written it down and passed the information to Shea. Shea recommended the Ford CL-9000 Truck but said that he had none in stock. He gave the plaintiff a brochure, exhibit 4, relating to this vehicle and offered to have one manufactured to meet the A & H specifications. The delay that this would involve was unsatisfactory to the plaintiff, who then went to other dealers in eastern Ontario to see if he could locate one in stock. The plaintiff found a model CL-9000 at the premises of the third party Ottawa, a Ford dealer in Ottawa. Following this, Shea advised the plaintiff that the truck was not only suited to the job in question but "had everything I needed plus a lot more" according to the plaintiff. The court found that the brochure constituted a collateral contract and awarded damages to the plaintiff. Donaghue v. Stevenson [1932] A.C. 562 (Scotland - House of Lords) A woman orders a beverage in a café. Her friend drinks from the beverage and becomes ill. There is a decomposed snail in the drink. The friend successfully sues the manufacturer of the beverage in spite of a lack of contractual relationship between the parties. Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. (1999), 176 D.L.R. (4th) 257 (Supreme Court of Canada) The plaintiff owned a vessel that was sunk by the negligence of a charterer. The insurance company paid out the plaintiff’s claim; however, the insurance policy contained a waiver that stated that no subrogated claim could be taken against any charterer for negligence. The plaintiff agreed to waive this waiver in the insurance policy and allow the insurance company to sue the charterer in a subrogated claim. The Supreme Court held that the waiver clause of the contract of insurance was there for the benefit of the third party charterer. As the clause was inserted into the contract by the insurer, it was clearly the intention of the parties that the waiver was to protect the third party. Therefore, the plaintiff was unable to revoke the right of the third party beneficiary, once that party’s rights had crystallized in the act of negligence.

Kerr. V. Baranow 2011 SCC 10 Page 232 footnote 11

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King’s Norton Metal Co. v. Edridge (1879), 14 T.L.R. 98 (England – Court of Appeal) See Case 8.6 at p. 257 in the text. Kirby v. Amalgamated Income Limited Partnership, [2009] B.C.J. No. 1555 (British Columbia Supreme Court) Mr. Kirby was an employee of the defendant company and sued for wrongful dismissal. The defendant counterclaimed with breach of fiduciary duty, damages for incompetent performance and restitution for alleged financial improprieties. The counterclaim included claims for damages arising from the negligence of the plaintiff. The court following the decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 (Supreme Court of Canada) held that there are strong policy rationales for limiting employee liability. Lewis v. Averay [1971] 3 All E.R. 907 (England Court of Appeal) The plaintiff had a car for sale. He sold the car to a person who claimed to be a television actor; this person had identification to support this claim. The purchaser paid by cheque. The cheque was not honoured. In the meanwhile, the purchaser resold the car to the defendant, this time claiming to be the plaintiff. The plaintiff then sued the defendant to recover the car. The court followed the case of Ingram v. Little [1964] 1 QB 31; that is, that because the transaction was made face to face, a valid contract existed and the title did in fact pass to the defendant. The appeal was allowed and judgment entered for the defendant. London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 (Supreme Court of Canada) See Case 11.3 at p. 249 in the text. The defendant agreed to store a transformer for London Drugs. The storage contract contained a clause limiting its liability to $40 on any one packet, unless the bailor chose to purchase additional insurance. Employees of the defendant negligently dropped the transformer while trying to move it, causing damage of almost $34,000. The defendant was held to be vicariously liable in negligence, but was entitled to rely on the contractual provision limiting its liability to $40. The employees were personally liable for their own negligence, but they too were entitled to rely on the contractual exemption even though they were not parties to the contract. It was contemplated that the transformer would be stored by employees, and to uphold the doctrine of privity of contract would have the effect of allowing London Drugs to circumvent a limitation that it had expressly agreed to. M.A.N.-B. & W. Diesel v. Kingsway Transport Ltd. (1997), 33 O.R. (3d) 355 (Ontario Court of Appeal) The plaintiff is a manufacturer of diesel engines. The defendant, Kingsway, contracted to transport an expensive and very heavy marine diesel engine from Halifax, N.S. to St. Copyright © 2016 Pearson Canada Inc.

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Catharines, Ontario: the bill of lading contained a clause limiting the liability of Kingsway to $4.41 per kilogram. There was no reference in the bill of lading to Tremblay, who was the driver of the truck transporting the marine engine. The motor tractor used was owned by Tremblay but registered in the name of Kingsway. The trailer was owned and registered in the name of Kingsway. In the course of transporting the marine engine, Tremblay fell asleep at the wheel. The transport rolled off the road and the marine engine was badly damaged. The plaintiff sued both Kingsway and Tremblay. It was awarded $106,000 against Kingsway, the maximum under the clause limiting Kingsway’s liability by weight. It also sued Tremblay for the balance of damages, based on his negligence in falling asleep. The court of appeal concluded that although Tremblay owned the motor tractor, he took his instructions from and was an employee of Kingsway. Kingsway exercised a substantial degree of control over how Tremblay was to carry out his duties, and he had little discretion in that respect. He was regulated by the policies and procedures set out by the company for its employees, and he was subject to the same kinds of disciplinary proceedings for violations of such policies and procedures. The court held that Tremblay was entitled as an employee to the benefit of the limitation of liability clause, following the London Drugs case. The claim against Tremblay was dismissed. Murray v. Sperry Rand Corp. Et al, (1979), 23 O.R. (2d) 456 Page 230 footnote 4 Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 at para 6 (Supreme Court of Canada) The plaintiff changed a bottle of water and saw in the new bottle a dead fly and part of another fly. The incident caused him severe psychological harm. He sued the defendant water supply company. The trial judge found the defendant to be liable, but the decision was overturned. The Supreme Court held that while the standard of care was breached, the injury was not foreseeable. Such an extreme reaction was not something a person of normal fortitude would suffer and therefore it was not foreseeable. Olsen v. Behr Process Corporation, [2003] B.C.J. No. 627 (British Columbia Supreme Court) The plaintiffs were attempting to bring a class action suit against the defendant for defective paint. The court held at paras 19-22: Warranty is a contract based claim but the breach of warranty does not go to the root of the contract [Fraser-Reid et al. v. Droumtsekas et al., 1979 CanLII 55 (SCC), [1980] 1 S.C.R. 720]. None of the plaintiffs are alleged to have purchased product from the defendants, and a claim for breach of warranty may only be made by a purchaser. The pleadings do not contain material facts which are necessary to plead a cause of action for breach of warranty. There is no close proximity between the cause of

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action in negligence shown by the plaintiffs and the claims for breach of warranty where it might be said one encompasses the other. The pleadings do not indicate the plaintiffs knew of any warranty and therefore were neither induced to purchase nor relied in any sense upon a warranty by the defendants. The plaintiffs can draw no comfort from the line of authorities which included Murray v. Sperry Rand Corporation et al. (1979), 23 O.R. (2d) 456); Shanklin Pier LD. v. Detel Products LD., [1951] 2 K.B. 854; and Haley v. Ford Motor Co. of Canada Ltd. (1966), 57 D.L.R. (2d) 15 (S.C.C.); were an indirect form of inducement and reliance was found. Those circumstances are not pleaded and do not exist here.

Price v. Easton (1883), 110 E.R. 518 (England – King’s Bench Division) The defendant agreed to some work in consideration of which he would pay a third party (the plaintiff). The work was done, but the defendant refused to pay the plaintiff. The court held that the plaintiff could not bring action against the defendant in contract for lack of privity. Re Flavell (1883), 25 Ch. D. 89 (England – Chancery Division) See Case 11.2 at p. 248 of the text. Shanklin Pier Ltd. v. Detel Products, Ltd., [1952] 2 K.B. 854 (England – King’s Bench Division) The plaintiff owned a pier and needed it painted. The plaintiff consulted with the defendant regarding the best paint to use. The defendant recommended its own product. The plaintiff then hired a contractor to do the work. The contractor purchased the defendant’s paint as required by the plaintiff. The paint was not suitable for the task and did not last as long as stated by the defendant. There was no contract between the plaintiff and the defendant, but the court held that there was an implied collateral contract between the parties, allowing the plaintiff to sue, thereby avoiding the privity rule. Re Schebsman, [1944] 1 Ch. 83 (England – Court of Appeal) Schebsman was employed by a Swiss company and by its English subsidiary. When his employment ended, he reached an agreement with the companies for severance pay to be paid to him in periodic payments over the course of six years. The payments were to go to his widow if he died and to their daughter if both he and his wife died. Two years later, Schebsman was forced to declare bankruptcy and he died within two months. The trustee in bankruptcy claimed that the remaining severance pay should form part of Schebsman's estate (for the benefit of his creditors) since the widow and the daughter were strangers to the severance pay contract.

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The widow and the daughter claimed they were beneficiaries of a trust but the court refused to impute the intention of creating a trust to the contracting parties. However, the court held in their favour on the ground that the trustee in bankruptcy had no basis for recovering the payments from them because the debtor himself could not have directed that the money not be paid to them. Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85 (Supreme Court of Canada) A developer built a building that was subsequently purchased by the plaintiff. The plaintiff became concerned about some masonry work and had it inspected. The inspector and other engineers offered the opinion that the building was structurally sound. A few years later some of the masonry (cladding) collapsed. The plaintiff had the masonry repaired and replaced the remaining masonry. The plaintiff sued the various defendants for the cost of the repairs. The Supreme Court held that it was reasonably foreseeable that the remaining masonry may fall and cause injury to persons or property and that the defendants were liable. Young v. Kitchen (1878), 3 Ex. D. 127 (England – Exchequer Court) The rights under a contract for construction work were assigned, but the work was not yet complete. The court would not allow the assignee to make a claim on the debt without taking into consideration the defendant’s claim for damages for the poor performance of the assignor under the contract.

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The material in this chapter is readily understood. The key methods of discharge of a contract are set out, and the text provides a good source of illustrations and cases on key concepts. When a contract is discharged, all obligations under it are brought to an end. Discharge (apart from breach) can occur in four ways: (1) Discharge by performance: discharge results when adequate performance has been completed by both sides in accordance with the contract. Sometimes it becomes necessary for one party to demonstrate that it was willing and able to perform a contract in order to show that the other party was in breach. For example, R may have a contract to make repairs to a house but the other party denies R access to the premises when she arrives to undertake the work. In this type of situation, R has "tendered" performance which may be used as evidence when she sues the defaulting party. When a person tenders performance, it is preferable to have the tender acknowledged or at least witnessed by a third party who can testify to the party's willingness to complete its contractual obligations. Tendering performance can be of vital importance in contracts concerning land if a party seeks the equitable remedy of specific performance, to be discussed in Chapter 13. (2) Discharge by agreement: discharge results when the parties agree not to perform the contract. The forms of these agreements can be summarized as follows: (i) Waiver is an agreement not to proceed with the performance of a contract already in existence. When a waiver is gratuitous, that is, when one party has no obligations left to perform and releases the other party from his obligation, the party waiving the other's performance usually does so under seal. However, when a waiver is expressly given in return for part performance of a contract, it will be binding in those provinces where statute renders acceptance of part performance in satisfaction of a debt binding. Refer to Illustration 12.1, page 252 for discussion. (ii) A substituted agreement discharges the original contract. This may occur by material alteration of the terms of the original agreement, by accord and satisfaction or by novation. Thornhill v. Neats, case 12.1, p. 253, is an excellent case relating the law of material alteration of the terms. (iii) A contract may contain a clause that discharges the contract upon the occurrence of a condition precedent or subsequent, or it may contain an option to terminate which gives one or both of the parties a right to discharge the agreement without liability. The distinction between these types of clauses can best be illustrated using the International Issue at pp. 255-256

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The Supreme Court of Canada thoroughly reviewed the law of discharge by agreement in the recent case of Jedfro Investments (U.S.A.) Ltd. v. Jacyk Estate [2007], SCC 55. P. 253 (3) Discharge by frustration: discharge results when performance of the contract becomes impossible or at least purposeless to proceed. There are several key elements to frustration. In the first place, frustration must relate to an event that occurs after the making of the contract. Secondly, the frustrating event must make performance impossible and not just create an unforeseen hardship. But note that "impossible" may not mean that it is physically impossible to perform but rather that the nature of performance has been altered radically. Finally, the frustration must not be selfinduced – a self-induced frustration is a breach of the contractual terms. Students should be made aware that most contracts anticipate frustration and include a term specifying the impact. Consider examining the standard residential agreement of purchase and sale. If the house burns down after agreement but before closing (i) is it a frustrating event? (ii) What does the contract say will be the result? (iii) What would be the outcome if the general law of frustration was applied to the situation? Alternatively, how does the student’s lease deal with fire or disruption of service? (4) Discharge by Operation of Law: discharge results in certain circumstances described by statute. Instructors can use the discussion of bankruptcy legislation to demonstrate the meaning of the word “discharge”. Students will be familiar with the concept of an undischarged bankrupt from Chapter 8 on capacity. Release from bankruptcy is referred to as a discharge and the reason will now be obvious to students – the debts are not extinguished. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 264) Once again, in planning a risk management strategy, students need to consider the possibility of contingencies in the case of unforeseen events. When the event is known, it is imperative that the condition be a part of the contract, either as a condition precedent or an option to terminate. Even planning for unforeseen events should be considered; that is, both conditions subsequent and frustrating events. INTERNATIONAL ISSUE (Source p. 255) Will the NHL Come to Hamilton? Question 1 - The need for league approval was a condition precedent. The approval was required before a firm sale agreement came into existence. Students should be cautioned that precise wording of the contract will determine the distinction between a condition precedent and a condition subsequent. While (technically) only a condition subsequent is required to deal with notice and the return of deposits, etc., most conditions (whether precedent or subsequent) clearly described required notice, time limits and entitlement to return of deposit. The league approval is the outside event that automatically crystallizes or terminates the contract. The clearest example of a condition precedent is the Predator purchase. Leipold was clear that there was no deal until league approval was obtained. This was a practical impossibility so no deal was ever created.

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Question 2 - Students may argue this question both ways; some may see the need for Balsillie to have a team by December 2007 as a condition precedent. The distinction is whether there is an agreement subject to it being terminated or no agreement until the condition is met. Here, the fact that Copps and Balsillie were both proceeding with the contract (sale of season tickets, etc.) shows that it was, in fact, a condition subsequent: Balsillie’s failure to acquire a team by December 2007 terminated his agreement with Copps. Question 3 - This looks, at first glance, like a condition subsequent. However, it is not automatically triggered by an event (low sales). Rather, the low sales allow the Predators’ owner a choice (option) - to trigger termination or not. As such, this is an option to terminate. ETHICAL ISSUE (Source p. 259) Multiple Customers Question 1 - As far as it can be, this is probably a fair result. The business should have been aware of the uncertainty surrounding the issuance of fishing licenses. The business got greedy and booked all of its boat before it knew whether it would receive four licenses. What would they have done if they’d received four licenses and one of the boats had broken down? The business left itself open to legal action by not keeping a reserve in case of calamity (no license, mechanical failure, etc.) and by not including a term in the charter agreement giving them an “out” in the event of a calamity. The business needs to accept responsibility for its irresponsible scheduling policies and assume the risk of its greed. Question 2 - In terms of fairness and respect, one would hope that the business would honour the agreements of the first three charter bookers, leaving the group that booked at the latest date as the one that gets bumped. Of course, this probably wouldn’t be the case. Odds are that the charters who paid the highest prices would keep their reservation and the group paying the least would get bumped. Air Canada operates a similar policy when it overbooks a flight – the lowest fares are always the first to get bumped. Students should be asked whether they think this unethical or just smart business. Consider the relative damage assessments, those paying the higher price may suffer less damage when re-renting else where. Those that paid very little are much more likely to have to pay a premium for short notice and thereby suffer damages. Question 3 - An option to terminate or a condition precedent (“Subject to the availability of the charter vessel for the purposes enumerated in the contract”).

QUESTIONS FOR REVIEW 1. If a creditor refuses a legal tender of payment, any subsequent action to recover the money will be at the creditor’s own expense. Refusing a tender of payment does not

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discharge the debt itself. The debtor must still pay it, but no interest will accrue after the date of tender. (Source p. 251) 2. If the parties agree not to proceed with the performance of a contract, each party gives consideration by agreeing to release the other from her bargain. The situation is different where one party has already performed his part of the contract. (Source p. 251) 3. The party admitting liability should obtain legal advice and tender payment of a reasonable amount in settlement. If the other party refuses, claiming it is insufficient, the first party may pay into court the amount offered. (Source p. 253) 4. Accord and satisfaction involves a compromise between the parties to substitute a new contractual obligation and to discharge obligations under the existing contract. (Source pp. 252-253) 5. When a person purchases a going business he often agrees to assume its existing liabilities. Novation occurs if existing creditors agree to discharge the vendor and accept the new owner as their debtor. (Source p. 253) 6. A contract subject to a condition precedent does exist and it binds the parties; they are not free to withdraw from their obligations unless and until the condition precedent becomes impossible to fulfill. (Source p. 254) 7. A contract may include a term that gives one party, or perhaps both, the option of bringing the contract to an end before its performance has been completed, usually by giving notice. Exercising the option results in discharge by agreement because the means of discharge was agreed upon when drawing up the contract. (Source p0. 253254) 8. Mistake relates to a false assumption made by the parties about the existence of the subject-matter at the time the contract is formed. By contrast, discharge by frustration refers to events that occur after the contract is formed. The legal effect of a mistake in assumption about the existence of the subject-matter is that the parties have failed to form a contract; that is the contract is void. (Source pp. 256-257) 9. Frustration can also occur when actual performance remains physically possible, but would have a very different meaning for the parties from that intended when the parties made their agreement. (Source p. 258) 10. The fact that contractual obligations prove to be more onerous than anticipated will not, by itself, discharge a contract by frustration. To excuse a promisor in these circumstances would be to undermine the authority of contracts. (Source p. 258) 11. A party to a contract cannot willfully disable itself from performing and then claim successfully that the contract has been frustrated; self-induced frustration is a breach of contract. In the present case, there is nothing to suggest that James deliberately disabled himself. The contract appears to be frustrated. (Source p. 259)

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12. If a seller of goods has invested considerable time, effort and resources into the production of goods, but has not yet delivered any of them to the buyer, it will be unable to recover any of its costs. On the other hand if the buyer has paid a substantial deposit and has received only a small advance shipment, it cannot recover any of the sum it has paid. (Source p. 260) 13. The British Columbia Act states that, “a ‘benefit’ means something done in the fulfillment of contractual obligations, whether or not the person for whose benefit it was done received the benefit”. Thus, expenditures made by the first party can be taken into account, and to the extent that the other party has received no benefit from them, the loss is divided equally. This solution seems fair to both parties. (Source p. 261) 14. The three conditions are: (1) the goods must be specific; (2) the risk must still be with the seller; and (3) the cause of the frustration must be the perishing of the goods. (Source p. 261) 15. In a contract of sale containing no terms about how the goods shall be produced, the destruction of the source of the subject-matter does not frustrate the contract. If the contract did not mention a specific source, then S must either purchase the goods elsewhere for delivery to the buyer or pay damages for non-delivery, and buyer cannot demand delivery. (Source p. 263) 16. Bankruptcy normally discharges a bankrupt debtor from existing contractual obligations (Bankruptcy is discussed in Chapter 29). (Source p. 263)

CASES AND PROBLEMS 1. The contract Ashley had with her customer had no option for termination. The customer may try to say the contract was frustrated, due to an event beyond her control. Frustration would only be available where the groom backed out of the wedding, not if the bride had since it would then be considered a self-induced breach. It is debatable if Ashley can keep the deposit – she would have to prove her loss. She has no actual expenditures yet, but may be able to prove the loss of the profit from the other job. 2. This problem is a review of the main issue in Thornhill v. Neats, (1860), 141 E.R. 1392 (described in Case 12.1 of the text at p. 270). It should be identified as a case of discharge by agreement. The parties made a substituted agreement by materially altering the terms of the initial contract. 3. This case is based on Dinicola v. Huang & Danczkay Properties (1998), 40 O.R. (3d) 252. The argument is found in the following excerpt from the Court of Appeal judgment: It is apparent to us that the risk of the City not approving the development was a direct concern of the appellant going into the negotiations of the

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individual condominium agreements. After all, the agreements were executed before the appellant even owned the property. To perform the agreements, the appellant had to get development approval and as experienced developers they must have been aware that their preferred design for the project could be rejected. This risk was alleviated to some extent by the terms of the agreements, in particular cl. 38, an escape clause which permitted the appellant to terminate the agreements without liability on or before June 30, 1988, in the event that municipal approval of the development was not obtained. The appellant also protected itself with cls. 25(h) and 26 which permitted it to make major design changes. It can scarcely be said that cl. 38 did not contemplate specifically what happened in this case. The appellant was assuming the risk after June 30, 1988 that the municipality might not approve the project. For their part, the respondents made commitments to purchase units, and if the development was not going to proceed as planned as of June 30, 1988 (as was the case since development approval was not obtained), had cl. 38 been triggered, then they could have retrieved their deposits and re-entered the market rather than risk that the units may never materialize. However, only the appellant had the ability to terminate without liability under cl. 38 and it did not do so. Accordingly, the trade-off to the appellant of acquiring the privilege of locking the respondents into the agreements past June 30, 1988 was the assumption of the risk that the project might not be approved. Accordingly, the trial judge was entitled to find as he did that the appellant could not argue that what occurred was "entirely beyond what was contemplated by the parties". This case provides an excellent example of the distinction between acceptable business risks and legal frustration of contractual arrangements. 4. This problem is based on Dryden Construction Co. Ltd. v. Hydro Electric Commission of Ontario (1957), 10 D.L.R. (2d) 124. Dryden Construction alleged that the contract had been frustrated since the performance of the contract had become entirely different from that contemplated by the parties. Is it possible to challenge this contention? No frustrating event occurred after the formation of the contract for construction of the road. The muskeg conditions existed at the time the parties made their agreement. In the actual case, the court held that the plaintiff had expressly agreed that it was fully informed by personal investigations about the conditions affecting work to be done. There was no frustrating event after the contract was formed and performance of the contract was not entirely different from that contemplated. The contract had not been frustrated and Dryden Construction was liable for breach. 5. This case affords an opportunity to review the much-debated decision in Gilbert Steel v. University Construction Ltd. (1976), 67 D.L.R. (3d) 606, from which the facts are taken. The Gilbert Steel case is cited in the text in Chapter 6 at p. 139, n. 9 under the heading "Relation between Existing Legal Duty and Consideration" where we saw that where A is bound by an existing contractual duty to B, a later promise by B to pay A something extra to perform the same obligation is not binding.

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What would be the nature of Universal Construction's defence? Universal would argue that it had contracted in September 1998 for the supply of steel at $253 per tonne and that its promise to pay an additional amount for the same steel in the March 2000 agreement lacked consideration. Gilman Steel was already obligated under the earlier contract to supply the steel at $253 per tonne and had given no new consideration for the later promise to pay more. This argument was accepted in the Gilbert Steel case. Gilman would argue that it did give consideration in return for Universal's promise to pay the higher price. It would claim that the original contract of September 1998 had been discharged by mutual agreement when the parties substituted a new one in August 1999 at a different price and for a different quantity; Gilman had agreed to supply less steel in return for Universal's promise to pay a higher price. Gilman would argue that this process repeated itself in March 2000; at that time, the consideration given by Gilman was an undertaking by Gilman to give Universal "favourable consideration in the supply of steel for the construction of additional apartment buildings." It is arguable that the consideration that Gilman claims to have given in the March 2000 substituted contract is too vague to be of value in the eyes of the law; this is what the Supreme Court held in the Gilbert Steel decision. On the other hand, from the point of view of anyone dependent upon a satisfactory supply of steel, a good relationship with a reliable supplier may indeed be a real benefit. A decision that no consideration exists can be criticized for failing to recognize the legitimate expectations of business people. In Professor Reiter's words, "The effect of these decisions [of the trial and appellate courts in Gilbert Steel] was to refuse enforcement to a business promise apparently made for valid commercial reasons, a surprising and seemingly undesirable result" ("Courts, Consideration and Common Sense" at p. 452). There was no evidence in the case of any unconscionable pressure being brought to bear by Gilman Steel on Universal Construction, such as a threat to stop the supply of steel if University refused to pay the increased price. Critics of the Gilbert Steel decision have suggested that the courts should only look diligently for a lack of consideration where such pressure is exerted. 6. The facts of this case are drawn from Pacific Wash-A-Matic Ltd. v. R.O. Booth Holdings Ltd. (1979), 88 D.L.R. (3d) 69 (B.C.S.C.). The defendant, Baldoon Holdings, will argue lack of privity of contract with the plaintiff. The issue is whether there has been novation. Is there any evidence of Parker's and Baldoon's consent to the novation? Parker paid the quarterly installment to Baldoon, from which its consent can be inferred. As for Baldoon, there are two relevant factors. In the first place, the contract between Parker's and Mountbatten was incorporated into the agreement of sale between Mountbatten and Baldoon. Secondly, Baldoon acquiesced in Parker's activities for three months. Given these circumstances, the court of appeal held in Pacific Wash-A-Matic that there had not been novation as the defendant did not accept any liability under the contract. The representations and warranties were of the vendor, not the purchaser. CASE SUMMARIES

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Atcor Ltd. v. Continental Energy Marketing Ltd. [1996] W.W.R. 274 (Alberta Court of Appeal) The buyer appealed a finding that there was no liability in an action arising out of an agreement to supply natural gas through a pipeline run by N Corp. The contract contained a force majeure clause which provided that failure to perform in consequence of a force majeure was deemed not to be a breach of the covenants. After N Corp. encountered problems, namely pipeline repairs, the supplier defaulted in delivery and gave notice under the clause. The buyer refused to accept that the clause applied and sued for damages. The supplier did not reduce delivery to its other supply customers. The court held that the supplier did not have to show that the problem made it impossible to carry out the contract but that it created, in commercial terms, a real and substantial problem. The supplier's decision to select the buyer as the victim was a key element in the causal chain. The trial judge's failure to address all the evidence about access to replacement gas indicated that he did not deal with some critical evidence. Neither party led evidence on the question of whether the cost of replacement gas was a crushing burden for the supplier. The supplier had a duty to mitigate by acquiring a new supply if to do so in all the circumstances was reasonable. Appleby v. Myers (1867) L.R. 2 C.P. 651 (England – Exchequer Court) Appleby contracted to build certain machinery on Myers' premises at specified prices, and to keep it in repair for two years. Myers was not to make any payment until the work was complete. After Appleby had done some work, the premises and the machinery were completely destroyed by fire. The court held that both parties were excused from further performance but that Appleby could not recover for the work and materials he had already supplied. Amirault v. M.N.R. (1990), 90 D.T.C. 1330 (Tax Court of Canada) The question before the Court in this appeal by Amirault, the appellant, from an assessment of income tax for 1986, is whether Mr. Amirault ("Amirault") is entitled to the deduction provided for in paragraph 110(1)(d) of the Income Tax Act ("Act'). This was a case relating to a share option purchase plan. In the appeal at bar only one term of the Option was varied by the Amending Agreement, the exercise price. A clause in a contract dealing with price is an important term of the contract. However, the court held that a change in the price at which the option can be exercised was not a fundamental change as the rest of the terms of the option remained the same. Blackburn Bobbin v. Allen [1918] 2 K.B. 467 (England – Court of Appeal) See Case 12.6 at p. 283 in the text. Budgett & Co. v. Binnington & Co., [1891] 1 Q.B. 35 (England – Court of Appeal)

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The plaintiff shipped barley on board the defendant's steamship "Fairfield" under a bill of lading which contained the clause, "All conditions as per charterparty." Under the charterparty, the cargo was to be brought and taken from alongside the ship at the plaintiff's risk and expense. The charterparty provided for a specific number of days for the loading and unloading of the ship ("laydays"), and for a penalty ("demurrage") if the ship were detained beyond the allotted number of laydays. The ship arrived in Bristol and unloading began. However, the stevedores employed by the defendant went on strike midway through the unloading. The strike ended only after the laydays had elapsed, and the defendant demanded the demurrage which the plaintiff paid under protest. When the plaintiff sued to recover the demurrage, the court held that the charterparty was an absolute contract with no conditions attached and therefore was not frustrated by the strike. The defendant was entitled to keep the demurrage. Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975), 9 O.R. (2d) 617 (Ontario Court of Appeal) Capital Quality Homes agreed to purchase twenty-six building lots from Colwyn Construction Ltd. Since Capital intended to build houses on the lots and resell them individually, the agreement was that the lots would be conveyed by twenty-six separate deeds. At the time of the agreement, the land was not subject to land use control but before the closing date, the land was brought under the Planning Act. The effect was that Colwyn had to get approval from the authority to convey the land by separate deeds. There was no way for Colwyn to get the necessary approval before the closing date and it was therefore unable to perform its part of the contract. Capital sued to recover the deposit it had paid to Colwyn on the ground of frustration, under the Frustrated Contracts Act. The court held that in the Cricklewood case, the House of Lords held that the doctrine of frustration might apply to leases; following and extending this concession, the court could find no valid reason why the doctrine should not apply to a contract for the sale of land. There was a supervening event, beyond the control of the parties and not contemplated by them, which significantly changed their original obligations. Therefore the contract was frustrated and Colwyn had to refund the deposit since it had not incurred any expenses in connection with performance prior to frustration. Chandler v. Webster [1904] 1 K.B. 493 (England – Court of Appeal) See Case 12.5 at p. 279 in the text. Cricklewood Property and Investment Trust, Ltd. v. Leighton's Investment Trust, Ltd., [1945] A.C. 221 (England – House of Lords) In 1936, the former owner leased land to Cricklewood for a term of ninety-nine years. Cricklewood was to build shops on the land: the rent was to consist of a peppercorn for each site for one year after notice from Cricklewood that construction could proceed according to the town's planning scheme, and then be £35 yearly. Cricklewood gave notice according to the lease but government restrictions on building during the war subsequently made it impossible to build the shops. When Leighton's, the new owner, Copyright © 2016 Pearson Canada Inc.

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claimed payment of the rent, Cricklewood repudiated the contract on the ground of frustration. The court held that even if frustration could apply to a lease, the circumstances did not justify it here since the lease was for a long term and construction was only suspended. Further, the lease itself contemplated payment whether or not building was going on. Cutter v. Powell (1795), 101 E.R. 573 (England - Court of King’s Bench) Mr. Cutter agreed he would sail with the defendant from Jamaica to England. Cutter did not survive the journey. He died seven weeks into the ten week voyage. The widow sued the defendant for the wages earned by the deceased. The court held that as the deceased had not completed the voyage the defendant did not have to pay the wages; part performance amounted to no performance at all. Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 (England – House of Lords) On July 9, 1946, the contractor agreed to build seventy-eight houses for the local authority within eight months for a fixed sum. Attached to the contractor's tender was a letter, dated March 18, 1946, stating that the tender was subject to adequate supplies of labour being available. Owing to unexpected circumstances, and without the fault of either party, adequate supplies of labour were not available and the work took twenty-two months to complete. The contractor was paid the contract price but it sued to recover its extra costs on the basis of quantum meruit, claiming that the contract had been frustrated. The court held that the letter of March 18, 1946 was not incorporated into the contract. Further, the contract had not been frustrated simply because it had been rendered more onerous than the contractor had anticipated. Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd., [1943] A.C. 32 (England – House of Lords) The plaintiffs were a Polish company that had entered into a contract with the defendants to purchase textile manufacturing machinery. The plaintiffs paid £1000 on account of the initial payment due. This payment was made on July 18, 1939. On September 1, 1939, Germany invaded Poland and on September 3, 1939, Great Britain declared war on Germany. The plaintiffs wrote to the defendants requesting the return of the payment since the contract could not be performed. The defendants refused. The plaintiffs sued for the return of the payment. The defendants defended stating that the contract was frustrated and so, the plaintiffs were not entitled to the return of the payment. The Court held that the plaintiff was entitled to the return of the payment under the doctrine of frustration, where the plaintiff received no benefit under the contract; there was a failure of consideration. Foster v. Caldwell, [19481 4 D.L.R. 70 (New Brunswick Court of Appeal)

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Caldwell leased a farm from Foster for three years, covenanting to leave the premises in good repair except for damage from fire. Half way through the lease, two barns and some outbuildings were destroyed and the house was damaged by fire. Caldwell moved away from the farm and refused to pay rent owing to Foster on the ground that the contract had been frustrated. The court held that the doctrine of frustration did not apply to leases. Further, the fire did not destroy the basis of the agreement, the farmland, nor was a fire beyond the parties' contemplation. Graham v. Wagman (1976), 14 O.R. (2d) 349 (Ontario High Court) Wagman agreed to lease to Graham one hundred and fifty parking spaces in a building Wagman was to construct. The agreement was that the spaces would be indoors, but might be outdoors until March 31, 1972. If indoor parking spaces were not available by that time, the rent would be reduced. Wagman was unable to erect the building because he could not obtain financing, and was unable to provide any parking spaces. Graham, who was under an obligation to provide parking to his tenants, had to rent elsewhere and he claimed from Wagman the difference between what he was paying and what the reduced outdoor rate would have been under the contract. When Wagman claimed in defence that the contract had been frustrated, the court held that lack of funds is not an excuse for non-performance, nor can a promisor take advantage of an event brought about by his own act or omission. Graham was entitled to damages for breach of contract. Hills v. Sughrue (1846), 153 E.R. 844 (England – Admiralty) The parties entered into a charterparty in which Sughrue agreed to send his ship to Ichaboe in Africa, load a full cargo of guano (the manure of sea birds) and proceed to England. The plaintiff was to supply the bags and materials necessary for loading the ship and to supply the stores for the voyage: this amount was to be deducted from the balance due for the shipping. The charterparty contained a clause that if the ship were lost at sea or if an unforeseen event caused the loss of the freight then the plaintiff was to only be repaid its advance. The plaintiff did as required and Sughrue sent his ship to Ichaboe but could not find enough guano to load the ship. He returned to England and repaid the plaintiff's outlay, but the plaintiff sued for damages for non-delivery. Sughrue claimed the contract had been frustrated, but the court disagreed with him. According to the terms of the charterparty, Sughrue had foregone the defence of frustration and he remained liable to load a cargo of guano. Hirji Mulji v. Cheong Yue Steamship Co., Ltd., [1926] A.C. 497 (Privy Council) In November, 1916, Cheong Yue Steamship agreed to charter its steamship to Hirji Mulji at Singapore from March 1, 1917 for ten months. The charter party contained a clause that all disputes were to be submitted to an arbitrator in Hong Kong. The ship was requisitioned by the British government before March, 1917, and was not released until February, 1919. Hirji Mulji refused to take delivery of the ship then and the dispute went to arbitration. The arbitrator awarded damages to Cheong Yue for breach of contract and Cheong Yue sued to recover those damages. The court held that frustration does not depend on the intention, opinion or knowledge of the parties. Rather, an event must occur

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in circumstances that are entirely inconsistent with performance of the contract. In 1917, there had been frustration of the charter party; it discharged the whole contract, including the arbitration clause. The arbitrator did not have jurisdiction to award damages and Cheong Yue had no basis for a claim for breach of contract. Jedfro Investments (U.S.A.) Ltd. v. Jacyk Estate [2007], SCC 55 (Supreme Court of Canada) Three companies, J Ltd., P Ltd., and G Ltd, entered into a joint venture agreement to purchase, develop, and sell property. Payments towards the purchase of the property were made until 1995 when the company selling the property demanded full repayment. J Ltd. and G Ltd. were not able to make their share of the payment. G Ltd. entered into an agreement with P Ltd. to arrange for payment but J Ltd. took no steps to arrange financing. P Ltd. was then forced to foreclose and J Ltd. brought an action against P Ltd. for breach of the joint venture agreement. The court found that the joint venture agreement was still valid and had not been discharged or breached. To discharge an existing agreement by novation a new agreement would have to be created. While P Ltd. entered into a new agreement with G Ltd., no such agreement was reached with J Ltd. Therefore, the original joint venture agreement was still in force. Failure to actively perform is not repudiation. As P Ltd. acted consistently with the terms of the original joint venture agreement, there was no breach. Joseph Constantine Steamship Line, Ltd. v. Imperial Smelting Corp., Ltd., [1942] A.C. 154 (England – House of Lords) Joseph Constantine Steamship Line chartered its steamship "Kingswood" to Imperial Smelting Corp. to go to Australia and load a cargo. Before it reached Australia, the ship was damaged by an explosion of its auxiliary boiler. Imperial admitted that the contract had been frustrated, but claimed damages for breach of the charterparty since Joseph Constantine had failed to load the cargo and had not proven that the explosion was not of its fault. The court held that when a contract is legally frustrated, the promisee can only succeed in a claim for damages for subsequent non- performance if the contract was terminated by the promisor's fault. The onus of proof is on the party seeking to avoid the legal result of frustration to prove the fault of the promisor. KBK no. 138 Ventures Ltd. v. Canada Safeway Ltd. (2000), 185 D.L.R. (4th) 651 (British Columbia Supreme Court) The plaintiff entered into a contract with the defendant to purchase some property with a view to redevelopment. The plaintiff paid an installment of $150,000. Shortly thereafter, unbeknownst to either party, the City rezoned the property rendering the desired redevelopment impossible. The defendant sold the property to another party for significantly less than the purchase price as between the plaintiff and the defendant. The plaintiff sued to recover the $150,000 payment as the contract was frustrated. The court held that the contract was frustrated as the rezoning radically altered the purpose of the contract and under the Frustrated Contracts Act the plaintiff was entitled to recover the payment.

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Kendall v. Ivanhoe Insurance Managers Ltd. [1985] O.J. No. 1725 (Ontario High Court) The plaintiff was an executive in the employ of the defendant. The defendant was in the business of managing insurance companies. The defendant had only one client, Northumberland General Insurance Company, and when it lost that client, it terminated the plaintiff's employment. The plaintiff claims damages for wrongful dismissal. The defendant, however, says that the contract of employment was frustrated when the Government of Canada, in the person of the Minister of State for Finance, directed the Superintendent of Insurance to take control of the assets of its only client, Northumberland General Insurance Company. Northumberland's insurance underwriting certificate was withdrawn shortly thereafter, and eventually an order was granted to windup Northumberland under the federal Winding-up Act, R.S.C. 1970, c. W-10. The court found that Northumberland had to be taken over by the Superintendent of Insurance (and eventually wound up), because of the negligence of the defendant in managing the affairs of Northumberland. Since the defendant was the cause of the frustration of the contract of employment, the frustration was therefore self-induced, and such frustration is not available as a defence to the defendant in this action. Laurwen Investments Inc. v. 814693 N.W.T. Ltd. (1990), 48 B.L.R. 100 (North West Territories Supreme Court) The plaintiff supplied video tapes under a rental agreement to the defendant which the defendant then rented to customers. A fire destroyed the defendant's store and the video tapes in stock. The plaintiff brought an action for damages for breach of contract and return of the video tapes. The defendant argued that the contract was frustrated by the fire and counterclaimed for restitution of all rentals paid after the fire. The court held that the plaintiff was entitled to the price of the video tapes on a quantum meruit basis. However, the contract was terminated due to frustration as a result of the fire. Accordingly, monies paid after the fire, under mistake of law could be recovered by the defendant from the plaintiff. Maritime National Fish Ltd. v. Ocean Trawlers Ltd. [1935] 3 D.L.R. 12 (Privy Council) The appellants were charterers of a steam trawler, the St. Cuthbert, which was the property of the respondents. The charter-party, dated October 25, 1928, had originally been entered into between the respondents and the National Fish Co. Ltd., but was later by agreement taken over by the appellants. The contract was for twelve calendar months, but was to continue from year to year unless terminated by three months' notice from either party, the notice to take effect at the end of one of the years. It was expressly agreed that the trawler should be employed in the fishing industry only; the amount of monthly hire was to be fixed on a basis to include a percentage of the purchase-price, and also operating expenses. There was an option given to the charterers to purchase the trawler. When the appellants applied to the Minister for licences for their five trawlers, Copyright © 2016 Pearson Canada Inc.

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including the one leased from the respondents, the Minister allowed them to license only three of the vessels. The appellants decided not to apply any of the licenses to the St. Cuthbert and On May 1, 1933, the appellants gave notice that the St. Cuthbert was available for re-delivery to the respondents; they claimed that they were no longer bound by the charter. On appeal the court held that frustration cannot be self-induced it must arise without blame or fault on either side; nor can the principle arise in circumstances where the parties must be taken to have contemplated the chance of the event which has happened. Here it was the act and election of the defendants which prevented the boat they had chartered from being licensed and they cannot rely on their own default to excuse them from liability under the contract of charter-party. The court dismissed the appeal. Metropolitan Water Board v. Dick, Kerr & Co. [1918] A.C. 119 (England – House of Lords) See Case 12.4 at p. 277 in the text. Naylor Group v. Ellis-Don Construction 2001 SCC 58 Page 256 footnote 11 Newfoundland and Labrador (Human Rights Commission) v. Newfoundland Liquor Corp., [2004] N.J. No. 22 at para 66 (Newfoundland Court of Appeal) Mr. Dawes applied to the defendant Liquor Corp. for a job. At his interview, Mr. Dawes admitted to having a back problem. The defendant requested a medical certificate from him before they would hire him. No other candidates had been requested to provide medical certificates and Mr. Dawes was enraged by the request. The defendant opted not to hire Dawes based on his conduct. The Court of Appeal held that there was a contravention of the Human Rights Code, but that contravention was only at the time of the interview. The basis for failure to hire Dawes was not because of disability, but because of his behaviour. Dawes only had six months in which to file his complaint, and the complaint was not ongoing, because the contravention; that is, to provide the medical certificate, was never engaged, because Dawes was never hired. The requirement was not a continuing action. At para 66, the court compared a continuing action to a condition precedent and stated at para 66: The latter is defined in Black's Law Dictionary, seventh edition, as: Condition precedent - An act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. If the condition does not occur and is not excused, the promised performance need not be rendered ... The Court dismissed the appeal by the Human Rights Commission.

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North v. Victoria Baseball & Athletic Co., [1949] 1 W.W.R. 1033 (British Columbia) See Illustration 12.4 at p. 272 in the text. Pacific Wash-A-Matic Ltd. v. R.O. Booth Holdings Ltd. (1979), 105 D.L.R. (3d) 323 (British Columbia Court of Appeal) The plaintiff entered into a contract with Mila Park Estates to operate a coin laundry service in an apartment building called Charlotte Manor. In November 1976 Mila sold the building to the defendant. The contract of purchase and sale of the building included a clause advising the purchaser of the building of the contract with the plaintiff. The plaintiff was not aware of the sale of the building until some three of four months later. The plaintiff continued to maintain the machines. The defendant contacted the plaintiff in July 1977 with a view to entering a new agreement or purchasing the machines; no agreement was reached. In August and September of 1977, the defendant demanded that the plaintiff remove its machines. It did not do so, and so the defendant had the machines removed and replaced. The trial judge held in favour of the plaintiff based on novation; that is the incorporation of the location contract in the sale agreement and the acquiescence of the defendant for such a long period of time. The Court of Appeal overturned that decision, stating that while there was a representation and warranty on the part of Mila, but no acceptance by the defendant; therefore, there was no assignment of the contract. The defendant had not accepted any liability under the contract. Palachik v. Kiss, [1983] 1 S.C.R. 623 at 631 (Supreme Court of Canada) The plaintiff claimed against his wife’s estate with respect to property that she owned and that he maintained. One of the arguments the Court considered was whether the plaintiff could claim under the doctrine of frustration; per Wilson J. at p. 631: If we confine our consideration for the moment to contract law it would appear that an innocent party to a breach of contract who has made payments pursuant to the contract can recover them in quasi contract: see Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Limited, [1943] A.C. 32. He must, however, be able to show that he did not breach the contract, that it was either breached by the other party or frustrated by circumstances beyond his control and that the result of the breach or frustration was a total failure of consideration. The purchaser cannot, of course, allege a total failure of consideration if he has enjoyed the subject matter in the interval. It is necessary therefore in this case to review the evidence to see whether the requirements for this form of relief to the respondent are met. It seems to me that they are.

Paradine v. Jane (1647), 82 E.R. 897 (England)

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The plaintiff leased land to the defendant for three years. During the civil wars in England, the defendant was thrown off the land by the royalist forces for all but four months of the term and did not pay the rent. The plaintiff sued for the arrears under the lease and the defendant claimed that the contract had been frustrated. The court held that liability under the contract was absolute and the defendant was not excused from paying the rent. Parrish & Heimbecker Ltd. v. Gooding Lumber Ltd., [1968] 1 O.R. 716 (Ontario Court of Appeal) See Case 12.7 at p. 284 in the text. Re Star Flooring Co. Ltd., [1924] 3 D.L.R. 269 (Ontario Supreme Court) Star Flooring Co. Ltd. was incorporated for the purpose of buying the assets and goodwill of Star Flooring Co. The agreement of sale between the companies included a term that Star Flooring Co. Ltd. would assume all of Star Flooring Co.'s debts. One of Star Flooring Co.'s creditors was Toronto Hardwood Lumber Co. Ltd. Star Flooring Co. Ltd. got into financial difficulty and reached an agreement that Toronto Hardwood Lumber would accept twenty-five cents on each dollar owing. When Toronto Hardwood Lumber subsequently demanded payment of this sum from Star Flooring Co. Ltd., it admitted liability but begged for time to pay. Toronto Hardwood Lumber then petitioned to put Star Flooring Co. Ltd. into bankruptcy and Star Flooring Co. Ltd. claimed that it was not indebted to Toronto Hardwood Lumber; rather its predecessor, Star Flooring Co., was. However, the court held that Star Flooring Co. Ltd. had assumed the debt and admitted its liability, and that Toronto Hardwood Lumber had adopted Star Flooring Co. Ltd. as its new debtor. There was novation and the bankruptcy petition was granted. Redmond v. Dainton, [1920] 2 K.B. 256 (England – King’s Bench) The former owner of a house, the landlord, leased it to Dale for ninety-nine years, starting at Christmas in 1855: one of the conditions of the lease was that the tenant would keep the premises insured against fire and would use the insurance money to repair or rebuild the premises. Dale assigned the lease to Dainton, and Redmond bought the house from the landlord. In 1918, the house was very seriously damaged when it was hit by a bomb dropped by a German plane. Dainton did not repair the house and Redmond sued. The court held, following Paradine v. Jane, that the tenant was liable for damages caused by the "King's enemies." Robinson v. Davison (1871), L.R. 6 Ex. 269 (England) See Case 12.3 at p. 277 in the text W.J. Tatem, Ltd. v. Gamboa, [1939] 1 K.B. 132 (England – King’s Bench)

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Tatem chartered its ship "Molton" for a month to Gamboa who was an agent of the Republican Government of Spain, at civil war with the Spanish Nationalists. The ship was chartered to be used for the evacuation of the civil population from North Spain. The charterparty contained specific clauses for the discharge of the contract, including if the steamer was lost or went missing. During the term of the charter, the ship was seized by the Nationalists and Gamboa repudiated the contract on the ground that the charterparty had been frustrated when the ship was seized. The ship was returned to Tatem who sued for damages for the time the ship was detained beyond the term of the charter. The court held that even assuming that the parties had contemplated that the ship might be seized and detained the foundation of the contract was destroyed when the ship was seized. The defendant had fully paid the charter in advance and could not recover that money, but neither could the plaintiff recover damages. Taylor v. Caldwell (1863), 122 E.R. 309 (England – Queen’s Bench Division) See Case 12.2 at p. 276 in the text.

Teleflex Inc. v. I.M.P. Group Ltd. (1996), 149 N.S.R. (2d) 355 (Nova Scotia Supreme Court) Teleflex was a manufacturer of aircraft and aircraft components. The I.M.P. Group manufactured aircraft components. They entered into a contract for the I.M.P. to manufacture quadrant assemblies for S-2 Tracker aircraft for Teleflex since the latter expected to enter into an agreement with the Brazilian government. As that agreement was not yet finalized, the parties allowed for a number of contingencies, including cancelling the contract or suspending the work with a reasonable price adjustment. The final version of the agreement between the parties provided for the supply of eleven quadrant assembly units to be delivered in packages of two or three units. Teleflex kept postponing initial delivery since the Brazil agreement had not come through. It then cancelled all production since negotiations with Brazil had reached an impasse. I.M.P. sent an invoice for work performed, amounting to $229,576 which remained unpaid. The Nova Scotia Court Appeal held there was nothing in the contract which stated that agreement was conditional upon Teleflex's success in closing the deal with the Brazilian government. I.M.P. never waived its contractual rights. There was no frustration of this contract, since a successful agreement with Brazil was never made a term of the contract. In addition, both parties knew the clear possibility that the program would not materialize, and they built logical contingencies into the contract. The doctrine of frustration was not an arguable defence for Teleflex because of the cancellation provisions built in to the contract.

Thornhill v. Neats (1860), 141 E.R. 1392 (England)

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See Case 12.1 at p. 270 in the text. Toronto Star Ltd. v. Aiken, [1955] O.W.N. 613 (Ontario Court of Appeal) The Toronto Star had a contract for the sale of its daily and weekly newspapers with George Aiken's Drug Store, operated by George Aiken. When he died in 1951, the defendant carried on the business, incorporating it in 1953 under the name George Aiken Drugs Ltd. The Star was not notified of the incorporation although it began to accept cheques made out to it in the name of the incorporated business. When the Star sued the defendant for money owing under the contract, the defendant claimed that there had been novation and the incorporated business was now liable to the Star. The court rejected the defence, because the defendant had not requested that the incorporated company be accepted as the debtor, nor had the Star accepted the substitution. Therefore the defendant was liable for the debt. Twentsche Overseas Trading Co. v. Uganda Sugar Factory Ltd. (1944), 114 L.J.P.C. 25 (Privy Council) Twentsche was a Dutch company with a branch in Uganda. There, Uganda Sugar Factory carried on its business, including operating seventy-two miles of railway. On August 12, 1939, Twentsche contracted to supply rails for three miles of railway line. The contract specified that the rails had to correspond with those already in use, manufactured by Krupp, a German company. War with Germany broke out and Twentsche refused to supply the rails, claiming that the contract was frustrated because the common assumption of the parties was that the rails would only come from Germany; it had become illegal to trade with the enemy. The court held that there was nothing in the contract stipulating that the rails had to come from Germany and indeed there were many other sources of supply. Therefore the contract had not been frustrated and Twentsche was in breach. Victoria Wood Development Corp. Inc. v. Ondrey (1977), 14 O.R. (2d) 723 (Ontario High Court) The parties made a contract for the sale of land: both parties knew that subdivision and development was intended by the purchaser, Victoria Wood. Subsequently, legislation was passed which prohibited Victoria Wood from developing the land as it wished. Victoria Wood sought to have the contract declared discharged by frustration while the Ondreys brought a counter-claim for specific performance of the contract. The court held that the agreement was not conditional on Victoria Wood's being able to carry out its intention to subdivide. The foundation of the contract, the transfer of the land, had not been destroyed and the contract had not been frustrated. The court ordered specific performance.

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CHAPTER 13 BREACH OF CONTRACT AND ITS REMEDIES This chapter combines the effect of a breach of contract along with the remedies available to the non-breaching party. IMPLICATIONS OF BREACH (Source p. 271) A breach of contract occurs when one or both of the parties to a contract fail to live up to the terms of the agreement. The instructor should emphasize the fact that not every breach may discharge a contract and breach doesn’t automatically discharge the contract as frustration or completed performance does. The majority of the chapter focuses on helping students understand when and how a contract is discharged by breach. There are some important terms used in this chapter and the instructor should take the time to make sure that students fully understand the legal meaning of the terms:  Condition – an essential term in the contract  Warranty – a non-essential term in the contract  Major breach – entitles the injured party not to perform  Minor breach – does not entitle the injured party not to perform Emphasis should also be given to ensuring that students understand the effects of major and minor breaches to conditions and warranties. A breach can occur in three ways:  Express repudiation  Acting in a way that makes the contract impossible to perform  Failing to perform or underperforming As business students, students should be aware of the consequences of the concept of a continuous expectation of performance; that is, an anticipatory breach that occurs long before a contract becomes active is still a breach. The Doctrine of Substantial Performance (Source p. 296) The doctrine of substantial performance is a good issue to highlight when again emphasizing that students need to be aware of the legal issues they face, but should always get independent legal advice before taking precipitous action. Note that the right of the injured party to discharge a contract as a result of breach may not be available if the breach is a trivial breach of a condition. Substantial performance occurs when performance has not been complied with in a minor way, for example, by delivering 995/1000 crates of orange in market condition, (when the contract was for 1000 crates in market condition) but 5/1000 too ripe for full price. Mistakes in Performance (Source pp. 276-277) This section of the material was previously included in Chapter 8; however it more properly belongs in this chapter under breach. If the paying party under a contract pays the wrong person in error, then it amounts to a total failure in performance. The party who made the payment to the wrong

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person would be required to pay again to the proper party. The person, who received a payment in error, is not entitled to keep the payment; a court would order restitution if it found there was an unjust enrichment.

EXEMPTION CLAUSES (Source p. 277) Students should be familiar with this topic by now. It is first introduced in Chapter 6 as part of the discussion of standard form contracts. It re-appears in Chapter 10 dealing with interpretation of contracts. It is relevant in this chapter for purposes of reducing or eliminating liability under a contract, and again in the section on remedies, when this type of clause is contrasted with liquidated damage clauses. Each time the topic appears instructors should re-emphasize the earlier points regarding notice in standard form contracts, consumer protection measurers, and narrow and restricted rules of interpretation, and then introduce the new element – here the impact of fundamental breach on such a clause. The Ontario Court of Appeal has considered fundamental breach several times between 2003 and 2008 and repeatedly emphasized the process for establishing fundamental breach. However, in the case of Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 59, the Supreme Court of Canada rejected the doctrine of fundamental breach and restated the test to include three parts: (1) Interpretation of Exemption Clauses – the Court must interpret the clause to determine whether it applies to the given circumstances; (2) Unconscionable Clauses - the Court must look at the clause at the time of formation of the contract and determine whether the agreement to the term was unfairly extracted from the weaker party; (3) Public Policy and Public Interest – the final part of the test allows the Court to still refuse to enforce the exemption clause where the injured party can “point to some paramount consideration of public policy sufficient to override the public interest in freedom of contract.”

TYPES OF REMEDIES (Source p. 279) DAMAGES In order for damages to be awarded, the loss must flow from the breach, that is, it must have been reasonably foreseeable at the time the contract was entered into. Also, damages must be mitigated, that is, minimized. It might be useful to discuss this heading using an example. Assume that supplier S agrees with buyer B to supply 100 boxes of leather pieces at $50 a box. The agreement is made on May 1st with delivery scheduled for August 1st. a) Suppose S fails to deliver on August 1st and B must as a result find a new supplier Q from whom she can acquire 100 boxes of leather on September 1st. Unfortunately,

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the market price of leather has gone up in the meantime and B must pay $60 a box from Q. B would be able to recover the extra $10 per box she had to pay Q together with any lost profits she suffered because of the one month delay in receiving shipment (expectation damages). b) Assume instead that on June 1st, S telephoned B and expressly repudiated the contract. B responded by advising S that she considered the contract continuing and binding, and that she expected S to perform on August 1st, regardless of this anticipatory breach. On August 1st, S supplied no leather: B can recover the loss of profits she sustained from having no leather. Is there a duty on B to mitigate her losses before the date of delivery has passed? She must act promptly to avoid those losses she reasonably can avoid once the date of delivery has passed. She also bears the risk that an intervening frustrating event might occur causing the contract to be void, and thereby losing her right to recover under the contract. c) Suppose B and S have had business dealings for a number of years while B has run a small business. She manufactures seats for buses, using the leather that S supplies for upholstery. On July 15th, just two weeks before S is scheduled to deliver leather under the May 1st contract, B enters into a contract with Atlas Bus Lines, a major bus purchaser, to supply seats for a number of buses. As a result, B will earn additional net income of $100,000 per year. B must provide Atlas with seats for two buses by October 1st and she expands her operation in order to meet the demand. S fails to supply the leather on August 1st and as a result B cannot meet her obligations to Atlas. She loses Atlas as a customer forever. B would not recover from S her loss of profits on the Atlas contract because that loss did not flow "naturally" from S's breach. When they entered their agreement, neither B nor S knew of the Atlas contract, which substantially altered B' s business. d) Assume that B had entered into the contract with Atlas on April 1st. This contract would then precede B's agreement with S. Assume further that B informed S at the time of the agreement that she was no longer a small operator and had a contract with Atlas that would generate a lot of extra profits. Again, following S's breach on August 1st, B is unable to meet her contractual obligations with Atlas and loses Atlas as a customer. In these circumstances, B could recover from S for her loss on the Atlas contract in consequential damages. e) Assume the same example as in (d), but add that S and B agree that in the event of a breach by S, S will pay B the sum of $200,000 in full satisfaction of any damages B suffers. This agreement (a liquidated damages clause) would be binding in the event of a breach if it were a genuine and reasonable attempt to estimate damages at the time the contract was made, regardless of how accurate that estimate in fact turns out. Suppose the $200,000 figure was a reasonable estimate but following S's breach, B is able to "mend her fences" with Atlas and keep Atlas as a customer. B might suffer a loss of only a few thousand dollars. Would she be entitled to the $200,000 from S in any event? Probably she would. For S's protection, the "liquidated damages clause" should have been made conditional upon B losing Atlas as a customer since that is the key factor in the estimate.

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Mental Anguish (Source p. 285) The law relating to mental anguish now considers mental distress as a foreseeable loss, in particular in relation to wrongful dismissal cases. Case 13.7 can be used to start a discussion on awarding damages for mental anguish, as can Vorvis v ICBC, p.285 footnote 39, a fact pattern where a superior held “Monday morning interrogations” of the employee prior to dismissal. EQUITABLE REMEDIES (Source p. 287) Students will be familiar with rescission and quantum meruit. Emphasis should be placed on the discretionary nature of equitable relief and the criteria that must be met as set out on p. 287. The class may want to debate why a successful litigant should not get whatever remedy he or she wants. Recent commentary has argued that the distinction between law and equity should be abandoned as the historical divide lost its relevance long ago. Supporters argue that retaining the discretionary nature of equity protects judicial integrity by giving them the discretion to deny an unworthy applicant. See: T. Leigh Anenson, “Treating Equity Like the Law: A Post-Merger Justification for Unclean Hands” American Business Law Journal 45(3) 455 – 509 (2008). The Checklist on p. 289 sets out a list of both the common law and equitable remedies which can be applied to various examples.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 290) In developing a risk management plan, students should consider proper preparation of contracts and ensuring that both parties to the contract understand who bears the risk, and thus, who needs to insure against the risk. Also, the need to communicate immediately with the other party when it becomes apparent that you are unable to meet a contractual commitment is important in reducing the costs of the breach. ETHICAL ISSUE (Source p. 274) Online Pharmacies Question 1 - The way students answer this question will likely depend on how they view the contract between the drug companies and the pharmacies. It appears that the prohibition against export is not an essential term in the contract – although, it is possible that the drug companies could present evidence that it is an essential term. As it stands, however, even if it is an essential term, the volume of export sales would appear to make it only a minor breach. If one considers the prohibition on export a major term, it is arguable that any percentage of export sales below 50% could be considered a major breach – a figure above 50% is undeniably a major breach as suddenly the pharmacy’s prime business would be drug export. In this case though, some figure between 20-40% could arguably be considered a major breach.

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Question 2 – This question deals with global issues of the right to life, or even the right to quality of life. It can be compared to the ethical principles involved in patent law; that is, the rights of a manufacturer to prevent others from re-producing their product for a set number of years, creating a situation where many are unable to afford the product. Students need to consider whose rights should be held to be paramount. It is a difficult task to balance the rights of various parties. Those who are being denied life-saving (or life improving) drugs versus those whose livelihoods depend on the company producing the drugs. Whether courts should be considering the end user in a contract dispute is debatable. Certainly the argument for the end user is emotionally swaying, but does it hold a place in a purely contractual disagreement? Was the purpose of the contract to benefit those in need of more affordable pharmaceuticals, or a purely business for profit situation? It seems unlikely that online pharmacies are in the business for purely philanthropic reasons. So where does the end user come into the equation? Students should be asked to consider whether there is a need for government legislation, and if so, how would that affect U.S. Citizens? Question 3 - This could be a good topic for class discussion. There are some very valid policy reasons why the Canadian government might object to the export of Canadian prescription drugs. To compensate for lost international revenues, the drug companies may raise their prices, in spite of what the Patented Medicines Prices Review Board might say – this could raise the costs to Canadian consumers. Alternatively, drug companies could begin to forgo Canada as a market, leading to drug shortages. The U.S. government might also take retaliatory actions to protect their drug companies against the “dumping” of “cheap, unsafe” Canadian drugs in the U.S. market. On the other hand, patent law already grants drug companies extensive and exclusive rights to make and market patented drugs – these prohibitions on exports are really just anti-competitive behavior built into sales contracts. A truly global, free market economy should be allowed to operate: if Canadian pharmacies can make money underselling U.S. pharmacies, why shouldn’t they? ETHICAL ISSUE (Source p. 274) Good Faith Performance The Ontario Court of Appeal quote is from Transamerica Life Canada Inc. v. ING Canada Inc. involving the pre-closing disclosure obligations as described in the Case Summaries. Question 1 - There are no simple, correct answers for either of the questions in this ethical issue. Students should be prompted to discuss what a general duty of good faith in contract performance means to them – they might find that they don’t define it all that differently than how the Ontario Court of Appeal defines an implied duty of good faith performance. The concept of a ‘generalized duty’ should be described as covering all behavior not just behavior that could be, or anticipated by, or in furtherance of, the

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“objectives of the agreement”. Students should discuss the implications this generalized duty might have on business relations – would such an explicit, generalized duty do more to foster the values of trustworthiness, fairness, respect, citizenship, and caring than an implied duty of good faith? Is an implied duty of good faith a concept used punitively, after demonstrable bad faith while a generalized duty of good faith is something more powerful – a cause of action as opposed to a tool for assessing damages? Question 2 – Once again, students must look to the freedom of contract and compare that to ethical standards. One would hope that most parties entering into contracts would act in a manner compliant with the duty of good faith, but should that duty be imposed in certain situations? The courts have already found that employment contracts can imply a duty of good faith; see Wallace v. United Grain Growers Ltd. (1997), 152 D.L.R. (4th) 1 (S.C.C.). Should other types of personal service contracts attach the same rights? Should consumers be protected in this way? Is it simply a matter of inequality in the bargaining process and therefore, vulnerable parties who should benefit from the duty? Question 3 - Ask students to define fiduciary duty and compare this definition with the definition of good faith they came up with in response to question 1. Are they different? Or has their definition of good faith merely extended the concept of fiduciary duty to all contractual relationships? One key consideration would be how much easier it would be to prove. The contract would impose the duty automatically without the need to establish elements of power, discretion, and vulnerability as described in Chapter 5. INTERNATIONAL ISSUE (Source p. 290) Enforcement of Foreign Judgments Instructors may want to reference the material in Chapter 31 on jurisdiction and the real and substantial connection test. The facts of Beals v. Saldanha (2003), 234 D.L.R. (4th) 1 (Supreme Court of Canada) are summarized as follows: A Florida plaintiff obtained a default judgment in Florida against a Canadian couple arising from the sale of a Florida vacation lot for $8,000. A mistake in the legal description of the deed led to the construction of a model home on the wrong lot. The Canadians defended the first action that was withdrawn. They entered an unsigned copy of the first defence when a second action was commenced. The claim was amended several more times without reply. A jury awarded $210,000 plus $50,000 in punitive damages even though there was limited evidence of harm. After post judgment was added the value of the judgment had risen to $800,000 (CDN) when the plaintiff sought recognition of the judgment in Canada. The Supreme Court (in a split decision) recognized the judgment based on substantial connection to the granting jurisdiction. The procedural inequities did not rise to a level that justified a lack of recognition. In his commentary (sited in Sources in text at p. 290), Mr. Fairley declares as a result of this judgment “Canada taken as a whole, and specifically in individual provinces, is one

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of the most hospitable jurisdictions in the world for the recognition and enforcement of judgments from foreign jurisdictions.” (p. 12) Question 1 - Provided that Canadian courts are satisfied with the procedural fairness of the foreign judgment/award, then yes, they should be recognized in Canada. We are all responsible for our actions – if you break a foreign law you can, and should, expect to be punished according to their criminal law. Why should things be any different if you breach a contract in a foreign country? Provided, of course, that the successful plaintiff didn’t go jurisdiction shopping in order to bring an action in a foreign jurisdiction known for excessively large awards – again though, this would go to the Canadian court’s assessment of the procedural fairness surrounding the award. Question 2 - In many ways, this question demands a political, rather than legal response; like a free trade agreement (FTA) you can probably expect things to happen in a tit-fortat manner – if one wants to facilitate business transactions in a global marketplace (as almost all Western governments want to do) then the decisions of foreign courts must be respected (unless, like the big players – U.S.A., China, Japan, soon India – you are powerful and important enough that you can ignore such rulings with impunity simply because smaller players need access to your markets). On the other hand, if foreign courts don’t reciprocate and honour Canadian judgments, we must ask whether courts are qualified to make the judgment as to which foreign rulings to honour and which to not. Courts are very good at assessing something like the procedural fairness of another jurisdiction; however assessing, for political reasons, whether to honour a foreign judgment, because they do not honour ours does not appear to be a function of the judiciary. This is dangerous territory that the court would instinctively shy away from. Perhaps some form of contract law extradition treaty would facilitate matters. Instructors may want to discuss the dilemma faced by high profile theatre promoter Garth Drabinsky who faces criminal charges in the United States and is currently serving a seven year sentence in Canada. When a class action was launched against him he feared incriminating himself and, therefore offered limited evidence in defence. The resulting American summary judgment was recognized by the Ontario Court of Appeal and leave to appeal to the Supreme Court was denied on February 12, 2009. See King v. Drabinsky 2008 ONCA 566, Garth Drabinsky et al. v. Dorian King et al. (Ont.) (Civil) (By Leave) (32837); R. v. Drabinsky (2009), 242 C.C.C. (3d) 449 and (2009), 246 C.C.C. (3d) 214 (Ontario Superior Court) and ); R. v. Drabinsky (2011) ONCA 582 and (2011) ONCA 647 (Ontario Court of Appeal) Coram: LeBel / Deschamps / Cromwell QUESTIONS FOR REVIEW 1. A major breach does not automatically discharge a contract in order to leave the option to the aggrieved party who has not committed a breach and may wish to continue with the contract. That party may elect to treat it as discharged. See Illustration 13.1. (Source pp. 271-272)

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2. An anticipatory breach may occur (a) when one party informs the other in advance of the time agreed for performance that it will not perform; or (b) when one party makes it impossible to carry out its obligations, as when it sells and delivers to an innocent third party a specific object that it had already agreed to sell to another. (Source p. 273) 3. The problem most often arises in contracts calling for the delivery of goods by installments when one or more installments fail to meet the amount called for the in the contract. (Source p. 276) 4. The doctrine of substantial performance asserts that a promisor is entitled to enforce a contract when it has substantially performed, even though its performance does not comply in some minor way with the requirements of the contract. The effect of the doctrine is that a promisee cannot seize upon a trivial failure of performance to avoid its own obligations. (Source p. 276) 5. The purpose of the rule is to remove any incentive for conduct that is wasteful of economic resources. An aggrieved party can recover only for such losses resulting from the breach as it could not avoid by acting reasonably. (Source p. 281) 6. When supply exceeds demand the buyer’s breach results in the seller’s losing the profit on one sale, regardless of the resale of those same goods to a second buyer. When the seller’s supply is limited and it could not have filled a second order if the first buyer had accepted the goods, the seller’s damages are measured by any additional expenses in taking reasonable steps to find a second buyer; and any loss in revenue as a result of having to accept a lower sale price for the goods. (Source p. 283) 7. Exemption clauses are strictly construed by the courts, and the court must be satisfied that the clause was properly brought to the attention of the other party. The clause cannot be unconscionable nor can it violate public policy or the public interest. (Source p. 277) 8. An example of strict interpretation of an exemption clause is set out in the Purolator case (Case 13.2). An exemption for delay in delivery did not include a complete failure to delivery. (Source p. 278) 9. A court might grant an interlocutory injunction to restrain immediate significant harm from being done by a breach of contract, pending formal resolution of the dispute at trial. (Source p. 310) 10. The usual procedure when the judgment debtor does not pay promptly is to register the judgment with the office of the sheriff of the county or district in which the debtor resides and to request the sheriff to levy execution against the assets of the debtor to satisfy the judgment. (Source p. 289) 11. Liquidated damages are an amount agreed to be paid by a party if it should commit a breach. It is assumed to be an estimate of the loss that may be suffered by the other Copyright © 2016 Pearson Canada Inc.

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party, rather than a penalty for non-performance. The purpose of liquidated damages is to provide some economic certainty to a possible breach of contract. (Source p. 281) 12. Expectation damages are an amount awarded for breach of contract based on expected profits. Where a vendor agrees to sell certain goods and the purchases refuses, the expectation damages are the lost profits on the sale. In this case however, there is also a consideration for supply and demand that must be taken into account in calculating those damages. (Source pp. 282-283) Consequential damages are damages that the seller knew or ought to have known would flow “naturally” from the breach, that is, were reasonably foreseeable by the seller at the time the contract was formed. Where a manufacturer orders parts for a product it is constructing for a purchaser, a breach of contract by the parts supplier causing the manufacturer to breach its contract with the purchaser would result in consequential damages; that is, any loss arising from the second breach would be payable by the parts supplier as arising from its initial breach. (Source pp. 283-284) Specific performance is an equitable remedy where the court may require a defendant to do a specified act, usually to complete a transaction; for example, to accept the full sale price and convey the land. (Source pp. 287-288)

CASES AND PROBLEMS

1. The main issue is whether the failure of the tiles to meet the specifications in the contract amounted to a major breach of the contract. Of course, in this situation where the swimming pool was completed on Thomson’s premises and appears to be fully in service for Thomson’s business, the contract cannot be rescinded. Should Thomson have the choice to close the Aquatic Centre for two weeks and receive damages for all lost business as well as the cost of replacing the tiles? The total might well be close to $100,000 final payment still in arrears. This becomes a question of cost of performance vs. economic loss; see Peevyhouse v. Garland Coal & Mining Company, 382 P.2d 109 (Okla. 1963). In view of the fact that the diminished appearance reduced the value of the pool by only $15,000, in a project of $450,000—or by about 3%—supports the argument that it is only a minor breach and that Thomson should not have the choice of insisting on tile replacement, an option that likely would cost five times as much as it would create a windfall for Thomson. For a case where similar arguments arise, see Convertible Pools Mississauga Ltd. v. Shewchuk, [1978] O.J. No. 220. 2. Carvel is requesting the remedy of specific performance. Traditionally, specific performance was almost always granted in situations involving real estate, however, as we know from the Semelhago v. Paramadevan, [1996] 2 S.C.R. 415 the remedy of specific performance is no longer automatic in contracts for the sale of land. In fact, when land is treated more like a commodity, for example, in creating a large subdivision of lots

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that are almost identical—or a row of identical townhouses—the strength of a claim for specific performance has been greatly weakened. In this case, however, there are several factors that strengthen Carvel’s argument for specific performance: the facts suggest that an architect has designed each house differently, because they are “up-market” homes on each lot; Carvel had already invested substantial sums in their design by the architect, which presumably would be wasted even if a different set of lots could be purchased (reliance damages). In any event the purchase of other lots in the area from a different owner remained highly speculative. Accordingly, the sum already invested and likely to be wasted if the repudiation stands is substantial. Carvel would also claim a very large sum for the lost expectation profits on the future sale of twenty-four large homes. If Carvel entered into other contracts in reliance on the purchase agreement and they were reasonably foreseeable, any breach of those contracts could also be claimed as consequential damages. The total damages might well run into the millions. Nevertheless, from Carvel’s point of view it is difficult to claim that the land is unique; it represents only a business investment for which damages can provide full compensation. Therefore, the problem for the court is in either granting specific performance or awarding a very large sum in damages. This is not an easy decision, as it was twenty years earlier. But, given Carvel’s substantial investment in the project, it is somewhat more likely that specific performance will be granted. 3. The issue here is whether the court should review the sum upon which the parties have agreed as liquidated damages in the event of delay. The courts generally take the position that figures used in contracts by way of liquidated damages are not binding on them and they will review the evidence to see whether the sum was intended to be a penalty. The court will look at whether the amounts were reasonable at the time the contract was entered into. If the sum is out of proportion to the likely damage, the court will consider the clause to be a penalty clause and will award damages as it sees fit. Only if the court is satisfied that the amount specified is a genuine estimate of likely damages will the court award damages based on such a figure. This is so whether the parties call the amount "liquidated damages" or not. In order to limit damages to the $1,000 a week agreed upon in the contract, Complicated Machinery Co. Ltd. will have to show that the parties attempted in good faith to value beforehand the damage that would likely occur. The letter from the manager of Northern Paper Co. would be good evidence that the $1,000 was a genuine attempt to estimate likely damages, especially since the estimate came from the party who would suffer the damages. In any event, the clause may also be viewed as limiting the liability of the defaulting party, in which case it clearly is not a penalty. 4. This case is based on Bombardier Inc. v. Canadian Pacific Ltd. (1991), 7 O.R. (3d) 559. The Ontario Court of Appeal, majority judgment agreed with Bombardier. It found that: [T]he salvage operation was not part of the contract of carriage. The damage caused during the salvage operation arose from an independent and separate

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negligent action, outside the provisions of the contract of carriage. Therefore, CP could not rely upon limitations upon liability in the contract of carriage and was fully liable for the damage to M's goods caused by the negligent salvage operation. As a general principle, carriage and the duties and liabilities of carriers are defined as beginning when goods are loaded aboard the carrying vessel and continuing until the goods are at their final destination. However, as there was an extended interruption of the carriage operation for a separate and distinct salvage operation of major proportions, it was found that this separate and severable salvage operation was not part of the contract of carriage. During the salvage operation, CP's bailment reverted from a carrier to a mere bailee for hire with respect to the salvaging of the goods. The appeal with respect to damages awarded in relation to the negligent salvage operation was dismissed. But there is an interesting dissenting opinion by Grange, J.A.: … the salvage operation should be regarded as part of the contract of carriage. Carriage includes all services required throughout the period between the point of receipt and the point of delivery. If a carrier in the course of transport drops any part of its load, it must pick it up as part of its duty to effect delivery. The salvage operation was part of the contract of carriage and payment for damages suffered from the salvage operation should therefore be limited to the sum allowed pursuant to the limitation proviso in the straight bill of lading. It is interesting to ask which of these approaches to interpreting the contract of carriage. The majority approach appears to be more rigid. In any event, it can reasonably be assumed that Bombardier had insurance coverage for any losses beyond the clause limiting CP’s liability. 5. The issue is whether Brown should be able to collect on the basis of quantum meruit for the work and material that he expended. The normal presumption is that a contractor who abandons after part performance, for whatever reason, cannot recover anything when payment is not due until completion of the work. Would it have made any difference to the result if Brown had substantially performed his part of the contract? Then Hilton would be required to pay the contract price, less any costs required to finish the work Brown had undertaken.

CASE SUMMARIES Agrifoods International Corp. v. Beatrice Foods Inc. [1997] B.C.J. No. 393 (British Columbia Supreme Court)

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Palm Dairies Ltd. was a firm making and distributing dairy products in Alberta. To facilitate a sale of its business in 1990, it was divided into two separate numbered companies. One of them, the plaintiff's predecessor, took the northern Alberta territory and its Edmonton factory. The other, the defendant's predecessor, took the southern Alberta territory. Coincident with that sale, a Production Agreement was executed between the plaintiff and defendant by which the plaintiff agreed to supply annually not less than $8.5 million of ice cream and similar products to the defendant and the defendant agreed to buy them. Both sides agree that the defendant never took that amount of product in any year of the contract. The defendant claims that it was justified in not taking the agreed amount of product. It says the plaintiff failed to ship correct quantities of product to its orders and unilaterally increased the prices beyond what was agreed. It further says that the original company with which it entered into the Production Agreement, amalgamated with two others of the defendant's competitors and that raised questions about the plaintiff's continued prompt supply of product. It says the amalgamated entity was its competitor and in view of the alleged history of short supply, it was justified in concluding that the plaintiff would favour itself over the defendant in the supply of product in a very competitive market so that the defendant's competitive position with grocery chains and other important customers would be threatened. The defendant claims that the plaintiff repudiated the contract. The Court found that the plaintiff’s default, consisting only of occasional short shipping was only a minor breach and held the defendant liable for damages for wrongful repudiation of the contract. APECO of Canada Ltd. v. Windmill Place (1978), 82 D.L.R. (3d) 1 (Supreme Court of Canada) APECO agreed to lease office space from Windmill Place for a period of five years with a total rent of at least $66,124.40 over the five years, starting October 1, 1975. APECO was to lease two thousand, five hundred and twenty-six square feet of a seventy thousand square foot building (about 3.5 percent of the space). On September 19, 1975, APECO repudiated the lease. Windmill Place had not rented any other part of the building at this time. Four months later, Windmill Place leased seventeen thousand square feet to a furniture store, including the space that APECO would have leased. The court held that the new lease was an independent transaction that did not mitigate the damages suffered by Windmill Place as a result of APECO's breach—much of the space was interchangeable. However, given that Windmill Place was likely to fill the building before the five year period of the lease was up it was not awarded the full amount it would have received under the lease. B.C. Saw Mill Co. v. Nettleship (1868), L.R. 3 C.P. 499 (England – Court of Common Pleas) See Case 13.4 at p. 301 in the text. Beals v. Saldanha (2003), 234 D.L.R. (4th) 1 (Supreme Court of Canada)

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A Florida plaintiff obtained a default judgment in Florida against a Canadian couple arising from the sale of a Florida vacation lot for $8,000. A mistake in the legal description of the deed led to the construction of a model home on the wrong lot. The Canadians defended the first action that was withdrawn. They entered an unsigned copy of the first defence when a second action was commenced. The claim was amended several more times without reply. A jury awarded $210,000 plus $50,000 in punitive damages even though there was limited evidence of harm. After post judgment was added the value of the judgment had risen to $800,000 (CDN) when the plaintiff sought recognition of the judgment in Canada. The Supreme Court (in a split decision) recognized the judgment based on substantial connection to the granting jurisdiction. The procedural inequities did not rise to a level that justified a lack of recognition. Brown v. Belleville (City) 2013 ONCA 148 Page 273 footnote 1

Carttera Management Inc.m v. Palm Holdings Canada Inc., 2014 ONSC 2573 Page 287 footnote 44 Cathcart Inspection Services Ltd. v. Purolator Courier Ltd. (1982), 34 O.R. (2d) 187 (Ontario Court of Appeal) See Case 13.2 at p. 299 in the text. Cornwall Gravel Co. Ltd. v. Purolator Courier Ltd. (1978), 18 O.R. (2d) 551 (Ontario High Court) The plaintiff contracted with the defendant to deliver a tender bid to the Ontario government. The defendant was informed that the item to be delivered was a tender and that it was required to arrive before a certain date and time. The Court held that because the defendant knew of the special circumstances, it was liable for the consequential damages of the lost tender. Dakin & Co., Ltd. v. Lee, [1916] 1 K.B. 566 (England – Court of Appeal) Dakin & Co. agreed to repair Lee's home for the sum of £264. Dakin & Co. did not comply exactly with the contract specifications; the supplies and labour turned out to cost £352. Lee had already paid £50 in deposit and offered to settle the whole matter out of court. Dakin & Co. refused and sued Lee for £352 less her deposit. Lee claimed in defence that Dakin & Co. was in breach of the contract for not complying exactly with its terms and was not entitled to any further payment The court held that Dakin & Co. had substantially performed the contract and was entitled to recover for its services and materials unless: (1) the work was of no benefit to the owner; or (2) the work was entirely different from that which it contracted to do; or (3) it had abandoned the work and left it unfinished. Accordingly, Dakin & Co. was entitled to be paid the £352 less the deposit and less any sum required to repair what it had done wrong. Copyright © 2016 Pearson Canada Inc.

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Elder v. Koppe (1974), 53 D.L.R. (3d) 705 (Nova Scotia Supreme Court) Koppe agreed to rent a motor-home to the plaintiffs, knowing they were to use the vehicle for their holidays. He failed to provide the motor-home. The court held that the plaintiffs were entitled to damages for their mental distress which was a reasonably foreseeable consequence of Koppe's breach. Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3 (Supreme Court of Canada) Fidler was employed as a receptionist and had an insurance policy for long-term disability benefits. After being diagnosed with chronic fatigue syndrome and fibromyalgia, Fidler collected disability benefits for over six years. Sun Life then terminated those benefits based on videos of Fidler driving, shopping, and climbing into the rear of her vehicle. Fidler brought an action against Sun Life, but before the trial could commence Sun Life offered to reinstate the benefits and pay outstanding interest. The question before the court was whether Fidler should receive punitive damages. The Court examined jurisprudence and concluded that the “right to obtain damages for mental distress for breach of contracts that promise pleasure, relaxation or peace of mind has found wide acceptance in Canada”. Therefore, the Court found that damages for mental distress for breach of contract may be appropriate in certain cases if: (1) an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and (2) that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. The Court found that both elements of the test were present in the current case and Fidler was entitled to punitive damages.

General Billposting Co. v. Atkinson, [1909] A.C. 118 (England - House of Lords) See Case 13.1 at p. 293 in the text. Gerrard v. Century 21 Armour Real Estate Inc. (1991), 4 O.R. (3d) 191 (Ontario General Division) The plaintiff G was employed as a sales manager at an office of the defendant Century 21, and was responsible for hiring, training and supervising staff. She left her employment after being asked to take a cut in her salary. There was an issue about whether she would have been fired had she stayed and refused to take the pay cut. G's employment contract with Century 21 prohibited her, for a one year period following termination of the contract, from (a) providing the same services that she had provided to Century 21 to any of Century 21's competitors within a prescribed territory; (b) soliciting or encouraging any other employees of Century 21 to leave the company; and (c)

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agreeing to a business association with any individual who was employed by the company during the term of the agreement. G brought an action against Century 21 for wrongful constructive dismissal and for a declaration that her employment contract with Century 21 was no longer in force. She and a former Century 21 salesperson subsequently opened a new office with Homelife Coventry Real Estate Inc. (Homelife), within the prescribed territory. Three agents and one secretary who had worked at Century 21 joined G's new firm. Century 21 applied to the court for an interlocutory injunction. The Court held that in order to enforce a restrictive covenant by way of an interlocutory injunction the applicant must make out a strong prima facie case. The true question is whether the acts and conduct of the party evince an intention no longer to be bound by the contract. Once it is established that an employment contract is rescinded, any restrictive covenant contained in it falls with it. The Court further held that by it’s dismissal of G, they had repudiated the contract. Hadley v. Baxendale (1854), 156 E.R. 145 (England – Court of Exchequer Chamber) Hadley contracted with Baxendale to deliver a broken crankshaft for repair. Baxendale failed to deliver on time and Hadley sued for lost profits as a result of the delay. The court held that Hadley was entitled to recover, but on appeal lost. The court held that the damages of lost profit had to be generally foreseeable, or if Hadley had informed Baxendale of the special circumstances prior to the contract. Healey v. Lakeridge Health Corporation, [2010] O.J. No. 417 (distinguishing Fidler) (Ontario Superior Court of Justice) The plaintiffs brought a class action lawsuit against the defendants for allowing them to be exposed to tuberculosis. The court dismissed the action for a variety of reasons. At para 72 the court distinguished this case from Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3: To argue that the psychological injuries of the Uninfected Persons were compensable, the Plaintiffs also relied on the Supreme Court of Canada’s judgment in Fidler v. Sunlife, 2006 SCC 30 (CanLII), [2006] 2 S.C.R. 3. However, that case dealt with damages for breach of a contract where the plaintiff is contracting for a service that has a peace of mind aspect to it. The contract law principles from Fidler do not apply to the circumstances of the Uninfected Persons. In my opinion, the current law in Ontario is that in the absence of a physical injury to recover for a psychological injury, the plaintiff must establish: (1) the psychological injury was a foreseeable consequence of the defendant’s negligent conduct; and (2) the psychological injury is a recognizable psychiatric illness.

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Hillis Oil and Sales Ltd. v. Wynn’s Canada, Ltd., [1986] 1 S.C.R. 57 at 68–9 (Supreme Court of Canada) The plaintiff was the sole distributor of the defendant’s products in the Maritime Provinces. The contract between the parties was drafted by the defendant and was not subject to negotiation. The defendant terminated the relationship pursuant to Clause 23 of the contract. However, the trial judge held that the relationship could only be terminated under Clause 23 if notice was provided; the court made this decision based on the fact that there was a second clause (Clause 20) in the agreement that stated that the defendant could give notice of termination under specific circumstances; Clause 20 was underlined in the contract. The Supreme Court agreed with the trial judge’s decision. The Court stated at para 15: If it stood alone as the only termination clause in the distributorship agreements clause 23 would have to be construed, I think, as permitting termination with or without cause by either party with immediate effect. But clause 23 cannot be regarded as standing alone; it must be construed in the light of the agreement as a whole, and in particular in the light of the other termination provision in clause 20. The general principle was stated by Estey J. in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at p. 901, where he said that "the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract." Hoare v. Rennie (1859), 157 E.R. 1083 (England) London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 (Supreme Court of Canada) The defendant agreed to store a transformer for London Drugs. The storage contract contained a clause limiting its liability to $40 on any one packet, unless the bailor chose to purchase additional insurance. Employees of the defendant negligently dropped the transformer while trying to move it, causing damage of almost $34,000. The defendant was held to be vicariously liable in negligence, but was entitled to rely on the contractual provision limiting its liability to $40. The employees were personally liable for their own negligence, but they too were entitled to rely on the contractual exemption even though they were not parties to the contract. It was contemplated that the transformer would be stored by employees, and to uphold the doctrine of privity of contract would have the effect of allowing London Drugs to circumvent a limitation that it had expressly agreed to. Honda Canada Inc. v. Keays, 2008 SCC 39 (Supreme Court of Canada) See Case 13.7 at p. 307 in the text. Hunter Engineering v. Syncrude, [1989] 1 S.C.R. 426 (Supreme Court of Canada)

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The appellants, Hunter et al supplied gearboxes to the respondent. The gear boxes were defective. The contract contained a broad exclusion clause. The Court found that this was a fundamental breach of the contract and the exclusion clause did not apply. Hydraulic Engineering Co. v. McHaffie Goslett (1878), 4 Q.B.D. 67 (England – Court of Appeal) See Case 13.5 at p. 302 in the text. James v. Hutton and J. Cool & Sons Ltd., [1950] 1 K.B. 9 (England – Court of Appeal) James subleased premises to Hutton. The lease contained a covenant that Hutton would not make any substantial alteration to the premises without the approval of James and her landlords. Hutton assigned the lease to J. Cook & Sons Ltd. James granted a license to Cook to put up a new store front on the condition that at James' request, Cook would restore the premises to its original state at or before the termination of the lease. Cook carried out the work but refused to restore the building to its original state at James' request. The Court held that the measure of damages was the damage actually suffered and not the cost of restoration. In this case, James had suffered only nominal damages since the value of the property had not been adversely affected by the alterations. Jarvis v. Swan's Tours Ltd., [1973] Q.B. 233 (England – Court of Appeal) The defendant tour company represented that Jarvis would have a certain kind of ski holiday. The holiday turned out to be very inadequate and did not fit the description. Jarvis sued for breach of contract and was awarded damages for loss of enjoyment on his holiday. This was a revolutionary decision. . Karrasch Construction Ltd. v. Telosky 2010 BCSC 423 Page 286 footnote 43 Keks v. Esquire Pleasure Tours Ltd., [1974] 3 W.W.R. 406 (Manitoba County Court) Keks purchased from the defendant a package tour to Hawaii for himself, his wife and their housekeeper. He specified that the accommodation should have kitchen facilities so that the housekeeper could prepare all their meals. The rooms were not equipped with kitchen facilities and they had to eat in restaurants for the entire holiday. Keks claimed the cost of the restaurant meals and tips over and above what it would have cost to have meals prepared by the housekeeper, the cost of the housekeeper's airfare since her trip had been a wasted expense, and damages for mental distress. The court held that the defendant had committed a clear breach of contract. Keks was entitled to all the damages he claimed, including $800 for mental distress.

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Note that Keks should not have recovered the cost of the housekeeper's ticket. The purpose of damages is to put parties where they would have been had the contract been performed properly. Under proper performance of the contract, Keks would have had to bear the expense of the housekeeper's flight. He should only have been entitled to the difference between the cost of the restaurant meals and the cost of the meals that the housekeeper would have prepared, along with whatever he could get for mental distress.

Kotai v. Queen of the North, [2009] B.C.J. No. 2022 (British Columbia Supreme Court) The plaintiffs brought a class action suit against the defendant for damages arising from the sinking of the ferry, Queen of the North. The defendant accepted liability under the Marine Liability Act for the lost possessions and other damages arising from the sinking of the ferry. This case dealt with the remaining issue of psychological damages claimed by the plaintiffs. The court held at para 58: Thus, despite the attempts to lower the barrier, I am satisfied that in British Columbia, at least up to the point of Mustapha, supra, a plaintiff who asserted a claim for damages for psychological injury in a “nervous shock” case had to meet the threshold test of establishing a recognizable psychiatric illness. While the threshold has been criticized and may be difficult to defend on principle, it appears to be one of the control mechanisms that have been employed to maintain what is perceived to be a fair balance between plaintiffs and defendants. And at para 69: Accordingly, I conclude that there remains a requirement that the claimants prove not just psychological disturbance or upset as a result of the defendant’s negligence but also that their psychological disturbance rises to the level of a recognizable psychiatric illness. Koufos v. C. Czarnikow Ltd. (The Heron 11), [1969]1 A.C. 350 (England – House of Lords) The plaintiff chartered the defendant's ship to load a cargo of sugar at Constanza and carry it to Basrah. The defendant took nine days longer than was reasonable to reach Basrah, and in the meantime the market price of sugar dropped considerably. The plaintiff claimed damages for the difference between the price it obtained for the sugar and that it would have received had the boat arrived on time. The Court held that the test for damages is not foreseeability, but likelihood; the defendant ought to have realized that the plaintiff was "not unlikely" to sustain the kind of loss that it did. Therefore the loss of profit was not too remote to be recoverable. This decision concentrated on mathematical probability and completely ignored the question of allocation of risk, an extremely important issue in a contract concerning a commodity such as sugar whose price is likely to fluctuate substantially. In this case, the carrier was turned into the charterer's insurer.

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Lakelse Dairy Products Ltd. v. General Dairy Machinery & Supply Ltd. (1970), 10 D.L.R. (3d) 277 (British Columbia Supreme Court) See Case 13.6 at p. 305 of the text. Lindal v. Lindal (1982), 129 D.L.R. (3d) 263 (Supreme Court of Canada) Brian Lindal was injured in a car accident caused by his brother, Kenneth's negligence. He was in a coma for three months and suffered permanent and serious physical, mental, and emotional damage. In 1978, the Supreme Court of Canada had set a limit of $100,000 for damages for non-pecuniary loss related to personal injury. Brian sought more than this amount for his pain and suffering and loss of amenities of life. The Supreme Court reaffirmed its 1978 decision. Awards for non-pecuniary loss are compensatory in nature and should be moderate. The $100,000 limit remains, subject to inflation and perhaps exceptional circumstances. Lokay v. Kilgour (1985), 31 C.C.L.T. 177 (Ontario High Court) Kilgour, a plastic surgeon, performed several minor cosmetic operations on Lokay. One of these operations was supposed to remove stretch marks from her stomach, but proved unsuccessful. Kilgour suggested that Lokay undergo a more serious procedure, under a general anesthetic, which would produce better results. Lokay agreed to the more drastic surgery but was upset with the results which left her more extensively scarred than she had anticipated. When Lokay sued Kilgour, the court held that she could not recover from him since she had not proven that her consent had been vitiated (necessary to sustain an action in battery) nor that he had made misrepresentations to her sufficient to amount to negligence. Madison Developments Ltd. v. Plan Electric Co. (1997), 36 O.R. (3d) 80 (Ontario Court of Appeal) E Corp. was a general contractor on a large construction project, and it had agreed with the owner M Ltd. to obtain comprehensive fire insurance covering losses arising from any cause. In an agreement with the defendant P Co., a subcontractor, E Corp. agreed to provide comprehensive fire insurance and P Co. agreed to insure its own materials and to obtain comprehensive general liability insurance and automobile liability insurance. E Corp. obtained a Builders' Risk policy that named the owner and the general contractor as insured but the "property insured" clause included property owned by others. The policy contained a waiver of subrogated claims against any interest with respect to which insurance was provided under the policy. It did not contain a trustee clause providing that the insurance was being obtained for the benefit of all the contractors working on the project. A fire occurred due to the negligence of the defendants TU and JB, employees of P Co. The insurer asserted a subrogated claim against P Co. and the employees.

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The Court of Appeal held that in the analogous circumstance of a landlord and tenant relationship, where the landlord covenants to obtain fire insurance, the law is clear that the landlord cannot sue the tenant for a fire loss caused by the tenant's negligence. This is so notwithstanding a covenant by the tenant to repair, which without the landlord's covenant to insure, would obligate the tenant to indemnify for such a loss. The contractual undertaking by one party to secure property insurance operates as an assumption by that party of the risk of loss caused by the peril insured against. The rationale is that the covenant to insure is a contractual benefit accorded to the tenant; there would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant's negligence. This reasoning applied equally to the contract between the contractor and subcontractor in the immediate case. The subcontractor's separate obligation to obtain liability insurance was akin to the separate obligation of the tenant to repair. The covenant by the contractor on behalf of itself and the owner protected the subcontractor from a subrogated claim for losses caused by fire resulting from the subcontractor's negligence. McIsaac v. Sun Life Co. of Canada (1999), 173 D.L.R. 645 (British Columbia Court of Appeal) The plaintiff was insured under a policy with the defendant. The defendant denied a claim for total disability by the plaintiff. The trial judge held that the plaintiff was totally disabled and therefore entitled to payment. The trial judge further added aggravated damages for mental distress. The Court of Appeal upheld the decision. Miller v. Advanced Farming Systems Ltd., [1969] S.C.R. 845 (Supreme Court of Canada) The plaintiff did work for the defendant. The defendant did not pay due to substandard construction. The plaintiff sued pursuant to a mechanic’s lien on the defendant’s property. The trial judge and the court of appeal applied the doctrine of substantial performance and allowed a payment of $22,654.60 on the plaintiff’s claim of $25,984.60. The Supreme Court of Canada disagreed with the trial judge’s application of the doctrine and reduced the award to $12,561.60 of the $25,984.60 claim. The Supreme Court looked at the cost of performance and adjusted the amount set by the trial judge to reflect the real cost. MHR Board Game Design Inc. v. Canadian Broadcasting Corporation 2013 ONCA 728 Page 275 footnote 4 Monta Arbre Farms Inc. v. Inter-Traffic (1983) Ltd. (1989), 71 O.R. (2d) 182 (Ontario Court of Appeal)

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Fruit trees belonging to the plaintiff were damaged in the course of shipment through the negligence of the defendant railway. A clause in the contract of carriage provided that "In no event shall the liability of the carrier exceed ... in respect of the contents [of containers] ... the sum of $20,000". In an action against the railway the plaintiff claimed $91,000 as the value of the trees, $145,000 described as "consequential or business loss being the profits to be earned on the sale of the trees," and $5,000 consequential damages for shipping and insurance costs. The trial judge awarded $170,000, limiting the claim for the value of the trees to $20,000, but allowing the claims for consequential loss in full. The Court of Appeal agreed, and held that the clause was applicable, but it was not sufficiently clear to exclude liability for consequential damages. Morguard Investments v. De Savoye, [1990] 3 S.C.R. 1077 (Supreme Court of Canada) The respondents were mortgagees of properties in Alberta. The appellant was the mortgagor of the properties. The appellant moved to British Columbia. When the mortgages went into default, the mortgagees commenced foreclosure actions in Alberta. The mortgagor did not defend, nor appear in Alberta. The mortgagees then proceeded to claim on the shortfall of the mortgages after the sale of the properties. They again obtained their judgments in Alberta. The respondents then sought to have the Alberta judgments enforced in British Columbia. The Court held that there was a real and substantial connection to the Alberta jurisdiction and that the actions were properly brought there. The Court further held that Alberta judgments should be recognized and enforced in British Columbia. Newell v. CP Air (1977), 74 D.L.R. (3d) 574 (Ontario County Court) The plaintiffs were travelling by air to Mexico and took their two dogs with them. They wanted to keep the dogs with them in the passenger compartment and even offered to buy the whole first-class section, but the defendant airline refused. The defendant's employees were aware of the plaintiffs' concern for their pets and assured the plaintiffs that the dogs would be fine in the cargo compartment. In contravention of the airline's own explicit regulations, the dogs were put in a cargo compartment that also contained dry ice. One of the dogs died and the other was seriously injured by carbon dioxide poisoning sustained as a result of the dry ice. The court held that the defendant was in breach of its contract to carry the dogs safely. The plaintiffs recovered damages for their distress which was a reasonably foreseeable result of the defendant's breach of contract. 1193430 Ontario Inc. v. Boa-Franc Inc. (2005), 78 O.R. (3d) 81 (Ontario Court of Appeal) The respondent company had entered into a distributorship agreement with the predecessor of the appellant, Salem Hardwood Flooring. The agreement allowed Salem virtually sole distributorship rights for the respondent’s product in Ontario. The owner of Salem sold the shares in the company to a dealer, Floorco. The respondent then terminated the distributorship agreement for cause based on this undisclosed sale. At trial Copyright © 2016 Pearson Canada Inc.

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the judge found that there was a duty of good faith and communication agreed between the parties and on this basis and other reasons, she found in favour of the respondent. The Court of Appeal overturned this decision. On the issue of good faith and communications, the Court of Appeal agreed that the parties had impliedly made this a term of their agreement; however, based on the other terms of the contract, this did not suggest that Salem was required to disclose the change in ownership to the respondent, at para 35: No doubt Boa-Franc may have been interested in that information. However, such a requirement would appear to create a new, unbargained for right and obligation independent from the terms of the agreement between these two parties and from their contractual objectives, and therefore contrary to the principles set out in Transamerica. The critical question for me, however, is whether the breach of this obligation even if it could be said to exist, gave Boa-Franc the right in law to terminate the agreement without notice. In my view, it did not, because in law a commercial distributorship agreement may not be terminated for cause, without notice, unless the cause relied upon constitutes a fundamental breach of the agreement. Here, even if there were a breach of an implied good faith and communication term of the agreement, it was not a fundamental breach. Peevyhouse v. Garland Coal & Mining Company, 382 P.2d 109 (Okla. 1963) See Case 13.8 at p. 308 in the text. Plas-Tex Canada Ltd. v. Dow Chemical of Canada Ltd., 2004 ABCA 309, 245 D.L.R. (4th) 650 at para 53 (Alberta Court of Appeal) See Case 13.3 at p. 300 in the text. PreMD Inc. v. Ogilivy Renault LLP, 2013 ONCA 412 Page 284 footnote 31 Ribeiro v. CIBC (1992), 13 O.R (3d) 278 (Ontario Court of Appeal) The plaintiff sued the defendant for wrongful dismissal. The court held that the plaintiff was entitled to general damages for mental distress and punitive damages as well. Roy v. 1216393 Ontario Inc. 2011 BCCA 500 Page 277 footnote 12 Sail Labrador Ltd. v. Challenge One, [1999] 1 S.C.R. 265 (Supreme Court of Canada) The plaintiff entered into a five year contract with the defendant to charter a vessel. The agreement included an option to purchase at the end of the five years, subject to “full

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performance of all of its obligations. The plaintiff carried out all of its obligations except: one payment was late because the bank bounced a cheque in error; and, the plaintiff was unable to provide all of the log books as requested by the defendant per the contract. When the option was exercised by the plaintiff, the defendant refused to sell. The Supreme Court held that this was not a contract where time was of the essence of the contract; so, a late payment did not affect the “full performance” of the agreement. The defendant had no right to cancel its obligation as the plaintiff had substantially performed the contract as it was written. Semelhago v. Paramadevan, [1996] 2 S.C.R. 415 (Supreme Court of Canada) In August 1986, the respondent purchaser agreed to buy a house under construction in the Toronto area from the appellant vendor SP for $205,000, with a closing date of October 31, 1986. To finance the purchase, the respondent would pay $75,000 cash, plus $130,000 to be raised by mortgaging his current house. The respondent negotiated a sixmonth open mortgage, so that he could close the deal on the new house and then sell his old one at an appropriate time in the six months following closing. Before the closing date, the appellant vendor reneged and in December 1986, title to the house was transferred to the appellant BP. The respondent remained in his old house, which was worth $190,000 in the fall of 1986, and $300,000 at the time of the trial. The respondent sued the appellants for specific performance or damages in lieu thereof. At the time of trial, the market value of the property to be purchased was $325,000. The respondent elected to take damages rather than specific performance and the Ontario Court (General Division) awarded him $120,000, being the difference between the purchase price he had agreed to pay and the value of the property at the time of trial. The appellants appealed on the ground that the assessment was a "windfall" because the respondent was benefiting not only from the increase in the value of the new house, but also from the gain in the value of the old house. The Supreme Court of Canada held that while specific performance should not be granted as a matter of course, absent evidence that the property is unique, this case was dealt with by the parties throughout on the assumption that specific performance was an appropriate remedy, and this appeal should thus be disposed of on that basis. A party who is entitled to specific performance is entitled to elect damages in lieu thereof. Damages are normally assessed at the date of breach; in the case, breach of contract for the sale of goods. However, in the circumstances of this case, the appropriate date for the assessment of damages is the date of trial. The increase in value of the respondent's residence, which he retained when the deal did not close, should not be deducted from the amount of damages awarded. If the respondent had received a decree of specific performance, he would have had the property contracted for and retained the amount of the rise in value of his property. Simpson v. Crippin (1872), L.R. 8 Q.B. 14 (England) See Illustration 13.5 at p. 296 in the text.

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Sullivan v. O’Connor, 296 N.E. 2d 183 (1973) (Massachusetts - U.S.A.) The plaintiff was an entertainer who entered into a contract with the defendant plastic surgeon for a nose job. The nose job was not successful and left the plaintiff disfigured. The plaintiff sued for breach of contract and negligence. The court held that mental distress and pain and suffering were compensable under breach of contract. Telecommander Corp. v. United Parcel Service Canada Ltd. [1996] O.J. No. 4664 (Ontario General Division) Telecommander Corp sued United Parcel Service (UPS) for damages as a result of a mistake made on delivery of goods. According to the Telecommander’s instructions, UPS was to deliver computer components to a business in British Columbia, and to collect-ondelivery the price of the goods, by a cheque postdated January 26th. However, the cheque was postdated February 11th; the UPS employee nevertheless delivered the goods to the purchaser. UPS sent the cheque to Telecommander, which then attempted to have the date rectified by the purchaser, without going through UPS's customer support, but Telecommander did not succeed. The purchaser went bankrupt in early February and Telecommander was unable to collect the funds or repossess the goods. The Court dismissed Telecommander’s action for damages on the basis that the loss was too remote to be recoverable. The Court recognized that the collection-on-delivery instructions were clear and unequivocal. It also stated that the conduct of the employee in delivering the goods and accepting a post-dated cheque bearing a date other than in accordance with the instructions constituted a breach of the duty of the defendant both in tort and in contract. However, Telecommander's attempt to rectify the problem itself discharged the defendant from taking any of their prescribed follow-up procedures to deal with the problem. Accordingly, the Court found that Telecommander failed to mitigate its loss. Telecommander had not informed UPS of any special circumstances as to the financial health or liquidity of the British Columbia business at the time the delivery contract was entered into. As a result, the loss was too remote to be recoverable. Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 59 (Supreme Court of Canada) The defendant made a request for tenders. It violated its own contract by accepting an illegible bid. The contract with the plaintiff and other tenderers contained an exclusion clause. The trial judge found that the exclusion clause did not contemplate barring a remedy arising from the defendant’s unfair dealings with an ineligible party. The Court of Appeal overturned the decision on the basis that the exclusion clause was clear and unambiguous. The Supreme Court allowed the appeal and reinstated the trial judge’s decision in a 5-4 split. Both the majority and minority positions discussed the doctrine of fundamental breach as related to exclusion clauses and rejected it. The test was restated by Binnie, J. at paras 121-123:

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The present state of the law, in summary, requires a series of enquiries to be addressed when a plaintiff seeks to escape the effect of an exclusion clause or other contractual terms to which it had previously agreed. The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter, at p. 462). This second issue has to do with contract formation, not breach. If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.

Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (Ontario Court of Appeal) leave to the Supreme Court of Canada refused Transamerica purchased all the shares in an insurance company owned by ING. During Transamerica’s due diligence investigations prior to closing, it discovered that the subject company was not managing investment products in compliance with the terms of the relevant insurance policies. After closing, it resolved the irregularities by making remedial payments to policy holders and then sued ING under the indemnity clause in the purchase agreement. In defence, ING claimed that Transamerica breached its implied duty of good faith and fair dealing by not disclosing the alleged errors before closing and not consulting ING prior to remedial payouts. The motions judge struck the good faith dealing allegations from the pleadings as failing to disclose a reasonable defence. The Court of Appeal overturned the motions judge and restored the pleadings. It agreed that Canadian courts have not recognized a stand-alone generalized duty of good faith (para 50 -51), but on the subject facts the Court felt that it was possible to imply such a duty from the objectives of the subject agreement. This was not considered a generalized duty, but rather one that arose from the agreement. Source p. 295, n. 4 and p. 306, n. 31 Vorvis v. Insurance Corporation of BC, [1989] 1 S.C.R. 1085 (Supreme Court of Canada) The plaintiff was an employee with the defendant company. The defendant began putting pressure on the employee with respect to productivity. The plaintiff suffered distress and obtained medical attention. The plaintiff was then dismissed without any precipitating

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event. The plaintiff sued for wrongful dismissal and punitive damages. The Supreme Court held that there was no claim for aggravated damages arising from the nature of the dismissal. Aggravated damages could arise if the acts complained of were independently actionable, but that was not the case here. Punitive damages did not apply here. Wallace v. United Grain Growers Ltd. [1997] 3 S.C.R. 313 (Supreme Court of Canada) In 1972 a printing company wholly owned by the respondent decided to update its operations and seek a larger volume of commercial printing work. The appellant, W, met L, the marketing manager of the company's publishing and printing divisions, to discuss the possibility of employment. W had the type of experience L sought, having worked approximately twenty-five years for a competitor that used a particular type of press. W explained to L that as he was forty-five years of age, if he were to leave his current employer he would require a guarantee of job security. He also sought several assurances from L regarding fair treatment and remuneration. He received such assurances and was told by L that if he performed as expected, he could continue to work for the company until retirement. W was hired and enjoyed great success at the company; he was the top salesperson for each of the years he spent in its employ. In 1986 he was summarily discharged without explanation. W issued a statement of claim alleging wrongful dismissal. In its statement of defence, the respondent alleged that W had been dismissed for cause. This allegation was maintained until the trial commenced. The termination of W's employment and the allegations of cause created emotional difficulties for him and he was forced to seek psychiatric help. His attempts to find similar employment were largely unsuccessful. Prior to his dismissal, W made a voluntary assignment into personal bankruptcy, and remained an undischarged bankrupt when he commenced his action against the respondent. At trial W was awarded damages for wrongful dismissal based on a twenty-four month notice period and $15,000 in aggravated damages resulting from mental distress in both tort and contract. The Supreme Court of Canada held that in light of W's advanced age, his fourteen year tenure as the company's top salesman and his limited prospects for re-employment, a lengthy period of notice is warranted. Another factor to be considered is whether the dismissed employee was induced to leave previous secure employment. The court also stated that bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period. The contract of employment has many characteristics that set it apart from the ordinary commercial contract. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure. This power imbalance is not limited to the employment contract itself, but informs virtually all facets of the employment relationship. The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence most in need of protection. The Supreme Court of Canada upheld the damages awarded to W at trial.

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Whiten v. Pilot Insurance Co., 2002 SCC 18 Page 284 footnote 33

Wilson v. Sooter Studios Ltd. (1988), 55 D.L.R. (4th) 361 (British Columbia Court of Appeal) This was an action against a wedding photographer who failed, in breach of contract, to supply satisfactory photographs, the trial judge awarded damages of $1,000 in addition to the sum paid by the plaintiffs. The contract price was $400. On an appeal by the plaintiffs it was argued that the damages should have been measured by the cost ($7,000) of reconstituting the wedding party, some of whom had come from distant places. The Court of Appeal dismissed the appeal holding that that $7,000 was unreasonable as it was unlikely that the plaintiffs would have agreed to pay that sum for the pictures in the first place. Wolf v. Advance Fur Dressers Ltd., 2005 BCSC 1097 Page 286 footnote 42

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CHAPTER 14 SALE OF GOODS AND CONSUMER CONTRACTS Contracts for the sale of goods are the most common type of contract, and the type most readily encountered by the general public. Consequently, the subject generated a vast amount of case law, which was eventually codified as the Sale of Goods Act. Although numerous statutes have been referred to in earlier chapters, this is the first chapter in which the provisions of a statute have been examined in depth. This makes it an appropriate occasion to remind students that not all law is to be found in cases. It should also be explained that the Sale of Goods Act is a rather unusual type of statute, since its purpose is to codify the existing law rather than to change it. It is important that students carefully examine the precise wording of the Act in order to appreciate how it is interpreted and applied. Instructors should also differentiate this statute from consumer protection legislation as the Sale of Goods Act applies to any sale of goods not just consumers so it is makes it particularly important to business to business transactions. It may sometimes be difficult to distinguish a sale of goods from other types of contracts. Goods are any form of property other than land, services, money, or rights of action. For example, if you buy a picture, you have made a contract for the sale of goods; on the other hand, if you hire someone to paint your portrait you would have made a contract for services and materials. The Sale of Goods Act, as its title implies, applies only to sales of goods. However, the terms implied by the Act are often also implied in contracts for services. TERMS IN A CONTRACT OF SALE (Source p. 295) An aspect of this chapter that requires special emphasis is the application of implied terms. It is important that students understand that the statutory implied terms will govern the contract only if there is no express term to the contrary. The Act recognizes the fact that parties do not sit down and formally agree on the consequences of all of the various possible contingencies that might be foreseen at the time of the contract. Often, a purchaser simply pays the money and the vendor delivers the goods. The Act attempts to cover those areas not dealt with expressly and specifically by the parties, but freedom of contract is preserved since the parties may come to their own terms. The conditions and warranties set out in the SGA include: seller’s title, description, sale by sample, and Suitability and Quality, which includes both fitness for purpose and merchantability. These are set out on pp. 298-303, with appropriate cases and illustrations, as well as a Checklist useful for review on p. 303- Implied Terms in a Contract for the Sale of Goods. Exemption Clauses Exemption clauses are discussed in the Ethical Issues topic at p. 304. Students need to be reminded that provincial legislation varies what may be exempted under a sale of goods Act.

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TITLE TO GOODS (Source p. 306) The text has minimized the section on title and risk. Materials previously covered in title and risk are now online. The text, for example, no longer sets out each rule with an Illustration, rather, the rules are set out in a list on p. 307. The rules on passing of title are also very important because, usually, risk passes with title. The section focuses not only on if title has passed but exactly when it passed. If the goods that are the subject of the contract are damaged or destroyed it is important to determine who owned the goods at that time—the seller or the buyer. Students should be familiar with this concept from the discussion of void and voidable contracts. Students may need to understand this section in conjunction with Chapter 28 on secured transactions and the Personal Property Security Act. Creating security interests depends on the passage of title. Students should be reminded that the specific terms of the contract as to risk and title override the general rules. REMEDIES OF THE SELLER & BUYER (Source p. 307-311) Students who plan on a working in manufacturing and sales will want to review this section of the text, with attention on Illustrations 14.5, 14.6, 14.7, and Case 14.10. The International Issue at pp. 311-312 discusses the international sale of goods. CONSUMER CONTRACTS Consumer protection was previously covered in Chapter 30. This section of the chapter discusses legislation which affects and controls consumer contacts. It covers pressure selling, unsolicited goods and telemarketing. Students enjoy discussing the receipt of unsolicited goods and reference should be made to the applicable provincial statute governing a consumer’s obligations in regards to such goods. A good focal point for a discussion on the requirement of disclosure of the true cost of credit, pp. 316-317, is to have students examine credit card bills, a car loan, and a current mortgage. ETHICAL ISSUE (Source p. 304) Exemption Clauses Question 1 - The instructor should ask students to consider the nature of the transactions in question: a retailer, when purchasing from a manufacturer, will generally have more time and opportunity to review the contract of sale, inspect the goods, request samples, etc. Consumers purchasing off the shelf products from a retailer generally lack these opportunities – goods are typically sold pre-packaged, as is. Moreover, with the growth of internet retailing, consumers lack the opportunity to even inspect the package goods come in. Do students think it is a fairer solution to place the burden of risk on the party with more time and opportunity to reflect on how and what to purchase?

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As a counter-argument: has the proliferation of independent online reviews, blogs, and websites dedicated to products changed the purchasing environment? Can consumers, if they are willing to take the time and effort, now put as much forethought into what products to purchase as a retailer can? Has the internet made consumers less deserving of protection because they now have more opportunities to review products before purchase? Why or why not? Question 2 - The question as to which legislation should be changed should follow naturally from how students answered question 1. Instructors should prompt students to make coherent arguments for or against changes to a particular piece of legislation: what impact do students think their suggested changes will have? Why? Instructors may want to discuss the Consumer Products Warranty and Liability Act, S.N.B. 1978 c. C-18.1 as one approach that prevents the retailer from being caught in the middle. (The same kinds of warranties apply throughout the distribution chain). INTERNATIONAL ISSUE (Source p. 339) International Sale of Goods Question 1 - There are numerous possible justifications for allowing parties to opt out of CISG. Prime amongst these would have to be the idea of freedom of contract. Although all contract law is built on the desire to facilitate and ease commercial transactions, at the core of contract law is the idea that a contract, honestly bargained and agreed to, is sacred. Freedom of contract is one of the longest standing principles in the common law world; while governments may impose safeguards, or suggested wording, they are loathe to impose contractual terms. Freedom of contract isn’t just the ability to enter into agreements, it also the ability to reject some of the legislative safeguards put into place by governments. Question 2 - A business may opt out of CISG because they are located in a jurisdiction with more stringent laws that offer them better protection and more generous terms – by including a choice of law clause they may be able to ensure that those laws govern contractual disputes. Or, it is entirely possible that rejecting CISG could be used as a bargaining tool, allowing a business to negotiate other, more favourable terms on some other aspect of the contract.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 318) The strategies set out an excellent review of what vendors can do, through carefully drafted standard form contracts, to minimize their risks and losses in selling goods.

QUESTIONS FOR REVIEW

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1. The principal purpose of the Sale of Goods Act was to set out succinctly the law as it then existed, with clarification where necessary; it made no attempt to change the law. (Source p. 295) 2. “Ownership” gives a right to possession, though not necessarily to immediate possession. “Possession” is physical custody, which may or may not be lawful. The separation of ownership and possession occurs frequently in contracts for the sale of goods: for example, the contract may pass title to the buyer immediately but the seller may remain in possession until the goods are collected. (Source pp. 297-298) 3. Goods are defined in the Sale of Goods Act as “all chattels personal, other than things in action and money… .” Chattels are tangible personal property. (Source p. 296) 4. The court will have to decide whether it was the work or the materials that constituted the essence of the contract; if the final value is mainly the result of the skill and labour that have gone into its preparation, then the contract will be one for work and materials and not for “goods.” (Source pp. 296-297) 5. In a sale, the seller transfers ownership or title in goods to the buyer at the moment the contract is made. In an agreement to sell, the transfer is deferred until a future time. (Source p. 296) 6. Consignment is used in two different senses. In common usage, a consignment is simply a shipment of goods from one person or business to another in performance of a contract of sale; here, the consignor is a seller and the consignee a buyer. But in a more technical sense, a consignor may send goods to an agent (consignee) who will offer them for sale at their new location. (Source p. 291) 7. The caveat emptor (which means, literally “let the buyer beware”) principle applies where the goods are in existence and are specific items that may be inspected by the buyer, and when the seller has made no misrepresentations about them. (Source p. 298) 8. An implied term of fitness offers protection to a buyer who has a particular purpose in mind for the goods. To have the advantage of this provision, the buyer should declare this purpose specifically if it is not one of the general uses for such goods. The implied term of merchantable quality is that the goods should be in such a state that a buyer, fully acquainted with the facts and having found the goods in reasonably sound condition, would buy them without reduction below the current market price without special guarantees. (Source p. 301) 9. The Sale of Goods Act provides that a condition of fitness does not apply when an article is sold under its trade name. (Source p. 301) 10. The terms that are implied in the case of sale by sample are: (a) that the bulk will correspond with the sample in quality; (b) that the buyer will have a reasonable opportunity of comparing the bulk with the sample; and (c) that the goods will be free

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from any defect rendering them unmerchantable that would not be apparent on reasonable examination of the sample. (Source p. 327) 11. The time set for payment is a warranty, not a condition. Consequently, a seller is not entitled to rescind the contract of sale and have the goods back simply because payment is not made on time. He must be content with an action for the price of the goods. (Source p. 304-305) 12. The Sale of Goods Act sets out five “rules” that determine when risk passes, in the absence of any express agreement of the parties to the contrary. The passing of risk depends on whether the goods are specific goods and the state they are in at the time of the contract. (Source p. 307) 13. Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made. (Source p. 307) 14. The general rule is that nemo dat quod non habet. The two main exceptions to that rule are (a) where goods are ‘sold’ by an agent, and (b) where goods are sold under a common-law or statutory power of sale. (Source p. 306) 15. Unascertained goods are goods that are in existence but have not yet been selected and appropriated to the contract. Future goods are goods that are not yet in existence. (Source p. 307) 16. A bill of lading is a receipt issued and signed by the carrier, acknowledging that specified goods have been delivered to it for shipment. (Source p. 307) 17. When goods remain in an unpaid seller’s possession, the seller has a lien on the goods (unless it has been agreed that the buyer is to have credit) for their agreed price, and can refuse to part with them until the debt is satisfied. The right to repossession occurs only where a seller has delivered goods to a buyer and the buyer, before having paid in full for the goods, becomes bankrupt or insolvent. (Source p. 307) 18. A consumer is an individual purchasing goods for individual, personal or household, not business, use. (Source p. 312) 19. The purpose of a cooling-off period is to give consumers a time frame in which they may terminate a contract, without further obligation, and recover any monies paid to date. (Source p. 313) 20. The Competition Act attempts to prevent telemarketing by making the use of telephoning for promoting a product or business a criminal offence, where it is done in a deceptive manner and certain conditions are not met. (Source pp. 303-304)

CASES AND PROBLEMS

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1. Provincial legislation varies as to exempting the sale of goods to a business. For example, in British Columbia, the Sale of Goods Act must be specifically exempted in regards to a sale to a business, otherwise the act will apply. It therefore depends on the province and the terms as to whether Ashley can claim for the money she has spent. It is unlikely that she would receive compensation for her time as this expense was not foreseeable at the time she entered into the contract. If the flowers were for her own personal use, they could be considered not fit for the purpose, if Ashley had stated the flowers had to be capable of lasting for a certain length of time, so that the criteria for fitness for purpose, as set out on p. 301, would apply. 2. Title in the carpet passed to Harris on the Friday afternoon. The carpet was a “specific good” in a deliverable state and title passed at the moment the contract was made. Consequently the carpet already belonged to Harris when Kabul ‘sold’ it to Lewis. Technically, both Kabul and Lewis have committed the tort of conversion. However, the Sale of Goods Act provides that where a seller (Kabul) remains in possession of goods and transfers possession of those goods to another person (Lewis), who receives them in good faith and without notice of the previous sale, the transfer has the same effect as if the seller was authorised by the owner to sell the goods. (See, for example, s. 25(1) of the Ontario Act.) Consequently, Lewis obtains a good title. Harris is entitled to damages (which would normally be a return of the purchase price) from Kabul, even though their mistake was an innocent one. 3. Deceptive telemarketing is an offence under the Competition Act, and also the Criminal Code of Canada. Here Dorothy was misled as to the price she would be paying, so it was a deceptive act. If she did not receive a copy of the contract, she may be able to have the contract declared void or unenforceable, for failure to include the required statutory information as required. See p. 314. 4. The truck appears not to have been of merchantable quality (or fit for the purpose for which it was bought). The main question is whether the dealer can rely upon the exclusion in the express warranty, limiting liability to one year. The case is based on Gregorio v. Intrans-Corp. (1994), 115 D.L.R. (4th) 200, a decision of the Ontario Court of Appeal. In that case the court held that the contract had been made when the purchase order was signed; that is May 12, or at the latest three weeks later, when the dealer confirmed that the financing arrangements were satisfactory. Thus, the warranty and the exclusion clause did not form part of the contract, since they were not brought to the purchaser’s attention until after the contract was made. In any event, since the document was described as a warranty, it was not effective to exclude the implied term of merchantability, which is a condition. 5. This case is concerned with the passing of title and of risk. Normally, risk of loss or damage passes together with title, so the question is whose timber was burnt? The case is based on A.M.S. Equipment Inc. v. Case [1999] B.C.J. No. 124, a decision of the British Columbia Supreme Court. There, the court held that the contract was one for the purchase of future goods by description. The delivery was delayed through the fault of the vendor, who had failed to mark a sufficient number of the logs. He had therefore

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failed to put the logs in a deliverable state and property did not pass to the purchaser. Consequently, the risk remained with the vendor. 6. This is a case of sale by sample. Borough produced a prototype of the chair, which was approved by Granite’s purchasing offer, and the order for 2,500 chairs was made on the basis of the sample. In the case of a sale by sample the Sale of Goods Act provides that there is an implied term that the goods will correspond with the sample. There is no evidence that the chairs delivered differed in any way from the approved prototype. The chairs proved to be unfit for the purpose for which they were ordered (and that purpose was obvious to the seller from the circumstances). The sale was a sale by description and the Act implies (a) that the goods are of merchantable quality; and (b) that they are fit for the purpose for which they were bought. However, those implied terms are not absolute. In the present case there is nothing to suggest that the buyer relied on the seller’s skill or judgment as to fitness; Granite’s officer examined a number of models and actually specified the modifications that were to be made. As for merchantable quality, the officer had examined the prototype and presumably that examination should have revealed the defect. The case is based on Borgo Upholstery Ltd. v. Canada (Attorney General), [2004] N.S.J. No. 7, where on similar facts it was held that the vendor was not in breach of its obligations under the contract. 7. First, was there a memorandum in writing sufficient to satisfy the requirements of the Sale of Goods Act? Lakehead Fish sent an invoice for the price of the fish to Winnipeg Seafoods. While the invoice describes the goods sufficiently to satisfy the Sale of Goods Act, it is not signed by the party to be charged. However, the letter accompanying the invoice, in which Lakehead Fish state they have decided to cancel the order, is signed by the party to be charged and does satisfy the statute. Had title in the fish passed to Winnipeg Seafoods? The goods were unascertained at the time the contract was made, but they may have been unconditionally appropriated to the contract. Lakehead Fish transferred the storage account with Bailey to Winnipeg Seafoods' name for one thousand boxes; this earmarked the boxes for Winnipeg Seafoods. But, the text states at p. 331 that there must normally be delivery for the goods to have been unconditionally appropriated to the contract. The Sale of Goods Act states that where the goods are stored with a third party, there is no delivery by the seller to the buyer unless and until the third party acknowledges to the buyer that it holds goods on the buyer's behalf (Ontario act, s. 28(3)). In this case, Bailey (the third party) immediately sent an invoice to Winnipeg Seafoods (the buyer) for one month's storage charges. Delivery was then complete, and with that title passed to Winnipeg Seafoods. Lakehead should therefore succeed in its action against Winnipeg for the price of the fish. In the alternative, Winnipeg repudiated the contract and would be liable for the damages suffered by Lakehead. 8. Ebrahim would clearly have an action against Cival for breach of contract, and perhaps also in tort, in respect of deceit or misrepresentation. However, an additional remedy may be provided by consumer protection law.

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The case is based on Eby v. J.S. Saville Holdings Inc. [1997] O.J. No. 4623, a decision of the Ontario Court (General Division). The court held there that the defendants had made false, misleading and deceptive consumer representations which were unconscionable, and had failed to state material facts which they knew or ought to have known, on which the plaintiff relied upon to his detriment. Their conduct was contrary to Business Practices Act, R.S.O. 1990, c. B.18. The business practices of the defendants were unfair and warranted an award of punitive damages. CASE SUMMARIES

A.G. of Canada v. Laminated Structures & Holdings Ltd. (1961), 28 D.L.R. (2d) 92 Page 297, footnote 4 A.M.S. Equipment Inc. v. Case, [1999] B.C.J. No. 124 (British Columbia Supreme Court) The court held that the contract was one for the purchase of future goods by description. The delivery was delayed through the fault of the vendor, who had failed to mark a sufficient number of the logs. He had therefore failed to put the logs in a deliverable state and property did not pass to the purchaser. Consequently, the risk remained with the vendor. Andrews Bros. Ltd.v. Singer & Co. Ltd., [1934] 1 K.B. 17 (England) See Case 14.7 at p. 328 in the text. Australian Knitting Mills Ltd. v. Grant (1933), 50 C.L.R. 387 (High Court of Australia) Grant purchased woollen underwear from a retail clothes merchant. The underwear was already packaged by the time it reached the merchant. After wearing the underwear, Grant broke out in a rash which developed into acute general dermatitis. He claimed that the manufacturer's process increased the sulphur content of the wool. When the sulphur combined with human sweat, it produced an acid which was responsible for his rash and dermatitis. The court held that there was no evidence that Grant relied on the skill or judgment of the retailer so as to imply a condition of reasonable fitness. However, Grant bought the goods by description which gave rise to an implied condition of merchantable quality. The evidence did not show a breach of this condition and Grant's case failed. However, he succeeded in tort. Baldry v. Marshall, [1925] 1 K.B. 260 (England—Court of Appeal)

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The plaintiff wanted to buy a car. He went to the defendant dealer and said that he wanted a comfortable car, suitable for touring. He added that he had heard very favourable reports about the Bugatti (a famous make of sports and racing car). The defendants agreed that a Bugatti would meet his requirements. He consequently ordered a Bugatti 8cylinder from them. The car turned out to be totally unsuitable for his needs. The plaintiff sought to reject the car and recover his money. The court held that the requirement that the car be comfortable and suitable for touring was a condition. The fact that it was ordered and sold under its trade name did not exclude the operation of the Act, since the plaintiff had made it clear that he was relying on the defendants’ judgment. Bartin Pipe & Piling Supply Ltd. v. Epscan Industries Ltd. (2004), 236 D.L.R. (4th) 75 (Alberta Court of Appeal) See Case 14.8 at p. 331 in the text. Borgo Upholstery Ltd. v. Canada, [2004] N.S.J. No. 7 (Nova Scotia Court of Appeal) The appellant purchased chairs from the respondent to be used in classrooms. The appellant rejected the chairs and refused to pay for them based on fitness. The trial judge held that the appellant had not relied on the skill and judgment of the respondent; and, therefore was liable even though the chairs were found to be unfit for their intended purpose. Nor, could the appellant rely on the implied condition of merchantability, because the appellant had examined the chairs before accepting them. The Court of Appeal upheld the trial judge’s decision. Bristol Tramways v. Fiat Motors, Ltd., [1910] 2 K.B. 831 (England—Court of Appeal) The plaintiff contracted to buy a Fiat bus and six chassis from the defendant. The goods were to be used to carry passengers in and around Bristol, a hilly area. The plaintiff relied on the defendant's judgment that the goods would be free of the defects the plaintiff had experienced with certain other buses it had recently purchased. The bus and the chassis were unfit for the purpose for which they were purchased; they broke down and eventually became useless. The court held that the goods were not sold under their trade name, and that they had been bought by description. There were implied conditions that the goods would be reasonably fit for the purpose for which they were required and that they were of merchantable quality. The defendant was in breach of those conditions. Canadian-Dominion Leasing Corp. Ltd. v. Suburban Superdrug Ltd. (1966), 56 D.L.R. (2d) 43 (Alberta Court of Appeal) The defendant requested the plaintiff to purchase a small revolving showcase for jewellery from a third party and to lease it to the plaintiff. On the reverse side of the lease agreement were exemption clauses excluding all representations and warranties as to the merchantability of the machine or its fitness for any purpose. The machine broke down

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five or six days after the defendant received it. The manufacturer replaced the motor in it, but it broke down again in another two to three weeks. It was repaired once more and broke down again, at which time the defendant stopped using it and refused to pay any rent for it. The court held that the machine was far from being reasonably fit for the purpose for which it was intended. This was a flagrant breach of a fundamental term of the contract and, despite the exemption clauses the plaintiff was not entitled to recover under the contract. Caners v. Eli Lilly Canada Inc. (1996), 134 D.L.R. (4th) 730 (Manitoba Court of Appeal) The plaintiff farmer purchased herbicide from the defendant manufacturers. The herbicide was labelled with a warning: “To cover the possibility of injury to rotational crops, seed the crops shallow into a warm moist seedbed.” The plaintiff’s crops were damaged by the failure of the herbicide to control weeds effectively, and in the following year by the effect of the residue. The manufacturer was held liable for the breach of warranty that the herbicide was suitable for the purpose for which it was bought; in particular, the warning was held to have been insufficiently precise. The trial judge reduced the amount of damages on account of the farmer’s contributory negligence in seeding the second crop too deep. On appeal, the Manitoba Court of Appeal held that the defence of contributory negligence was not available. The defence was created by statute—in this case, by s.4 of the Tortfeasors and Contributory Negligence Act, R.S.M. 1987, c. T-90—which reads, in part: “contributory negligence by a plaintiff is not a bar to the recovery of damages by him and in any action for damages that is founded upon the negligence of the defendant, if negligence is found on the part of the plaintiff which contributed to the damages, the court should apportion the damages in proportion to the degree of negligence found against the plaintiff and defendant respectively.” The statute did not apply, since the plaintiff’s claim was based upon breach of contract. Chapronière v. Mason (1905), 21 T.L.R. 633 (England—Court of Appeal) The plaintiff bought a bun from the defendant baker. When he bit into it, his teeth struck a stone; one of his teeth was damaged and he developed an abscess on his jaw. The court held that the defendant must have known of the purpose for which the plaintiff bought the bun, and it was obvious that the plaintiff relied on the defendant's skill and judgment. However, the jury had held at the trial that there had been no breach of the warranty in fact. The Court of Appeal ordered a new trial. Coast Hotels Ltd. v. Royal Doulton Canada Ltd., [2000] B.C.S.C. 1545 (British Columbia Supreme Court) See Case 14.3 at p. 324 in the text. Fording Coal Ltd. v. Harnischfeger Corp. of Canada (1991), 6 B.L.R. (2d) 157 (British Columbia Court of Appeal) Copyright © 2016 Pearson Canada Inc.

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The plaintiff purchased a mining shovel, which it used continuously from 1982 to 1987, when a roller on the shovel suddenly failed. It took thirty-two days to repair the shovel, at a cost of $400,000 on the repair and $160,000 for a temporary replacement shovel. Normally a roller could be expected to have a working life of about twenty years. The defendant vendor had given a one-year warranty that was more extensive than the standard warranties implied by s.18 of the Sale of Goods Act, R.S.B.C. c.370. It argued that the question of allocation of risk had been specifically addressed in the contract and that the purchaser had accepted the one-year warranty in place of the standard implied warranties. The court held that, notwithstanding the express term, the standard warranties continued to apply. The express warranty was not inconsistent with the less comprehensive implied warranties, which were not restricted in time. On the facts, the implied warranties of fitness and merchantable quality were held to have been breached. Gee v. White Spot Ltd. (1986), 32 D.L.R. (4th) 238 (British Columbia Supreme Court) The plaintiff claimed damages for botulism he alleged to have suffered after eating a meal at the defendant restaurant. The court held that the sale of food in a restaurant constitutes a sale of goods within the Sale of Goods Act, and the conditions of quality implied under s. 18 of the Act (similar to s. 15 of the Ontario legislation) gave the plaintiff a cause of action against the defendant. Gregorio v. Intrans-Corp. (1994), 115 D.L.R. (4th) 200 (Ontario Court of Appeal) The plaintiff was a truck driver. In 1984, he purchased a truck from the defendant for the purpose of transporting goods over long distances. Almost immediately, the plaintiff experienced problems with the truck; the problems were incapable of being remedied in spite of numerous attempts to service the truck by the defendant. In 1987, the plaintiff sued for damages or rescission. The plaintiff continued to use the truck until 1991 when he sold it. The trial judge imposed liability on the defendant based on the statutory conditions of fitness for a purpose and merchantable quality under the Sale of Goods Act. The Court of Appeal upheld this decision. With respect to an exemption clause limiting liability on the warranty of fitness, the court held, per Laskin, JA: Further, I would uphold the trial judge's finding of Intrans' liability under the Sale of Goods Act, even if Gregorio had received timely notification of the warranty. The express terms of the Peterbilt Warranty do not exclude the statutory conditions of fitness for a purpose and merchantable quality in s.15. There is a difference between a breach of warranty and a breach of condition. Words that exclude only implied warranties do not also exclude implied conditions. Although a vendor may exclude the implied conditions contained in the Sale of Goods Act, he must use explicit language to do so. See Chabot v. Ford Motor Co. of Canada Ltd. (1982), 39 O.R. (2d) 162 (H.C.), approved in Hunter Engineering Co. Inc. et al. v. Syncrude Canada Ltd., 1989 CanLII 129 (SCC), [1989] 1 S.C.R. 426 at 449-50. At best, from Intrans' perspective, the warranty is ambiguous as to whether it excludes the statutory conditions, in which

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case the rule of contra proferentem would apply. Accordingly, even if the warranty applies Gregorio still has a claim against Intrans for breach of the implied conditions in s.15. Hodgkinson v. Hitch House Ltd. (1987), 60 O.R. (2d) 793 (Ontario High Court of Justice, Divisional Court) The defendant contracted to build a mobile home on the plaintiff's cottage lot. The house was supplied by a third party (which later became bankrupt) and was delivered in two parts. The parts were laid on the foundation and joined together. The defendant did some additional work on the building. Four years later, the house and its contents sustained considerable water damage caused by leaks in the building. The court held that the plaintiff bargained for the supply and erection of a house; the Sale of Goods Act did not apply to the transaction. Hunter Engineering v. Syncrude, [1989] 1 S.C.R. 426 (Supreme Court of Canada) See Case 14.6 at p. 328 in the text. The appellants, Hunter et al supplied gearboxes to the respondent. The gear boxes were defective. The contract contained a broad exclusion clause. The Court found that this was a fundamental breach of the contract and the exclusion clause did not apply. Karsales (Harrow) Ltd. v. Wallis, [1956] 2 All E.R. 866 (England—Court of Appeal) Stinton offered to sell Wallis a second-hand Buick. Wallis inspected the car and found it to be in excellent condition; he agreed to buy it if Stinton would arrange a lease-to-own agreement with Karsales. Stinton then sold the car to Karsales who resold it to Wallis under the lease-to-own agreement which contained a term that no condition or warranty as to the car's fitness for any purpose was implied in the contract. Stinton had retained possession of the car and Karsales had never inspected it. Stinton left the car outside Wallis' home one night and Wallis discovered the car was in deplorable shape and would not run. The car had been badly damaged and had been towed to Wallis' house. Wallis refused to accept the car and it was towed back to Stinton, but Karsales sued for arrears under the lease-to-own agreement, relying on the exemption clause in the contract. The court held that the car delivered was not that contracted for under the lease-to-own agreement and therefore Karsales could not rely on the exemption clause to enforce the contract. Laminated Structures & Holdings Ltd. v. Easter Woodworkers Ltd., [1962] S.C.R. 160 (Supreme Court of Canada) As there was reliance on the skill and judgment, the contract for work and supply of materials therefore contained an implied condition of fitness analogous to that found in the Sale of Goods Act.

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Leaf v. International Galleries, [1950] 2 K.B. 86.43 (England – House of Lords) See Case 14.9 at p. 340 in the text. McCann v. Sears Canada Ltd. (1998), 43 B.L.R. (2d) 217, Aff’d. (1999) 122 O.C.C. 91 (Ontario Supreme Court) See Case 14.5 at p. 326 in the text. McCready Products Ltd. v. Sherwin Williams Co. of Canada Ltd. (1985), 61 A.R. 234 (Alberta Court of Appeal) Sherwin Williams developed a type of paint for aluminum siding manufactured by McCready Products. The paint weathered poorly and McCready Products brought an action for breach of the implied condition that the paint was reasonably fit for its intended purpose. The court held that Sherwin Williams knew of the purpose of the paint and that McCready relied on its skill. The paint was a complete failure and the fault lay entirely with the paint itself. Sherwin Williams was liable to pay McCready Products damages for the claims made against McCready by dissatisfied customers. Nikka Traders, Inc. v. Gizella Pastry Ltd., 2012 BCSC 1412 Page 302, footnote 17 Pinnock Brothers v. Lewis and Peat. Ltd., [1923] 1 K.B. 690 (England—King’s Bench Division) The plaintiff bought one hundred bags of "East African copra cake" (used for cattle feed) from the defendant under a contract stating that the goods would be of fair average quality and delivered sound. The contract provided that the goods were not warranted free of defects rendering them unmerchantable. The plaintiff resold the cake to dealers who in turn sold it to various farmers whose cattle became ill after eating it. It was proven that the cake contained so large a proportion of castor beans that it was poisonous. The farmers claimed damages from the dealers who in turn claimed against the plaintiff. The court held that the exemption clause as to defects in the goods did not protect the defendant since the mixture containing castor beans could not properly be described as "copra cake". Pitman Estate v. Bain (1994), 19 C.C.L.T. (2d) 1 (Ontario Court General Division) This was another case involving HIV-tainted blood. The court held that biological products are not the same as manufactured products in a commercial sense. Biological products carry inherent risks; no implied warranties apply.

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SNC-Lavalin International Inc. v. Liquid Carbonic Inc. (1996), 28 B.L.R. (2d) 1 (Alberta Court of Queen’s Bench) See Case 14.4 at p. 325 in the text. Spanos v. Dufferin Tile & Marble Inc., 2007 Carswell Ont 8625 (Ontario Superior Court of Justice) Ms. Spanos hired Dufferin to install a granite countertop. At the time she entered into the contract, she was told the countertop would be free of veins. The resulting countertop was not free of veins, they were quite obvious, and the counter had cracks, large gaps between slabs of granite, and the sink hole was cut in the wrong place so that the faucet would not work. Ms. Spanos sued Dufferin for breach of contract. The court found that the contract had an implied term “that the goods constituting part of the services must comply with their description, that is, their specifications”. However, the countertop did not meet the specifications that Ms. Spanos was told and therefore Dufferin breached the contract. The court also found there was another breach of an implied term that constituted a fundamental breach of the contract: Ms. Spanos received no benefit from Dufferin whatsoever amounting to a “total failure of consideration”. Stevenson v. Colonial Homes Ltd. (1961), 27 D.L.R. (2d) 698 (Ontario Court of Appeal) Stevenson made a written contract with Colonial Homes for the purchase of a prefabricated home, with a down payment of $1,000. He later refused to take delivery of the home and Colonial Homes rescinded the contract, retaining Stevenson's $1,000. When Stevenson sued for the return of his money, the court held that he was entitled to that sum less any damages Colonial had suffered as a result of Stevenson's breach. Stockloser v. Johnson, [1954] 1 Q.B. 476 (England—Court of Appeal) Stockloser agreed to purchase factories and machinery that Johnson was leasing to two other companies on a royalty basis. Stockloser was to take over the leases and become the recipient of the royalties. The contracts provided that payment of the purchase price would be made by instalments and that if Stockloser defaulted on any instalment for more than twenty-eight days, Johnson could rescind the contracts, keep what Stockloser had paid, and retake possession of the machinery and plants. Stockloser was unable to meet an instalment. Johnson rescinded the contracts, kept Stockloser's money and retook possession. Stockloser sued for the return of his money, claiming that the forfeiture clause was unconscionable enough to constitute a penalty clause which the court should not uphold. The court held that Johnson was allowed to insist on his contractual rights since the term was not onerous enough to be penal in nature given that Stockloser had been receiving royalties under the leases.

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Sun Toyota Ltd. v. Granville Toyota Ltd. [2002] B.C.J.No.807 (British Columbia Supreme Court) The plaintiffs purchased five vehicles and hired a firm (S) to transport them. S ‘sold’ the vehicles to the defendants and then told the plaintiffs that it wished to purchase the vehicles. The plaintiffs agreed and sold them to S at a small mark-up. Later, the plaintiffs discovered that S had ‘sold’ the vehicles to the defendant before it had bought them from the plaintiffs. The plaintiffs sued the defendants for conversion. The court held the defendants liable, but awarded only nominal damages since the plaintiffs had suffered little or no loss. Szilvasy v. Reliance Home Comfort, 2012 ONCA 821 Page 314, footnote55 ter Neuzen v. Korn (1995), 127 D.L.R. (4th) 577 (Supreme Court of Canada) See Case 14.2 at p. 321 in the text. The plaintiff was infected with HIV as a result of artificial insemination carried out by the defendant physician. The risk of infection in this way did not become widely known until some months later and, at the time of the insemination, no test was available in Canada for the detection of HIV in semen. The defendant had followed what were then the standard Canadian procedures for recruiting and screening donors. At trial, the jury found the defendant negligent and awarded damages of almost $1 million. On appeal, the finding was overturned. There was no room for a finding of negligence where the defendant had followed the standard practice of the profession, unless that standard practice was obviously inadequate. Vanvic Enterprises Ltd. v. Mack, [1985] 3 W.W.R. 644 (British Columbia Court of Appeal) Mack offered to buy commercial property from Vanvic Enterprises for $900,000 with a non-refundable deposit of $45,000. Vanvic refused to accept the offer until the deposit was made available to it, and Mack refused to give the deposit until the offer was accepted. In order to resolve the impasse, Mack agreed to pay the deposit in trust to Vanvic's lawyer, to be paid to Vanvic upon acceptance of the offer. Vanvic finally accepted the offer after Mack gave a cheque for $45,000 to Vanvic's lawyer. Two days later, Mack stopped payment on the cheque and notified Vanvic that he had decided not to buy the property. The court held that Mack had breached a condition of the contract of sale. Both parties were discharged from further performance but the contract was not rescinded. Mack's obligation to forfeit the deposit had arisen upon Vanvic's acceptance of his offer. Accordingly, the non-refundable deposit had already accrued to Vanvic and it was entitled to that sum in damages. Varley v. Whipp, [1900] 1 Q.B. 513 (England—Queen’s Bench Division)

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The plaintiff agreed to sell the defendant a second-hand reaping machine which the defendant had never seen. The plaintiff stated that the machine was one year old and had only been used to cut fifty or sixty acres. He delivered the machine to the defendant who refused to accept it as the machine was old and in bad shape. The court held that there had been a contract for the sale of goods by description under the Sale of Goods Act. Therefore, the contract contained an implied condition that the goods would correspond with the description, which they did not. There had been no acceptance by the defendant and title to the machine had not passed to him. The plaintiff was not entitled to recover the purchase price. Wharton v. Tom Harris Chevrolet Oldsmobile Cadillac Ltd., [2002] B.C.J.No.233 (British Columbia Court of Appeal) The plaintiff's husband bought a Cadillac from the defendants. After the car was delivered the plaintiff detected a buzzing noise. The car was serviced a number of times but the noise was not fixed. Eventually a specialist was sent to correct the problem. The problem was caused by a loose wire in a module in the back of the car. The plaintiff sought damages for loss of use, enjoyment and mental anguish as a result of the noise. The Court of Appeal upheld the trial judge's finding that the problem in the sound system did not render the vehicle of non-merchantable quality, but did breach the implied warranty of fitness.

Win Sun Produce Co. v. Albert Fisher Canada Ltd. (1998), 111 B.C.A.C. 295 (B.C.C.A.), varying cost order [1999] B.C.J. No. 294, leave denied [1998] S.C.C.A. No. 522 (QL) (British Columbia Court of Appeal) See Case 14.1 at p. 320 in the text. Wren v. Holt, [1903] 1 K.B. 610 (England—Court of Appeal) The plaintiff bought and drank beer in the defendant's beer house, which supplied only Holden's beer. The plaintiff went there because he expected to get Holden's beer which he preferred above all others. Arsenic in the beer made the plaintiff ill, although some of his illness was caused by excessive drinking. The court held that the beer had been bought by description under the Sale of Goods Act. Although examination of the beer by the defendant would not have revealed the defect, the defendant was nevertheless liable under an implied warranty that the beer was of merchantable quality.

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CHAPTER 15 BAILMENT AND LEASING BAILMENT (Source p. 323) Bailment is a subject that embraces a wide variety of contracts, although all have the common element of separation of ownership and possession. The rights and obligations of parties under a bailment may be governed by contract. Often, a bailee will include a disclaimer as a term of the contract; students should be reminded of the principles of offer and acceptance discussed in Chapter 6 and of the need for bailees to bring disclaimers to the attention of bailors. Bailment relationships usually end up in court in one of three circumstances: (1) the goods are damaged (2) either party fails to pay proper charges or expenses (3) the bailee fails to return the goods. Students should note the remedies that are available in each case. It should also be noted that a bailment may be for value or be gratuitous, and may be for the benefit of either party or of both. When discussing contractual standards of care and common carriers, instructors may want to refer students to Figure 30.1 at p. 710, in the text, which deals with cargo shipments. Students may also need to be reminded of the standards of care as opposed to a duty of care from the sections on negligence in Chapter 4. Bailment has its own rules as compared to negligence which may make it easier for a plaintiff to sue; a duty of care in bailment is automatically established. LEASING (Source p. 332) This chapter could simply be entitled Bailment, since leasing is really just one type of bailment. However, leasing contracts, as an alternative to purchase and sale, have become so important in recent years that the subject merits separate treatment in its own right. The leasing of real property is dealt with separately in Chapter 22. Leasing, as noted above, is a form of bailment. The owner (lessor/bailor) of a chattel permits another person (lessee/bailee) to have temporary possession of it, in return for the payment of rent. The Checklist on p. 336 sets out the standard terms in a lease contract. As we note in the chapter, business practice normally draws a distinction between: operating leases, where the intention is that the property will revert to the owner at the end of the period of the lease; and purchase leases, where the intention is that the lessee will acquire eventual ownership. Sometimes, as where there is an option to purchase, the distinction is not entirely clear. Purchase leases can further be divided into security leases (where the lessor/seller provides the credit and retains ownership of the chattel as security) and finance leases (where credit is provided by a third party). Students should be encouraged to examine and contrast the respective rights and liabilities of the parties with those that exist under a contract for the sale of goods, considered in the previous chapter. The use of a lease as a security device is considered further in Chapter 28. Copyright © 2016 Pearson Canada Inc.

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STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 339) Once again, students are encouraged to consider the real risks businesses face when involved in the various types of bailment and lease. A risk management plan should include dealing with these issues by ensuring that responsible parties are informed of legislation affecting the rights of balilors/lessors and bailees/lessees. They should also stay current with industry standards and norms in order to maintain proper standards of care when dealing with bailed property. INTERNATIONAL ISSUE (Source pp. 330-331) International Transport of Goods Question 1 - Having read the section of the text just prior to this International Issue, students should be aware that common carriers bear the risk of loss or damage to the goods they carry, and that carriers have only three defences available to them. The standard terms for assignment of liability are of no assistance if the point of damage cannot be established (see Figure 31.1 at p. 806 in the text). Students may come up with many schemes for apportioning liability; however, would it be unusual or unfair to evenly apportion liability amongst all carriers? Or to apportion liability based on the relative time the goods were in each carrier’s possession? Consider policy reasons for imposing liability and how carriers would deal with insurance costs. ETHICAL ISSUE (Source p. 338) Consumer Leases Question 1 - Discussing this question will likely give the instructor some sense of students’ political leanings. Typically speaking, when it comes to leases, we aren’t talking about small ticket items – entering into a lease agreement involves significant financial commitment and consumers should be responsible enough to reflect and get advice before signing any agreement. People should be responsible for doing their own due diligence. That said, there are numerous shady businesses that pressure people into signing agreements without giving them the opportunity to reflect and seek advice. Moreover, most people do not want to incur the time and expense of seeking independent advice; is it not a better public policy decision to protect these folks from the get-go, rather than let them “learn their lesson” the hard way? After all, our economy needs people to spend, not go broke making bad decisions. What would probably work best is a solution that adequately balances these two points – in this sense, a disclosure requirement would seem to provide sufficient balance – consumers would have the opportunity to see exactly what they were getting themselves into, but wouldn’t be entirely protected from making bad or foolish bargains. As for adding an implied term, instructors should ask students who are in favour of such a solution to explain what they think such a term should look like – how far should it go and how would they word it? Question 2 - No, a cap does not unfairly penalize lessors, provided the cap allows the lessor enough time to make alternative arrangements – just as severance pay, one month’s

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notice to a landlord, etc. operate as sufficient to terminate other forms of contract, a cap should be designed to strike a balance between both sides who entered into a lease agreement. Question 3 - In any recession, credit options decrease for consumers when incomes are fixed or low. Decline in consumer auto leasing post-2008 can be attributed to a number of factors, including reduced income; financial difficulties faced by the lessors, forcing higher lease rates; and, high levels of competition between lessors and vendors, pushing outright purchasing at lower interest rates. The massive debt problems faced by the major auto manufacturers affected the availability of leases as well as pricing, making it less attractive to consumers to lease rather than buy, where that was an option.

QUESTIONS FOR REVIEW 1. An operating lease is a lease where there is no intention to transfer ownership. A purchase lease is a lease whereby ownership is intended to change hands at the end of the lease term. (Source p. 333) 2. A security lease is where the lessor has a security interest by virtue of his continued ownership of the property (as in a purchase lease where the lessor provides the credit). In a finance lease, a third person, such as a financial institution, provides the credit financing. In this type of transaction the supplier of the goods sells them to the financer, who in turn leases them to the lessee. (Source p. 334) 3. Warranties normally implied in a chattel lease are (a) a warranty of quiet possession; and (b) a warranty of fitness for the purpose for which the article was hired. (Source p. 336) 4. Probably the main reason for preferring leasing lies in the way the transaction is treated for tax purposes. (Source p. 335) 5. A business with cash-flow problems may enter into a sale-and-leaseback transaction to raise working capital. The business sells assets for cash, and leases them back in return for future rental payments. (Source p. 334) 6. The lessor may be entitled both to retake possession of the chattel and to sue for damages for loss of bargain in respect of the rent that would have been payable if there had been no default, or for any minimum rent stipulated in the contract. (Source p. 337) 7. (a) An example of non-contractual bailment occurs when the owner of a lawnmower lends it gratuitously to a neighbour. (b) An involuntary bailment occurs, for example, when a customer leaves a coat behind in a restaurant. A person who finds a valuable object is not bound to take possession of it, but once she does so she becomes a bailee for the owner. (Source p. 323)

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8. Bailments require a transfer of possession and a voluntary acceptance of the common law duty of safekeeping, while licences amount to no more than a grant of permission to the user of a chattel to leave it upon the licensor’s land on the understanding that possession is not transferred. (Source p. 323) 9. The standard of care required by the law of torts applies in circumstances not covered expressly or impliedly by the bailment contract, and the standard applies also to gratuitous bailments involving no contract at all. The required standard of care varies according to the type of bailment. The standard of care is most exacting on a bailee when the bailment is gratuitous and for the benefit of the bailee; it is least exacting when it is gratuitous and for the benefit of the bailor. (Source p. 326) 10. Sub-bailment is the relationship between a bailor and sub-bailee. A sub-bailee is a person who receives a bailment of property from a bailee. (Source p. 325) 11. A right of lien under common law rules is available to bailees who perform services in the nature of repairs or improvements to goods bailed with them, to innkeepers, to common carriers, who are under a duty to accept goods from anyone so long as they have space for them, and also to professional people like lawyers and bankers, who have a common right of lien over documents in their possession when they have performed services related to the documents. (Source p. 327) 12. Fungible goods are goods that can be replaced with identical goods. When goods stored are fungible, the bailee’s liability is discharged when she returns to the bailor goods of the exact description in the warehouse receipt. (Source p. 328) 13. A warehousing firm that accepts goods for storage is a bailee for storage or safekeeping and is under a duty to take care of goods stored with them unless the contract specifies otherwise. (Source p. 328) 14. A common carrier is a business that holds itself out to the public as a carrier of goods for reward. A private carrier is a business that undertakes on occasion to carry goods for reward, but reserves the right to select its customers and restrict the type of goods it is willing to carry. (Source p. 329) 15. A common carrier undertakes to indemnify the shipper (the bailor) against loss whether the loss occurs through the carrier’s fault or not. (Source p. 330) 16. The defences available to a common carrier when goods in its possession are damaged or lost are (i) an act of God, (ii) an inherent vice in the goods, or (iii) default by the shipper. (Source p. 330) 17. At common law, innkeepers are liable for the loss or theft of their guests’ goods. A hotel may however, avoid liability if it can show that the disappearance was due to the carelessness of the guest. (Source p. 331) 18. A pledge, also known as a pawn, is a bailment of personal property as security for repayment of a loan. (Source p. 331)

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CASES AND PROBLEMS 1. Leaving the coat created a non-contractual or gratuitous bailment. (Source p.323) The standard of care for a gratuitous bailment is the lowest – but liability can attach for gross negligence. Whether Ashley and the restaurant will be liable depends on whether negligence can be proven, and whether the posted exemption clause applies. The sign does say loss or damage, which occurred here. 2. Intrepid may or may not have a claim against Globres for breach of the contract; in any event, Intrepid acted correctly in attempting to minimize the loss resulting from the breach (if any), by seeking to escape from the leasing contract with Banditoil. The principal issue here is whether Banditoil is entitled to claim the full twelve months’ rental, of $180,000, despite the fact that Intrepid purported to cancel the lease before it had even taken delivery of the drilling unit. Banditoil will claim that it was ready and able to deliver the drilling unit and that Intrepid had agreed to make twelve monthly payments of $15,000. There seems to be no statutory bar (in Canada) to such a claim. However, Intrepid can argue that, by leasing the unit to Cutprice, Banditoil impliedly consented to a discharge of the original lease agreement. (The effect is the same as if Banditoil had agreed to take back the unit ahead of time.) Further, by leasing the unit to Cutprice, Banditoil placed itself in the position of no longer being able to perform its part of the bargain. Consequently, Banditoil should be restricted to a claim for damages, equal to the difference (if any) between the rent agreed with Intrepid and the rent it was able to obtain from Cutprice for the same twelve month period. 3. The issue in this case is whether Dave is entitled to rely on the clause in the contract that limits his liability to approximately $7,000 (Dave has admitted liability for the loss). Firth had agreed to the limitation, but only because she had been assured that the trailer containing her goods would be properly supervised. The case is based on Solway v. Davis Moving & Storage Inc. 62 O.R. (3d) 522, where the Ontario Court of Appeal held that the defendant storers should not be entitled to rely on the limitation clause. The plaintiff was never advised that her goods might be stored in a trailer left unattended on a public street, and had never agreed to such an arrangement. 4. If Nerdley had bought the equipment from Millenium, her claim would be based on the provisions of the Sale of Goods Act. She would claim that she had made known to Boffin the purposes for which she required the equipment, and had relied upon his skill and judgment; consequently, there was an implied condition (see Chapter 14 of the text) that the goods were fit for that purpose. The problem is complicated by the fact that Nerdley did not buy the equipment from Millenium. Instead, Millenium sold it to the finance company which in turn leased it to Nerdley. That raises two further issues: (a) do the terms implied by the Sale of Goods Act

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apply by analogy to lease contracts, especially purchase leases; and (b) was the standard printed clause in the lease sufficient to exclude liability? The law is relatively uncertain on point (a), although there is authority for the proposition that the implied condition of fitness for the purpose applies to leases (see the text at p. 24). The difficulty is that Nerdley made the purpose known to Millenium (through Boffin), but not to the finance company, and it would be hard to establish that Boffin was acting as agent for the finance company, since no question of lease financing had been raised at the time Nerdley told him what she wanted the equipment for. Further, the exclusion clause in the lease contract would seem to have been carefully drafted to ensure that the finance company is not liable. This leaves the possibility that Nerdley might be able to sue Millenium. Even though Millenium did not sell the equipment to her, there is a collateral contractual relationship between them. (Nerdley agrees that she will lease the equipment from the finance company if Millenium will sell it to them and arrange finance.) Consequently, she might argue that Millenium has a duty to ensure that the goods selected are suitable for the purpose which she has made known to them. 5. The contract in this case is one for work on a chattel (similar to contract for repair) and gives rise to a bailment for value. The problem raises two main questions. First, is 4D entitled to repudiate the contract? It has purported to do so on the ground that Jung has taken a lot longer over the work than it had anticipated, and also that, since entering into the contract, it has heard negative things about Jung’s work. However, it made no stipulation in the contract as to the time for completion: consequently, there would seem to be an implied term that the work would be done within a reasonable time. It is unlikely that a period of 3-4 weeks would be considered unreasonable. 4D should be entitled to terminate the contract and to recover its computers on payment of the contract price. However, Jung would have a lien on the computers—that is, he is entitled to keep possession of them until he is paid what is due to him. That might be either the full contract price or, if 4D is entitled to repudiate the contract, at least the value of the work already done by him (quantum meruit). The problem is based on 3D Holdings Inc. v. Young, [2000] O.J.No.1798 a decision of the Ontario Superior Court, in which it was held that the bailee was entitled to a lien on the computers until his claim for payment had been resolved.

CASE SUMMARIES

Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994), 111 D.L.R. (4th) 493 (Ontario Court of Justice, General Division) The owner of a number of vans leased them to the defendant truck leasing firm and registered the leases under the Personal Property Security Act. The respondent trust company provided financing and also registered its interest. The truck leasing company became bankrupt. The question arose as to the priority as between the original owner and

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the trust company. The court held that the owner had priority as a result of the first registration. Although the leases were genuine operating leases they were also intended to be financing leases and as such created a security interest. Consequently the Act applied and the owner’s registration was effective. Astley Industrial Trust Ltd. v. Grimley, [1963] 1 W.L.R. 584 (England—Court of Appeal) The plaintiff company bought a lorry from dealers under a hire-purchase agreement and leased it to the defendant. Before signing the agreement, the defendant pointed out certain defects to the dealers, who promised to put them right. They did not do so. Other defects were later discovered and the defendant sought to terminate the agreement. The court held that, subject to any contrary agreement in the hiring contract, there is an implied condition, analogous to that in the Sale of Goods Act that goods supplied under a hirepurchase contract are of merchantable quality and are fit for the purpose for which they are supplied Bata v. City Parking Canada Ltd. (1973), 2 O.R. (2d) 446 (Ontario Court of Appeal) The plaintiff parked his car at the defendant’s lot and left the keys with the defendant. The court held that even in these circumstances, the language on the parking ticket was sufficient to create a relationship of licensee and licensor rather than bailment. Cuvelier v. Bank of Montreal (2000), 100 A.C.W.S. (3d) 691; [2000] N.S.J.No.334 (Nova Scotia Supreme Court) The plaintiffs brought an action to recover cash missing from a safe deposit box rented from the defendant bank. The bank had mistakenly drilled open the plaintiffs' box but claimed that there was no opportunity for cash to be taken. The court held that the contract was one of bailment for reward. The onus was therefore on the bank to show that the cash did not go missing through a negligent or wrongful act on its part. It had failed to do so and was liable. Davies v. Collins, [1945] 1 All E.R. 247 (England – Court of Appeal) See Case 15.4 at p. 350 in the text. Duckworth v. Armstrong (1996), 29 C.C.L.T. (2d) 239 (British Columbia Supreme Court) See Case 15.6 at p. 351 in the text. Fitzgerald v. Grand Trunk Railway (1880), 4 O.A.R. 601 (Ontario Court of appeal) The substantial question must always be, whether that care has been exhibited which the special circumstances reasonably demand. (From the text at p. 351) Copyright © 2016 Pearson Canada Inc.

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Griffith Steamship Co. Ltd. v. Western Plywood Co. Ltd., [1953] 3 D.L.R. 29 (British Columbia Court of Appeal) The plaintiff owned a barge which it delivered to the defendant for loading a cargo of cottonwood logs. Under the contract, the plaintiff was expressly exempted from liability for loss or damage, however caused. The defendant was required to load and lash the logs in accordance with the rules of the Board of Marine Underwriters of San Francisco, and get their approval of the loading job. The inspector for the underwriters found that the barge was overloaded and that the logs were insufficiently lashed. Unknown to the defendant, the tanks of the barge contained an excess of water which created a dangerous condition. The barge capsized, the cargo was spilled overboard and the barge was damaged. The court held that the defendant was entitled to assume that the barge was in seaworthy condition and had no reason to anticipate excess water in the tanks. There was nothing to suggest that the way the logs were loaded and lashed resulted in the capsizing. The defendant, as bailee, had shown that the accident happened without its negligence and it was not liable for the damage to the barge.

Heffron v. Imperial Parking Co. (1974), 3 O.R. (2d) 722 (Ontario Court of Appeal) The plaintiff, car owner parked it in the defendant's parking lot, receiving a numbered ticket and delivering the keys to the attendant. The parking lot closed at midnight and the practice was for the attendant to take the keys of cars still in the lot to a nearby parking garage where there was an attendant on duty until 2:00 a.m. The plaintiff, on returning to the lot an hour after its closing, discovered that his car was missing. It was later recovered in a damaged state and without certain items of personal property that had been in it. The parking ticket contained the words "we are not responsible for theft or damage of car or contents, however caused". The same words were displayed on signs in the parking lot. The court of appeal held the defendant was a bailee, not a licensee, in that it took positive custody of the plaintiff's car. The failure to return the car in accordance with the duty of a bailee was a fundamental breach of the contract of bailment, the effect of which was to render the exemption clause ineffective. The liability of the defendant extended to any personal property of the kind that might reasonably be expected to be found in a car.

Helby v. Matthews, [1895] A.C. 471 (England—House of Lords) The owner of a piano agreed to let it on hire, the hirer to pay a monthly rent over two years, on terms (1) that the hirer might terminate the agreement by returning the piano, but would still be liable for all arrears; and (2) that if the hirer should pay all the instalments as agreed he would become the owner at the end of the lease. The hirer paid a few instalments and then pledged the piano with a pawnbroker. The question arose whether the pawnbroker had obtained good title to the piano. The court held that the hirer had no obligation to buy the piano—he merely had an option to do so. Consequently he

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had not agreed to buy goods, within the meaning of s.9 of the Factors Act, and could therefore not pass title to the pawnbroker. Hertz Canada Ltd. v. Suburban Motors Ltd., [2000] B.C.J. No. 830 (British Columbia Supreme Court) See Case 15.5 at p. 351 in the text. Hallmark Pool Corp. v. Storey (1983), 144 D.L.R. (3d) 56 (New Brunswick Court of Appeal) As a result of reading the defendants’ advertisement in a local newspaper, the plaintiffs order a swimming pool from them to be installed at the plaintiffs’ home. The advertisement had emphasized the durability of the pool and stated that it was guaranteed for fifteen years. The advertisement reproduced a copy of the guarantee document—in very small print, readable only with a magnifying glass. The pool was installed by a local contractor. It deteriorated and became unusable after four years. The defendants sought to rely on the wording in the guarantee document, which restricted liability to the quality of certain components only. The court held that the advertisement constituted a collateral contract of guarantee, the consideration for which was the plaintiff entering into the purchase contract. The reasonable meaning of the advertisement was that the pool was fully guaranteed for fifteen years. [NOTE: the case is not a leasing case. It demonstrates, however, that a collateral contract may exist between the original seller and a lessee under a finance lease.] Hogarth v. Archibald Moving & Storage Ltd. (1991), 57 B.C.L.R. (2d) 319 (British Columbia Supreme Court) A fire at the defendants' warehouse resulted in the destruction of the plaintiff's goods. The court held that the defendants' failure to install alarm and sprinkler systems amounted to a failure to exercise due care and diligence. Kauffman v. Toronto Transit Commission, [1960] S.C.R. 251 (Supreme Court of Canada) The plaintiff was travelling by subway. She exited at her station and took the escalator up to street level. In front of her was a man, and in front of him were two youths. The youths started a scuffle and fell back on the man, who in turn fell on the plaintiff. The plaintiff suffered severe injuries. She sued the defendant in negligence. The trial judge allowed the claim, but the court of appeal overturned the decision. The Supreme Court dismissed the appeal. In the course of the decision, Kerwin, C.J. likened the escalator to a common carrier of people as being part of the transit system.

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Keneric Tractor Sales Ltd. v. Langille (1987), 43 D.L.R. (4th) 171 (Supreme Court of Canada) The appellant, Langille, agreed to lease agricultural equipment from the respondent, Keneric. Langille defaulted and Keneric repossessed the equipment, sold it and sued Langille for damages for loss of profits. The court held that the lessor was entitled both to terminate the lease and to recover damages. Letourneau v. Otto Mobiles Edmonton (1984) Ltd. [2002] A.J.No.825 (Alberta Queen’s Bench) The plaintiffs arranged to have their trailer repaired by the defendants. They delivered the trailer to a parking lot next to the defendants’ premises for repair the following day. An employee of the defendants showed them where to park it. The trailer was stolen from the parking lot. The plaintiffs claimed damages from the defendant for the loss of their trailer. The court found in favour of the plaintiffs. A bailment relationship had been established and the bailee (repairer) was in possession of the trailer. Although they never physically delivered possession of the trailer to the defendants the plaintiffs had complied with the defendants’ instructions regarding the drop-off of the trailer. The defendants breached their duty of care to properly secure the trailer. London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 (Supreme Court of Canada) The defendant agreed to store a transformer for London Drugs. The storage contract contained a clause limiting its liability to $40 on any one packet, unless the bailor chose to purchase additional insurance. Employees of the defendant negligently dropped the transformer while trying to move it, causing damage of almost $34,000. The defendant was held to be vicariously liable in negligence, but was entitled to rely on the contractual provision limiting its liability to $40. The employees were personally liable for their own negligence, but they too were entitled to rely on the contractual exemption even though they were not parties to the contract. It was contemplated that the transformer would be stored by employees, and to uphold the doctrine of privity of contract would have the effect of allowing London Drugs to circumvent a limitation that it had expressly agreed to. Mallais v. D.A. Campbell Amusements Limited, (2007) 84 O.R. (3d) 687 (Ontario Court of Appeal) Mallais visited an amusement park in a mall parking lot and went on a ride. The ride attendant failed to ensure that the safety restraint was property secured; Mallais fell off the ride and was injured. The court found that the ride did not fall under the definition of a common carrier. The court differentiated rides from common carriers by looking at the intention of patrons; patrons of common carriers expect to be conveyed to their destination safely whereas patrons of rides in amusement parks are expecting a thrill. Consequently, the court refused to impose a higher duty of care, similar to that of common carriers, on the ride operator.

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Mason v. Westside Cemeteries Ltd., 1996 CanLII 9113, 135 D.L.R. (4th) 361 (Ontario Superior Court) See Case 15.1 at p. 348 in the text. Mitsui & Co. Ltd. v. Royal Bank of Canada (1995), 123 D.L.R. (4th) 449 (Supreme Court of Canada) A lease of a helicopter contained an option to purchase at a fair market value, to be established by the lessor. The lessee became insolvent. The question arose whether the lease constituted a conditional sale and was consequently void as against the lessee’s creditors (not having been registered).The applicable statute—Conditional Sales Act, R.S.N.S. 1989, c. 84, s. 2(1)(b)—provided that a contract for hiring goods, under which it is agreed that the hirer may become, or has the option of becoming, the owner on full compliance with the contract, is a conditional sale. The court held that the lease came within this provision and was a conditional sale. Although the price was to be established by the lessor, the option was a genuine option and the lessee could compel a sale. (The lessor would be required to act in good faith in establishing fair market value.) The lessor’s interest therefore was required to be registered in order to be effective against other creditors. Neff v. St. Catharines Marina Ltd. (1998), 155 D.L.R. (4th) 647 (Ontario Court of Appeal) Three boats stored at a marina were destroyed by fire of unknown cause. The boat owners were awarded damages at trial based on the breach of the duty of care imposed on the marina as a bailee for reward. The marina appealed to the Ontario Court of Appeal arguing that liability was precluded by the Accidental Fires Act which precludes any action being brought, or any recompense being made, in respect of an accidental fire. The Court of Appeal held that a bailee was required to prove either that it took appropriate care or that its failure to do so did not contribute to the loss. The doctrine of res ipsa loquitur could not rise to establish negligence from proof of the mere occurrence of the fire alone without evidence about how the fire originated. Once it was established that the cause of the fire was unknown, the bailee had thereby established that no failure on its part had contributed to the loss. Even if the claim were framed not for loss by fire, but for breach of bailee's duty, the Act precluded any recovery being obtained for damage suffered in an accidental fire. The Pioneer Container, [1994] 2 A.C. 324 (England – Privy Council) See Case 15.3 at p. 349 in the text. Punch v. Savoy Jewellers Ltd. (1986), 26 D.L.R. (4th) 546 (Ontario Court of Appeal)

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See Case 15.2 at p. 348 in the text. Re Giffen, [1996] 5 W.W.R. 111 (British Columbia Court of Appeal) A lessor (L), who was in the business of commercial leasing, leased a vehicle to a firm (E), which in turn leased it to one of its employees (B), who became bankrupt. Neither L nor E had registered their leases. After the bankruptcy, L seized the vehicle and sold it. B’s trustee in bankruptcy claimed the proceeds of sale. The court held that the Personal Property Security Act did not create a property interest in B or in her trustee, and no such interest existed apart from the Act. The vehicle remained the property of L. (L’s failure to register his security interest would prevent him claiming the vehicle from the trustee, but once L had successfully repossessed the vehicle, the trustee had no claim to it.) Re Speedrack Ltd., [1980] O.J. No. 141 (Ontario Supreme Court—High Court in Bankruptcy) Shelfrack sold equipment to CLC, a leasing company, which leased it to Speedrack (a corporation associated with Shelfrack). CLC in turn assigned its lease to CCC, a finance company. Speedrack became bankrupt and the trustee in bankruptcy claimed the equipment as part of the assets of Speedrack. CCC counter-claimed, based on the assignment by the owner, CLC. It claimed that the original transaction between CLC and Speedrack was a simple lease, and was not by way of security. Consequently (under Ontario law as it then stood), it was not within the scope of the Personal Property Security Act, and did not require to be registered. [NOTE: this particular issue is considered further in Chapter 28.] The court held that the lease was intended as security and fell within the scope of the Act. Since CCC’s interest was not registered it was subordinate to the claim of the trustee in bankruptcy; that is, CCC was not a secured creditor. In reaching its decision, the court attached particular importance to the fact that the lease contained an option to purchase. Reynolds v. Roxburgh (1886), 10 O.R. 649 (Ontario – Court of Queen’s Bench) See Case 15.8 at p. 363 in the text. Royal Bank of Canada v. Reynolds (1976), 66 D.L.R. (3d) 88 (Nova Scotia Supreme Court—Appellate Division) The plaintiff, Reynolds, deposited money in a bank night depository. The next morning it was removed and taken into the bank for counting and crediting to the appropriate account. While it was being counted, in full view of customers in the bank, there was a robbery and the plaintiff’s money was stolen. The question arose whether the bank had become a debtor of the plaintiff (which it would be once the deposit was completed), or was simply a bailee in custody of the plaintiff’s money. The court held that the deposit

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was not complete until the contents of the depository had been counted, verified and accepted by the bank; until then it was simply a bailee. Nevertheless, as a bailee it still owed a duty of care to the bailor. By counting the contents in full view, it had not exercised reasonable care. Shanklin Pier Ltd. v. Detel Products, Ltd., [1952] 2 K.B. 854 (England – King’s Bench Division) The plaintiff owned a pier and needed it painted. The plaintiff consulted with the defendant regarding the best paint to use. The defendant recommended its own product. The plaintiff then hired a contractor to do the work. The contractor purchased the defendant’s paint as required by the plaintiff. The paint was not suitable for the task and did not last as long as stated by the defendant. There was no contract between the plaintiff and the defendant, but the court held that there was an implied collateral contract between the parties, allowing the plaintiff to sue, thereby avoiding the privity rule. Solway v. Davis Moving & Storage Inc. (2002), 62 O.R. (3d) 522, leave dismissed [2003] S.C.C.A. No. 57 (Ontario Court of Appeal) The plaintiffs contracted with the defendants to remove their household goods, store them briefly, and deliver them to their new home. The goods were placed in a trailer and left unattended overnight. The goods were stolen. The contract contained a limitation clause of which the plaintiffs were aware. The trial judge found that the defendants knew that the goods in question were exceedingly valuable; consisting of antiques and artifacts collected from around the world. In spite of the limitations clause the defendants had given verbal assurances that the goods would be kept safe. Under the circumstances, the trial judge ordered that the limitation clause was not effective; to limit the claim would be unconscionable. The Court of Appeal upheld this decision although allowed the appeal in other respects. Wallace Sign Crafters West Ltd. v. Delta Hotels Ltd., 1994 CanLII 1510 (British Columbia Supreme Court) See Case 15.7 at p. 362 in the text.

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CHAPTER 16 INSURANCE AND GUARANTEE Although Insurance and Guarantee are quite different types of contract, they do have certain features in common. In particular, they may create triangular situations, in which a creditor under one contract, or a tort victim, may look to a third party for payment because of the existence of the contract of insurance or guarantee. Figure 4.2 in Chapter 4 at p. 89 and Figure 16.1 at p. 354 may help to clarify and contrast the two relationships. INSURANCE AND THE MANAGEMENT OF LEGAL RISK (Source p. 370) The topic of “legal risk” was introduced in Chapter 4. Chapter 16 returns to the subject and begins with a brief introduction to the role of insurance in managing legal risk. This should help to explain why insurance law is relevant to all businesses, and not just insurance companies. Although insurance policies are based on the ordinary law of contracts, they are regulated by provincial legislation and have certain unique features: 

An offer is made by the proposed insured in his application. Acceptance is made by the insurer upon issuing the policy, unless interim arrangements are agreed upon between the parties to affect earlier coverage.



In order to be compensated by insurance, the insured must have an insurable interest – the “genuine risk of loss that may be suffered from damage to the thing insured “ (Source p. 348)



Consent in writing of the person whose life is insured is usually required , or there must be an insurable interest at the time the contract was entered into A policy of insurance ends upon the expiry of its term unless renewed specifically or in accordance with the intentions and past dealings of the parties. For reasons of public policy, claims arising out of criminal or intentional tortious acts (apart from claims arising under negligence insurance) will generally not be enforced. Ambiguous standard form provisions will be interpreted strictly against an insurer because it is the insurer who drafted the clauses in question – contra proferentum On the other hand, an insured owes a duty of utmost good faith to provide full, true, and complete disclosure of all material facts affecting the risk, failing which the insurance contract is voidable by the insurer. Virtually all policies of insurance contain strict notice provisions by which the insured must immediately notify the insurer in the event of a loss. An insured's failure to comply allows the insurer to escape liability. (Prompt notice of a claim is a form of condition precedent.) Likewise, the insurer owes a duty of utmost good faith to the insured and any bad faith in dealing with a claim by an insured could lead to penalties to the insurer by way of punitive damages. Life insurance is assignable without the consent of the insurer.

   

 

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Subrogation is the right of the insurer to claim from the wrongdoer any funds paid out to the insured

REGULATION OF INSURANCE BUSINESS (Source p. 344) Provincial insurance legislation governs not only the contractual relationship but the industry itself – controlling the licensing and supervision of insurance companies. Many students will take co-op terms with insurance companies so instructors should spend some time on the organization of and players in the insurance industry. The recent blurring of the line between banking and insurance (insurance companies selling financial products and banks promoting some insurance products) makes for an interesting discussion; refer to the Canadian Bankers Association website (cba.ca) for background on this topic. GUARANTEE (Source p. 353) It is not uncommon for one person to agree to guarantee the obligation—usually an obligation to repay a loan—of another person; a parent may guarantee a loan made to her child, or a company director may stand as guarantor of a loan made to the corporation. The law on this subject is intricate and rather complex, and is covered here only in outline. It should be borne in mind that the liability of a guarantor is secondary; it is only a default by the principal debtor that creates liability on the part of the guarantor. Also, the guarantor’s promise and obligation relates to a specific obligation; a substantial change in that obligation may have the effect of discharging the guarantor from his promise. INTERNATIONAL ISSUE (Source p. 346) Medical Malpractice Insurance Question 1 - Students could answer this question any number of ways – although, if they pay any attention to American discourse they’ll likely focus in on excessive damage awards and possibly on high legal fees. The instructor should challenge students to think about their answers to this question – can students modify their opinions and justifications to take into account counter-arguments made by other students? Some possible explanations: a) High legal fees – the disproportionately high number of lawyers in the United States has led to a serious “ambulance chaser” phenomenon. Moreover, the ability for lawyers to work on contingency means that lawsuits can proliferate (because, while a plaintiff’s lawyer may be working on a contingency basis, the lawyers defending doctors, lawyers, accountants, etc. certainly do not). The high cost of legal defence, usually paid for by insurance, certainly results in higher premiums. The recent move in Canada to allow contingency fee work and class actions may lead to a similar situation here in the future. b) Excessive damages – The United States is much more likely to see the use of juries in civil matters and, thus, much higher damage awards. These huge Copyright © 2016 Pearson Canada Inc.

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damage awards are often reduced on appeal, but appealing a judgment results in higher legal fees which, in turn, can lead to higher premiums. c) Lack of competition in the insurance industry – there are only so many insurance companies that can, or will, take on high-risk clients like doctors and lawyers (high-risk in the sense that doctors and lawyers, regardless of true fault, tend to get sued a lot). This creates a monopolistic situation. As good business students, the class should be well-versed and able to articulate the dangers associated with monopolies. This holds true in both the U.S. and Canada; however, Canadian governments have historically shown a greater willingness to regulate the insurance industry to mitigate monopolistic tendencies. The most accurate answer would probably be for students to recognize that this is a very complex issue and that all of the above interact in varying degrees to create the high premium situation. More than anything, it could be argued that it is the Canadian government’s willingness to intervene and regulate, combined with (until recently) the lack of contingency fees, and fewer lawyers that have kept Canadian premiums lower. Question 2 - A public malpractice insurance scheme might be one viable solution to the skyrocketing premiums problem – look at British Columbia’s experience with public auto insurance, for example. Such a scheme, however, would also have to include reasonable caps on awards – it would be unreasonable for taxpayers to finance litigiousness. A publically funded malpractice insurance scheme would likely face a lot of resistance in the United States – where anytime government steps into a field where private interests have been making a lot of money cries of “Communism!” can be heard from coast to coast and on conservative talk radio – perhaps if the Obama administration manages to pass comprehensive healthcare reform Americans will be more disposed to see the benefits of public insurance schemes. What happens when the exposure becomes so great that no insurance company will take on the risk? Some professions are forced to provide their own insurance. Look at the example of Ontario lawyers. In 1990 the Law Society of Upper Canada incorporated the Lawyers’ Professional Indemnity Company (LawPRO) when private carriage became difficult to obtain at an affordable price. (See lawpro.ca) ETHICAL ISSUE (Source p. 351) Bad Faith This issue can be linked with the Ethical Issue in Chapter 13 relating to the appropriateness of punitive damages in contract actions. The values of trustworthiness, respect, fairness, caring, and citizenship are involved in determining when an insurance company has a legitimate right to refuse or delay payment while it examines the question of entitlement. The 2006 Supreme Court of Canada case Fidler v. Sun Life is explained in the case summaries and often cited for the principle that each case must be decided on its own facts.

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Question 1 - To avoid allegations of bad faith an insurance company could employ any number of strategies: they could automatically pay out, investigate and, if necessary, claw monies back after the fact; they could perform a fast, initial investigation to determine whether further investigation is needed; they could, and MUST, avoid any “Rainmaker” policies of “deny, deny, deny” regardless of the merits of the claim; they could put in place an open and transparent claim adjustment process, keeping those who have made claims well-apprised of their status and why their claim is under investigation. Ultimately, the percentage of false to valid claims is likely a low one – considering the suffering, stress, and anguish a claim denial might cause someone in need, insurance companies should adopt a policy of good citizenship and choose to believe claims are genuine – as Ronald Reagan once said of Soviet arms reduction promises: “Trust, but verify” – insurance companies have the resources to pursue false claimants after the fact. The existence of criminal and quasi-criminal proceedings are relevant in determining whether civil punitive damages should be awarded (this may amount to double punishment): see Insurance Corporation of British Columbia v. Eurosport Auto Co. Ltd., (2007), 69 B.C.L.R. (4th) 257 (B.C.C.A.) Strategies to Manage the Legal Risk The strategies set out include insuring the adequate scope of the coverage, perhaps using a comprehensive policy to enable all risks to be covered.

QUESTIONS FOR REVIEW 1. A business faces two main types of legal risk—the risk that its property or assets may be destroyed or damaged as a result of an accident or due to the fault of some other person, and the risk that it may be held liable for some loss or injury caused to another person. Both types of risk may be insured against. (Source p. 343) 2. An insurance agent is an employee or agent of the insurance company whose function is to arrange contracts with persons seeking insurance protection. An insurance broker conducts an independent business and generally acts as agent for the insured rather than for the insurer. (Source p. 344) 3. A business normally insures against (a) loss or damage to its own property or assets— typically damage to buildings and contents to fire or storm; loss due to theft, loss of, or damage to, vehicles used in the business; loss of profit due to interruption of business activities; bad debt losses; losses caused by theft or fraud of employees (fidelity insurance); and loss due to injury to, or death of, important personnel (keyperson insurance); and (b) against liability to others—typically liability for negligent acts and omission; liability for defective products; liability for the dangerous state of their premises; and liability for breach of professional duty of care. (Source p. 345) 4. The advantages of comprehensive general accident insurance is that unexpected risks are insured against rather than falling between the cracks of two or more separate

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policies. The disadvantage is that because of its broader scope such insurance tends to be expensive, though it may well turn out to be cheaper than purchasing a series of separate policies insuring against specific risks. (Source p. 346) 5. An insurable interest is the measure of loss that may be suffered by the insured from damage, destruction or loss of the thing insured. (Source p. 348) 6. The Supreme Court of Canada has held that a person who owned all the shares in a corporation has an insurable interest in the property of the corporation, because damage to the property would necessarily reduce the value of his shares. It has not yet been established whether a minority shareholder, especially one holding only a small proportion of the total shares, would also have an insurable interest. (Source p. 348) 7. When an insured fails to renew an insurance policy by the due date, no contract is formed until the insured communicates acceptance, and because the offer is open at most for a reasonable time, the insured cannot wait indefinitely to express assent. (Source p. 349) 8. Insurance contracts other than for life insurance contain a statutory term that the insured shall notify the insurer promptly of any such change that is material to the risk and within the control or knowledge of the insured. (Source p. 348) 9. A life insurance policy can be assigned to a third party, since the risk of the insurer is not affected. In contrast, property insurance is not assignable without the consent of the insurer. (Source p. 349) 10. Subrogation is the right of an insurer who has paid a claim to “step into the shoes” of the insured and sue the person responsible for the loss. (Source p. 352) 11. A guarantee usually arises in one of three common business situations: (1) a prospective creditor may refuse to advance money, goods, or services solely on the prospective debtor’s promise to pay for them; (2) a creditor may state that it intends to start an action against its debtor for an overdue debt unless the debtor can offer additional security to support a further delay in repayment; (3) a prospective assignee of rights under a contract may be unwilling to buy these benefits if it has nothing more to rely on than the undertaking the promisor in the original contract. (Source pp. 353-354) 12. A guarantor gives her promise to the creditor, not the principal debtor. (Source p. 354) 13. Frequently the guarantor does not receive any economic benefit for her promise; but consideration need confer no economic benefit on a promisor. The essential element of consideration is simply that the promisee pays a price for the promise of the other party. The creditor gives sufficient consideration for the promise of the guarantor by performing some act or forbearing to do some act at the request of the guarantor. (Source p. 355)

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14. A guarantee will be discharged in the following ways: (1) if the creditor breaches the contract of guarantee; (2) if the principal contract between the creditor and the debtor is varied without the guarantor’s consent and in a manner that is not obviously to the benefit of the guarantor; (3) if the creditor acts in breach of its contract with the principal debtor, and the breach materially affects the risk assumed by the guarantor, the guarantor will be discharged; or (4) when the creditor does something that impairs the value of any security given by the principal debtor, but without materially affecting the guarantor’s risk under the original contract of guarantee, the guarantor is entitled to be partially discharged from her obligation, but only to the extent that the value of the security is reduced. (Source p. 356) 15. A contract of guarantee must be in writing and signed by the guarantor to be enforceable against him (except in Manitoba). (Source p. 357)

CASES AND PROBLEMS 1. If the guarantee had not been released, which it appears it was, the bank would still not be able to enforce the guarantees given. The contract between the creditor and debtor was varied without the guarantors’ consent and to their detriment, including an increase in the interest rate charged. (Source p. 356) 2. Contracts of insurance are contracts of utmost good faith, requiring full disclosure of relevant information by the insured. The initial question here is whether Whitehorse’s failure to disclose the fact of the previous fires invalidated the contract. A second issue concerns the potential liability of J&H; were they agents for Whitehorse, or for Kansafe? To whom did they owe a contractual duty/duty of care? Were they negligent in not asking about previous fires? The case is based on Adams-Eden Furniture Ltd. v. Kansa General Insurance Co. (1996), 141 D.L.R. (4th) 288, a decision of the Manitoba Court of Appeal. In that case, the court held that the broker was the agent of the insured and owed no duty of care to the insurer. The insurer's remedy, in case of non-disclosure of material facts, was to deny liability on the policy. [NOTE: the decision seems to establish that the non-disclosure by the insured entitled the insurer to deny liability on the policy. Even if the broker had owed a duty of care to the insurer, should it be entitled to recover what it had paid out, when it need not have done so?] 3. The case bears some similarity to the leading cases of Macaura v. Northern Assurance Co., [1925] A.C. 619 (House of Lords) and Kosmopoulos v. Constitution Insurance Co. (1987), 34 D.L.R. (4th) 208 (Supreme Court of Canada). One significant difference from Kosmopoulos is that, in the present case, the insured corporation was no longer in the sole ownership of the owner of the property (i.e. in our case, Mr.Vandervelde could no longer claim that he had an insurable interest in the building through his shareholding in Sharbo). However, that leaves open the question whether

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Perennial, the tenant, could claim to have an insurable interest in the building owned by Sharbo. The case is based on Evergreen Manufacturing Corp. v. Dominion of Canada General Insurance Co. (1999) 170 D.L.R. (4th) 240, a decision of the British Columbia Court of Appeal. There, the court held that the tenant had an insurable interest in the building because it benefited from carrying on business on the premises and would suffer prejudice from its destruction. The insurer knew there was a foundry business on the premises and there was no suggestion that anyone involved in the building's ownership was likely to increase the risk. The court held that the tenant, who was the only party to the insurance contract, could recover for the building loss and should hold those amounts in trust for the owner. 4. The insurance company will seek to avoid liability on the ground of the misrepresentations made by Desai in the application. The case is based on Lachman Estate v. Norwich Union Life Insurance Co. (1998) 40 O.R. (3d) 393, a decision of the Ontario Court (General Division). In that case, the court held that the insurer was not liable. The insured had made inaccurate statements and those statements were material to the risk. An insurance contract may be void ab initio as a result of misrepresentations if the insurer was induced to enter the contract based upon false information. There is a duty upon the party seeking the insurance to make true and full representation of facts which are material to the insurance risk. As to what is material, this must be assessed from the insurer's perspective and the test is an objective one. [NOTE: Whether the misrepresentations are fraudulent or innocent does not become an issue where the policy has not been in force for two years during the lifetime of the insured.] 5. The understanding that the guarantee was to become effective only upon the execution of all nine directors, including Fowler, was a condition precedent. The eight directors who had signed had communicated this understanding to the bank manager. Since the condition was not satisfied, the guarantee never became operative and therefore it cannot be enforced by the bank. Although it might appear that evidence about the condition precedent would be precluded by the parol evidence rule, a condition precedent is an exception to that rule and accordingly, the court would permit introduction of such evidence. The express condition (that the guarantee was to become effective only upon the execution of all nine directors) overrides the clause in the standard form rendering liable all guarantors who signed. 6. The insurance company may seek to deny liability on the ground that the death resulted from a deliberate criminal act on the part of the life assured. There is a principle of public policy that a person should not be allowed to benefit from his own crime. However, in this case, it is not the person who committed the criminal act who benefits, and the actual beneficiary, Maria has done no wrong. Additionally, Paul’s death was accidental; he did not intend to kill himself. (See Bertalan Estate v. American Home Assurance Co. (2001) 196 D.L.R. (4th) 445)

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The case is based on Oldfield v. Transamerica Life Insurance Co. of Canada (1998), 43 O.R. (3d) 114, a decision of the Ontario Supreme Court. There, the court held that the beneficiary was entitled to recover. The public policy rule against persons benefiting from their crimes does not apply where the owner of the policy insured his life and designated another person as the beneficiary before the crime; although the owner died in the course of committing a crime; the death was accidental, and the beneficiary was innocent in the sense of having no involvement with the crime.

CASE SUMMARIES Adams Eden Furniture Ltd. v. Kansa General Insurance Co. (1996), 141 D.L.R. (4th) 288, leave denied [1997] S.C.C.A. No. 42 (Manitoba Court of Appeal) The Manitoba Court of Appeal noted that the broker in marine insurance is the agent of the assured, not of the underwriter. American International Assurance Life Company Ltd. v. Martin (2003), 223 D.L.R. (4th) 1 (Supreme Court of Canada) A physician, who had a history of drug abuse, died from a self-administered overdose. His beneficiary brought a claim on his insurance policy for “accidental death” benefits. The insurance company argued that the death resulted from a deliberate, voluntary act, and was not accidental. The court allowed the claim. The physician had not intended to kill himself. Amexon Realty Inc. v. Comcheq Services Ltd. (1998), 155 D.L.R. (4th) 661 (Ontario Court of Appeal) See Case 16.10 at p. 381 in the text. Assaad v. Economical Mutual Insurance Group (2002), 214 D.L.R. (4th) 655 (Ontario Court of Appeal) Note: This case is erroneously named “Economic Mutual Insurance Group” in the text. The plaintiff’s car was stolen and he claimed under his insurance policy. It was then discovered that the car had been previously stolen. The insurance company denied liability on the ground that the plaintiff was not the true owner of the car and, therefore had no insurable interest. The trial judge found for the plaintiff on the ground that he had possession of the car when it was stolen and could have expected to continue to enjoy its use. On appeal, the court found for the insurance company. The plaintiff had acquired the car in suspicious circumstances, ought to have known it was stolen, and thus should have no higher insurable interest than the thief. (NOTE: the case does not establish what the position would be if the plaintiff had been entirely innocent.) Bank of British Columbia v. Turbo Resources Ltd. (1983), 23 B.L.R. 152 (Alberta Court of Appeal)

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The Bank of British Columbia agreed to finance the purchase of a gas station by F.Ltd., and to extend to it an operating line of credit. The loan was secured by promissory notes, a floating charge debenture on the assets of F.Ltd., and a guarantee from the defendant, Turbo Resources which was a supplier of oil and gasoline to F.Ltd. The terms of the guarantee required the bank to notify Turbo within fifteen days of any default by F.Ltd. and to make turbo a party to any negotiations concerning the loan. F.Ltd. fell into arrears. The bank had discussions with the principal shareholders of F.Ltd. but failed to notify Turbo. The Court held that the bank’s breach of the guarantee agreement was sufficiently serious as to discharge Turbo from liability. [NOTE: not any breach will operate to discharge a guarantor: see Rose v. Aftenberger, below.] Bank of Montreal v. Korico Enterprises Limited (2000), 50 O.R. (3d) 520 (Ontario Court of Appeal) The plaintiff bank sued the borrower company and several individual defendants who had signed guarantees of the company's indebtedness, following default in repayment of the loan. The company and the guarantors defended the action, alleging that the bank had acted improvidently in selling its security. (The Personal Property Security Act requires the creditor to dispose of secured assets in a commercially reasonable manner.) The bank argued that the guarantors had impliedly waived their right to raise that defence. The court held that such a waiver could only be affected by a clearly worded clause. Bank of Montreal v. Wilder (1986), 32 D.L.R. (4th) 9 (Supreme Court of Canada) The bank financed a family business in which several family members signed personal guarantees. The bank had allowed the business to exceed its credit limits, but eventually the bank dishonoured a cheque of the company. Two of the family members met with a representative of the bank whereby the bank agreed to continue to finance the company until the completion of some projects if there was a capital injection into the company and the family members signed additional guarantees. The parties agreed. Almost immediately thereafter the bank dishonoured further cheques and eventually put the company into receivership. The Supreme Court held that the new agreement attached the earlier guarantees to it. The bank made a form agreement to finance the company until after the projects were completed. The bank breached that agreement and subsequently could no longer rely on the guarantees. The guarantors were discharged from their obligations by the breach of the bank as it increased the guarantors’ risk in a substantial way and impaired their security. Bertalan Estate v. American Home Assurance Co. (2001), 196 D.L.R. (4th) 445 (British Columbia Court of Appeal) See Case 16.3 at p. 375 in the text. Beresford v. Royal Insurance Co., Ltd., [1938] A.C. 586 (England—House of Lords)

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In 1925, Major Rowlandson took out a number of insurance policies on his own life with the defendant insurer. A condition of the contracts was that they would be void if the assured committed suicide within one year of the date the policies were issued. A few minutes before the policies were to expire, in August 1934, he shot himself. Beresford, Rowlandson's niece and administratrix, sued the insurer for the value of the policies. The court held that it would be contrary to public policy to allow a personal representative to recover the fruits of a crime committed by the assured. The fact that the policy made the insurer liable to pay was held to be irrelevant. British Columbia Ferry Corp. v. Commonwealth Insurance Co. (1985), 40 D.L.R. (4th) 766 (British Columbia Court of Appeal) The plaintiff owned a ferry terminal in Tsawwassen, B.C. Parts of the terminal were damaged in a storm; the damage was largely caused by large waves striking the terminal. The defendant insurer denied the claim under an exclusion clause in the policy. The exclusion was to damage caused by flood. The word “flood” was defined in the policy to include: waves, tides, tidal waves, and the rising of, the breaking out or the overflow of, any body of water whether natural or man-made. The trial judge held that there was no ambiguity in the clause and, therefore the defendant was not liable under the policy. The Court of Appeal overturned that decision. In interpreting the clause, the court noted the use of the conjunctive “and” in the second part of the clause; at para 9: In my opinion the exclusionary clause excludes liability for loss or damage caused, directly or indirectly, by flood, and then the clause goes on to give a meaning to the word “flood”. It says: “ ‘Flood’ means waves, tides, tidal waves …” and then the word “and” appears used in its conjunctive sense and, in my opinion, the use of the word “and” at that place in the exclusionary clause is of significance, because what follows thereafter appears as follows: “… and the rising of, the breaking out or the overflow of, any body of water …” It appears to me that in interpreting this clause the learned trial judge lost sight of the words following ‘tidal waves” in the clause. He attached no meaning to the words “and the rising of, the breaking out or the overflow of, any body of water”. Properly construed, in my opinion, what the draftsman of the clause has done is to provide that flood is to be interpreted as covering both cause and effect. Thus, the flood may be caused by waves, tides, tidal waves, and if, for example, as in this case, waves result in the rising of, the breaking out, or the overflow of a body of water that would amount to a flood within the meaning of that term as defined in the exclusionary clause. The appeal was allowed and the defendant was required to indemnify the plaintiff for loss.

British Columbia Insurance Corp. v. Kraiger (2002), 219 D.L.R. (4th) 49 (British Columbia Court of Appeal) The defendant was convicted on two counts of arson. Several homeowners obtained judgment against him for the damage caused. The defendant was insured under a

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homeowner's insurance policy, which provided indemnity for liability to others, but excluded damage caused by intentional or criminal acts. The court held that the exclusion applied and the insurance company was not liable to indemnify him. Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87 (Supreme Court of Canada) A decision of the Supreme Court of Canada delivered by Sopinka J. who in considering a joint policy of husband and wife on their lives with the benefit being paid to the survivor, found the contract was similar to Demeter and refused to order that proceeds be paid. Canadian Indemnity Co. v. Canadian Johns Mansville Co., [1990] 2 S.C.R. 549 (Supreme Court of Canada) The defendant was involved in the asbestos industry and obtained a comprehensive liability insurance policy and a product liability policy from the plaintiff in 1970. In 1979 the plaintiff brought an action in the Quebec Superior Court requesting that the policy be made null due to a failure to disclose material information about health risks related to inhalation of asbestos fibres. The trial judge allowed the policy to be declared null. The Court of Appeal overturned the decision by stating that the insured was entitled to presume that the insurer had a basic professional knowledge of the health risks associated with asbestos based on the evident public characteristics and notoriety of those risks. The Supreme Court upheld the decision of the Court of Appeal. Celestica Inc. v. ACE INA Insurance (2003), 229 D.L.R. (4th) 392 (Ontario Court of Appeal) The plaintiff company manufactured modules for use in photocopiers. The transformer used in the module was found to be defective and created a risk of electric shock, especially with the type of plugs used outside North America. The plaintiffs took corrective measures and sought to recover the extra costs under its general liability insurance policy. The court held that the policy only covered “accidents”. No accident had occurred (because of the corrective measures taken) and the plaintiffs had no claim for the cost of preventing accidents. Chanore Property Inc. v. ING Insurance Co. of Canada (2010), 94 C.L.R. (3d) 223 (Ontario Superior Court of Justice) The plaintiff owned a rental property. Unbeknownst to the plaintiff, the tenant undertook renovations, including excavating the basement. The tenants never completed the renovations. The tenants were evicted for non-payment of rent. The plaintiff only discovered the condition in the property when it attempted to sell the property. The sale did not close due to structural problems caused by the basement excavations. The plaintiff did eventually succeed in selling the property, but for $239,000 less than the initial offer to purchase. The plaintiff then claimed against the insurance company for the

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damage to the property and/or diminution in value. The defendant brought a motion for summary judgment to have the claims dismissed as the insurance policy only covered physical damage, and that was not the case here. Master Dash dismissed the motion on the grounds that there was a triable issue; that is, there was evidence of direct physical damage to the property, and the damage was not the result of defective design or faulty workmanship as in the Celestica case. The Celestica case was looking at a comprehensive liability policy where the plaintiff was looking to be indemnified for the cost of repairing faulty photocopiers. In this case, the policy was one of property damage. Communities Economic Development Fund v. Maxwell, [1992] 1 W.W.R. 193 (Supreme Court of Canada) The Fund was empowered under its enabling statute to "encourage the optimum economic development of remote and isolated communities." The Fund advanced money to Canadian Pickles Corp. for a business enterprise carried on in Stony Mountain, a town near Winnipeg that was neither remote nor isolated. Maxwell, solicitor for Canadian Pickles as well as a shareholder, director and officer of the corporation, guaranteed the loan. The loan fell into arrears and the Fund called upon Maxwell to make good on the debt. The court held that the contract of loan was a nullity since it was beyond the powers of the Fund. Maxwell had not personally received any money from the loan and so could not be liable for repayment of the money. Co-operators Life Insurance Co. v. Gibbens, [2009] S.C.R. 605 (Supreme Court of Canada) The plaintiff had unprotected sex with various women. He contracted genital herpes which caused transverse myelitis, a rare complication of herpes resulting in paralysis. The defendant refused to payout under the insurance policy claiming the paralysis was not caused by a critical disease, or by external, violent or accidental means; transverse myelitis was not considered a critical disease under the policy. The plaintiff brought an action, and was awarded damages at trial. This was affirmed by the Court of Appeal. The Supreme Court of Canada allowed the appeal stating at para 20: The courts have developed a number of general interpretative principles that reflect a concern that customers not suffer from the imbalance of power that often exists between insurers and the insured but, on the other hand, that customers obtain no greater coverage than they are prepared to pay for. The exercise of interpretation should avoid “an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted” The plaintiff’s injury did not result from an accident and therefore had no claim under the policy.

Coronation Insurance Company v. Taku Air Transport Ltd. [1991] 3 S.C.R. 622 (Supreme Court of Canada)

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The defendant operated an airline. It had previously had insurance coverage with the plaintiff insurer, but that had been cancelled in 1978 due to a number of claims for three accidents. The defendant reapplied for insurance in 1986 and the insurer asked for disclosure. The defendant disclosed only one accident and claimed four seats on a plane, instead of five. The policy was granted. The defendant airline had another accident where the plane crashed killing all five passengers. The plaintiffs brought action to have the policy declared void, due to the misrepresentations. The Supreme Court held that the insurer was not entitled to escape liability on the grounds that the defendant failed to disclose the earlier accidents, when that information was available to it in its own records. The insurance policy is required by statute and is for the benefit of the public as well as the insured; therefore, the insurer must take basic steps to investigate the flying record of the insured. The plaintiff was allowed to have the policy declared void on the material misrepresentation regarding the number of passengers and seats in the plane. Demeter v. Dominion Life Assurance Co. (1982), 132 D.L.R. (3d) 248 (Ontario Court of Appeal) A husband who was convicted of his wife’s murder was held not to be entitled to the proceeds of a policy of life assurance, on the wife’s life, of which he was the named beneficiary. Evergreen Manufacturing Corp. v. Dominion of Canada General Insurance Co. (1999), 170 D.L.R. (4th) 240 (British Columbia Court of Appeal) The plaintiff was a tenant in a building owned by Boshar. As part of the tenancy agreement, Boshar was responsible for obtaining insurance on the building, but the tenant was responsible for the payments. An insurance broker, Pate approached the plaintiff and suggested certain insurance. The plaintiff asked Boshar if it could switch insurers, and Boshar agreed, as long as the coverage was the same. Pate then brokered a deal for the plaintiff with the defendant. Sometime later, the building was destroyed in a fire. The defendant agreed to pay out on the losses of the plaintiff relating to stock and equipment, business interruption, and other expenses; however, it refused to pay out on the building itself as Boshar was a third party not contemplated in the contract. The Court held that the plaintiff as tenant had an insurable interest in the property and were entitled to recover, on behalf of Boshar (as agent or as trustee) for the loss of the building. Existological Laboratories Ltd. v. Century Insurance Co. (1982), 133 D.L.R. (3d) 727, aff’d [1983] S.C.J. No. 61 (Supreme Court of Canada) The plaintiff was conducting scientific experiments at sea. The craft it was using was a unique style of barge. The craft sunk when a crew member opened a valve to release air from the hull and thereby lower the stern, negligently forgot to close the valve. The plaintiff made a claim under its marine insurance policy, claiming that the loss arose from a peril of the seas or in the alternative, another peril, loss, or misfortune covered by the policy. The trial judge held that the harm suffered was not within the risks contemplated

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by the policy. The Court of Appeal overturned that decision holding that the sinking of the ship, in spite of the negligence on the part of the crew, did constitute a peril of the sea. One defence put forward by the defendant was a breach of warranty. The policy stated that a watchman is to be stationed on the craft each night with instructions for shutting down all equipment in an emergency. The plaintiff acknowledged that there had not been a watchman in place since the policy had been in effect. However, the Court of Appeal held that the clause in the policy had no relationship with risk or occurrence that caused the loss, as the loss occurred in the day, not when the watchmen would have been on duty. The defendant argued that the clause in the policy was a warranty, and as such must be exactly complied with regardless of whether it is material to the risk. The Court held that it was not a warranty, in spite of the language used, but rather, a clause that limits the risks. The defence therefore, failed and the defendant was found liable under the policy.

Family Insurance Corp. v. Lombard Canada Ltd. (2002), 212 D.L.R. (4th) 193 (Supreme Court of Canada) The owner of a horse stable was insured under a householder’s policy issued by the plaintiff company. She later joined a trade organization and also became insured under a comprehensive policy that covered the organization's members, issued by the defendant company. A customer using the stable was injured and the claim was settled. An action was then brought to determine which insurance company should be liable for the loss. (The situation was complicated by the fact that both policies imposed limits on liability and the loss exceeded those limits.) The British Columbia Court of Appeal held that primary liability should be borne by the first insurer; that is, under the householder’s policy. The organization’s policy was issued on the assumption that each member would normally have her own insurance and was intended to provide excess coverage. On further appeal, the Supreme Court of Canada held that each policy should be interpreted as providing primary coverage and the two insurers should therefore share the loss equally up to the limits of the lower policy. (The excess would be borne by the insurer with the higher limit, up to that limit.) Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3 (Supreme Court of Canada) Fidler was employed as a receptionist and had an insurance policy for long-term disability benefits. After being diagnosed with chronic fatigue syndrome and fibromyalgia, Fidler collected disability benefits for over six years. Sun Life then terminated those benefits based on videos of Fidler driving, shopping, and climbing into the rear of her vehicle. Fidler brought an action against Sun Life, but before the trial could commence Sun Life offered to reinstate the benefits and pay outstanding interest. The question before the court was then whether Fidler should receive punitive damages. The court examined jurisprudence and concluded that the “right to obtain damages for mental distress for breach of contracts that promise pleasure, relaxation or peace of mind

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has found wide acceptance in Canada”. Therefore, the court found that damages for mental distress for breach of contract may be appropriate in certain cases if: (1) an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and (2) that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. The court found that both elements of the test were present in the current case and Fidler was entitled to punitive damages. Goderich Elevators Ltd. v. Royal Insurance Co. (1999), 169 D.L.R. (4th) 763 (Ontario Court of Appeal) See Case 16.2 at p. 374 in the text. Hodgkinson v. Economical Mutual Insurance Co. (2003), 235 D.L.R. (4th) 1 (Ontario Court of Appeal) Note: This case is erroneously named “Economic Mutual Insurance Co.” in the text. The original plaintiffs brought an action for defamation in respect of messages published on the Internet, alleging that they were participating in improper securities trading. The defendant (H) was insured under a homeowner's policy that included coverage for liability, except for damage caused by an intentional act. H brought an application for a declaration that the insurance company had an obligation to defend the action. The court held that H’s action was intentional (even if he believed in the truth of the allegations) and the insurer was not obliged to defend the action. Jer-Mar Foods Ltd. v. Arrand Refrigeration Inc., [2010] O.J. No. 1119 (Ontario Superior Court) The defendants signed two promissory notes and two guarantees. There were some irregularities with the documents. The first promissory note was held to be out of date with respect to the limitation period under which the plaintiff could bring an action. The plaintiff argued that the promissory note could not be claimed against, but the guarantee was still enforceable. The Court found that both the notes had in fact been paid in full, but commented that if that was not the case in would not matter with respect to the first note as it was unenforceable due to the limitation period, so was the supporting guarantee.

J.J. Barnicke Ltd. v. Commercial Union Assurance Co. of Canada (2000), 5 B.L.R. (3d) 199 (Ontario Court of Appeal) See Case 16.8 at p. 379 in the text.

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Kosmopoulos v. Constitution Insurance Co. (1987), 34 D.L.R. (4th) 208 (Supreme Court of Canada) Kosmopoulos had owned a leather goods store, which he later transferred to a corporation of which he was the sole shareholder. The store burned down. Insurance had been taken out in the name of Kosmopoulos, who had omitted to have the insurance transferred when the store was transferred to the corporation. The insurance company refused to pay, relying on the decision in Macaura (see below). The Ontario Court of Appeal found in favour of Kosmopoulos, distinguishing Macaura on the ground that Kosmopoulos was the sole shareholder, and not just the majority shareholder. The Supreme Court of Canada rejected that reasoning, but found that Kosmopoulos had an insurable interest in the store. The loss of the store caused his shares to lose their value. Lachman Estate v. Norwich Union Life Insurance Co. (1998), 40 O.R. (3d) 393 (Ontario Superior Court of Justice) The plaintiff was the estate of a woman who was murdered. The deceased had taken out a life insurance policy naming the murderer as beneficiary. Her estate claimed against the defendant insurer, stating that as the beneficiary could not claim against the policy, the proceeds of the policy should be paid to the estate of the deceased. The Court disagreed that the estate stands in the place of the insured in this case. The family members of the deceased, who would be the beneficiaries under the estate, were not the named beneficiaries under the policy. The court would not rewrite the policy for them. Further, certain material misrepresentations by the deceased were in violation of the duty of utmost good faith owed to the defendant rendering the policy void. Under the circumstances, the defendant was not liable to payout under the policy; however, the estate was entitled to recover the payments made to the policy by the deceased. Miller v. Guardian Insurance Co. of Canada (1997), 149 D.L.R. (4th) 375, leave denied [1997] S.C.C.A. No. 480 (Alberta Court of Appeal) See Case 16.1 at p. 371 in the text. Manulife Bank of Canada v. Conlin (1996), 139 D.L.R. (4th) 426 (Supreme Court of Canada) The defendant guaranteed a mortgage for his wife. Shortly before the mortgage was due to mature, the mortgagor and the mortgagee entered into an agreement to extend the term of the mortgage by three years and increased the rate of interest. The guarantor’s signature was not obtained on these changes. The mortgagor went into default and the mortgagee sued both the mortgagor and the guarantor under the mortgage. The Court of Appeal set aside the judgment by the mortgagee and dismissed the action against the guarantor. The Supreme Court upheld this decision; the guarantor was released from

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liability on the guarantee because the creditor and the principal debtor agreed to a material change in the terms of the debt without the consent of the guarantor.

Oldfield v. Transamerica Life Insurance Co. of Canada (1998), 43 O.R. (3d) 114 aff’d (2002), 210 D.L.R. (4th) 1 (Ontario Supreme Court) The plaintiff was separated from her husband. The husband maintained two life insurance policies on his life with the plaintiff named as beneficiary in lieu of child or spousal support. The husband died in South America. The cause of death was attributed to the fact that the deceased was carrying twenty-nine condoms filled with cocaine in his digestive tract; one of the bags had burst causing cocaine intoxication. The death was found to be accidental. The defendant insurers denied the claim under the policy based on the illegal act. The court held that the plaintiff was not the criminal claiming benefit of her crime and was entitled to recover.

Patterson v. Gallant (1994), 120 D.L.R. (4th) 1 at para 35 (Supreme Court of Canada) See Case 16.5 at p. 376 in the text. Pax Management Ltd. v. Canadian Imperial Bank of Commerce, [1992] 2 S.C.R. 998 (Supreme Court of Canada) The appellant bank financed the purchase of shares of a corporation by the individual respondents’ holding company. The loan agreement and subsequent operating loans were guaranteed by the respondents (Pax). The bank became concerned about the company’s financial health and considered calling in the loan. Before doing so, it retained a firm of accountants to examine the corporation’s affairs but, before receiving the accountants’ report, it decided to call in the loan immediately and to appoint a receiver. The corporation was not in default under the loan agreement as it had been making repayments of principal and interest as agreed; however, it was insolvent at the time, although the bank did not know this. The bank made misrepresentations to the corporation to induce it to consent to the appointment of the receiver, and made various threats of action that it was not, in fact, entitled to take. The respondents sued the bank for wrongfully putting the corporation into receivership, and the bank counterclaimed on the guarantees. At trial, the bank’s counterclaim succeeded but this was reversed on appeal. On further appeal to the Supreme Court of Canada, the bank succeeded and the original judgment against the guarantors was restored. No damage had been caused to the guarantors, even though the bank had acted improperly. In fact, their potential liability had been reduced as a result of the early receivership, since the corporation’s position was getting steadily worse.

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Planidin v. Insurance Corporation of British Columbia (2004), 245 D.L.R. (4th) 511 (British Columbia Court of Appeal) The plaintiff's car was damaged while it was in the care of repairers. She brought an action against the repairers, but also sued her insurer and its adjuster. She claimed that the insurer was liable for not advising her when she first reported the damage that she could make a claim directly against the insurer on her insurance coverage. Her claim was dismissed. The insurer had no legal obligation to give the plaintiff advice about the coverage she had. Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. (1993), 99 D.L.R. (4th) 741 (Supreme Court of Canada) The plaintiff was insured by the defendant. The plaintiff worked on the construction of a sewer system. The installation was faulty and the defendant paid out on the insurance policy. Sometime later, further problems with the sewer were identified. The defendant refused to indemnify the plaintiff because the claim did not relate to a claim made prior to the expiry of the policy. The Supreme Court held that: In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance policies, including, but not limited to: (1) the contra proferentum rule; (2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and (3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.

Rose v. Aftenberger (1969), 9 D.L.R. (3d) 42 (Ontario Court of Appeal) The plaintiff loaned money to W, taking real estate that W owned as security as well as a personal guarantee from the defendant. After W had defaulted, the plaintiff entered into an agreement with W under which the property was reconveyed and the plaintiff took back a mortgage on it. W defaulted again and the plaintiff sued the defendant on the guarantee. The defendant claimed to be discharged from the guarantee as a result of the plaintiff’s dealing with the security. Held—the defendant was discharged only to the extent (if any) that the dealing with the security was detrimental to him’ that is, up to the amount of the security thereby lost to him. Royal Bank of Canada v. Bruce Industrial Sales Ltd. (1998), 40 O.R. (3d) 307 (Ontario Court of Appeal)

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The appellants were employed by Bruce Industrial. They signed guarantees on bank loans including a revolving line of credit and a term loan. In March 1991, Bruce Industrial terminated the employment of the appellants. The appellants notified the bank that they were determining their liability as guarantors at that time. In June 1992, the bank converted the revolving loan to a term loan and made other changes to the business’s credit agreements. The Court held that once the guarantors had given their notice of determination, the subsequent advances under the revolving loan were not covered by the guarantee. Taking into account the circumstances surrounding the loan transaction as a whole, there was nothing to suggest that in providing their guarantees, the guarantors intended to confer upon the bank an unqualified right to materially alter the loan agreement. The conversion of the revolving loan into a fixed loan was a material alteration to the principal agreement and it was prejudicial to the guarantors. They were consequently not bound by it. Royal Bank of Canada v. Nobes (1982), 49 N.S.R. (2d) 634 (Nova Scotia Court of Appeal) The bank acted precipitously in putting a company into receivership. The guarantor sought to have the guarantee discharged. The Court held that the altering of the security did not in itself discharge the guarantor to any greater extent than it had been prejudiced; at para 30: Even assuming that no notice of the demand was given to Coastal or, alternatively, that it was not given reasonable time to respond to the demand before the receiver was appointed and that the latter’s entry into Coastal’s premises was therefore both premature and wrongful, such, under the circumstances, is not in my opinion the kind of interference with the security arrangement that should discharge the guarantors. I say this because it is clear from the findings of fact of Chief Justice Cowan that it would not have made any practical difference as far as the guarantors and Coastal were concerned if the demand for payment was unobjectionable, more than adequate time to pay had been given and a period of a week or month had existed between the demand and the appointment of the receiver. Coastal just couldn’t respond to a payment demand. Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. (1994), 115 D.L.R. (4th) 478 (Supreme Court of Canada) See Case 16.6 at p. 378 in the text. Scott v. Wawanesa Mutual Insurance Co. (1989), 59 D.L.R. (4th) 660 (Supreme Court of Canada) The Scotts obtained a fire insurance policy on their house with the defendant insurer. The policy protected the property of relatives, but excluded "loss or damage caused by a

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criminal or wilful act or omission of the insured or any person whose property is insured hereunder." The house was damaged by a fire set deliberately by the Scotts' fifteen year old son, and the insurer denied liability. The court held that the terms of the policy were clear and unambiguous and excluded the insurer's liability. Somersall v. Friedman (2002), 215 D.L.R. (4th) 577 (Supreme Court of Canada) Two parties were injured in a car accident with an under insured driver. The parties sued the driver for their injuries. At some point the plaintiffs entered into an agreement with the defendant driver to limit their claim to his insured limit and in turn he would admit liability. The plaintiffs had their own insurance plan that included underinsured coverage. The plaintiffs applied to their insurer to recover the remainder of their damages. The insurer denied the claim, based on an endorsement that requires the insured to be “legally able to recover” damages from the underinsured motorist. A motion was brought to determine if the “limits agreement” precluded the plaintiffs from claiming against their insurer. The Court held that it did, but the Court of Appeal overturned that decision. The Supreme Court upheld the Court of Appeal’s decision and dismissed the appeal. The Court held that the limits agreement had no bearing on the right of the insured at the time of the accident which is the time for determination of legal entitlement. Unger v. Unger (2003), 234 D.L.R. (4th) 119 (Ontario Court of Appeal) The plaintiff was injured by a truck driven by an employee of a recycling business, and brought an action against both the owner of the truck (who was covered under an automobile insurance policy) and the business (which was covered under a general liability policy, issued by a different insurance company). The court held that all of the claims alleged that the plaintiff was injured as a result of the operation of the truck and the second insurer had no obligation to defend the claim. Walton v. General Accident Assurance Co. of Canada (2000), 194 D.L.R. (4th) 315 (Saskatchewan Court of Appeal) See Case 16.4 at p. 376 in the text. Whiten v. Pilot Insurance [2002] 1 S.C.R. 595 (Supreme Court of Canada) The plaintiffs lost their home and all of their belongings in a house fire. The defendant insurer paid only $5,000 in initial expenses and a couple of month’s rent for a winterized cottage where they were staying. The defendant then cut off all payments to the plaintiffs. The defendant alleged arson, although the fire chief’s report showed that there was no indication of arson. At trial the plaintiffs were awarded damages and another $1,000,000 in punitive damages. The Court of Appeal reduced the punitive damages to $100,000, but the Supreme Court restored the jury’s award of $1,000,000. The defendant was in breach of its contractual duty to pay the claim; it was further required to act in good faith toward its policy holder, which it failed to do.

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William E. Thompson Associates Inc. v. Carpenter (1989), 61 D.L.R. (4th) 1 (Ontario Court of Appeal) The plaintiff lent money to the defendant company in an effort to keep it going while it got its affairs in order and would be able to obtain more conventional financing. The plaintiff agreed to lend the company $750,000 of which $250,000 would be paid immediately and the remainder to be advanced at the creditor’s discretion. The company was obliged to repay the loan with interest, as well as a “facility fee” of $37,500, plus pay for the plaintiff’s legal fees and disbursements in the amount of $7,500. Guarantees were taken by the directors of the company. When the company became insolvent, the plaintiff sued the guarantors. The guarantors claimed that the loan was void for illegality as it charged a criminal rate of interest (taking into consideration the interest and the fees); and therefore, the guarantees were discharged. The Court of Appeal agreed that the interest plus fees did amount to a criminal rate of interest, but that those terms could be severed from the contract leaving the principal amount still owing. The guarantees were therefore still enforceable. Wilson v. Saskatchewan Government Insurance, [2011] 2 W.W.R. 154 (Saskatchewan Queen’s Bench) See Case 16.9 at p. 380 in the text. Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 222 D.L.R. (4th) 655, leave denied [2003] S.C.C.A. No. 33 (Ontario Court of Appeal) See Case 16.7 at p. 378 in the text.

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CHAPTER 17 AGENCY AND FRANCHISING Superficially, agency and franchising have much in common. Both are methods that permit a business to expand rapidly. In both, the proprietor of the original business— the principal or the franchisor—employs the assistance of other persons or business entities in order to reach out to a wider public. Independent agents are engaged to market the principal’s products, just as franchisees are used to market the franchisor’s products. In law, however, there are significant differences between the two relationships. A useful way of reviewing the chapter is to ask students to outline the differences between the two types of relationship.

DEFINING AGENCY (Source p. 362) An agency relationship exists where one person (the agent) is authorized by another (the principal) to bind the latter to contractual obligations with third parties. Agency situations occur frequently in all types of business transactions. As a way of introducing the subject, the class could be asked to suggest examples of typical agency situations. (Note that realestate agents, though they clearly act as agents for their clients, do not normally have authority to conclude contracts on their clients' behalf and are therefore, not agents in a legal sense.) In the usual agency relationship there are two distinct contracts: 1. The principal has a contract with the agent (the agency contract), and 2. The principal has a contract (made on its behalf by the agent) with a third party. DUTIES OWED BY AN AGENT TO THE PRINCIPLE 

Duty to comply with the agency agreement



Duty of care



Personal performance



Good faith

Good faith (source p. 364) can be confusing because it is a term used in conjunction with types of contracts (insurance contracts) and types of relationships (fiduciary relationships). Students may need some clarification on the language. Instructors might consider defining good faith as requiring honesty, full disclosure and an avoidance of conflict of interest in contractual dealings. Such an obligation may arise due to the nature or subject matter of the contract being dealt with or the nature of the relationship between the parties.

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DUTIES OWED BY THE PRINCIPAL TO THE AGENT 

The agent is entitled to compensation by the principal



The principle must pay the agent’s expenses and compensate the agent for any losses

THE AUTHORITY OF THE AGENT Students should understand that not all agents act with actual authority, and that apparent authority of an agent can create serious circumstances for the principal in a business. Why? Because a third party is entitled to assume that an agent has authority due to actions of the principal. Circumstances such as entering into contracts which the principal later ratifies, having business cards, a company car, company uniform – these can all lead to a third party stating that the principal was holding out that the agent had authority. The principal is then stopped from denying liability for the acts of the agent. Note: it is the principal who has made the representation that the agent has authority, not the person acting as an agent. Contracts may also be formed by ratification where an agent exceeds the authority he or she has or has not authority and yet acts as an agent. Ratification must be of the whole contract, and the principal must be named or be in existence at the time of the contract. An exercise defining how agencies are formed in various situations may help clarify the need for a principal to not create unintended agencies, and how to terminate implied agencies where situations like termination of the agent have occurred. RIGHTS AND LIABILITIES OF PRINCIPAL AND AGENT Breach of Warranty of Authority (Source p. 373) The agent does not normally have a contract with the third party; the (relatively uncommon) circumstances in which a contract is created between agent and third party are discussed in the text. An agent may also be liable to a third party for breach of warranty of authority. Students often struggle with this tort because in Chapter 4 we indicated that only fraudulent and negligent misrepresentation gave rise to liability in tort and in Chapter 3 we described tort damages as compensation of a loss (as distinct from contract damages which place the party in the position as if the contract had been performed). Therefore, breach of warranty of authority seems to be a hybrid of tort and contract principles. It may be helpful to point out that breach of warranty of authority is often advanced as an alternative to a principle’s contractual liability based on apparent authority. It often hinges on the objective and subjective knowledge of the third party: See the following comments of the Alberta Court of Appeal in Financial Management Inc. v. Planidin [2007] 391 A.R. 259 at para 8 (leave to re-argue application): It is our view that a misrepresentation by an agent does not negate the principle that, in addition to the objective intention of the parties, the subjective knowledge of the third party is relevant in determining whether an agent contracted in a personal capacity or solely as agent. Such a misrepresentation

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may be relevant to the question of liability for breach of warranty of authority or deceit … The Court initially found the principal contractually liable based upon apparent authority see: Financial Management Inc. v. Planidin, 2006 ABCA 44. FRANCHISING (Source p. 375) Unlike an agent, a franchisee is an independent businessperson, who deals with customers on his or her own behalf, and not on behalf of the franchisor. A franchise is an independent business, not operated by an agent or employee of the franchisor. There is consequently normally no contractual relationship between franchisor and customer (although, as discussed in earlier chapters, a collateral contractual relationship may be brought about; for example, by advertising). This is a most important point, since customers (and suppliers) often assume that they are dealing with a large, multinational, concern when, in fact, they are dealing with what may well be a small, local firm. An important element of almost all franchising agreements is the assignment or licensing of intellectual property rights—trademarks, patents, etc. The franchisor will control and restrict the use of intellectual property by the franchisee. This subject is discussed further in Chapter 20. The legislative right to rescind for failure to provide proper disclosure has recently been considered by the Alberta Court of Appeal. In Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276, the Court held that where the deficiency in disclosure is severe it completely nullifies the disclosure and the relevant rescission time period is two years not sixty days (as for merely deficient disclosure). The Checklist on p. 378 provides a list of the contents of a typical franchise agreement. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 381) Students need to make a point of thinking through an agency relationship and the inherent risks associated with this type of relationship. There is enormous trust in the relationship, hence, the duty of good faith owed by the agent to the principal. When hiring parties to act in the capacity of agent (whether independent or employee), principals must be sure of the abilities and honesty of the individual. Further, agreements should be in writing and clear. Principals should be wary of ratifying contracts that exceed an agent’s authority and be sure to notify all parties of the excess of authority. The agent too should insist on written contractual terms to avoid misunderstandings and the risk of exceeding authority, thereby creating personal liability. ETHICAL ISSUE (Source p. 366) Insurance Broker Compensation This issue should raise discussion surrounding the values of trustworthiness, fairness, and responsibility.

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Question 1 - Disclosure, to some extent, is a satisfactory solution. Students will soon see that disclosure is used as a solution for other conflicts of interests in areas of corporate governance and privacy. Insurance customers must take some responsibility for their choices and familiarize themselves with the nature of an independent insurance brokerage. The consumer should know that it is a for profit business and if the consumer is not paying a fee, the insurance companies must be. Informing customers of potential conflicts of interest allows them to ask questions; for example, why are you pushing this product – is it because you get the highest commission for this? Explain to me why this is my best choice? And so on. This gives consumers the opportunity to shop around if they are unhappy with the responses they receive. Question 2 - The instructor should ask students to consider the values listed above when considering other measures to recommend. Possible recommendations:  Flat rate commissions for brokers regardless of the product sold.  No contingent commissions  No fees (other than processing fees) from customers (there is an issue here – if brokers couldn’t charge fees to customers, it would essentially represent the end of independent brokers – it makes sense to push policies they’d receive the highest commissions for).  No commissions from companies  Some combination of the above. Overall, the disclosure solution discussed in question 1 probably does the most to fairly satisfy the interests of buyers and sellers. INTERNATIONAL ISSUE (Source p. 380) Resolving Franchise Disputes Question 1 - Usually the terms of the contract are drafted by the franchisor and there is little or no true negotiation. This may result in unfair terms being inserted in the contract. And, since the franchisor normally has far greater financial resources than the franchisee, it is far more able to bear the costs of litigation. However, it should be noted that entering into a franchise agreement represents a significant financial investment and commitment – a franchisee would be a fool to sign an agreement without consulting a lawyer and attempting to mitigate some of the harsher terms. The justification in favour of standard terms is the recognition that the franchisee’s position is far more like that of a consumer in a leasing or sale contract. Thus, it might be appropriate to regulate the terms of franchise agreements in much the same way as is done in consumer protection legislation. Arguments against could include a denial that franchisees can in any way to be equated to consumers. Franchisees aim to establish a profitable business and they should be expected to take the same risks as any other type of business. Moreover, the very fact that someone has the resources to buy in to a franchise indicates that they are savvy and capable and, therefore, in less need of protection than the common consumer. It should also be noted that franchisors are licensing a successful business plan and, typically, years of goodwill built into a successful brand and that, as such, they have a legitimate interest in protecting their goodwill and brand. Perhaps this justifies harsh conditions.

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This is an opportunity to revisit the strategies of “disclosure”. Mandatory disclosure is required in some jurisdictions to resolve the inequality of bargaining power in franchise negotiations. The Canadian provinces that have legislation included disclosure obligations. Many states in the U.S. have similar legislation, for example Illinois enacted the Franchise Disclosure Act of 1987. Question 2 - This is more of a philosophical question than anything else. Imposing mandatory arbitration may violate the notion of freedom of contract, on the one hand, but, on the other hand, since franchisees have little bargaining power to change the terms of franchise agreements perhaps it is justified in this case. As for enforceability, arbitration is a widely accepted business practice and is, generally, cheaper and faster than litigation. Instructors will want to link this discussion with the Ethical Issue: Access to Justice at p. 41 of Chapter 2 and the arbitration content at p. 727 in Chapter 30. Instructors may want to refer students to the Alberta legislation’s provision on choice of forum and discuss its impact on arbitration: Limit on jurisdictional choice 17. Any provision in a franchise agreement restricting the application of the law of Alberta or restricting jurisdiction or venue to any forum outside Alberta is void with respect to a claim otherwise enforceable under this Act in Alberta. Dell Computers v. Union des consummateurs 2007 SCC 34 (Supreme Court of Canada) case (discussed and summarized in Chapter 2) may offer insight. One interesting decision of the Ontario Court of Appeal enforced a mandatory arbitration clause in a franchise agreement. In MDG Kingston Inc. v. MDG Computers Canada Inc., 2008 ONCA 656, the Court stayed a court action for rescission and referred the matter to arbitration because the arbitration clause was disclosed in accordance with the Ontario franchise legislation. QUESTIONS FOR REVIEW 1. A dependent agent is one who acts exclusively, or mostly, for a single principal. An independent agent is not an employee and acts on behalf of several principals or clients. (Source p. 362) 2. Not usually. A real estate agent does not have authority, as such, to sell the property of a client—her role is to introduce prospective purchasers and the client contracts directly with the purchaser. (Source p. 362) 3. A power of attorney is a special type of express agency agreement, authorizing the agent to sign documents on behalf of the principal. (Source p. 363)

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4. When a principal ratifies a contract made on its behalf by an agent who lacked the authority to enter the contract, the principal adopts the proposed agreement and is then entitled to sue on the contract and becomes liable to be sued. (Source p. 369) 5. A principal many not ratify a contract made for him if, at the time the contract was made he would have been unable to enter into the contract himself. Nor may the principal ratify a contract if, at the time he purports to ratify it, he could not have made that contract himself. Finally, a principal cannot ratify when the rights of an outsider are affected. (Source pp. 369-370) 6. Actual authority is usually given expressly, but may be implied either from commercial usage or from the conduct of the parties. (Source p. 367) 7. An agent may acquire apparent authority from a past manner of transacting business or from trade custom. (Source pp. 367-368) 8. Holding out occurs when someone represents a person to be her agent, either by words suggestive of that relationship or by acquiescing in similar contracts made by that person in the past. In such a situation, the representor will not be permitted to deny the existence of an agency. (Source p. 368) 9. The general rule is that an agent cannot delegate her duties. There are a few limited exceptions. (Source p. 364) 10. An agent who acts for both parties to a transaction is in a position of conflict of interest, but may do so if they are aware of the arrangement and have both agreed to it. Otherwise, the agent may not be entitled to commission and may have to account for any profit made. (Source pp. 364-365) 11. When an agent describes herself as a principal, though she is in reality acting or intending to act for an undisclosed principal, the agent alone is liable on the contract. Where an agent does not disclose that she is acting as an agent, but has authority to contract on behalf of the principal, the third party may sue either the agent or the principal. (Source p. 371) 12. Generally, the answer is yes; he may normally intervene and enforce the contract against the other party. To that rule there is one major exception. An undisclosed principal is not permitted to enforce a contract that is essentially personal in nature. (Source p. 372) 13. There is no contract when a person holds herself out to be an agent but has no authority, actual or apparent. In such a case, the third party may sue the “agent” for damages for breach of warranty of authority—that is, the “agent” has misrepresented herself as possessing authority. (Source p. 373) 14. In a franchise, the franchisor grants the franchisee a licence to market its product, use its trade name, etc. However, a franchise normally amounts to considerably more than

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the mere granting of a license: it involves a substantial degree of control by the franchisor over the franchisee’s business. (Source p. 375) 15. Usually, the franchisee is required to covenant that the business will be carried on only in accordance with the franchisor’s regular operating instructions and that no other competing business will be carried on by the franchisee. (Source p. 376) 16. The franchisee contracts with members of the public on its own behalf, not as agent for the franchisor. There is thus no contract between the customer and the franchisor. (Source p. 375) 17. It would seem that no fiduciary obligations exist between a franchisor and franchisee as a result of the franchise itself, though such a relationship could arise in particular cases, especially where the franchisor exercises a substantial degree of control over the operation of the business. (Source p. 378) 18. Under the recent Alberta and Ontario legislation, franchisors are required to provide a disclosure document to prospective franchisees, containing detailed information about the business and the franchise system. Both acts also contain “fair dealing” provisions—that is, they impose on the parties a duty of fair dealing—and recognize a “right of association” among franchisees—a franchisor may not prohibit or restrict its franchisees from forming an organization and may not penalize them in any way for doing so. (Source p. 379)

CASES AND PROBLEMS 1. It would appear that a contract was formed by Karen, binding Ashley’s Restaurant. Karen did not have actual authority but because she has acted on behalf of Ashley’s in various other smaller contracts, she has implied agency or agency by estoppels. (Source p. 363-364) 2. The relationship between Halloran and Scallop is one of agency. Two principal questions are raised: is Scallop entitled to terminate the agency agreement; and is Halloran liable to account for the shortfall? The case is based on Killoran v. RMO Site Management Inc. (1997), 33 B.L.R. (2d) 240, a decision of the British Columbia Court of Appeal. In that case, the court held that the owner of the gas station was entitled to terminate the agency agreement based on the operator's failure to account promptly, which constituted a breach of the contract. Although there was no evidence that the operator was directly responsible for the shortfall in funds, his failure to keep proper accounts, and to follow the prescribed banking procedures, were partly responsible for the shortfalls, and he was liable for the loss caused by his negligence. 3. The facts of this case are drawn from Jirna Ltd. v. Mister Donut of Canada Ltd. (1973), 40 D.L.R. (3d) 303, a decision of the Supreme Court of Canada. The issues

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arising in this case are as follows: what is the nature of the relationship between Da Silva and Snacks; is the rebate arrangement between Snacks and the suppliers contrary to the legal consequences of the relationship with Da Silva? The recognition of a relationship such as partnership or principal and agent depends on the actual arrangements between the parties. A term of the agreement between the parties stating that the relationship is to be one of independent contractors and is not to be one of principal and agent is not conclusive. The court will look at the actual relationship between the parties. In the present case, Snacks controlled every aspect of the business, including setting it up, purchasing the equipment, selecting personnel, arranging advertising and even overseeing very detailed day-to-day operations such as purchasing supplies. Such a degree of control over the relationship reserved by Snacks, and actually exercised by it, may indicate that the parties were not independent contractors, notwithstanding the provision in the agreement. If the relationship was not that of independent contractors, what sort of relationship was it? Da Silva had delegated authority to Snacks, at least with respect to the purchase of supplies. The franchising organization was to purchase supplies in order to obtain the benefits of mass purchasing power. Indeed, it was this representation made by Snacks that persuaded Da Silva to pay the significant mark-ups on the purchase of equipment and on the rent. At least insofar as the purchase of supplies is concerned, the relationship might be characterized as one of principal and agent. The relationship of principal and agent carries with it a duty of good faith. Accepting kickbacks, or "secret commissions," is a breach of that duty owed by the agent to the principal. Accordingly, Da Silva should succeed in his action for an accounting. This was the result at the trial level in the Mister Donut case. However, on appeal, the Supreme Court of Canada held that the terms of the contract explicitly excluded the relationship of principal and agent, and that the franchisee could not recover the secret profits. 4. This case is based on Lang Transport Ltd. v. Plus Factor International Trucking Ltd. (1997) 143 D.L.R. (4th) 672, a decision of the Ontario Court of Appeal. In that case it was held that the broker (Transshipments, in our problem) acted as agent for the owner of the goods (Factorplus). The trucking firm (Longhaul) were entitled to recover the amount of the unpaid invoices from the principal/owner, since the agent/broker was acting within the scope of its authority in arranging the shipments. The agent/broker was not liable. This was not a case where the agent was acting for an undisclosed principal. The plaintiff intended to deal with the principal, not with the agent. Its only mistake was in believing that it was dealing directly with the principal rather than through an independent agent. [NOTE: in the original case, the plaintiff had obtained a default judgment against the agent. The trial judge held that both the agent and the principal were jointly liable, and the first judgment prevented it from bringing a second action against the principal. The appeal court reversed that decision; there was no joint liability, because the agent was not liable at all. Therefore it set aside the judgment against the agent and allowed that against the principal.]

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5. On the face of it, Strauss is in breach of the franchise agreement in a number of ways. He has not paid the franchise fee in full, he is in arrears with the payment of royalties, and he is in breach of the restrictive covenant not to set up a competing business. His principal defence is to argue that the contract is not valid, or that he is entitled to repudiate the contract, it having been induced by misrepresentation. That, in turn, might entitle him to damages for what he has lost as a result of the misrepresentation. The case is based on Nutrilawn International Inc. v. Stewart, [1999] O.J. No. 643, a decision of the Ontario Court of Justice (General Division). There, it was held that the franchisor was entitled to damages for breach of contract. The franchisee’s counterclaim was dismissed. The franchisor had not made any specific representations about the potential sales or profit of the franchise. The franchisee was an experienced business administrator, who was aware of the variable factors contained in the financial statements, and had also made his own enquiries. He had not established that the franchisor had failed to disclose material facts about the franchise, or had made any negligent misrepresentations. He was consequently obliged to adhere to the terms of the franchise agreement. [NOTE: In the actual case the franchisor sought (and received) only damages for breach of the restrictive covenant. It did not seek an injunction to restrain the franchisee from carrying on the competing business, though it presumably might have done so.]

CASE SUMMARIES

Aaron Acceptance Corp. v. Adam (1987), 37 D.L.R. (4th) 133 (British Columbia Court of Appeal) Mr. and Mrs. Adam wanted a loan to redeem the mortgage on certain property that they owned. They signed an agreement with Aaron under which Aaron agreed to obtain a loan from a lender in consideration for a commission of ten percent of the mortgage loan. Later, Aaron sent the Adams a letter of commitment stating that Aaron itself would lend the Adams the money. The Adams then rescinded the mortgage loan agreement. Aaron sued for its commission or, in the alternative, for its reasonable and necessary expenses. The court held that the parties envisaged that Aaron as the Adams' agent would obtain a loan from a third party. Aaron's commission was to be its reward for looking after the Adams' interests. By assuming the role of lender, Aaron put itself in a position of conflict of interest and was no longer entitled to its commission. The services which Aaron had performed were not contemplated by the agreement and Aaron could not recover those either. Since the Adams had rejected Aaron's services, Aaron was not entitled to payment on the basis of quantum meruit. Alvin’s Auto Service Ltd. v. Clew Holdings Ltd., [1997] S.J. No. 387 (Saskatchewan Court of Queen’s Bench)

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Clew Holdings owned commercial property, but had defaulted in its mortgage payments to the Federal Business Development Bank (“the Bank”). Clew had agreed to cooperate in the disposal of the property and had instructed the Bank to find a buyer. The plaintiff was interested in purchasing the property and entered into negotiations with the Bank to purchase the property; a deal was signed. Shortly thereafter, a better offer came through and the Bank instructed Clew to accept the second offer. The Bank then informed the plaintiff that it was unable to proceed with the deal they had negotiated. The Court held that the Bank was liable to the plaintiff for Breach of Warranty of Authority and negligent misrepresentation; the bank had signed the documents as “vendor” and led the plaintiff to believe that it had the authority to sell the building.

Andrews v. Ramsay [1903] 2 K.B. 635 (England – King’s Bench Division) The plaintiff hired the defendant to act as an estate agent and sell his property. As part of the agreement the plaintiff would pay the agent £50 less than the asking price. The buyer further paid the agent £20. The Court ordered that the plaintiff was entitled to recover the £50 he paid to the defendant agent, as well as the £20 paid by the buyer for the breach of fiduciary duty. Attis v. Ontario, 2011 ONCA 675 Page 373 footnote 33 Avery v. Salie (1972), 25 D.L.R. (3d) 495 (Saskatchewan Court of Queen’s Bench) A real estate agent was held liable when he failed to ensure that the type of mortgage requested by the purchaser was the same type as the one registered against the property. The Court held that the agent is in a position of a gratuitous agent to the purchaser. B.B.J.Enterprises Ltd. v. Wendy’s Restaurants of Canada Inc. [2004] N.S.J. No. 81 (Nova Scotia Supreme Court) BBJ operated a Wendy’s franchise. Within a year of opening the business its sales were dropping disastrously. Wendy’s terminated the franchise. BBJ was in a difficult financial position and agreed to sell its assets to Wendy’s. Less than an hour before the scheduled closing time Wendy’s demanded that BBJ execute a release in its favour, otherwise it would not close the sale. BBJ signed the release, but subsequently brought proceedings to have the release set aside. The court found for BBJ. The release had not been part of the sale agreement and Wendy’s actions were unconscionable.

32262 B.C. Ltd. v. 411676 Alberta Ltd., (1995) 29 Alta. L.R. (3d) 415 (Alberta Court of Queen’s Bench)

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The plaintiff company attempted to enter into a contract regarding the lease of signage with another company that was acting as temporary manager of a hotel during a foreclosure proceeding. The defendant company sent an offer to the plaintiff. The plaintiff changed the offer, but the defendant never received it. The defendant started making payments under the contract in the belief that the first contract was accepted; the payments under both contracts were the same. The plaintiff alleged that the contract was for a seven year term, instead of a one year term. The defendant argued that the plaintiff knew that the defendant was an agent in a foreclosure and that it was limited in authority to a one year term on any contracts. The court held that there was no contract as there was no acceptance, but even if a contract had been formed, it would not be binding on the defendant’s principal as it was beyond the defendant’s authority and the plaintiff knew that. Butwick v. Grant, [1924] 2 K.B. 483 (England—King’s Bench Division) Butwick was a wholesale dealer in London; Grant was a tradesman at Southend-on-Sea. Chait had done business with Grant in the past but had never met Butwick. In March of 1923, Chait called on Butwick and told him that Grant was a client of his who would probably do business with Butwick. Butwick made inquiries about Grant's business and then authorized Chait to sell sixty-four sports coats to Grant, giving Chait one as a sample. Grant agreed to buy the coats, taking and paying for the sample. Butwick sent the rest of the coats to Grant along with an invoice bearing Butwick's name. Chait, who had no authority to take payment from Grant, called on Grant who paid him and got a receipt. Chait never paid the money to Butwick who sued Grant for the price of the coats. The court held that Chait's authority to sell did not imply authority to receive payment. Butwick was entitled to be paid. Cash Converters Pty. Ltd. v. Armstrong, [1997] O.J. No. 2659 (Ontario Court of Justice - General Division) The plaintiff was an international franchisor of retail stores dealing in second hand goods. It sought an injunction against the defendant, a former franchisee, to restrain it from operating a similar type of business. The court held that any potential harm was compensable in damages and as such, the issues of irreparable harm and balance of convenience were in favour of the plaintiff. The court denied the injunction. Collins v. Associated Greyhound Racecourses, [1930] 1 Ch. 1 (England—Court of Appeal) The plaintiff subscribed for shares in a corporation through an underwriter. He subsequently discovered that there were a number of misrepresentations in the corporation’s prospectus. He sought to avoid the contract on the ground that he did not contract with the corporation. Held—he was an undisclosed principal, and the underwriter was his agent. He was therefore not entitled to rescind the contract.

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Columbia Caterers Ltd. and W.E. Sherlock Co. Ltd. v. Famous Restaurants Ltd. (1956), 4 D.L.R. (2d) 601 (British Columbia Court of Appeal) On October 9, 1954, Columbia Caterers made an offer in writing to Famous Restaurants for the purchase of a restaurant. Famous Restaurants suggested several changes to the proposed terms of purchase. Columbia agreed to all the changes except one, and sent a telegram containing its revised offer to Famous Restaurants on October 12, 1954. That same day, Famous Foods' real estate agent (W.E. Sherlock Co. Ltd.) accepted Columbia's revised offer on behalf of Famous Restaurants by telephone. Famous Restaurants later refused to complete the sale and successfully defended an action for breach by Columbia on the ground that the agreement had not been evidenced in writing as required by the Statute of Frauds. The real estate agent sued for its commission nonetheless. The court held that W.E. Sherlock was still entitled to its commission from Famous Restaurants since it had found a purchaser "ready, willing and able to purchase." Community Savings Credit Union v. United Assn. of Journeymen and Apprentices of the Plumbing and Pipefitting Industry, [2002] B.C.J. No. 654 (British Columbia Court of Appeal) A credit union advanced money to the defendant union. An indemnity agreement was provided by the defendant as security for a line of credit. The indemnity agreement was signed by the defendant’s business agent without formal authorization. The credit union sued to collect on the line of credit and the defendant argued that it had not executed the indemnity agreement, because the business agent had no authority to sign it. The court held that the business agent had apparent authority. When the defendant discovered the existence of the indemnity agreement it did nothing; by failing to notify the credit union (that the business agent had acted without authority), it effectively ratified his actions. Acquiescence with knowledge of a disputed transaction was sufficient to constitute ratification. Country Style Food Services Inc. v. Hotoyan (2001), 106 A.C.W.S. (3d) 640; [2001] O.J. No. 2889 (Ontario Superior Court of Justice) The defendant operated a franchised donut store. He encountered competition from an existing franchise of the plaintiff within one kilometre, and later a second competing franchise was opened within the same distance. Eventually the business failed. The court held that the franchisor was not in breach of any duty owed to the defendant. Delta Construction Co. Ltd. v. Lidstone (1979), 96 D.L.R. (3d) 457 (Newfoundland Supreme Court, Trial Division) Lidstone and others wished to form Algo Enterprises Ltd. They began the process on April 2, 1975 when they signed the memorandum and articles of association, but the company was not incorporated until October 22, 1975. In the interim, Lidstone requested the plaintiff to do work for Algo. The work, which consisted largely of the rental and use of earth-moving equipment, was done between May 26 and September 26, 1975 at a cost of $17,845. The plaintiff was paid $3,187 before Algo was incorporated, by cheques drawn on an account in Algo's name. The project for which Algo was being incorporated

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foundered, and the plaintiff was not paid the balance it was owed. The court held that the plaintiff believed the work was being done for Algo. The defendants were liable to the plaintiff for breach of warranty of authority (no contract was formed with Algo since it was not incorporated when the plaintiff was requested to do the work). However, the measure of damages was that which the plaintiff could have recovered from Algo. Since Algo was insolvent, the plaintiff could recover only nominal damages. Doiron v. Devon Capital Corp. (2003), 232 D.L.R. (4th) 732 (Alberta Court of Appeal) The plaintiffs wanted to make an investment. They contacted an employee of a life insurance company with whom they had dealt before and who had invested money for them with the company. The employee offered them an investment vehicle with another business, but did not tell them that it was not a product of the company. They assumed that it was. The other business was a sham and the investment failed. The plaintiffs sued the insurance company. The court held that the employee was not an agent of the company in this transaction but it had, by its previous conduct, given the employee ostensible authority to make contracts on its behalf and was liable for the loss on that basis. Ellis v. Subway Franchise Systems of Canada Ltd., [2000] O.J. No. 3849 (Ontario Superior Court) The franchisor claimed that the franchisee was in default of the franchise agreement and demanded that certain remedial steps be taken. It invoked a provision of the agreement requiring arbitration in Connecticut, although the franchise was located in Ontario. The franchisee brought an action in Ontario, seeking a declaration that the franchise agreement was unconscionable and therefore invalid. The court held that the terms of the agreement were necessary to preserve the goodwill of the franchisor and the agreement was for the mutual advantage of the parties. The arbitration provision was valid and binding. Financial Management Inc. v. Associated Financial Planners Ltd. (2006), 56 Alta. L.R. (4th) 2007 (Alberta Court of Appeal) Financial Management Inc. (FMI) entered into an oral agreement with a branch manager of Associated Financial Planners pursuant to which FMI agents would be licensed with Associated to sell mutual funds. Five to ten percent of any commissions earned by those agents were to be paid to FMI. The manager never told head office about the agreement and FMI was never paid any commissions. The court found Associated was bound by the agreement and liable to FMI for the breach. This conclusion was based on the fact that branch managers in the industry normally have authority to make such contracts and FMI believed that the branch manager had the necessary authority. Consequently, the branch manager had apparent authority to enter into the agreement and Associated was in breach for not paying the commissions.

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Jade West Holdings Ltd. v. Canada Zau Fu Trade Ltd., [2002], B.C.J. No. 596 (British Columbia Supreme Court) Jade entered into a contract, negotiated by Li, for the sale of ten thousand bottles of veterinary pharmaceuticals, to be delivered to CZF. Li gave a cash deposit. She did not mention that she was acting as agent for CZF, but gave Jade her business card, which described her as a director of CZF. The court held that Jade’s contract was with CZF and it has no claim against Li personally.

Jirna Ltd. v. Mister Donut of Canada Ltd. (1973), 40 D.L.R. (3d) 303 (Ontario Court of Appeal) The plaintiffs entered into three franchise agreements with the defendant. The plaintiffs sued based on misrepresentation by the defendant. The trial judge held that the representation was made by the defendant, but that it was not false. However, the trial judge characterized the franchise relationship as a fiduciary one and created a constructive trust. The Court of Appeal overturned that decision. It found that the franchise relationship was not a fiduciary one; that the court must give recognition to contract terms made on an equal footing and at arm’s length. Kardish Food Franchising Corp. v. 874073 Ontario Inc., [1995] O.J. No. 2849 (Ontario Court of Justice, General Division) The case involved an application for an interlocutory injunction restraining the defendants from taking any steps to breach a franchise agreement. Under the agreement, entered into in 1990, the plaintiff was the franchisor while the defendant numbered company was the franchisee. The agreement was to expire in 2004. On July 3, 1995, the defendants sent a fax to the plaintiff purporting to terminate the business operations of the franchisee relying on provision of the Franchise agreement which provided for termination of the agreement in the event of the cessation or suspension of the active operation of the franchised business. The defendants contended that they ceased the active operation of the franchised business within the meaning of that provision when the business closed its doors at the end of the business day on June 30, 1995. The store reopened its doors on July 3, 1995 essentially carrying on the identical business, but under a new name and with a new numbered company carrying on the operation. The court held that an injunction was warranted in this case. The balance of convenience favoured the plaintiff because although the plaintiff's injury might be compensable in damages, the success of the plaintiff's franchise business depended in large measure on the goodwill associated with its name and customer connections, to allow franchisees to take the benefit of such goodwill, set up their business and then unilaterally terminate the agreement so as to continue on their own was unfair. . Kelly v. Cooper, [1993] A.C. 205 (Bermuda – Privy Council) Copyright © 2016 Pearson Canada Inc.

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Mr. Kelly owned property in Bermuda that he wished to sell. He had tried to sell the property for a number of years and used a number of agents. In 1989 he hired Coopers to act as his agent. At that time Coopers also represented a neighbor of Mr. Kelly who had a similar property for sale. Coopers found a buyer who was interested in both properties. He offered $2,000,000 for the second property and then offered $2,500,000 gross; that is, Mr. Kelly would have to pay the agent’s commission. The parties agreed and the properties were sold. Only after the sale of the second property went through, did Mr. Kelly discover that the agents had also sold the neighbouring property to the same purchaser. As a result, Mr. Kelly refused to pay the commission. The privy council held that in these circumstances there was no breach of fiduciary duty as the contract of agency contemplated the possibility of Coopers acting for other vendors at the same time as Kelly. Further, it would have been a breach to reveal confidential information on the second sale to Mr. Kelly as he had no right to know. Lastly, even if there had been a breach of fiduciary duty, without a dishonest act or bad faith on the part of Coopers, they would still be entitled to their commission. Kendall v. Hamilton (1879), 4 App. Cas. 504 (England –House of Lords) Kendall, a London merchant, made large advances to Wilson & McLay, a firm of merchants in Glascow, in connection with a speculation in iron. Wilson & McLay fell into financial difficulties. Kendall brought an action against them to recover the debt and obtained judgment. Wilson & McLay became bankrupt before Kendall could collect from them. Kendall then claimed in the bankruptcy, and recovered a small amount. Kendall later discovered that Wilson & McLay had a third partner, Hamilton, who was solvent. The House of Lords held that Kendall could not bring an action against Hamilton; Kendall had already obtained judgment on the contract and could not sue again on the same contract. (Note: although the case concerned a partnership, it should be remembered that partners are agents for each other—see Chapter 24.) Kentucky Fried Chicken Canada v. Scott's Food Services Inc. (1998), 41, B.L.R. (2d) 42 (Ontario Court of Appeal) The trial judge had allowed Kentucky Fried Chicken's (KFC) action for termination of a licensing agreement. Scott's Food was owned by Scott's Hospitality who also owned a school bus business. In 1996, as part of a transaction with Laidlaw Inc., the shareholders of Scott's Hospitality transferred its ownership of the franchise to Scott's Restaurants. The shareholders then owned Scott's Restaurants which owned Scott's Food. The change in ownership of the franchise was made without KFC's consent. On appeal the court held that the contract, being a negotiated commercial document, was interpreted objectively and in accordance with sound commercial principles and good business sense. The contract did not give KFC a right to approve a change in the controlling shareholder of the franchisee, Scott's. Such a right would have meant a significant change in the agreement which had governed the franchise relationship since 1969. Prior to executing the agreement, KFC was told that Scott's would not agree to any restriction on changes of ownership in the franchisee and the standard "deemed transfer"

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language present in every other KFC franchise agreement, which provided for KFC's right to approve a change in shareholders of the franchisee, was conspicuously absent from the Scott's license agreement. The interpretation suggested by KFC resulted in a commercial absurdity. Consequently, KFC did not have the right to terminate the franchise. Killoran v. RMO Site Management Inc. (1997), 33 B.L.R. (2d) 240 (British Columbia Court of Appeal) The plaintiff operated a gas station under an agency agreement with the defendants. The defendants had terminated the agency agreement, alleging the plaintiff did not account for the defendant’s products, or the proceeds of the sale of those products in accordance with the agency agreement. The Court of Appeal held that the defendants owned the property being sold by the plaintiff; the plaintiff had agreed to promptly and accurately account for the property; the plaintiff failed to do so and was consequently liable to the defendants. Knoch Estate v. Jon Picken Ltd., [1991] O.J. No. 1394 (Ontario Court of Appeal) Real estate agent case: the role of agent as a fiduciary. The court held at para 30: …Generally speaking, it has been held that listing agents and brokers, in the position of Roloff and Royal Trust, are fiduciaries owing the highest obligation of full disclosure and fair dealing to the vendor who pays the commission (D’Atri v. Chilcott (1975), 7 O.R. (2d) 249 55 D.L.R. (3d) 30 (H.C.)). That duty emerges from the confidential nature of the relationship which arises when the agent undertakes to list and sell the property for the vendor under either multiple or exclusive listing agreements. In other words, the vendor is legally entitled to expect that his or her real estate agent will faithfully serve to promote the vendor’s interests. Krawchuk v. Scherbak 2011 ONCA 352 Page 373 footnote 30 Lang Transport Ltd. v. Plus Factor International Trucking Ltd. (1997), 143 D.L.R. (4th) 672 (Ontario Court of Appeal) The plaintiffs sued both Plus Factor and Canadian Tire. Plus Factor did not defend the action and default judgment was entered against it. The issue here was whether that default judgment could be set aside and judgment against Canadian Tire entered in its place. The plaintiff had believed that Factor Plus was simply the “dispatch arm” of Canadian Tire, when in fact it was an agent of Canadian Tire. In agency, the plaintiff can only sue either the principal or the agent, but not both. Since Plus Factor did not defend the action, default judgment was entered against it, precluding the plaintiff from pursuing its claim against the principal. The Court of Appeal allowed the setting aside of the

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default judgment against Plus Factor and entered judgment against Canadian Tire as the principal instead. Lloyd v. Grace, Smith & Co. Ltd. [1912] A.C. 716 Page 373 footnote 29

MAA Lloyd v. Grace, Smith & Co., [1912] A.C. 716 (England –House of Lords) Lloyd owned two cottages at Ellesmere Port and held a mortgage on another property. Grace, Smith & Co. was a firm of solicitors in Liverpool. The business was carried on alone by Frederick Smith with whom Lloyd became acquainted when he acted as solicitor for the vendor when Lloyd bought the Ellesmere Port properties. Lloyd was dissatisfied with the income she was receiving from the properties and called at Grace, Smith & Co. to consult the firm on the matter. She saw Sandles, Smith's conveying manager and managing clerk, who had authority to arrange, negotiate and carry out sales of real property without supervision. Acting as the representative of the firm, he induced Lloyd to sell the cottages and call in the mortgage money. For that purpose, she gave him the deeds to the property (receiving a receipt in the firm's name) and signed two documents which she did not read and were not explained to her. She believed she had to sign them in order to effect the sale of the properties. In fact, the documents were a conveyance to Sandles of the cottages and a transfer to him of the mortgage. He disposed of the property for his own benefit. The court held that the firm was responsible for the fraud of its representative committed in the course of his employment. Machias v. Mr.Submarine Ltd., [2002] O.J.No.1261 (Ontario Superior Court) The plaintiff franchisee claimed rescission of the franchise agreement on the grounds that he had been induced to enter into it by misrepresentations regarding its past performance and financial position. The court found that the franchisor had failed to disclose important information and that its conduct had been reckless, if not fraudulent. Rescission was granted. [NOTE: the judgment contains an excellent review of current Canadian franchise law.] McRae Management Ltd. v. Breezy Properties Ltd., (2008) 74 R.P.R. (4th) 50 (British Columbia Supreme Court) The plaintiff and defendant entered into complicated negotiations for the purchase of a commercial property. The plaintiff dealt largely with a Mr. O’Neill, agent for the vendor. The plaintiff claims that the agent accepted an offer on behalf of the defendant and, therefore, the defendant was bound to the contract. The court held that in this case, the agent had neither actual, nor apparent authority. The plaintiff knew that Mr. O’Neill was only a listing agent and that the defendant had to accept and sign any offer to purchase.

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McCullough v. Tenaglia (1998), 40 B.L.R. (2d) 222 (Ontario Court of Justice, General Division) aff’d [1999] O.J. No. 4401 (Ontario Court of Appeal) The plaintiff gave the defendant $7,500 to buy shares for him. The shares were part of a new issue that was heavily oversubscribed. The defendant bought as many shares as he could get, making a substantial profit, but told the plaintiff he had been unable to obtain any shares for him. The court held that the defendant had undertaken to buy shares as an agent for the plaintiff. As such, he owed a fiduciary duty to the plaintiff to try to obtain the shares. He was not entitled to simply keep for himself those shares that he was able to buy. [NOTE: the judgment provides a useful review of the authorities on an agent’s fiduciary duties.] McPherson v. Watt (1877), 3 App. Cas. 254 (England – House of Lords) See Case 17.1 at p. 395 in the text.

MDG Kingston Inc. et al. v. MDG Computers Canada Inc. et al. (2008), 92 O.R. (3d) 4 (Ontario Court of Appeal) The plaintiff was the franchisee of the defendant. The plaintiff rescinded the franchise agreement based on non-disclosure by the defendant as required under the Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c 3. The plaintiff claimed rescission and damages. The defendant brought a motion for a stay of the proceedings as per arbitration clauses in the agreement and the plaintiff moved for summary judgment. The motions judge granted the summary judgment. The Court of Appeal overturned that decision and allowed the stay for arbitration: the franchise agreement was not invalid at law; it was subject to rescission. Mercantile Credit Co. Ltd. v. Garrod, [1962] 3 All E.R. 1103 (England –Queen’s Bench Division) See Case 17.2 at p. 397 in the text. Neish v. Melenchuk (1993), 120 N.S.R. (2d) 239 (Nova Scotia Supreme Court ) See Case 17.8 at p. 410 in the text. Metropolitan Asylums Board Managers v. Kingham & Sons (1890), 6 T.L.R. 217 (England –Queen’s Bench Division) The plaintiffs advertised for the supply of various kinds of food and the defendant sent in a tender for the supply of eggs from September 30th to March 20th. The tender was submitted on a form issued by the plaintiffs that stated that tenders were due by September 14th and that the Board would meet on September 22nd to decide which tender Copyright © 2016 Pearson Canada Inc.

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to accept. Within two days, a seal would be attached to the tender making it into a binding contract. The defendant's tender was submitted on time and, at the September 22nd meeting, a resolution was passed that its tender should be accepted and have a seal affixed to it. On September 24th, the defendant withdrew its bid in writing, stating that it had made an error in its tender. On October 6th, the plaintiffs, who were the managers of the Board, met and decided to hold the defendant to its contract. A seal was later affixed to the tender. The Court held that the ratification by the managers of the Board's acceptance was too late. They had to ratify within a reasonable time which could not extend past the date that the contract was due to commence. Nutrilawn International Inc. v. Stewart, [1999] O.J. No. 643 (Ontario Court of Justice – General Division) This was a case of a failed franchise where the franchisee claimed it relied on the misrepresentations of the franchisor. The Court found that where, on the facts, a franchisee’s decision to enter into an agreement was his own decision, based on his own investigation and his own business judgment, the franchisee cannot be said to have placed reasonable reliance on the franchisor. 1017933 Ontario Ltd. v. Robin’s Foods Inc., [1998] O.J. No. 1110 (Ontario Court of Justice – General Division) See Case 17.6 at p. 407 in the text. Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. [1971] 2 Q.B.711 (England – Court of Appeal) A company secretary entered into an arrangement with the plaintiff car rental firm to make cars available to him, or persons sent by him. The bills were sent directly to the company for payment. It was later found that the company secretary had been converting the cars to his own use. He was sent to prison. The company denied liability to the rental company. The court held that a company secretary has ostensible authority to enter into such contracts and the company was liable. Portavon Cinema Co. Ltd. v. Price and Century Insurance Co. Ltd., [1939] 4 All E.R. 601 at 607 (England – King’s Bench Division) The plaintiff was a lessee of a cinema and took out fire insurance with Lloyd’s. The lessors then were interested in obtaining a loan on the security of the cinema, took out a policy with the defendant insurance company. After both policies were in place, the property burned down. The plaintiff claimed against Lloyd’s, but Lloyd’s discovered the second policy and refused to pay based on the same interest being double insured. The court held that the two different parties each had their own interest in the property and therefore, this was not a true case of double insurance.

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Pure Energy Marketing Ltd. v. Ramarro Resources Inc., [2003] A.J.No.1105 (Alberta Court of Appeal) The plaintiffs (Pure Energy) acted as agents for the defendants (Ramarro) in negotiating a contract with KCS for the sale of natural gas. The contract was to continue for a period of eighteen months. Without informing the plaintiffs, Ramarro agreed with KCS for an earlier termination. The court held that the plaintiffs were entitled to their commission for the entire period. There was an implied term in the contract that the principal could not breach a contract with its buyer that would deprive the agent of its commission. QNS Paper Co. Ltd. v. Chartwell Shipping Ltd. (1989), 62 D.L.R. (4th) 36 (Supreme Court of Canada) Chartwell, a managing operator acting for charterers of ships, contracted with QNS for stevedoring services. Chartwell expressly described itself in all relevant documents as acting exclusively as the agent of an unnamed charterer. QNS agreed to contract on this basis, without asking about the identity of Chartwell's principal. Chartwell's principal later became insolvent and QNS sued Chartwell for the contract price. The court held that Chartwell had indicated that it acted only as an agent and could not be made liable for the contract price. R. v. Kelly, [1992] S.C.J. No. 53 at para 26, (1992), 92 D.L.R. (4th) 643 (Supreme Court of Canada) The accused was selling MURBs; he acted as agent to the purchasers. During the transactions he accepted secret commissions and did not disclose this to the purchasers. When the MURBs failed as an investment and the purchasers then discovered that the accused was being paid a commission by the MURB developers to sell the MURBs, criminal charges were laid. The Supreme Court (in a split decision) held that the Crown had not made out the elements of the offence under s. 426(1)(a) of the Criminal Code. The court did give a useful description of the nature of agency at paras 26 & 29: 26 Before considering the purpose of s. 426, something must be said of the importance of the agency relationship in today's society. Society today simply could not function without the services of agents. The number of the principal/agent relationships is legion. It is difficult to sell a house or commercial property without relying upon a real estate agent. It is difficult to place insurance of any kind without consulting an insurance agent. Holidays are arranged through a travel agent. Brokers act as agents in the most complex and difficult financial transactions. Solicitors act as agents for their clients. 29 The principal must be able to place trust and confidence in the agent since the agent has the authority to affect the legal position of the principal. This is perhaps the focus of the relationship. In essence the agent acts to achieve the same results that would have been obtained if the principal had acted on his or her own account. The influence the agent can have on the affairs of the principal and the power to take action on behalf of the principal are significant. They are of such

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great significance that it follows as the night the day that the agent must always act in the best interests of the principal.

Salomons v. Pender (1865), 195 E.R. 682 (England) A real estate agent arranged the sale of land to a corporation in which he was a director and shareholder. The court held that as the agent had an interest in the purchasing corporation, he was not entitled to a commission on the sale. Salter v. Cormie (1993), 108 D.L.R. (4th) 372 (Alberta Court of Appeal) See Case 17.5 at p. 404 in the text. Shelanu Inc. v. Print Three Franchising Corp. (2003), 226 D.L.R. (4th) 577 (Ontario Court of Appeal) The plaintiff was a franchisee of the defendant. It brought legal action against the defendant alleging breach of the franchisor’s obligations to the franchisee claiming both damages and release from its contractual obligations. The trial judge held that there was a breach by the defendant and a fundamental breach allowing the plaintiff to discharge itself from its obligations under the contract. The Court of Appeal held that there was a breach of the contract by the defendant, but not a fundamental breach and therefore, the plaintiff could not consider itself discharged from its obligations. In the course of its decision, the Court of Appeal held that there were similarities between the franchise relationship and the employment relationship and therefore, a duty of good faith did exist on the part of the franchisor. Sign-O-Lite Plastics Ltd. v. Metropolitan Life Insurance Co. (1990), 49 B.C.L.R. (2d) 183 (British Columbia Court of Appeal) See Case 17.3 at p. 402 in the text. Straus Estate v. Decaire, [2007] O.J. No. 737 (Ontario Superior Court of Justice) [NB – there is an error in the citation; it should read: Straus v. Decaire, 2011 ONSC 1157 (Ontario Superior Court of Justice) at paras 67-73] The plaintiffs were not sophisticated investors. The defendant encouraged the plaintiffs to purchase shares in a company which represented a high risk and was meant only for sophisticated investors. The plaintiffs relied on the defendant’s assertions that investing in this company would result in huge gains. The company went insolvent. The court considered the nature of apparent authority in relation to the defendant and the company he worked for at paras 67-73, and held that:

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In conclusion, what emerges is that the question of whether or not an act falls within scope of apparent authority depends upon the understanding of the reasonable third party and not the perspective of the principal. The court held that the defendant, as well as the various parties for whom the defendant was acting, were liable to the plaintiffs for losses sustained. Thiessen v. Mutual Life Assurance Co. of Canada (2002), 219 D.L.R. (4th) 98 (British Columbia Court of Appeal) The defendant life insurance company sold annuities to the public through licensed sales agents. The plaintiffs gave money to one of its agents to invest in an annuity, making out their cheque to the agent directly. The agent stole the money. The court held that the agent was an independent contractor but that the company was vicariously liable. It did not matter that the agent was not an employee of the company. Toronto Truck Centre Ltd. v. Volvo Trucks Canada Inc. (1998), 163 D.L.R. (4th) 740 (Ontario Court of Justice, General Division) An agreement between a dealer and a manufacturer of trucks provided that it should terminate automatically in certain circumstances, one of which was the making of a misrepresentation by the dealer. The agreement also included a dispute resolution process providing for binding mediation of any dispute, including a dispute "for termination of this Agreement". The manufacturer purported to terminate the agreement without notice, alleging a misrepresentation. The dealer applied to the court for interlocutory mandatory orders compelling the manufacturer to submit to the dispute resolution process, to name a mediator, and to continue the dealership until completion of the process. Held, the orders should be granted. The clear intent of the agreement, read as a whole, was that disputes should be submitted to the dispute resolution process. It was an implied term that the dealership would continue pending completion of the process. A clear case should be shown to justify a mandatory injunction; here the dealer had established a clear case and would suffer irreparable harm if the injunctions were refused. The balance of convenience was also in favour of the injunctions. United States v. Arnold, Schwinn & Co., 388 U.S. 365 at 386 (dissenting opinion) (1967) (United States Supreme Court) This was an antitrust case, where the government brought action against the defendants for conspiracy to fix prices, allocated territories to specific wholesalers, and to confine merchandise to franchised dealers. The Government appealed to the Supreme Court to have the limitations on distribution of the products by consignees or agents of the defendant to be considered an unfair restraint on trade. The Supreme Court held that the distribution system of the defendant did not constitute an unfair restraint on trade, however the attempts on the part of the defendant to restrict sales on the products that it, as manufacturer, has already sold does constitute a violation of s. 1 of the Sherman Act. In his dissent, Stewart, J. discusses the importance of franchising in the market place.

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Wilson v. Clarica Life Insurance Co., [2002] B.C.J. No. 292 (British Columbia Court of Appeal) See Case 17.4 at p. 404 in the text. Yesac Creative Foods Inc. v. Hohnjec (1985), 6 C.P.R. (3d) 398 (Ontario High Court of Justice) See Case 17.7 at p. 408 in the text.

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CHAPTER 18 THE CONTRACT OF EMPLOYMENT As we saw in Chapter 17, it is common for an employee to act as agent for his or her employer; but the essence of agency is the conclusion of a contract by the agent, on behalf of the principal, with some third party. Most employees perform a considerably wider range of duties and tasks. A contract of employment is normally much broader in scope than a contract of agency. We also saw that the functions of an agent may be performed by an employee of the principal or by some independent, self-employed person. In the same way, other tasks may be entrusted either to employees or to independent contractors. The distinction between an employee and an independent contractor is especially important in determining questions of tortious liability and tax liability. Generally speaking, a person will not be liable for the torts of an independent contractor, while it will be vicariously liable for torts committed by an employee during the course of employment. Why have the courts distinguished between independent contractors and employees in this fashion? One explanation is that employees are not usually in a position to carry liability insurance to protect those whom they may injure, whereas independent contractors are in such a position, and usually do buy such insurance. When an independent contractor carries third-party liability insurance and pays the premiums, it will then charge that much more for its services; the other party is indirectly paying for the insurance and third parties are protected by the insurance without vicarious liability on the part of the person who engaged the contractor. Sometimes the difference between an employer-employee relationship and an employerindependent contractor relationship has been characterized as the difference between a contract of service and a contract for services. In Stevenson v. Macdonald, [1952] 1 T.L.R. 101 at 111, Lord Denning said: It is often easy to recognize a contract of service when you see it, but difficult to say wherein the difference [from a contract for services] lies. A ship's master, a chauffeur, and a reporter on the staff of a newspaper are all employed under a contract of service; but a ship's pilot, a taxi-man, and a newspaper contributor are employed under a contract for services. One feature that seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it. Contracts of employment may contain clauses for their termination; otherwise, they may be terminated on reasonable notice. NOTICE OF TERMINATION OF INDIVIDUAL EMPLOYMENT CONTRACTS 

Express term of the contract



Implied term of reasonable notice

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Length of reasonable notice -

See Checklist p. 391 for “Factors Relevant to Length of Reasonable Notice”

This Checklist can be used with various scenarios to encourage class discussion on termination

Employees can be discharged without notice for "cause;" virtually any major breach of contract by an employee may constitute "cause" for dismissal. Contracts of employment can also be terminated by frustration; for example, through serious illness or disability of the employee. They may also be terminated for cause where there is misconduct, disobedience and incompetence. (Source p. 392) WRONGFUL DISMISSAL (Source p. 394) An important area covered in this chapter is wrongful dismissal. The Supreme Court of Canada released a key decision on the calculation of damages just as the text went to press. Noted in footnote 13 at p. 390 is Honda v. Keays. Commentary is describing this case as a new direction in calculation of damages and a qualification of Wallace v. United Grain. First, the Court retained the often debated Bardal Factor of “character of employment” as a relevant factor, stating at para 30: It is true that there has been some suggestion that a person’s position in the hierarchy should be irrelevant to assessing damages for wrongful dismissal (see Bramble v. Medis Health and Pharmaceutical Services Inc. (1999), 214 N.B.R. (2d) 111 (C.A.), and Byers v. Prince George (City) Downtown Parking Commission (1998), 53 B.C.L.R. (3d) 345 (C.A.). The traditional assumptions about the relevance of a person’s position in the hierarchy was not directly challenged in this case. It will therefore suffice to say here that Honda’s management structure has no part to play in determining reasonable notice in this case. The “flat management structure” said nothing of Keays’ employment. It does not describe the responsibilities and skills of that worker, nor the character of the lost employment. The particular circumstances of the individual should be the concern of the courts in determining the appropriate period of reasonable notice. Traditional presumptions about the role that managerial level plays in reasonable notice can always be rebutted by evidence. (Emphasis added) Second, the Court revised the Wallace principle relating to bad faith behaviour during or after dismissal. The duty of good faith dealing was retained but damages must be calculated as flowing from the breach not tacking on of notice at para 59: Damages attributable to conduct in the manner of dismissal are always to be awarded under the Hadley principle. Moreover, in cases where damages are awarded, no extension of the notice period is to be used to determine the proper

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amount to be paid. The amount is to be fixed according to the same principles and in the same way as in all other cases dealing with moral damages. Thus, if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages. Examples of conduct in dismissal resulting in compensable damages are attacking the employee’s reputation by declarations made at the time of dismissal, misrepresentation regarding the reason for the decision, or dismissal meant to deprive the employee of a pension benefit or other right, permanent status for instance (see also the examples in Wallace, at paras. 99-100). (Emphasis added)

Employee Welfare Legislation and Collective Bargaining are also covered in the textbook, and should be discussed if part of the course subject matter.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 409) In preparing a risk management plan, students need to consider the risks associated with hiring and firing employees. Procedures must be set in place to deal with training and warning employees where behaviours are not appropriate. Maintaining documentation as to steps taken is vital. Management should understand the significance of the “personal nature” of the employment contract and be sensitive to inappropriate actions on its part in dealing with employees. ETHICAL ISSUE (Source p. 397) Protection of Employee Privacy This issue raises questions related to the values of trustworthiness, respect, fairness, and responsibility. Instructors may want to link this discussion with Chapter 32 on Privacy. The obvious challenge is balancing an employer’s rights to security and to supervise the employment activities with the employee’s right to privacy. Employers sometimes dismiss for “theft of time” when they discover too much time has been devoted to personal endeavors while at work. Key evidence is usually the history of internet and email use obtained through employee monitoring. As noted in the text, statistics on monitoring can be found in the 2007 Electronic Monitoring and Surveillance Survey available at the American Management Association website (amanet.org). Students may find the following selected statistics interesting: Year 1993 1997 2001 2007

Survey Result 30% of employers (surveyed) monitored technology use 45% of employers (surveyed) monitored technology use 67% of employers (surveyed) monitored technology use 25% of employers (surveyed) had fired for email misuse

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33% of employers (surveyed) had fired for internet misuse Question 1 - It would certainly seem right – as both a sign of respect and as an act of fairness - to inform employees that they are being monitored in the workplace. Instructors should note that this is yet another example of the use of disclosure to cure an ethical dilemma. Is supervision an invasion of an employee’s rights? Or is it a reasonable exercise of an employer’s contractual rights? Whether students answer “yes” to the first or to the second question will likely determine their response to the question of whether an employee has a reasonable expectation of privacy. When a worker on an assembly line is supervised by a foreman is that an invasion of the employee’s rights to privacy? How different are the privacy rights of another employee of the same employer, working behind a desk at a computer? A prohibition against all monitoring in the workplace appears unlikely to become the norm. Otherwise, an employee could sit at her desk and play computer games for much of the workday without her employer being able complain about her non-work. The key, it would seem, is to find a workable balance between an employee’s wish not to be monitored 24/7 by a “Big Brother”-type employer, with an employer’s legitimate interest in ensuring their employees are earning their pay cheques. It also depends on the nature and general invasiveness of the monitoring. As Chapter 32 discusses the least invasive form of monitoring must always be undertaken. Question 2 - Reducing personal privacy to a mere contractual right is problematic in and of itself – the gross inequality in bargaining power between a potential employer and job seeker is enough to ensure that any employer that wanted to monitor its employees would have employees who consented to the monitoring. This question leads naturally into question 3 concerning whether personal privacy is a “fundamental human right”. Question 3 - This is a question best handled in conjunction with Chapter 32 when understanding the difference between absolute and reasonable privacy. There are degrees of personal privacy that are regarded as human rights although not specifically enshrined; for instance can we imagine an employer having the power to install surveillance cameras in toilet booths? That said, calling personal privacy a “fundamental” human right in many ways diminishes other rights and may confuse people into thinking that absolute privacy is protected. Citizens willingly give up small aspect of privacy everyday – some studies have shown that, in major cities, a person is captured on camera somewhere between six and two hundred times a day. Moreover, with the advent of Facebook, many people have opened all aspects of their lives to complete, or relatively complete strangers. The same could be said of the popularity of Twitter. If personal privacy is a fundamental human right it is certainly not one society seems to hold very dear. Overall, personal privacy is probably something that probably falls somewhere between a mere contractual right and a fundamental human right – worthy of a reasonable level of protection, but not something worth manning the barricades for.

INTERNATIONAL ISSUE (Source p. 435)

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Global Employment Standards Question 1 - Arguments can, obviously, be made for and against both sides of this question. The business network approach, more or less non-coercive, allows businesses to share strategies for meeting the standards, has a small degree of “peer pressure” to conform, and has the advantage of being a more organic business initiative. Publicizing their progress toward the goals also allows compliant businesses to reap the goodwill associated with being “good corporate citizens”. The government-backed OECD approach may be successful because it has the legitimate potential for coercion – the standards may be voluntary now, but businesses would certainly be aware that, if voluntary adherence is not successful, mandatory adherence to these, or more rigorous standards is a definite possibility. A quick glance at the membership of the OECD shows that the OECD represents the “giants” of the modern world – the United States, Canada, much of the European Union, Japan, and others. The backing of these countries alone – the countries where the majority of multinational businesses are based – could be enough to ensure the success of the OECD initiative. Visit the OECD website (oecd.org) for a list of members. In reality, a healthy combination of the best aspects of the two standards will probably have the most success – the business network approach allows businesses to share successful strategies and reap public goodwill, while the OECD approach scares businesses into compliance to fend of real, enforceable standards. Question 2 - A full text (with commentary) of the OECD Guidelines for Multinational Enterprises can be found on their website. Please refer to pp. 18-21 for the sections on Employment and Industrial Relations. Instructors should make students aware that any attempt to assess the relative pros and cons of the two standards should begin by looking at the nature of the group that produced each document: the Global Compact is a UN document and, as such, would have been voted on by the full membership of the United Nations – comprised primarily of poor, developing nations; whereas, the OECD is a group comprised primarily of wealthy first world nations. Looking at the two documents, it is clear that the principles contained in the Global Compact are much looser – they are general principles encapsulating the most basic of labour standards. The OEDC document, on the other hand, is geared much more toward preventing the exploitation of developing countries by multinational corporations. Intuitively, one might assume that the Global Compact would be the OECD standard and the OECD document would be the basis of the Global Compact – the reason these positions are reversed becomes clearer when one looks at the interests of the drafting parties. Developing countries gain a certain amount of competitive advantage from a little bit of exploitation – they generally don’t have as rigorous labour laws as do first world nations, making them an attractive locale for the mass production of goods. As such, they have more to gain from having businesses follow a more general standard – essentially saying you can exploit us, but not too much. On the other hand, “outsourcing” jobs is probably an issue in almost every election held in OECD countries. As such, they have articulated a standard that is more rigorous, and

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serves to level the playing field for their domestic workers – less opportunity for exploitation lowers the odds that businesses will find it more profitable to outsource work to developing nations. Keeping the above points in mind makes it clear that the pros and cons of each standard is really a matter of perspective – where one sits, and in which country, will radically affect how one assesses the pros and cons of the two standards. Instructors should encourage students to approach this question from multiple perspectives – how do the pros and cons change depending on the point of view they are advocating? QUESTIONS FOR REVIEW 1. (a) A purchasing agent who has authority to order goods on her employer’s credit and to do so within the broad limits of her agency. She is nonetheless also a company employee subject to the direction of its senior officers. (Source p. 386) (b) A truck driver who is as an employee may have very limited authority as an agent: such as to take the employer’s truck for servicing, binding the employer to pay the charges. (Source p. 386) 2. Usually an independent contractor undertakes to do a specific task that is not supervised by the other party, such as building a house. An employee is normally subject to continuing supervision by the person engaging him. (Source p. 387) 3. An employer is generally vicariously liable for torts committed by an employee only if the tort is committed in the course of the employee’s duties. (Source pp. 388-389) 4. Bruce should argue that as he had received only favourable assessment letters and salary increases for two years and no warnings or criticisms that there was no basis for asserting that he was incompetent. Incompetence is harder to prove the longer an employee has been retained. Receiving notice of dismissal along with his final pay cheque after three years would not be seen as reasonable notice by the courts. (Source pp. 421-422) 5. When Norman is hired as a waiter at a summer resort he could not reasonably expect the resort to stay open after the summer has ended and there are no more guests. In the absence of any discussion that his term of employment would extend beyond the summer vacation period, it would be an implied term that his employment would cease at the end of the summer without further notice. He would not be considered to have been wrongfully dismissed. (Source p. 390) 6. An employer need not give notice when the employee is dismissed “for cause”. This includes misconduct, disobedience, incompetence, and prolonged illness. (Source pp. 391-393) 7. The main factors are: the nature of the employment, the length of service of the employee, the employee’s age, and the availability of similar employment, having regard to his or her experience, training and qualifications. (Source pp. 421-422)

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8. It is unlikely when the aggrieved employee would have to work in person with the employer who dismissed him. The larger and more impersonal the nature of the work the more likely it is that reinstatement will be granted, usually under a collective agreement. (Source p. 396) 9. The problem is that in many areas women have traditionally been paid less than men; their “market value” is less because women can still be hired at lower cost. (Source p. 399) 10. The benefits of compulsory retirement are that it creates certainty for employers and others—especially young people seeking work—who want employees to retire at the established compulsory retirement age. The problems are that increasing good health and life expectancy mean that many people approaching their retirement wish to continue working. In addition, inflation has led to a diminution of pensions available to many people reaching retirement age; they feel they must continue to work to maintain a reasonable standard of living. (Source pp. 400-401) 11. There were a whole range of barriers to an injured employee obtaining a remedy: contributory negligence, negligence of a fellow employee, “assumed risk” by the employee, the burden of proof fell on the injured employee. (Source p. 402) 12. Compensation is paid out of a government fund to which employers are required to contribute. (Source p. 402-403) 13. Collective agreements normally cover such matters as – grievance procedures; promotion and laying-off of employees; wage rates; working hours; and vacation entitlement. (Source p. 404) 14. The arbitration board in that jurisdiction will summon both sides to appear before them and present their cases. Unless the board decides that the two parties should resume negotiations, it will impose arbitration and a binding decision—a first contract—upon them. (Source p. 406) 15. A jurisdictional dispute occurs where two or more unions compete for the right to represent a particular group of employees. An interest dispute is one in which the employer and the union disagree about the particular terms of a collective agreement. (Source p. 405) 16. The process is one that subordinates individual employee preferences to the collective goals of an organization. An individual’s terms of employment are determined by virtue of his status as a member of the bargaining unit, rather than by virtue of any personal bargaining efforts. In these ways collective agreements are similar to legislation for individual workers. (Source pp. 406-407) 17. It complicates the process in two ways. First, working conditions such as cost of living may vary considerably; compensation may not be seen as adequate in some regions. Second, each province has its own trade-union legislation and it may be

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difficult to comply with conflicting requirements between jurisdictions. (Source p. 406)

CASES AND PROBLEMS 1. It would appear that Benson was originally fired for misconduct, which while it occurred outside of his employment it brought Ashley’s restaurant into public disrepute. It is unlikely Benson would succeed in an action for wrongful dismissal. (Source p. 392) 2. This case is based on Yellow Cab Co. v. M.N.R. (2002), 215 D.L.R. (4th) 413. The Federal Court of Appeal held that the drivers were owners or operators of their own businesses within the meaning of s. 6(e) of the Regulations. The ownership situation differed between drivers, but it was clear that the taxi company did not own the vehicles in any case. The drivers were in a position to gain a profit or suffer a loss from the operation of the business. The degree of financial risk taken by the drivers was considerably more than that taken by the company. The drivers were in a position to delegate their driving duties, which indicated independent status. 3. The following policy considerations might be discussed: 1. Is freedom of contract an absolute and unlimited right or is it subject to overriding principles of general public welfare? 2. Is there genuine freedom of contract in such a case? Is there equality of bargaining power? 3. Can it be said that public welfare is promoted not only by statutes and previous judicial decisions but also by the substantive reasoning underlying them? The question really is whether the courts, in the absence of legislation, will consider the clause void as contrary to their perception of public policy. 4. What is public policy? How is it determined? Public policy is "the community of common sense and common conscience extended and applied throughout the country to matters of public morals, public health, safety, welfare and the like. It is a general and well-settled public opinion relating to man's plain, palpable duty to his fellow men, having due regard to all the circumstances of each particular relation and situation." The facts of the problem are similar to those of Pittsburgh, Cincinnati, Chicago and St. Louis Railway Co. v. Kinney, 95 Ohio St. 64, 115 N.E. 505 (1916). In that case, the court held that the exemption clause was void for being contrary to public policy. The clause set out in this case would now be void under workers' compensation legislation. 4. The facts of this problem are substantially the same as those of Dusessoy's Supermarkets St. James Ltd. v. Retail Clerks Union Local No. 832 (1961), 34 W.W.R.577.

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Devellano would argue: (i) that the union conspired to injure her business by using false and misleading statements on placards; (ii) that even if no conspiracy were found, the intention of the defendant union was to cause injury to Devellano through employing unlawful means; and (iii) that since she was not involved in the dispute and was an innocent third party, she should be entitled to the injunction. In the actual case, the court held that there was a conspiracy to injure the plaintiff in its trade. It ordered damages and issued an injunction. Discuss with the class the defence that a trade union cannot be sued. This should involve a review of the relevant provisions of provincial legislation, for example the Ontario Rights of Labour Act, R.S.O. 1998, c. R-33. 5. Are the provisions of the restrictive covenant in the contract of employment between Anang and Plastic Toy Co. reasonable in the circumstances or do they go beyond reasonable protection against the disclosure of the employer's trade secrets? The employer is entitled to be protected against such disclosure provided that the processes are in fact secret (the employer has taken every effort to ensure that they remain secret). Plastic Toy Co. would argue that it has suffered damages as a result of the disclosure of the trade secret by Anang: this is evidence that the restrictive covenant was not unreasonable. Anang will argue that the covenant is unreasonable enough to be contrary to public policy and that an injunction would effectively preclude her from earning a livelihood. Moreover, the processes claimed by Plastic Toy Co. to be trade secrets are merely chemical processes which cannot be described as secrets at all. Knowledge of the processes could be easily acquired by anyone expert in the field. 6. The facts in this case are taken from Bardal v. The Globe and Mail Ltd. (1960), 24 D.L.R. (2d) 140, a decision of the Ontario High Court of Justice. There is no suggestion that Bell's employment was terminated for just cause. Accordingly, Bell is entitled to reasonable notice. What constitutes reasonable notice in this case? The reasonableness of notice must be determined in each case by reference to all the circumstances of the case, including the character of employment, the length of service, the age of the employee and the availability of similar employment, having regard to the experience, training and qualifications of the employee. In this case, there would be relatively few comparable positions available in Canada. Considering the senior position that Bell had, his length of service (about fifteen years), his age (about fifty-eight), and the availability of alternative employment, a period of about one year would appear to constitute reasonable notice. That was the result in the Bardal case. Since Bell obtained alternative employment in 1999, although at a reduced salary, he would be entitled to the difference between the remuneration he would have received for the balance of the one year in his old position and the salary he actually received in his new position. The court would also take into account the pension loss arising from the termination of his employment. However, Bell would probably not be entitled to recover for loss of a Christmas bonus or participation in a profit-sharing plan. The bonus was discretionary. The profit-sharing plan was not contractual but dependent on the choice of

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its recipients by a selection committee; it was unlikely that profits would be distributed to an employee with notice of termination. 7. The facts of this case are roughly those of MacLean v. Kennedy (1965), 53 D.L.R. (2d) 254 (N.S.S.C.), although the parties never signed a written contract in the MacLean case. This case illustrates how some of the essentials for the formation and the rules for interpretation of contract apply to contracts of employment. Meyer will not obtain damages unless he can prove breach of contract, and breach of contract in turn depends upon whether a contract was formed containing the alleged promises. Is the hockey club liable for breach of the promise to insure its players against injury? Does the parol evidence rule exclude the court's giving effect to an alleged oral undertaking when the final written version of the agreement omits any statement of that undertaking? It is unlikely that Meyer can succeed in arguing that the oral promise to provide insurance for its players was a collateral agreement since Meyer gave no separate consideration for the promise. Meyer might argue instead that the written contract was not intended to be a reduction of the whole oral contract, but was merely part of a larger total agreement intended to be partly in writing and partly oral. The hockey club might argue in response that the oral promise that if a player were disabled, he would be "looked after" is too uncertain and vague to be enforceable. The enforceability of Knowles' statement at the end of the game in which Meyer was injured is a separate issue. Can Meyer claim to be party to a statement addressed to his teammates and not to him? In the MacLean case, the court held that no contractual rights were conferred on the player by the owner's statement since he was not present when it was made. The court dismissed the player's case, but it is worth noting that the MacLean decision is now twenty-five years old. Attitudes toward the rights of employees have changed in the interim.

CASE SUMMARIES

A.A. Waters & Brookes v. Lachini, [2001] O.L.R.B. Rep. 1119 (Ontario Labour Relations Board) The employer was held to be in violation of the Employment Standards Act, in not paying its employees overtime and vacation pay. The employer appealed this decision maintaining that its business was landscape gardening and was therefore exempt from the provisions in the Act. The Board held that the company was in fact in the landscape gardening business and therefore exempt from the provisions in the Act. At para 42, the Board stated that it was appropriate to consider the overall purpose of the enterprise and the employees role in the overall enterprise in determining whether or not a person is employed in the business of landscape gardening. Air Canada Pilots Assn. v. Kelly, [2011] F.C.J. No. 152 (Federal Court of Canada)

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Two pilots employed by Air Canada brought actions before the Canadian Human Rights Tribunal against the airline for requiring them to retire at the age of sixty. On appeal, the Federal Court held that s. 15(1)(c) of the Canadian Human Rights Act was not justified under s. 1 of the Charter, however, it did allow that under s. 15(1)(a) that Air Canada had a right to attempt to justify the mandatory retirement based on a bona fide occupational requirement. The Court ordered that the matter be remitted back the tribunal.

Ansari v. B.C. Hydro & Power Authority, [1986] 4 W.W.R. 123, aff’d [1986] B.C.J. No. 3006 (British Columbia Supreme Court) B.C. Hydro laid-off several hundred engineers at one time. The court found that the engineers were terminated without cause and without reasonable notice. The defendant had paid severance based on years of performance and either twenty-five percent or thirty percent additional for benefits. The Court held this to be an inadequate formula. The Court applied the Bardal factors and recalculated the notice period for the various employees. Assn. of Justices of the Peace of Ontario v. Ontario (Attorney General) (2008), 92 O.R. (3d) 16, [2008] O.J. No. 2131 (Ontario Superior Court of Justice) The Ending Mandatory Retirement Statute Law Amendment Act made mandatory retirement policies illegal for most employers; however, judicial officers were expressly exempt. The issue for the Court was whether mandatory retirement for judicial officers violated the Charter. G.R. Strathy J. comments at para 45: To conclude on this subject, in the sixteen years since the Supreme Court of Canada’s decision in McKinney, there has been a sea change in the attitude to mandatory retirement in Ontario, led by the efforts of the Commission. The Legislature has confirmed that mandatory retirement is a serious form of age discrimination and has abolished it in the public and private sectors. The rights of the individual Applicants, and of their colleagues in the Association, must be considered in this context. The Court held that mandatory retirement for judicial officers violated the Charter and was not justifiable under s. 1. Bannister v. General Motors of Canada Limited (1998), 40 O.R. (3d) 577 (Ontario Court of Appeal) The plaintiff was a security manager for the defendant company. A number of female employees made complaints to the defendant regarding the behavior of the plaintiff. The defendant investigated the allegations made by the women, and dismissed the plaintiff for sexual harassment. The trial judge found the defendant liable for wrongful dismissal. The trial judge concentrated on the harassment policy of the defendant and stated that it did not enforce its own policy sufficiently, nor did the actions of the plaintiff amount to sexual harassment. The Court of Appeal disagreed strongly; the Court overturned the trial

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judge’s decision and found that there had been sexual harassment and that that was sufficient grounds to dismiss without notice.

Bardal v. The Globe and Mail Ltd. (1960), 24 D.L.R. (2d) 140 (Ontario High Court) The plaintiff was hired under an indefinite term contract as an advertising manager and then dismissed after sixteen years. The defendant conceded that the plaintiff was entitled to notice. The issue for the Court was how to determine the appropriate notice period. As per McRuer C.J.H.C. at p. 145: There can be no catalogue laid down as to what is reasonable notice in particular classes of cases. The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.

Bomford v. Wayden Transportation Systems Inc., [2010] B.C.J. No. 2080 (British Columbia Supreme Court) The plaintiff was dismissed for incompetence. The Court stated at para 5: In order to dismiss an employee summarily, where the employer believes the employee’s performance is substandard, the employer must provide the employee with a clear warning which specifically informs the employee that his or her job is in jeopardy. The employer cannot employ oblique language when warning the employee that his or her employment may be terminated. It is not sufficient for the employer to merely criticize the employee’s performance or simply urge improvement The Court held that the defendant, at most only told the plaintiff that his work was “unsatisfactory” or “inadequate,” and that it did not give the plaintiff a timeframe in which to improve, nor did it assist in re-training. Under the circumstances, the plaintiff was entitled to notice.

Bonsor v. Musicians’ Union [1954] Ch. 479 (The dissenting judgment of Denning, L.J., was approved on appeal to the House of Lords: [1956] A.C. 105) (England – House of Lords) The plaintiff was a musician and was a member of the defendant union. The plaintiff was wrongfully expelled from the union and was thereby unable to obtain any work in his field, as the union was a “closed shop.” The House of Lords held that while a union was not an incorporated body, it was wrong to suggest that an action against the union was a representative action and therefore, the plaintiff was suing himself and his own agent. The union as a body was capable of entering into contracts and, therefore, was capable of

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breaching those contracts. The union and not the representatives would be liable for the remedies available under breach of contract. Bramble v. Medis Health & Pharmaceutical Services Inc. (1999), 175 D.L.R. (4th) 385 (New Brunswick Court of Appeal) The defendant dismissed a number of employees without reasonable notice. The trial judge looked at the circumstances of individual employees and set reasonable notice periods. The defendant appealed on the grounds that trial judge did not properly consider the character of the employment, which for these individuals was menial labour. The Court of Appeal discussed the character of employment factor as being only one of the factors as set out in Bardal and other cases that should be considered. The Court of Appeal dismissed the appeal except with respect to one employee who was granted an additional three months’ notice due to an illness; the Court of Appeal reduced this employee’s notice by the three months as the illness was not a factor to be considered in determining notice. Brito v. Canac Kitchens, [2011] O.J. No. 1117 (Ontario Superior Court of Justice) The plaintiff (Olguin) was dismissed after twenty-four years of employment with the defendant due to restructuring. The defendant provided pay in lieu of notice at the statutory minimum. The plaintiff found other employment at a much lower rate of pay for fifteen months, but then developed cancer. His new job did not have benefits, the benefits under the package provided by the defendant was only for eight weeks (the statutory minimum). The Court stated that the defendant had gambled that the plaintiff would find suitable alternative employment and would remain healthy, and when that did not happen, they chose to litigate for five years. It acted in a high-handed and malicious manner. The Court held that the defendant was liable for the long term disability benefits payable to the plaintiff; the Court further ordered an additional $15,000 in punitive damages for the high-handed treatment of the defendant. Brown v. Pronghorn Controls Ltd., 2011 ABCA 328 Page 391 footnote 16 Chappell’s Ltd. v. Municipality of County of Cape Breton, [1963] S.C.R. 340 (Supreme Court of Canada) A contractor was hired to repair a house owned by the plaintiff. The contractor hired a sub-contractor to solder a hole in a gutter. An employee of the subcontractor negligently set the house on fire while doing the soldering. The plaintiff sued the contractor in contract. The Supreme Court held that the only connection to the incident of the fire that the contractor had, was in hiring the subcontractor. In these circumstances the duty owed by the contractor was no more that to exercise reasonable care in the selection of a competent subcontractor to perform the work. The defendant hired the subcontractor to

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do work for the plaintiff at the plaintiff’s request. The work done was not part of the defendant’s contract. Cronk v. Canadian General Insurance Co., (1995), 128 D.L.R. (4th) 147 (Ontario Court of Appeal) The plaintiff had worked as a clerk for the defendant for substantially all of her working life. She was dismissed when the company reorganized. She was offered nine months’ notice. The plaintiff refused. The defendant made payments to her account amounting to eight weeks’ salary and sixteen weeks’ severance plus vacation pay. The plaintiff was fifty-five years of age when she was dismissed and restricted by public transit in looking for another position. The motions judge awarded the plaintiff twenty months’ notice. The Court of Appeal reduced the notice period to twelve months’ notice as the motions judge did not follow the accepted rule regarding training and qualifications of the employee. Dionne v. Commission scolaire dies Patriotes, 2014 SCC 33 Page 403, footnote 60 Douglas/Kwantlen Faculty Association v. Douglas College, [1990] 3 S.C.R. 570 (Supreme Court of Canada) This case was a challenge to mandatory retirement provisions in a collective bargaining agreement. The issue for the Supreme Court was whether an arbitrator had the jurisdiction to decide Charter issues. The Court held that arbitrators did have the jurisdiction to decide Charter issues, but the Court did not consider whether the breach of s. 15 of the Human Rights Act was justified under s. 1 of the Charter. Duncan v. Cockshutt Farm Equipment Ltd. (1956), 19 W.W.R. (N.S.) 554 (Manitoba Queen’s Bench) The defendant company employed Duncan for almost thirty years before dismissing him with three months' pay in lieu of notice. Duncan had an outstanding record of employment with the company, having risen rapidly from a junior clerk to the position of branch manager. He was transferred to Winnipeg where the branch was having difficulties that Duncan was supposed to solve. He did his best and the evidence showed that there had been no cause for his dismissal. The court held that three months' notice was too little and that Duncan was entitled to one year's pay in lieu of notice. He had to deduct from that the three months' pay he had already received as well as the salary he had made at his new job. Dusessoy’s Supermarket St. James Ltd. v. Retail Clerks Union Local No. 832 (1961), 34 W.W.R. 577 (Manitoba Queen’s Bench)

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Where a labour union as defined by an Act, and particularly where it had been certified under that Act as a bargaining agent, is a legal entity, not only for the purposes of the Act, but also under the common law; it can be held liable for damages in tort or contract. Evans v. Teamsters Local Union No. 31, 2008 SCC 20 (Supreme Court of Canada) Evans was a business agent for the Union for over twenty-three years. A new union executive was elected and Evans was dismissed. Evans' lawyer wrote the Union claiming that he was wrongfully dismissed and asking for twenty-four months’ notice. The lawyer and the Union exchanged letters but did not reach an agreement. Evans continued to receive his salary and benefits during this time. Five months later, the Union wrote Evans asking him to return to work for the remainder of the notice period; the letter stated that the Union would treat a refusal to return to work as just cause for formal termination. Evans said that he would return to work if the Union would rescind the original termination letter. The Union did not rescind the letter and Evans was terminated. The court found that Evans had been wrongfully dismissed and was entitled to twentytwo months’ notice. However, the court of appeal set aside a damage award on the basis that Evans failed to mitigate his damages. The court said that employers in wrongful dismissal cases are required to pay damages in lieu of notice, but that obligation is dependant on the employee making reasonable efforts to mitigate the damages. In some cases, employees may have to return to work for their original employers as long as the conditions are not substantially different, the work demeaning, or the relationships involved acrimonious. The test to be applied is whether a reasonable person in the employee's position would accept such an offer. The fact that Evans agreed to return to work if the original termination letter was rescinded indicated that there was no acrimony and that the relationship between Evans and the Union was not seriously damaged. The court found that Evans failure to return to work was therefore a failure to mitigate damages.

Farber v. Royal Trust Co., [1997] 1 S.C.R. 845 (Supreme Court of Canada) The plaintiff was employed by the defendant as a regional manager. His job included supervising four hundred real estate agents and administered twenty-one offices. The plaintiff’s income for 1983 was $150,000 including salary, commissions and benefits. In 1984, the defendant decided to eliminate the regional manager positions as it was reorganizing. It offered the plaintiff the position of manager at one of the least profitable branches ads well as some other financial compensation. The plaintiff determined that his income would be reduced by half and refused the offer. The defendant would not negotiate further. The plaintiff brought an action for constructive dismissal. The Supreme Court held that at the time the offer was made, a reasonable person would have felt that the contract for employment was substantially changed. Under the circumstances, the Court found that there had been constructive dismissal and the employee was entitled to pay in lieu of notice. Copyright © 2016 Pearson Canada Inc.

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Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3 (Supreme Court of Canada) Fidler worked as a bank receptionist until she was diagnosed with chronic fatigue syndrome and fibromyalgia. She collected disability payments for two years when Sun Life then terminated the payments claiming they had video surveillance proving that she could perform sedentary work. Fidler brought an action against Sun Life; Sun Life offered to reinstate her benefits and pay all arrears plus interest before the trial began. The issue before the court was therefore limited to an assessment of damages. The court established that punitive damages are to address the purposes of “retribution, deterrence and denunciation.” Such damages are appropriate in breach of contract cases if there is impugned conduct that departs markedly from ordinary standards of decency and if that conduct is independently actionable. In this case, there was a breach resulting from the denial of insurance benefits and breach by the insurer of the contractual duty to act in good faith. However, the court stated that “an insurer will not necessarily be in breach of the duty of good faith by incorrectly denying a claim that is eventually conceded, or judicially determined, to be legitimate.” In absence of bad faith, the court dismissed the claim for punitive damages. Finnegan v. Riley, [1939] 4 D.L.R. 434 (Ontario Court of Appeal) Stephenson was assaulted by Riley, a waiter, in the course of Riley's employment. Stephenson got judgment against Riley and against Finnegan, the proprietor of the hotel, for his injuries. Finnegan paid the judgment and the costs, and then sued Riley. Finnegan claimed that the assault was unauthorized and contrary to his express instructions. The court held that there were general instructions to deal with customers peacefully and that Finnegan was entitled to recover from Riley. Greater Vancouver Regional District Employees’ Union v. Greater Vancouver Regional District, 2001 BCCA 435, 206 D.L.R. (4th) 220 (British Columbia Court of Appeal) The Union brought an action against the defendant when an employee was terminated shortly after being hired, when the defendant employer discovered that the employee was over sixty-five years old. The issue on this appeal was whether the Greater Vancouver Regional District, as a government body had to justify its mandatory retirement policy under s. 1 of the Charter when it was justified under the British Columbia Human Rights Code. In a two-one decision the Court dismissed the appeal by the District and stated that the decision in McKinney v. University of Guelph (1990), 76 D.L.R. (4th) 545 did not decide that all government mandatory retirement policies are saved under s. 1 of the Charter; the onus was on the defendant to demonstrate that its policy was justified under the Charter and ordered the employee reinstated.

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Hall v. Halifax Transfer Co. Ltd. (1959), 18 D.L.R. (2d) 115 (Nova Scotia Supreme Court) Hamblin was employed by the defendant company to transport mail on a set route. He took time off from his route to drive two friends of his in the company truck to a sporting event on the other side of town. While returning to his route, he negligently struck Hall's car. Hall's car sustained substantial damage as a result of the collision and he sued the defendant company for its employee's negligence. The court held that Hamblin had undertaken a purpose completely unrelated to his duties and had departed entirely from the scope of his employment when the collision occurred. Therefore the employer was not liable for his negligence. Hill v. C A. Parsons & Co. Ltd., [1971] 3 All E.R. 1345 (England – Court of Appeal) The plaintiff was a sixty-three year-old engineer who had been employed by the defendant for thirty-five years. He was due to retire at age sixty-five. It became a condition of his employment that he join a union. He refused to join and was consequently dismissed by the defendant with one month's notice. When he sued for reinstatement, the court held that one month's notice was too little. If he had been given proper notice, his employment would have continued until such a date that his joining the union would no longer, under statute, be required. In the special circumstances, the plaintiff was reinstated. Hodgkin v. Aylmer (Town) (1996), 23 C.C.E.L. (2d) 297 (Ontario General Division) The plaintiff was employed as property manager by the City. He was the emergency response person for all facilities and was in charge of monitoring and preventing ammonia leaks in the arena. He was warned several times that his beard would obstruct the efficient functioning of breathing apparatus when he needed to enter the compressor room, and that this would endanger his and other employees lives, and expose the City to potential legal liability. Despite the advice, the plaintiff did not shave and on several occasions he entered the compressor room without the proper breathing apparatus. On one occasion, he was unable to detect a leak even though he had on the proper apparatus. The plaintiff continued to reject recommendations to shave or to designate another person as ammonia emergency response person. He argued that the City should purchase apparatus that could accommodate his beard. The plaintiff's employment was terminated. He refused the City's three offers to reinstate him if he shaved his beard or if he agreed to shave for a short duration required to train another employee. The court held that the plaintiff was dismissed for cause. The plaintiff's conduct constituted insubordination and willful disobedience. His conduct was incompatible with his duties. It went to the root of his employment contract with the result that the employment relationship was too fractured to expect the employee to be provided a second chance. The court went on to note that had the court determined that the plaintiff was wrongfully dismissed, then the court would have concluded that he failed to mitigate his loss by accepting the alternative arrangements offered him by the defendant.

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Honda Canada Inc. v. Keays, 2008 SCC 39 (Supreme Court of Canada) Keays worked for Honda for eleven years before being diagnosed with chronic fatigue syndrome. Keays was placed in a disability program where employees could take absences from work if they had a doctor's note. Keays was away from work frequently and Honda became curious as to whether these absences were actually related to Keays' disability. Honda asked Keays to meet with their occupational medical specialists to determine how Keays' disability could be accommodated. Keays refused to meet with the doctor. Honda then told Keays that his employment would be terminated if he did not meet with the doctor. Keays again refused to meet with the doctor and he was terminated; Keays sued Honda for wrongful dismissal claiming bad faith “Wallace” damages. The court found that Keays had been wrongfully dismissed, but ruled that neither aggravated nor punitive damages were appropriate. The court established that aggravated damages are only appropriate where the parties contemplated, at the time of the contract, that a breach could cause mental distress. However, such damages were not appropriate here as there was no evidence of bad faith on behalf of Honda. Similarly, punitive damages were not appropriate either. The court said that punitive damages should only be granted in exceptional cases where, among other things, there was behaviour that was “deserving of full condemnation and punishment.” The court found that there was no such conduct in this case. General Dry Batteries of Canada Ltd. v. Brigenshaw, [1951] O.R. 522 (Ontario High Court) The plaintiff's employees went on strike during negotiations for a collective agreement. They picketed, turned away delivery trucks and customers, kept stock from leaving the yard, and followed a delivery truck while carrying signs about the strike. Eventually they prevented supervisory staff from entering the premises without police assistance. Finally there were physical and verbal assaults. When the employer sought an injunction, it claimed that the strike was illegal. The court held that peaceful picketing was allowed whether or not the strike was lawful. However, interference with the business interest could be restrained by an injunction, which was granted. Harrison v. University of British Columbia, [1990] 3 S.C.R. 451 (Supreme Court of Canada) The plaintiff challenged the University of British Columbia’s mandatory retirement policy. The Court held that it was governed by the Supreme Court decision in McKinney v. University of Guelph (1990), 76 D.L.R. (4th) 545. International Brotherhood of Teamsters v. Thérien (1960), 22 D.L.R. (2d) 1 (Supreme Court of Canada) See Case 18.2 at p. 442 in the text.

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Lake Ontario Portland Cement v. Groner (1961), 28 D.L.R. (2d) 589 (Supreme Court of Canada) The plaintiff was employed by the defendant under a contract that allowed the defendant to give ten days’ notice for dismissal. In 1957 the plaintiff resigned, but the president of the defendant company entered into an agreement with the plaintiff and he withdrew his resignation. In July of 1957 the plaintiff had the president sign an undated letter setting out the terms of their agreement. Later the plaintiff filled in the date of the letter as October 1956. In September of 1957, a new president of the company gave the plaintiff ten days’ notice as per the original contract and dismissed the plaintiff. The Supreme Court held that the agreement dated October 1956 was to be read with the original agreement and the ten days’ notice period was, therefore still valid. Further, although at the time of the dismissal the defendant did not know about the deceit practiced by the plaintiff in backdating the letter, the defendant was justified in dismissing the plaintiff without notice. Longdo v. Gordie’s Auto Sales Ltd. (1979) 28 N.B.R. (2d) 56 (New Brunswick Queen’s Bench) Note: This case was erroneously named “Longo v. Gordie’s Auto Sales Ltd.” in the text. The plaintiff claimed for damages resulting from a collision involving his vehicle. The defendant operated a used and new car lot. The plaintiff was in financial difficulty and owed money to the defendant. The plaintiff left his vehicle on the defendant's lot in order that the defendant should sell it. An employee of the defendant drove the vehicle to the defendant's house and had an accident on the way there resulting in damage to the vehicle of a third party and to the plaintiff's vehicle. The third party obtained judgment against the plaintiff who now sought indemnity from the defendant. The court held that the defendant was liable for the acts of his employees done during the course of employment. He was liable for what he authorized his employees to do and also for the way in which the employees carried out their authority. Machtinger v. HOJ Industries Ltd. (1992), 91 D.L.R. (4th) 491 (Supreme Court of Canada) An employer dismissed two employees without giving notice. Each had a contract for an indefinite period. The termination clause in the in the contract for employee M provided for dismissal without notice and without cause, while the notice period for termination without cause in the contract of employee L was two weeks. Under the Ontario Employment Standards Act (ESA) each employee would have been entitled to four weeks' notice or pay in lieu of notice. The Supreme Court of Canada held that the clauses were void because they contradicted the ESA. Although employment contracts for an indefinite period require the employer to give reasonable notice of termination if the dismissal is without cause, the principle is only a presumption, rebuttable by a contract of employment that clearly specifies some other period of notice, whether expressly or impliedly. What constitutes reasonable notice will, of course, vary with the circumstances of any particular case. However, the minimum Copyright © 2016 Pearson Canada Inc.

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notice periods set out in the ESA do not operate to displace the presumption at common law of reasonable notice. S. 4(2) states that a "right, benefit, term or condition of employment under a contract", that provides a greater benefit to an employee than do the ESA standards, shall prevail over those standards. However, an employer cannot impose a lesser notice of termination period than the ESA provides. In other words the ESA provides only minimum requirements. McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC39 Page 399 footnote 41

McIntyre v. University of Manitoba (1981), 119 D.L.R. (3d) 352 (Manitoba Court of Appeal) McIntire was a full-time faculty member in the University's faculty of education. The collective agreement that covered her employment provided for retirement at age sixtyfive. She sought a declaration that the mandatory retirement provision was illegal under the Manitoba Human Rights Act, S.M. 1974, c. 65. The court held that the provision was illegal since it discriminated on the basis of age which was prohibited under the Human Rights Act. McKinley v. B.C. Tel., [2001] 2 S.C.R. 161 (Supreme Court of Canada) The plaintiff took a leave of absence from work for health reasons. The defendant employer dismissed the plaintiff on grounds of dishonesty about his medical condition and the treatment for it. The plaintiff rejected a severance offer and sued for wrongful dismissal. The trial judge allowed the action, but the decision was reversed by the Court of Appeal. The Supreme Court restored the trial judge’s decision and stated the test for dismissal for dishonesty, at para 48: …the test is whether the employee’s dishonesty gave rise to a breakdown in the employment relationship. This test can be expressed in different ways. One could say, for example, that just cause for dismissal exists where the dishonesty violates an essential condition of the employment contract, breaches the faith inherent to the work relationship, or is fundamentally or directly inconsistent with the employee’s obligations to his or her employer. And the Court held that a judge must instruct the jury to determine at para 49: (1) whether the evidence established the employee’s deceitful conduct on a balance of probabilities; and (2) if so, whether the nature and degree of the dishonesty warranted dismissal. In my view, the second branch of this test does not blend questions of fact and law. Rather, assessing the seriousness of the misconduct requires the facts established at trial to be carefully considered and balanced. As such, it is a factual inquiry for the jury to undertake.

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And at para 57: Based on the foregoing considerations, I favour an analytical framework that examines each case on its own particular facts and circumstances, and considers the nature and seriousness of the dishonesty in order to assess whether it is reconcilable with sustaining the employment relationship. Such an approach mitigates the possibility that an employee will be unduly punished by the strict application of an unequivocal rule that equates all forms of dishonest behaviour with just cause for dismissal. At the same time, it would properly emphasize that dishonesty going to the core of the employment relationship carries the potential to warrant dismissal for just cause.

McKinney v. University of Guelph (1990), 76 D.L.R. (4th) 545 (Supreme Court of Canada) Eight faculty members and a professional librarian, who were facing mandatory retirement, brought applications against four Ontario universities for declarations that forced retirement contravened s. 15 of the Canadian Charter of Rights and Freedoms. They also applied for declarations that s. 9(1)(a) of the Ontario Human Rights Code, 1981, S.O. 1981, c. 53, contravened s. 15 of the Charter since it defined "age" with respect to the right to equal treatment in employment to mean an age that is eighteen years or more and less than sixty-five years." The Supreme Court of Canada held that the Charter does not apply to universities. Further, although both the practice of the universities and s. 9(1)(a) of the Human Rights Code, 1981 violated s. 15 of the Charter, they were reasonable limits under s. 1. Minott v. O’Shanter Development Company Ltd. [1999] 42 O.R. (3d) 321 (Ontario Court of Appeal) The plaintiff was employed by the defendant for eleven years as a maintenance worker. Throughout that period, he was a good worker and a loyal employee. Because of a minor dispute with his supervisor, the plaintiff was suspended for two days. When he did not report for work on the day following his suspension, he was summarily dismissed. He applied for unemployment insurance benefits but was denied. The plaintiff then brought an action for damages for wrongful dismissal arguing that he merely mixed up the days he was supposed to be suspended for and that was not grounds for dismissal. The court held that the Ontario Court of Appeal had not set an upper limit of twelve months' notice for all non-managerial or non-supervisory employees as had been suggested. Moreover, a rule of thumb that an employee is entitled to one month's notice for every year worked should be applied. To do so would undermine the flexibility that must be used in determining the appropriate notice period. The trial judge's award of thirteen months' notice was not unreasonable considering the plaintiff's age, his lack of formal education, his limited skills and the recession in the construction industry. Even if it was slightly outside of the high end of an acceptable range, to reduce it would amount to unwarranted tinkering.

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New Brunswick(Human Rights Commission)v. Potash Corporation of Saskatchewan Inc. 2008 SCC 45 Page 401 footnote 53

Newport v. Government of Manitoba (1982), 131 D.L.R. (3d) 564 (Manitoba Court of Appeal) Newport was employed by the Manitoba Civil Service Commission. When he reached his sixty-fifth birthday, his employment was terminated under s. 54 of the Civil Service Superannuation Act, R.S.M. 1970, c. C120 which required retirement at age sixty-five. Newport challenged his dismissal and the court held that the duty of non-discrimination on the Crown under s. 35 of the Human Rights Act, S.M. 1974, c. 65, was paramount over the mandatory retirement provisions. The mandatory retirement section was impliedly repealed since it was in conflict with the Human Rights Act, which prohibited discrimination on the basis of age.

O.K. Economy Stores v. R.W.D.S.U., Local 454 (1994) 118 D.L.R. (4th) 345 (Saskatchewan Court of Appeal) The employees represented by the respondent union were locked out by their employer, a division of a food enterprise, during a labour dispute. They began picketing the retail grocery outlets of the appellant, another division of the same enterprise. The respondent union did not represent the employees of the retail grocery outlets picketed and there was no labour dispute between the two. The primary employer and the appellant were connected by way of common ownership and shared head office personnel. Management and control of the two divisions was the same. However, the Saskatchewan Labour Relations Board recognized the two divisions as separate employers and issued a certification order designating the respondent as the bargaining agent for the employees of the primary employer and a different union as a bargaining agent for the employees of the appellant. The two divisions bargained separately and the bargaining committee of each division was separate and distinct from the other. The two divisions were operated separately. There was no interdivisional reporting and no connection between the two divisions for the purposes of profit and loss, budgeting, collective bargaining, payroll and accounting. The appellant applied for an interim injunction prohibiting the picketing. The Court noted the difference between types of picketing. Primary picketing takes place at the employer's place of business. This type of picketing is allowed. Secondary picketing takes place when the union moves the picket line to the business premises of someone with whom the employer carries on business, but who is a third party to the dispute between the union and the employer. Secondary picketing can take two forms. The first is where the picketing is designed to interrupt the production of a third party secondary employer and cause that third party employer economic loss. The second is consumer picketing which is designed to convince consumers not to purchase the products of the primary employer from the secondary employer. Secondary picketing is

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usually regarded as illegal per se, because the objective of the picketing was to injure the secondary employer in its trade. [Note that in this case the court was unable to determine whether the picketing was primary or secondary as the two companies were related. However, the point was moot as by the time this case got to the Court of Appeal the strike had been settled].

Pilato v. Hamilton Place Convention Centre (1984), 45 O.R. (2d) 652 (Ontario High Court) The plaintiff was a thirty-six year old employee who had been employed by the defendant for about two years when serious allegations were made against him. The plaintiff was not given the opportunity to respond to them and his dismissal was published in the press while he was on vacation. The court considered psychiatric evidence and made an award of $25,000 for aggravated damages in addition to an award of $25,000 punitive damages.

Pliniussen v. University of Western Ontario, (1983), 2 C.C.E.L. 1 (Ontario County Court) A part time lecturer's dismissal from the defendant’s school of business administration was held to be justified on the ground that his conduct in filing false insurance claims was immoral, dishonest and deceitful, and potentially damaging to the reputation of the school.

Pulisfer v. GTE Sylvania Canada Ltd. (1983), 56 N.S.R. (2d) 424 (Nova Scotia Court of Appeal) Pulisfer was hired by GTE as its sales representative. He was salaried and had certain fringe benefits including a pension plan. He was dismissed without notice and without being given a reason for his dismissal, although the employer claimed at the time to have cause. The court held that the plaintiff was not entitled to be informed of the reason for his dismissal. On appeal, the issue was sent back to the trial judge for a ruling as to whether the dismissal had been wrongful or not.

Rajakaruna v. Peel (Regional Municipality) (1981), 10 A.C.W.S. (2d) 522 (Ontario County Court) The plaintiff was dismissed for disobedience; he was asked to work late on an evening where he had made plans to accompany his wife to the doctor. The Court held that if there is a reasonable explanation for the disobedience it will not be cause for dismissal.

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54 (Supreme Court of Canada)

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The manager of a branch of RBC Dominion Securities left his job and took several other employees to the defendant competitor. The Bank sued the manager, the employees and the Merrill Lynch. The Supreme Court held that the manager and employee were required to give notice to the plaintiff. Further, the manager breached a duty of good faith to the plaintiff to not compete unfairly. Reilly v. Steelcase Canada Ltd. (1979), 26 O.R. (2d) 725 (Ontario High Court) The plaintiff was employed by the defendant for two and a half years as a district sales manager responsible for a number of the defendant's dealers. He carried a lot of responsibility and expected to be promoted shortly to the position of regional manager. He was ordered to resign without notice and without explanation when his employer discovered that he had entered into a relationship with the now-estranged wife of a fellow employee. Without waiting for the plaintiff to tender his resignation, the defendant circulated a memo that he had resigned to pursue other business interests. The plaintiff was without employment for sixteen months, but eventually secured a new position with a better salary. The court held that the plaintiff's conduct with respect to the relationship was not prejudicial to the interests or reputation of the defendant. The fellow employee was able to tolerate the situation and none of the defendants' clients were bothered by the relationship. There had been no ground for the dismissal and the plaintiff was entitled to nine months' pay in lieu of notice. Renard v. Facet Decision Systems Inc., [2010] B.C.J. No. 2694 (British Columbia Supreme Court) The plaintiff was laid off due to an economic downturn. The employer erroneously believed that no payment in lieu of notice was required. The plaintiff attempted to find other employment, but was only successful in finding some temporary work. A few months after her dismissal, when business picked up again, the employer contacted the plaintiff and offered her job back. The plaintiff refused the job offer and sued for wrongful dismissal. The issue before the Court was whether the refusal to accept the job was a failure to mitigate. The Court found that many of the factors the plaintiff relied on did not justify refusing the position; however, the plaintiff’s uncertainty about payment of wages in the short term and whether she would have an office to work in did justify the refusal. The Court further noted that the burden of proof was on the defendant to show that there was a failure to mitigate, and the defendant did not meet this burden. Ridgway v. Hungerford Market Co., (1835), 111 E.R. 378 (England) The plaintiff recorded a protest against a resolution by the directors in the company’s minute books; as a result the plaintiff was dismissed without notice. Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27 (Supreme Court of Canada)

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A bankrupt firm's employees lost their jobs when a receiving order was made with respect to the firm's property. All wages, salaries, commissions and vacation pay were paid to the date of the receiving order. The province's Ministry of Labour audited the firm's records to determine if any outstanding termination or severance pay was owing to former employees under the Employment Standards Act ("ESA") and delivered a proof of claim to the Trustee. The Trustee disallowed the claims on the ground that the bankruptcy of an employer does not constitute dismissal from employment and accordingly creates no entitlement to severance, termination or vacation pay under the ESA. The Ministry successfully appealed to the Ontario Court (General Division), but the Ontario Court of Appeal overturned that court's ruling and restored the Trustee's decision. The trustee paid a dividend to Rizzo's creditors, thereby leaving significantly less funds in the estate. Subsequently, the appellants, five former employees of Rizzo, moved to set aside the discontinuance, add themselves as parties to the proceedings, and requested and were granted an order granting them leave to appeal. At issue here is whether the termination of employment caused by the bankruptcy of an employer gives rise to a claim provable in bankruptcy for termination pay and severance pay in accordance with the provisions of the ESA. The Supreme Court of Canada held that this was a case of statutory interpretation and found that as all dismissed employees are equally in need of the protections provided by the ESA, any distinction between employees whose termination resulted from the bankruptcy of their employer and those who have been terminated for some other reason would be arbitrary and inequitable. Savage v. Wilby, [1954] S.C.R. 376 (Supreme Court of Canada) S, who operated a restaurant in a building he leased from W, gave a contract to D, a painting contractor, to renovate the interior of the leased premises. It was specified in the contract that the old paint should be removed. In doing the work D used an inflammable paint remover. A fire broke out and damaged the building. In an action brought by W against S and D to recover damages, it was proved that the usual method of removing paint from the interior of a building was used, and that it was attended by the risk of fire, unless special precautions were taken. The trial judge gave judgment against D and dismissed the action against S. The appellate court found both defendants liable. S appealed on the grounds that he knew nothing about the usual methods of removing paint; he did not know that D was using an inflammable paint remover; and as D was an independent contractor, he was not liable for D's negligence. The Supreme Court of Canada held that S was properly found liable. He had ordered the doing of work which if done by the usual method created a danger of injurious consequences and he therefore came under a duty to take reasonable precautions to avoid them. It was not enough that he himself did not know of the danger, since it was one which would be obvious to any reasonably well-informed person, nor could S escape liability for non-performance of such duty by delegating it to an independent contractor.

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Sickel v. Wilby [1954] S.C.R. 376 Page 388 footnote 4

Stevens v. Globe and Mail et al. (1992), 86 D.L.R. (4th) 204 (Ontario General Division) The plaintiff had been employed by the defendant newspaper since 1962, with a threeyear gap between 1970 and 1973. In 1983 he became managing editor, and in 1985 he was appointed to the management committee the members of which received annual bonuses. In January, 1989, the editor-in-chief informed the plaintiff that he was being removed as managing editor and suggested that the plaintiff might consider becoming the newspaper's Washington analyst. The plaintiff wrote a letter asking for further details of the proposed Washington post, but the letter was not answered and details of compensation and other benefits were never given. The plaintiff did not pursue the Washington position but looked elsewhere for newspaper management positions, rejecting an offer from another newspaper of a writing job in order to maximize his chance of a management position. He failed to find such a position and became a freelance journalist and consultant. He sued for wrongful dismissal. The court held that the defendant's actions amounted to a dismissal or alternatively to a constructive dismissal, as the proposed Washington position was clearly a demotion. On the question of mitigation of loss, the plaintiff had acted reasonably in not pursuing the Washington position since insufficient details of it were supplied. He had also acted reasonably in seeking management positions and in rejecting the writing position in order not to diminish the prospects of a management post. The period of reasonable notice, in the circumstances, was twenty-one months. The plaintiff was also entitled to damages for loss of the bonus that he would have received as a member of the management committee. Stoffman v. Vancouver General Hospital, [1990] 3 S.C.R. 483 (Supreme Court of Canada) Several doctors with admitting privileges at the Vancouver General Hospital brought a challenge against the Hospital’s requirement that doctors had to retire at the age of sixtyfive unless they were able to demonstrate that they could offer some unique service to the Hospital. The doctors were not employees of the Hospital and so could not rely on the British Columbia Human Rights Act, nor could they rely on the Charter as hospitals are not a part of government. The Court did note that even if the Charter did apply the discrimination would be saved under s. 1 as per McKinney v. University of Guelph (1990), 76 D.L.R. (4th) 545. Taff Vale Railway Co. v. Amalgamated Society of Railway Servants, [1901] A.C. 426 (England - House of Lords) See Case 18.1 at p. 442 in the text.

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U.N.A. v. Alberta (Attorney-General) (1990) 89 D.L.R. (4th) 609 (Alberta Court of Appeal) The appellant was a union found guilty of criminal contempt of court on two occasions by judges of the Court of Queen's Bench. Locals of the union were bargaining agents for nurses at various hospitals. The Labour Relations Board, created under the Labour Relations Act, R.S.A. 1980, c. L-1.1, had issued directives forbidding the union from threatening to strike or causing a strike forbidden by statute. The union disobeyed these directives which were then filed in the Court of Queen's Bench to make them enforceable by the court. The union still disobeyed the directives in highly publicized and deliberate ways and it was then found in criminal contempt on the two occasions. On appeal from these convictions the union argued that it was not a legal person subject to prosecution. The Alberta Court of Appeal held assuming that courts can convict only legal persons, an unincorporated union such as the accused in this case which is registered under provincial labour legislation can be guilty of criminal contempt. While the definition of "every one" and "person" in s. 2 of the Criminal Code does not specifically cover unincorporated bodies such as the union, the prosecution in this case was not laid under or covered by the Criminal Code, but was pursuant to the court's common-law power to punish for contempt of court as preserved by s. 9 of the Criminal Code. In any event the definition of "every one" and "person" in s. 2 does not purport to be exhaustive. The provincial legislature does not purport to legislate directly on criminal status, but rather for provincial purposes and gives to a union rights, functions and status which impliedly entail liabilities including liability for criminal contempt. The province could validly give to the accused union in this case sufficient status to make it indirectly subject to general duties and liability, whether they were civil or criminal.

Varsity Plymouth Chrysler (1994) Ltd. v. Pomerleau (2002), 23 C.C.E.L. (3d) 148 (Alberta Queen’s Bench) The plaintiff was hired by the defendant company and worked there for four years. He rose quickly and did well with the company. There was no written employment contract, nor any written policies. The practice of the plaintiff and other employees was to purchase vehicles from the defendant and resell them for personal gain. In another incident a sexual harassment claim against another employee was brought and the employee was not dismissed. In 1999 the plaintiff sold a vehicle that he had not yet purchased for personal gain. The defendant dismissed the plaintiff for cause, stating the dishonest act. The Court looked at the decision in McKinley v. B.C. Tel., [2001] 2 S.C.R. 161 and found that it was necessary to determine whether the dishonesty was serious enough for dismissal for cause, not in a general way, but in relation to the employer’s particular business culture. In this case, the Court found that employee dishonesty was not considered an impediment to sustaining employment with other employees and therefore the defendant was not justified in dismissing the plaintiff without notice.

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Vic Priestly Landscaping Contracting Ltd. v. Elder (1978), 19 O.R. (2d) 591 (Ontario County Court) Elder rented a large tent from the plaintiff for a horse show. During the course of the show, the tent was destroyed by a fire caused by the negligence of an independent contractor. The contractor had been engaged by Elder and started the fire while operating a barbecue. The court held that Elder, as the bailee of the tent, could discharge the burden of proving that she had not been negligent by showing that the fire was caused by the negligence of a third party. However, the third party was an independent contractor whom Elder had engaged. Since the use of fire was so inherently dangerous Elder was liable for not taking adequate steps to prevent damage. She was entitled to be indemnified by the contractor. Wallace v. United Grain Growers Ltd. [1997] 3 S.C.R. 313 (Supreme Court of Canada) In 1972 a printing company wholly owned by the respondent decided to update its operations and seek a larger volume of commercial printing work. The appellant, W, met L, the marketing manager of the company's publishing and printing divisions, to discuss the possibility of employment. W had the type of experience L sought, having worked approximately twenty-five years for a competitor that used a particular type of press. W explained to L that as he was forty-five years of age, if he were to leave his current employer he would require a guarantee of job security. He also sought several assurances from L regarding fair treatment and remuneration. He received such assurances and was told by L that if he performed as expected, he could continue to work for the company until retirement. W was hired and enjoyed great success at the company; he was the top salesperson for each of the years he spent in its employ. In 1986 he was summarily discharged without explanation. W issued a statement of claim alleging wrongful dismissal. In its statement of defence, the respondent alleged that W had been dismissed for cause. This allegation was maintained until the trial commenced. The termination of W's employment and the allegations of cause created emotional difficulties for him and he was forced to seek psychiatric help. His attempts to find similar employment were largely unsuccessful. Prior to his dismissal, W made a voluntary assignment into personal bankruptcy, and remained an undischarged bankrupt when he commenced his action against the respondent. At trial W was awarded damages for wrongful dismissal based on a twenty-four month notice period and $15,000 in aggravated damages resulting from mental distress in both tort and contract. The Supreme Court of Canada held that in light of W's advanced age, his fourteen year tenure as the company's top salesman and his limited prospects for re-employment, a lengthy period of notice is warranted. Another factor to be considered is whether the dismissed employee was induced to leave previous secure employment. The court also stated that bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period. The contract of employment has many characteristics that set it apart from the ordinary commercial contract. Individual

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employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure. This power imbalance is not limited to the employment contract itself, but informs virtually all facets of the employment relationship. The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence most in need of protection. The Supreme Court of Canada upheld the damages awarded to W at trial. Wenz v. Royal Trust Co., [1953] O.W.N. 798 (Ontario High Court) Wenz was drinking beer with some friends in the Waverly Hotel in Port Arthur. When Wenz ordered another round of beer, Cambly (the waiter) shortchanged him. This was not the first time that Wenz had been shortchanged by the same waiter. When Wenz asked for the correct change, Cambly accused Wenz of making trouble. He told Wenz to "get the --- out of here" and threatened to cut off the table's beer. Wenz went to the main lobby to find the manager. Cambly followed, insulted Wenz and then hit him several times quite hard. The court held that Cambly was acting in the course of his employment when he hit Wenz and the owner/operator of the hotel was liable for the injuries resulting from Cambly's assault. Werle v. Saskenergy Inc. (1992), 103 Sask. R. 241 (Saskatchewan Queen’s Bench) This was an action for wrongful dismissal. The plaintiff was hired as vice-president of marketing of the defendant. His resume set out that he had a bachelor of commerce when he in fact had no such degree. A newsletter announcing his hiring mentioned his degree, but the plaintiff made no effort to correct the error. When the truth was discovered the plaintiff refused an offer of a reduced position and was fired. The court dismissed the action holding the defendant was entitled to fire the plaintiff. The defendant had not condoned the dishonesty by offering a reduced position. Dishonesty was clearly established as the misrepresentation of his credentials was intentional.

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CHAPTER 19 NEGOTIABLE INSTRUMENTS The federal Bills of Exchange Act, R.S.C. 1985, c. B-4, governs the law relating to negotiable instruments. Cheques, bills of exchange, and promissory notes are all included under the Bills of Exchange Act as negotiable instruments. The classes of negotiable instruments to be discussed are set out in a Checklist on p. 423. The cheque is the most familiar to students. Negotiable instruments are negotiated by endorsement and delivery, although an instrument that is payable to the holder or "to bearer" need only be delivered in order to complete negotiation. Students should be aware of the seven essential ingredients for negotiability: a) The promise or order must be in writing. b) The obligation must be for money payment(s). c) There must be a certain, fixed sum on the face of the instrument. d) The promise or order must be unconditional such that the holder need not look outside of the instrument in order to determine whether the conditions have been satisfied. e) The instrument must be payable at a fixed or determinable time, or upon demand. f) Negotiation must be of the whole instrument, not just a portion of it. g) The instrument must be signed by the drawer or maker. Even if an instrument is not negotiable, in that it fails to meet one or more of these criteria, it still may be assignable in the ordinary sense of assigning contractual rights, as discussed in Chapter 11. The drawer of an instrument becomes liable to the holder once the payer has delivered it. There are strict notice requirements in the Bills of Exchange Act that must be met before a holder is permitted to pursue remedies by legal action against the drawer and prior endorsers. Occasionally, a drawer may intentionally dishonour an instrument. For example, she may give a cheque in payment of goods and subsequently find the goods are defective. The drawer might then stop payment on the cheque until the matter is resolved. However, stopping payment does not affect the drawer's liability on the instrument. In other words, the holder may successfully sue on the instrument, although the drawer could counterclaim on the basis of the defective goods. While this procedure may be practically advantageous, it may in some circumstances expose a drawer to criminal prosecution. For example, where a drawer gives a cheque in order to persuade the seller to relinquish possession of goods being held under a lien, and then stops payment on the cheque, she might be prosecuted for fraud. A holder may sue the drawer and prior endorsers if she gives them proper notice that the instrument has been dishonoured. The nature of the defences available to the drawer and endorsers will depend upon the circumstances of each case. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 435)

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For any business that uses cheques as a means of payment, it is important to be sure that the cheques are kept safe, and that only authorized and trusted personnel have access. Likewise, in making cheques, a prudent business will ensure that the cheque is payable to a designated person rather than “to bearer” to protect against loss or fraud. INTERNATIONAL ISSUE (Source p. 417) Electronic Transfers of Funds: Are Negotiable Instruments Becoming Obsolete? In the text, the ability to track the movement of money is presented as an advantage for the detection of crime. This characterization should be challenged by students not only in the context of opportunity for crime, but also what it would mean for privacy rights (See Ethical issue, below). Question 1 - In the short term, an international move to digital cash could be catastrophic to developing economies – developing countries often lack the IT security, infrastructure, and computer literacy to compete and function successfully in a fully digital economy. However, in the long term, a move to digital cash may pull developing economies forward faster by providing an impetus to invest and modernize. Then again, some underdeveloped countries have embraced new technologies, certainly with respect to satellite communication systems – so who is to say that a digitized economy will not benefit developing economies in both the short and long term? Developing economies don’t have years of “this is just the way we do things” to bury and, therefore, might not face the same institutionalized resistance to change one might find in modern economies. Question 2 - The answer to this question is largely a matter of opinion, but the answer is likely “yes”. The anonymity of digitization almost screams with opportunities for fraud and malfeasance. Clever criminals are already making a killing from internet fraud; full digitization will likely swell their ranks. Even the government cannot yet answer this question. In July 2008, the British Columbia Ministry of Labour and Citizens’ Services pledged $350,000 to launch The International Cybercrime Research Centre with Simon Fraser University and the International Society for Policing of Cyperspace. The Centre research and collect data on economic crimes, social networking abuses, identity management and critical infrastructure protection.

ETHICAL ISSUE (Source p. 418) Should All Transfers of Funds Be Digital? Question 1 - Methods of paying bills and settling accounts have changed drastically in recent years. “Paper” has been replaced by “plastic” in many cases, and the use of the Internet for banking and other transactions has become increasingly common. Yet much of the law has remained virtually unchanged since 1882. Nevertheless, as the report of the Canadian Bankers’ Association points out, traditional methods – such as payment by cheque – still constitute a large percentage of transactions. There are obvious benefits to electronic transfers of money – speed being probably the most obvious. Information is instantly available. Costs are, or should be, substantially Copyright © 2016 Pearson Canada Inc.

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lower. There may also be disadvantages – one being that it is necessary to have access to a computer and to be computer-literate. Electronic transfers also give rise to entirely new types of security problems. Question 2 - Individuals should absolutely be able to keep their financial activities private. One of the hallmarks of any bill of rights – the Canadian Charter of Rights and Freedoms included – is to constitutionally entrench limits on state behaviour. Since 9/11 these limits have been continually eroded – the scope of behaviours under surveillance has kept getting larger; the number of transactions that now must be reported to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) in order to detect money laundering and possible terrorist financing keeps growing. Law Societies across Canada have challenged the reporting provisions that would have required lawyers to breach their duty of confidentiality to their clients, but other professions, including real estate agents, accountants, and home builders, must report certain transactions to FINTRAC. Instructors should prompt students to consider whether the loss of liberty to individuals resulting from such disclosures is worth the extra security gained. It should also be noted that these provisions are of questionable constitutionality – the Law Societies challenged the provisions but, as yet, other professions have not undertaken a constitutional challenge; unless challenged, even unconstitutional laws will stand. Even the Privacy Commissioner has questioned the constitutionality of this legislation; see information about this on their website, at privcom.gc.ca. How far are we willing to let “Big Brother” go in order to “protect” us? Do students see the value in reporting these transactions, or has combating terrorism simply become an excuse for governments to widen the scope of their surveillance of ordinary citizens? For more on the FINTRAC Guidelines please refer to their website at fintrac-canafe.gc.ca. The balance for protection and privacy is also tempered by convenience. Students should also ask themselves if the invasion of their personal financial privacy is worth the loss of the convenience provided by electronic means of handling financial transactions.

QUESTIONS FOR REVIEW 1. Banks are moving toward the use of electronic processing of cheques known as cheque truncation. The banks convert a paper cheque to a digital image and transfer it electronically; this type of transfer only occurs within the national clearing system. (Source p. 423) 2. The Bills of Exchange Act only govern bills of exchange (drafts), cheques, and promissory notes. Cash is legal tender and freely negotiable by virtue of the Bank of Canada Act. (Source p. 419) 3. (a) Demand drafts are payable immediately upon presentation without the addition of any days of grace. The cheque is a leading example of a demand draft. (b) Sight drafts can be used as a collection device. Instead of employing a collection agency, a business may draw sight drafts on defaulting customers and have the drafts presented for acceptance and payment through the bank.

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(c) Time drafts can be used as a means of finance for the businesses drawing them. By discounting them at a bank or by pledging them as a security for a bank loan, the drawer can obtain cash in advance of the time when payment is due from the customer. (Source p. 420) 4. When the drawer has her cheque certified her bank guarantees that the there are sufficient funds and will pay the amount to the holder. The drawer may still stop payment, for example where goods delivered by the payee turn out to be the wrong goods. However, when the payee has the cheque certified at his request, the drawer can no longer stop payment because the payee could have cashed the cheque instead of having it certified. (Source p. 420) 5. (a) A negotiable instrument may be transferred (or assigned) from one holder to another without the promisor being advised about each new holder; (b) an assignee may acquire a better right to sue on the instrument than its predecessor (assignor) had; (c) a holder may sue in its own name any other party liable on the instrument without joining any of the remaining parties. (Source p. 424) 6. In order to be a valid negotiable instrument the money promised must be a “sum certain”. That is not so in the case of Donna’s cheque and the bank is correct in refusing payment. (Source p. 424) 7. An order instrument is one expressed as payable “to A,” “to A or order,” or “to the order of A.” To negotiate it, A must endorse it. A bearer instrument is made payable “to bearer” or “to A Co. or bearer” or when no payee has been named, and endorsement is not necessary. (Source p. 427) 8. When a party transfers a negotiable instrument endorsed “without recourse” he effectively denies liability as an endorser. Anyone giving value for the instrument is on notice that no remedy is available against the transferor should the party primarily liable default. Manufacturers or wholesalers that “factor” their accounts receivable sometimes use a qualified endorsement. (Source p. 427) 9. L Bank was the holder that accepted the cheque with the forged endorsement; unless the forger can be caught and made to pay, the loss will ultimately be borne by the party that acquires the instrument immediately following the forgery. Accordingly, L Bank has no rights against K, J or J’s bank. (Source p. 428) 10. Z should inform both X and Y of that W has insufficient funds and will hold them liable for W’s failure to honour his cheque. Z will likely be able to collect from his tenant Y, since Y has no defence, so far as we know, for non-payment of her rent. In any event, Z has an even stronger case against X who cannot raise any personal defence against Z. (Source p. 434) 11. A holder in due course must satisfy four conditions: (1) she must have taken the instrument complete and regular on its face; (2) she must have acquired it before it was overdue and without notice of any prior dishonour; (3) she, or someone through whom she claims, must have given consideration for the instrument; and (4) she must

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have taken the instrument in good faith and without notice of any defect in the title of the person who negotiated it. (Source p. 432) 12. It is up to you to see that every time you make a partial payment you ensure that an endorsement on the instrument by the holder acknowledging the amount paid. Otherwise you remain liable for the full face amount of the instrument if it is subsequently negotiated to a holder who is unaware of the partial payments. (Source p. 428) 13. Since Cohen has refused to accept the time draft, he owes the amount owed only to Gower. Gower has no legal relationship with Jenkins. (Source p. 420) 14. (a) This is a qualified endorsement which provides notice to anyone giving value for the instrument that no remedy is available against John Factor should the party primarily liable default. (b) This is a restrictive endorsement. By endorsing an instrument “for deposit only”, the payee makes it non-negotiable. It is of no value in the hands of a thief. (c) By signing the negotiable instrument “no protest” an endorser is waiving the right to any notice of dishonour, and avoids the expense of the notary’s fee required in this circumstance. To protect itself, a bank may occasionally require an endorsement for someone known to it for the purpose of identifying the person seeking to cash a cheque as is done in this example by the use of the phrase “Archibald Grosvenor is hereby identified” and the subsequent signature of the person identifying Archibald, who in this case is Ralph. (Source pp. 426-427) 15. It seems clear that the note signed by Wilma comes within the definition of a consumer note in the federal Bills of Exchange Act. Under s. 191 of the Act, the right of Yarrow “…to have the whole or any part thereof paid by the purchaser… is subject to any defence or right of set-off… that the purchaser would have had an action by the seller [Xenon]…” Accordingly, whatever right Wilma would have against Xenon for failure to meet its three-month warranty could be used by her in defending the action by Yarrow. (Source p. 435)

CASES AND PROBLEMS 1. The bank is will bear the loss as they took the cheques immediately following the forgery by Miranda. They will have to reimburse Ashley. Ashley is not responsible for the lost money as she was unaware of the wrongdoing and was never a holder in due course. Miranda can of course be apprehended and the funds could be recovered from her for committing the forgery. The principles of negotiability and the principles of dishonor of a negotiable instrument come into play here. 2. The amount of the note made by the University is not "a sum certain in money." Accordingly, the note made by the University and assigned by Baroque Construction Ltd. to R. Jay is not a negotiable instrument. Since it could not be negotiated, R. Jay is simply an assignee who can acquire no better right than the assignor had. In other words, R. Jay

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is subject to the equities between the University and Baroque Construction and will not be able to succeed in an action for payment on the note unless he can show that the University's liability on the note is not affected by the guarantee in the contract with Baroque. 3. Osmond deposited a cheque for $76,000 from a customer. The Portage Bank announced that it would not honour the cheque; it would appear that Osmond would have a claim against the customer that gave it the cheque. Despite the problem with the cheque drawn on the Portage Bank, if the Kelsey Bank had honoured the certified cheque for $47,500 delivered to Connor, the Kelsey bank could then have claimed any deficiency in Osmond’s account from Osmond. However, the Kelsey Bank chose not to honour the cheque it had certified. Once a bank has undertaken certification, it assumes liability to the holder for the amount of the cheque. It is legally bound to pay Connor who may sue successfully to collect the sum from the bank; see Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 21 O.R. (3d) 161, a decision of the Ontario Court of Appeal. 4. The facts of this problem are roughly those of Aldercrest Developments Ltd. v. Hamilton Co-Axial (1958) Ltd., [1970] 3 O.R. 529. The promissory note was made by Ham Ltd. to the order of Elston. For an order note to be negotiated, it must be endorsed and delivered. Atlas Bank received delivery of the note but did not require Elston to endorse the note. Although under the Bills of Exchange Act the Bank has the right to demand the necessary endorsement, this right is now of little value because Elston has already executed a release which includes the note. Since the Bank did not acquire Elston's endorsement, the note has not been negotiated and the Bank is not a holder in due course. Accordingly, the Bank is an ordinary equitable assignee of the note who has not given notice to the primary debtor. The Bank is subject to whatever equities arise between Elston and Ham Ltd. before Ham Ltd. receives notice of the assignment. Since Elston executed the release before Ham Ltd. received notice of the assignment, the Bank's action fails. This was the result in the Aldercrest case. 5. This case draws on the facts in Don Bodkin Leasing Ltd. v. The Toronto Dominion Bank (1998),40 O.R. (3d) 262. In that case Don Bodkin Leasing (DBL) had signed an “operation of account agreement;” DBL’s accountant, during a period of approximately four years, forged seventy-eight cheques totaling over a half million dollars. The trial judge held that DBL was entitled only to recover the proceeds of three forged cheques in the amount of $25,000 for which it had given “timely notice of objection”. The “operation of account agreement” was held to release the bank of liability in all other instances of forgery, whether or not it had been negligent. In our case, Allison would claim that that she had given timely notice of the forgeries, and if so the bank would be liable to return the funds to her account. The question would be whether the delay until the general manager returned from vacation resulted in the notice not being timely. The Bodkin case certainly provides a broad defence for the bank. Discussing how long the general manager was on vacation and what the limits are on Allison’s window of opportunity to report can provide useful class discussion on the fairness of decision.

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6. The facts of this problem are taken from U.S. Fidelity and Guarantee Co. v. Cruikshank and Simmons (1919), 49 D.L.R. 674, a decision of the Saskatchewan Court of Appeal. Is there consideration flowing from the bonding company to Smith? Forbearance from proceeding with a criminal prosecution for embezzlement against Cole does not constitute good consideration, as a matter of public policy, since it interferes with the administration of justice. Since there was no consideration given to Smith for his guarantee, the bonding company could not sue him on the note. If the bonding company had discounted Smith's note at its bank, the result would then depend on whether the bank knew of the circumstances surrounding the making of the promissory note. If it did not, then the bank would have become a holder in due course. Lack of consideration is not a defence against a holder in due course. The bank would then succeed in forcing Smith to pay on the note. 7. This was not a conditional delivery nor was the cheque incomplete. The question is whether or not there was proper delivery of the instrument. VanWyck would argue that Anderson was not acting within the scope of his authority when he handed over the instrument and therefore his handing it over did not constitute delivery. Snider would argue in response that Anderson was acting within his apparent authority and therefore VanWyck should be taken to have authorized the delivery. Further, since Snider took the cheque with no notice of the circumstances of the delivery to Lockhart, Snider was a holder in due course. The defence of improper delivery is a defect of title defence, which is not good against a holder in due course. As long as both VanWyck and Lockhart have been adequately notified that the cheque was dishonoured, Snider can recover against VanWyck, the drawee, and against Lockhart, the endorser, and leave them to sort out their liability between themselves. 8. This case is based on Royal Bank of Canada v. LVG Auctions Ltd. (1983), 2 D.L.R. (4th) 95; Affirmed, 12 D.L.R. (4th) 768. The trial judge discussed a number of cases in which money had been paid by mistake; some where a stop-payment order had been accidentally ignored by a bank. Where the facts were unclear or where the stoppayment order was given ambiguously, the courts sometime refused to order restitution. However, in this case, the judge believed the facts were clear and he stated: The situation now is, in brief, that the machine is back in its original owner's hands; they, in effect, have lost nothing. Midway [the bidder] has its money back from the bank, and the defendant [the auction firm] has retained the proceeds of the cheque, thus obtaining a windfall of $9,600 of which part would have been commission. Only the bank is the loser. To recover the plaintiff must show that it paid the cheque under a mistake of fact… He then went on to state that the bank had an obligation to restore the amount of the cheque to the bidder’s account. He concluded: By now it is obvious that in my opinion the defendant has had a windfall of $9,600 or it has been unjustly enriched by that amount and in either case it has

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no legal, moral or equitable right to retain the money and it must return it to the bank. This reasoning aptly applies to the facts of this case.

CASE SUMMARIES Allprint Co. Ltd. v. Erwin (1982), 136 D.L.R. (3d) 587 (Ontario Court of Appeal) The defendant, a signing officer for a corporation, signed a cheque in favour of the plaintiff. The cheque bore the printed name of the corporation at its top and above the space where the defendant had signed. The plaintiff brought an action on the cheque against the defendant personally as drawer. The court held that even though it was not completely clear on the face of the cheque that it was a corporate signature, extrinsic evidence showed that the defendant had signed as the agent of the corporation and was not personally liable on the cheque. Canada Trustco Mortgage company v. Canada 2011 SCC 36 Page 418 footnote 13 Canadian Imperial Bank of Commerce (CIBC) v. Morgan (1993), 143 A.R. 36 (Alberta Queen’s Bench) This was an action to recover the deficiency owing on a bank plan note. M obtained a bank loan to purchase a car. G, a friend of M, agreed to co-sign the loan. A bank plan note was signed by M and G for $21,500 repayable with interest at 17.25 percent per year in twelve equal monthly installments with the balance of principal and interest due and payable in one year. M, defaulted and had no assets. The car was sold and the proceeds credited to the loan. The bank seeking the balance of the deficiency on the note from G, took money from G's account and cashed an investment certificate hypothecated towards the loan. The bank argued that the note was a promissory note. G claimed that he was given to understand that his maximum liability was limited to the $10,000 investment certificate hypothecated and argued that the note was not a promissory note as it was conditional and not made out for a sum certain. The Court held that the note contained additional terms allowing for extension or altering of terms without notice. The possibility of a contingency arising made the note conditional. It could not be certain on its face where the underlying contract between the parties was to be considered and therefore was not a promissory note. While an acceleration clause was permitted and was within the spirit of section 27(1) of the Bills of Exchange Act, the note here was uncertain as to sum, as authority was given to extend it beyond the note to another security document. G was not a guarantor, having signed as a primary borrower. The investment certificate and the sum taken from G's account were ordered to be returned.

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MacLeod Savings & Credit Union Ltd. v. Perrett, [1981] 1 S.C.R. 78 (Supreme Court of Canada) Perrett signed, with another, an instrument by which both promised to pay the Credit Union a specified sum at a specified interest rate in monthly installments. The promisors agreed to pay "the stated principal amount...with interest on the unpaid principal from the date of advance both before and after maturity at the rate ...set forth until the full amount of principal and interest had been paid." The monthly payments were to be of a specified amount except that the last payment would be "equal in any case to the unpaid principal and interest of the loan." The promisors defaulted after two payments, causing the whole sum to become due immediately. The Credit Union sued on the instrument, alleging that it was a promissory note which it held as payee and on which Perrett was liable as an accommodation maker. The court held that it was not a promissory note since the document in question was neither certain nor negotiable. Robinson v. Mann (1901), 31 S.C.R. 484 (Supreme Court of Canada) Mann endorsed a note signed by W. Mann & Co., that was payable to Molson's Bank. The court held that under the Bills of Exchange Act, Mann was liable as an endorser even though the Bank had not itself endorsed the note. Rouge Valley Health System v. TD Canada Trust, [2010] O.J. No. 5302 (Ontario Superior Court) The plaintiff was an acute care community hospital. One of its managers was authorized to issue cheques under the amount of $10,000. Over a period of years, this manager issued cheques totaling $1.329 million to a legitimate service provider, Delisle. In 2003 the executive director and Delisle parted ways and so he advised the manager at RVHS that services would be provided by a new service provider called Scarborough-York Mobile Rehabilitation. The manager continued to authorize payments under $10,000 to SMR, again for a number of years, totaling $686,511. A new employee at RVHS discovered that no services had been provided by SMR or Delisle. An investigation revealed that Delisle had received no money from RVHS; that SMR was not a real company; and that the funds had ultimately gone back to the manager personally. The plaintiff sued the defendant bank on the SMR cheques for conversion; that is, it never intended to pay SMR, and therefore, the bank had wrongfully converted its cheques. The defendant argued that the plaintiff did intend to pay SMR, and therefore, the bank is a holder in due course and protected from liability under the Bills of Exchange Act. The Court looked to Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727 Westboro Flooring & Decor Inc. v. Bank of Nova Scotia (2004), 241 D.L.R. (4th) 257 (Ontario Court of Appeal)

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An accountant who was employed by a corporation prepared corporate cheques payable to a fictitious business, and then deposited them into a bank account of his own, registered in the name of the business. The business name he used on the bank account was slightly different from the name of a legitimate customer of the corporation. The bank cleared all of the cheques, and the accountant disappeared with the money. The corporation brought an action in conversion against the bank for accepting and endorsing the cheques for deposit. The court held the bank liable. The cheques were not created for legitimate debts, the corporation remained the true owner, and when the bank processed the cheques, it had paid moneys out to the accountant to which the corporation was entitled.(Supreme Court of Canada) on the matter of fictitious payees and distinguished this case, at para 72:In my view, this case is factually distinguishable from Boma, Metroland and Westboro in material respects. Any connection between the acronym S.M.R. and Delisle is, at best, tenuous and involves an extension of Boma to a point that is commercially nonsensical. Rouge Valley’s illogical position is illustrated by its suggestion that the “rightful holder of the cheques was Scarborough-York”. ScarboroughYork is not a person. It is not even a trade name that had been utilized by a person. To use the wording of the statute, Scarborough-York was non-existing. Section 20(5) of the BEA applies. Consequently, TD Canada Trust was at liberty to treat the cheques issued by Rouge Valley in favour of that payee as payable to bearer.Further, the Court discussed another aspect of the defence available to the defendant at para 84: TD Canada Trust has a valid defence under s. 20(5) of the BEA for a second reason … . On the facts of this case, Rouge Valley had “no intent” because it did not intend to pay someone to whom it did not owe and never had owed money. Consequently, S.M.R. was also a fictitious payee.

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CHAPTER 20 INTELLECTUAL PROPERTY This Chapter is the first of four dealing with Property Law. Instructors may find it helpful to give students a brief introduction to the various forms of property—real and personal, tangible and intangible. Students should already be familiar with the notion that certain types of "property" can come into existence by virtue of a contract; examples are bills of exchange and insurance policies. But not all forms of property are created contractually. One of the remarkable characteristics of intellectual property is that it can be brought into existence by the unilateral act of its creator. Note that in some cases registration is necessary but in others it is not. Intellectual property can be divided into four distinct categories: trademarks, copyright, patents and industrial designs. Each category comprises a particular type of property, protected according to its own rules. Recent legislation has also created special property rights, similar in nature to patent rights, in new varieties of plants and in integrated circuits. Even more so than most areas of law, intellectual property is a very complex and technical subject and is very much the preserve of the specialist. Where one encounters a problem involving intellectual property, expert advice should always be sought. Nevertheless, it is important for business persons to be able to recognize when they may have an interest that can and should be protected by intellectual property law. Also, they should know enough to be able to avoid the unintentional infringement of someone else's rights. TRADEMARK (Source p. 442) The fact that a trademark must not be “clearly descriptive” is discussed on page 446 of the text. Recently, Thorkelson v. Pharmawest Pharmacy Ltd, 2008 FCA 100 changed the threshold for what is considered “clearly descriptive”. In this case, the Federal Court of Appeal overturned a decision that the trademark CANDADRUGS.COM was clearly descriptive of an online pharmacy. The implication is that there is now a higher threshold for establishing that a mark is “descriptive of the goods and services” that it is being used in association with.

COPYRIGHT (Source p. 451) The discussion of copyright has been amended in this edition of the text, to reflect substantial amendments to the Copyright Act in 2012. 2012 was an important year as Parliament passed the Copyright Modernization Act and the Supreme Court of Canada set out the law in 5 important cases, as noted on p. 452 footnote 45. The Nature of

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Copyright, p. 453, sets out the rights of the owner and lists examples of specific rights protected. The moral rights are set out on p. 454. Copyright exists in literary works, computer software, dramatic works, communication signals and telecommunications, musical works, artistic works, and performers’ performances. Instructors would be well-advised to discuss the protection of copyright and the infringement of copyright as set out in the text. PATENTS (Source p. 461) The requirement that an invention be non-obvious - the “ingenuity” requirement - is discussed on page 464 of the text. Instructors should be aware of the case Apotex Inc. v. Sanofi Synthelabo Canada Inc., [2008] SCJ 63. In this case, the test for determining what is obvious was relaxed, resulting in a widening of the scope for holding patented inventions obvious. The test adopted was the “obvious to try” test. INTERNATIONAL ISSUE (Source p. 452) Canada – US Tension Question 1 - The questions of whether Canada should coordinate its copyright regime with the United States in order to reduce tensions needs to be analyzed from a number of perspectives, while also keeping in mind Canadian priorities and values. Instructors should have students consider the beneficiaries of both the current U.S. and Canadian copyright regimes and ask: who benefits and why? In the U.S., the Digital Millennium Copyright Act is weighted in favour of copyright holders. This may seem, at first glance, a morally acceptable and just decision, but if one looks closely what one sees is that the entities really protected by the Act aren’t individual artists (although independent artists are certainly protected it is debatable whether or not they benefit more from the exposure they get through file sharing than they do by having the copyright protected), but rather the huge corporations that distribute an artist’s work. Canada currently skews the other way, protecting the user that initially paid for a product, at the expense of the artist. The question becomes: whose interests are the most valid? Instructors should note here that the U.S. Digital Millennium Copyright Act is much more stringent even than the WIPO treaties – would it be wise for Canada to go so far toward protecting the interests of rights holders at the expense of users? Is there a fairer balance that would help diffuse tensions with the U.S. without skewing Canadian law so far in favour of right holders? Does the proposed Bill C-11 move Canadians closer to the U.S. system? Instructors should also ask students to consider other factors when composing answers to this question:  What role should privacy concerns play in Canada’s decision? Note Pierre Trudeau’s famous statement (in the context of decriminalizing homosexuality)

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that “the State has no place in the bedrooms of the nation”. Does the state have a legitimate role to play in the digital universe? How far can or should the State go in an effort to protect right holders? What about the moral implications of downloading – stealing is stealing, after all – should this play any role in the decision to adopt more stringent legislation? (see the Ethical Issues in this chapter for more on these issues) What about political considerations – stepping away from the main issue, do the tensions created by the copyright issue have any traction in terms of affecting other trade-related issues between Canada and the U.S.? If yes, then other parties (other than rights holders and users) have interests affected by copyright-related tensions and must be considered as well.

Question 2 - No, the ratification of the WIPO treaties have not caused Canada to lose the ability to independently determine its own direction in copyright law. As of February 2009, Canada has yet to ratify (introduced domestic legislation adopting the WIPO treaties) the WIPO treaties – legislation has been proposed and died on the order paper. If, and when, Canada does ratify the treaties it will certainly lose some scope for discretion but, the simple act of choosing to ratify is an indication that Canada has made a conscious choice to follow WIPO’s lead. Moreover, should Canada ever feel it needs to go in a different direction it has two choices: it can repeal the ratifying legislation, or it can choose not to sign and/or adopt future WIPO treaties.

ETHICAL ISSUE (Source p. 467) Music Downloading Instructors will want to link this topic with the content on copyright and the internet contained in Chapter 31 which describes digital methods of tracking and locking access. .Instructors may want some additional information on the music industry to foster debate:  In November, 2007 Statistic Canada reported on the state of the music industry (record production, music publishing and recording studios) in 2005. Sales increased, releases increased, profit increased, see <www.statcan.gc.ca/daily-quotidien/071107/dq071107a-eng.html>. This performance seems to be at odds with the global trends.  The Recording Industry Association of American reveals a reduction in the value of the industry by almost 25% between 1998 and 2007. See Key Statistics at the RIAA website <www.riaa.com>.  In December 2008, the American music industry announced a new approach to copyright enforcement. Rather than processing legal actions against individual infringers (through the use of locks and tracking) it will coordinate efforts with Internet service providers to withhold or reduce infringers service: see Michael Geist, “The Music Industry’s Digital Reversal” Law Bytes, Toronto Star, January 29, 2008 available in the Column archives of his website <www.michaelgeist.ca>.

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Heritage Canada website reports statistics on purchasing and downloading activities by age groups. Although they are somewhat dated they are still revealing. See The Music Market at <www.pch.gc.ca>.

Question 1 - Instructors should encourage students to openly debate this question. Most undergraduate business students will be of an age where they can’t even remember a preloading era, so the instructor may be forced to play the role of “Devil’s Advocate” and argue on the side of the immorality of music sharing. Questions that should be raised are: What is stealing? Who can, and who is, being hurt by music sharing? What impact, positive or negative, does music sharing have on artists, producers, distributors, and others involved in the process? Does the fact that music companies kept CD prices artificially inflated for so long affect anyone’s opinion? Instructors should also use some of the ideas and distinctions found in question 2 below to throw a wrench into the class discussion. Question 2 - This question asks students to consider the ethical difference between downloading, uploading, burning a CD, and lending a CD. The WIPO Internet treaties focus on making copyrighted material available to download, which indicates that WIPO considers uploading as more reprehensible than downloading. However, students should consider whether there is an ethical difference between making a copyrighted work available for others to copy and taking advantage of what other users have already posted on the Internet. As for burning a CD, there are valid reasons why a person might burn a CD other than infringing copyright. For example, a person may be making a back-up copy of a CD, which would fall under the private copying exception in the Copyright Act. However, there are also reasons why a person might burn a CD that would constitute copyright infringement. Is it fair to assume that every time a person burns a CD they are doing it for infringement purposes? Lending a CD to another person would seem to pose the fewest ethical problems, especially considering the fact that lending a CD does not involve making additional physical copies of a copyrighted work, which is what the court in Theberge v. Galerie d’Art du Petit Champlain Inc. (2002), 210 D.L.R. (4th) 385 (Supreme Court of Canada) focused on. Yet, this begs the question: what is the person you lend the CD to doing with it? Are they uploading the CD, burning a copy, or otherwise infringing the copyright? ETHICAL ISSUE (Source p. 471) Drugs for Aids Question 1 - This is an issue that could give rise to a very interesting and heated class discussion. It is often argued that this is necessary to reward innovation and, hence, to promote research. Without research, advances in medical science will be limited. Someone, somewhere, has to pay the price to fund innovation and research. If one considers that we are all global citizens, and that Canadians are both extraordinarily lucky to live where we do, and relatively wealthy, is it not fair to ask Canadians, who can afford to pay higher prices, to do so in order to help fund future innovation and indirectly subsidize drugs for those in dire need? Instructors should also try and have students

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divorce the issue of whether Canadian are entitled to cheaper drugs from the issue of cheaper drugs to combat the AIDS epidemic in Africa – in so doing, instructors should highlight the idea that one of the reasons Canadians pay such high prices for drugs is not to fund past and future research, but is a result of the nature of Canadian and foreign patent protection. Many essential drugs can be produced for less than one-tenth of the price that is being charged by the drug companies; high prices are the result of patent protection. Patent protection creates monopolies, resulting in prices that are much higher than they need to be. In many cases, patented medicines are not even the result of new research and innovation; for example, AZT, one of the earliest AIDS drugs (a component of the “triple cocktail”) was originally patented in the 1960s as a cancer drug. It failed as a cancer drug, but in the early 1980s someone realized it could fight AIDS, and a new patent was granted. This patent was granted for a new use, not a new drug. The result was to greatly extend the patent life of AZT and retard the production of cheaper generic versions. Perhaps Canadians (and students) in favour of cheaper domestic drugs should begin advocating for changes to Canadian patent law rather than worrying about certain “advantages” being granted AIDS sufferers in Africa. Some students may go further and argue that, in the case of medicines, it is immoral to make excessive profits when to do so may put essential medical treatment out of the financial reach of many persons. Discoveries and inventions in the field of health care should belong to the entire human race, and not be exploited for profit. Medicines differ from other forms of goods in that the purchaser does not even have the choice of “take it or leave it.” The choice is “take it (and pay for it) or die”. In these cases, governments are justified in over-riding patent rights as a matter of public policy, as has been done in the case of CAMR. This question could be discussed with the previously discussed International Issue dealing with online pharmacies. The regulated prices of Canadian drugs became a concern for manufacturers when cheap drugs were supplied to the United States, so it is logical for concern to be raised again if preferred pricing is being offered elsewhere. Question 2 - Considered in light of the discussion above this question presents an interesting ethical problem – patent holders do possess rights that need to be protected. On the other hand, very few would argue that saving lives should take a backseat to patent protection. Any restrictions should try and balance the legitimate interests of patent holders with the overriding interest in saving lives. Instructors should have students brainstorm potential solutions – some ideas might include licensing patents to governments for a fee, thus allowing production and distribution of necessary drugs, threshold lengths for the use of patents to make generics to fight pandemics, and geographic restrictions on use of generic versions of patented medicines (after all, one of the reasons so few in Africa are receiving AIDS treatment is that no one can afford the drugs. Drug companies will probably never make a profit there, so why shouldn’t they be good global citizens?). It is, after all, criminal that hundreds, if not thousands, of people are dying every day of treatable diseases like malaria, tuberculosis, and leprosy.

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QUESTIONS FOR REVIEW 1. The types of intellectual property protected by law are trademarks, copyright, patents, and industrial designs. In addition, legislation now protects plant breeders’ rights and integrated circuit topography rights. (Source p. 471) 2. The principal costs of protecting intellectual property are higher prices and payment of royalties and fees; there may also be inefficient use of resources resulting from restrictions on the use of new techniques and from the exercise of monopoly power. The principal benefits of protecting intellectual property rights are to reward creators for their efforts, and thus to encourage research and creativity. (Source p. 442) 3. A trademark is defined as a mark that is used by a person for the purpose of distinguishing goods or services manufactured, sold, or performed by him from goods or services manufactured, sold or performed by some other person. (Source p. 442) 4. The essential elements of the tort of passing off are that: (1) the plaintiff’s goods, services, or businesses must enjoy a reputation that is of some value worth protecting; (2) the defendant must have misrepresented its goods, service, or business as those of the plaintiff; (3) there must be either actual confusion or a likelihood of confusion in the public’s mind between the goods, services, or businesses of the plaintiff and those of the defendant; and (4) the plaintiff must have suffered damage in consequence of the passing-off. (Source p. 444) 5. Registering a trademark gives the owner the exclusive right to its use throughout Canada, so that the right is not restricted to the area in which the owner does business. In addition, the registration of a trademark creates a presumption that the mark is valid when filing a foreign application in a country that adheres to the International Convention for the Protection of Industrial Property. (Source p. 446) 6. A certification mark is a special type of trademark used to identify goods or services that conform to a particular standard, a typical example being the “Good Housekeeping Seal of Approval” mark. The owner of a certification mark may register it and license its use to other persons whose goods or services meet the defined standards. (Source pp. 446-447) 7. Registration of a trademark may be opposed on the following grounds: (1) the application did not comply with the various formal requirements for filing; (2) the mark is not registrable; (3) the applicant is not the person entitled to registration, or (4) the mark is not “distinctive.” (Source p. 448) 8. The principal rights possessed by an owner of copyright are: (1) the right to produce or reproduce the work in question, or any substantial part of it, in any material form, (2) the right to perform or deliver the work in public, and (3) the right to publish an unpublished work. (Source p. 453)

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9. Moral rights are the rights of an author or creator to prevent a work from being distorted or misused and include: the right to the integrity of the work; the right to prevent its being distorted or mutilated; the right to prevent it from being used in association with some product, service, cause or institution; and, where the work is copied, published, or performed, the right to be associated with the work as author or to remain anonymous. (Source p. 454) 10. The Supreme Court of Canada has held that copyright subsists in computer programs embodied in a chip, or in other machine-readable form, and that the copying of a chip constitutes and infringement of the copyright of the program itself. (Source p. 455) 11. Copyright generally is protected during the life of its author and for a further period of fifty years after the author’s death. (Source p. 457) 12. Normally, copyright belongs to the author or creator of a work. Copyright may be assigned by the original owner to some other person (for example, a publisher), or an owner of copyright may pass it under a will or intestacy of the owner. (Source p. 457) 13. Fair dealing consists of acts that would otherwise amount to infringements of copyright, but instead are expressly permitted by the Copyright Act. The most important exemption allows for the fair use of copyright works for the purpose of research or private study, for criticism or review, or for news reporting. (Source pp. 459-460) 14. For an invention to be patentable an invention must possess the following three elements. It must be: (1) an art, process, machine, manufacture, or composition of matter or improvement to such; (2) new; and (3) useful. (Source p. 463) 15. An inventor might choose not to register a patent if she wants to keep the invention entirely secret and continue to exploit it indefinitely. This runs the risk that some other person will sooner or later stumble upon the same invention. Registering a patent is also quite an expensive business. If an invention is likely only to have a short productive life, secrecy may be the better option. (Source p. 462) 16. An industrial design means “features of shape, configuration, pattern or ornament and any combination of those features that, in a finished article, appeal to and are judged solely by the eye”. Features which are solely utilitarian or functional are not protected. (Source p. 468) 17. Know-how may be protected through a contractual or fiduciary relationship rather than as a proprietary interest. Some contracts of employment include a restrictive covenant restraining the employee, if she leaves the employment, from making use of the employer’s confidential information or divulging it to someone else. (Source pp. 569-470)

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CASES AND PROBLEMS

1. Ashley did not have rights as her trademark was not registered unless she can argue that she has pre-existing rights as Kate’s mark will be confused with hers. (Source p. 448) 2. This case is based on an actual dispute that arose in the United States; see Pact Reached on U.S. Edition of 'Lolita' Retelling, New York Times, June 17, 1999, Section E; Page 1. According to the report, an agreement was eventually reached by the publishers, the author of the new work, and the estate of Mr. Nabakov, the author of the original work, under which royalties were to be shared. The U.S. law in this area seems to differ from the Canadian law. Literature is full of examples of works where the author has taken the plot of an existing work and has reworked it. (West Side Story, for example, is in a sense a re-working of Romeo and Juliet.) Usually the original work is not protected by copyright, as Lolita was in the present case. However, Lo's Diary seems to have been an original work that merely takes the story of the original Lolita and re-tells it from a different perspective. As such, it would not seem to constitute a breach of copyright unless, perhaps, substantial parts of the original work were reproduced. As stated at p. 490 of the text: “There is no copyright in a mere idea or thought. Copyright attaches to the expression of an idea in a material form”. 3. Registration of a trademark does not necessarily give exclusive right to that mark. There will be no infringement of the mark if there is no likelihood of confusion. Thus it is possible for one person to use a trademark in respect of one type of product and for some other person to use the same (or an essentially similar) mark in connection with some entirely different product. This case is based on Toyota Jidosha Kabushiki Kaisha v. Lexus Foods Inc. (2000), 194 D.L.R. (4th) 491. When the applicant filed to register the trade mark “Lexus,” the registrar had rejected the opposition; that is allowed the application. On appeal to the trial division, the registrar's decision was set aside. The applicant then appealed to the Federal Court of Appeal, which allowed the appeal. In the view of the court, confusion is unlikely when the goods in question are markedly different. It was hard to see how anyone about to buy some of the applicant's canned fruit, marketed only in Quebec would ever have thought that the Japanese auto manufacturer was the producer. [NOTE: the Court accepted that the applicant might be attempting to “cash in” on a well-established name. However, there is no doctrine of mens rea in the field of trade marks. 4. In order for an invention to be patentable it must be new, useful, and be "an art, process, machine, manufacture, or composition of matter or an improvement to such": Patent Act, s.2. The question here is whether or not the new system can properly be described as a "process." In Re Application for Patent of North Oakland Development Corporation (1982), 82 C.P.R. (2d) 282, on which the facts of this problem are based, the Patent Appeal Board rejected an application to patent a method of developing land which involved constructing an on-site structure that served as a factory for manufacturing residential buildings to be erected on the site, and converting the factory structure into a shopping centre when the development was completed. The Board ruled that conversion

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of buildings to different uses falls within the skills of an architect, and does not relate to a manual art or skill constituting patentable subject-matter. 5. Dolphin will contend that Kopykat, by reproducing its DM35X design, has infringed its copyright in the design. In Bayliner Marine Corp. v. Doral Boats Ltd. (1986), 10 C.P.R.(3d) 289, on which the facts of this problem are based, the court held that the original boat itself was not an architectural work, building or structure having an artistic character, and was not protected by copyright. However, the drawings for the boat were clearly protected by copyright and the defendant had copied those drawings by making a three-dimensional reproduction of them. This infringed the plaintiff's copyright in the drawings. In Bayliner, the defendant argued unsuccessfully that the design was not protected by copyright, since it was capable of being registered under the Industrial Design Act. The court held that the design was not registrable under that Act. The Copyright Act has been amended since that decision, and now provides that there is no copyright in three-dimensional articles that are functional and intended for massproduction, nor in drawings or plans for such articles. The law is not entirely clear, but the exclusion from copyright protection appears to apply where the article is produced in quantities of fifty or more. 6. This case raises two principal issues: (1) who owns the copyright in the article; and (2) were any rights of Richards infringed? As a general rule, copyright in a written work belongs to the author. An exception is where the author is an employee and the work is written in the course of employment. (A special rule applies to employees of newspapers, under s.13 of the Copyright Act). In this case, Richards is stated to be a freelance writer – not an employee – and she owns the copyright unless it has been assigned to the newspaper. However, even if the newspaper owns the copyright, it may have infringed Richards’ moral rights, by editing the article without her permission. If Richards still owns the copyright she clearly consented to it being published in the newspaper. Did she also consent to it being published in the Internet site? As stated in the text, copyright in a work may be infringed by reproducing it in an altogether different form. Publication on the Internet does not seem to be an essentially different form. In Robertson v. Thomson Corp. (2004), 243 D.L.R.(4th) 257, the court held that by agreeing to the publication of the article in the newspaper the author had given the newspaper a licence to publish it in electronic form as well. Thus Richards’ copyright does not seem to have been infringed, though her moral rights may have been. (There is also the fact that, by being selected as one of the best articles of the year, her reputation does not seem to have been damaged at all.)

CASE SUMMARIES Amazon.com, Inc. v. Canada (Attorney General), [2010] F.C.J. No. 1209 (Federal Court Trial Division)

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See Case 20.16 at p. 501 in the text. Anton Piller KG v. Manufacturing Processes Ltd., [1976] Ch. 55 (England—Court of Appeal) The plaintiff was a German manufacturer of components for computers. It had reason to believe that the defendants, its agent in England, were secretly passing on confidential information and details of a new frequency converter to other German manufacturers, and feared that the defendants would dispose of various plans and documents before discovery. In an action for infringement of copyright and misuse of confidential information, the English Court of Appeal held that in exceptional cases, where the plaintiff has a very strong prima facie case, the risk of damage is serious and there is evidence that the defendant is in possession of vital material which might be destroyed so as to defeat the ends of justice, the court has jurisdiction to permit the plaintiff's representatives to enter the defendant's premises to inspect and remove such material. Apotex Fermentation Inc. v. Novopharm Ltd. (1998), 162 D.L.R. (4th) 111 (Manitoba Court of Appeal) See Case 20.18 at p. 508 in the text. Apotex Inc. v. Eli Lilley and Co. (2004), 240 D.L.R. (4th) 679 (Federal Court of Appeal) The plaintiff alleged that the defendant had infringed eight patents which it owned. Four of those patents had been assigned to it by another company, as a result of which it now controlled all the processes for manufacturing a particular antibiotic. The defendant claimed that the assignment resulted in an undue lessening of competition in Canada and counterclaimed for damages. The defendant’s claim was struck out, but on appeal it was held that the defendant had a reasonable cause of action. [NOTE: the court did not decide whether, in fact, there was a violation of the Competition Act.]

Apotex Inc. v. Wellcome Foundation Ltd. (2002), 219 D.L.R. (4th) 660 (Supreme Court of Canada) The respondents owned a patent covering the use of the compound AZT in the treatment of HIV. The AZT compound was already known; the originality of the respondents’ patent was in the discovery of a new use for it. The court held that an “invention” of such a nature is patentable.

Bayliner Marine Corp. v. Doral Boats Ltd. (1986), 10 C.P.R. (3d) 289 (Federal Court of Appeal) The defendant purchased boats from the plaintiff, stripped them down and then reproduced the hulls of the boats from the plaintiff and then modifications are added. The defendant bypasses the necessity of paying for design engineers. The plaintiff sued for Copyright © 2016 Pearson Canada Inc.

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infringement of copyright in the design plans. The Court held that the plaintiff was entitled to register its designs under the Industrial Design Act, but that no copyright subsisted in the designs themselves, and therefore the defendant had not infringed copyright. Beecham Canada Ltd. v. Proctor & Gamble Co. (1982), 61 C.P.R. (2d) 1 (Federal Court of Appeal) Appellants produced a fabric softener product called “Cling Free” that was held to be an infringement of the respondent’s patent. The Court of appeal upheld the decision and the defendant was found to be liable for patent infringement.

Bell Canada v. SOCAN (2010), 323 D.L.R. (4th) 42 (Federal Court of Appeal), leave to appeal granted [2010] S.C.C.A. No. 379 SOCAN submitted an application for a tariff to apply to “previews” of audio clips used in the sale of music on the internet. The Copyright Board found this type of use was permitted under s. 29 of the Copyright Act – the section on “fair dealing.” The Court of Appeal upheld the decision. The amount of the dealing, was short (seconds) and the preview was for the purpose of “research” by consumers in making a decision whether to purchase. Bilski v. Kappos 561 U.S. (2010) (Supreme Court of the United States) The plaintiff attempted to patent a fixed bill system for energy markets. The Supreme Court held that business methods were patentable under the Act, but in this case, the process was simply an abstract idea and therefore not patentable.

BMG v. John Doe (2004), 239 D.L.R. (4th) 726, partially aff ’d (2005), 252 D.L.R. (4th) 332 (Federal Court of Appeal) The plaintiff was denied an application for an order to have Internet service providers disclose the names of users alleged to have infringed copyright. The Court of Appeal affirmed the motions judge’s decision in part; the Court of Appeal held that while the appeal should be dismissed, it should be without prejudice to the appellant’s right to commence a further application. The plaintiff’s claim must disclose a bona fide and not a prima facie claim.

Cadbury Schweppes Inc. v. FBI Foods Ltd. (1999), 167 D.L.R. (4th) 577 (Supreme Court of Canada) A company improperly copied the recipe for a beverage, and made the recipe available to others. In a claim for damages, the court found that a competitor could, within twelve

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months, have created a similar product without copying the recipe. That factor should be taken into account in assessing damages. The Supreme Court of Canada held that the licence agreement created no fiduciary relationship, nor should the licensor's interest in the information be categorized as proprietary. The proper measure of damages in a case such as this was the profit actually lost in all the circumstances during the twelve month period following termination of the licence.

Canadian Association of Internet Providers v. SOCAN (2004), 240 D.L.R. (4th) 193 (Supreme Court of Canada) SOCAN, a collective society responsible for administering performing rights in musical works in Canada, sought to have a tariff imposed on Internet service providers (ISPs) in respect of performers’ royalties, on the basis that ISP facilities were used for the transmission of musical works. The court held that so long as an ISP confines itself to providing a conduit for information it is not “communicating” to the public. An ISP normally has no actual knowledge of any material transmitted that might infringe copyright and it would be impractical for it to monitor all the material moving through the Internet. A person does not authorize infringement by authorizing the use of equipment that could be used to infringe copyright. According to the court, “the Copyright Act provides a balance between the public interest in the encouragement and dissemination of works of the arts and intellect and obtaining a just reward for the creator.

CBS Songs Ltd. v. Amstrad Consumer Electronics, [1988] 2 All E.R. 484 (England— House of Lords) Amstrad manufactured and marketed twin-deck tape recorders, which could be used to reproduce one tape directly onto another. They were advertised in such a way as to be likely to encourage home taping and copying of copyright material, although the advertisements warned that some copying might require permission. The appellants, representing record companies and other copyright owners, sought an injunction to prevent the marketing of such machines, alleging that the advertisements in effect incited members of the public to commit an offence by making copies infringing copyright. The House of Lords held that the defendant had not in any way authorized any infringement, even though their product facilitated it. Amstrad had no control over the way in which the machines were used after they had been bought. Ciba-Geigy Canada Ltd. v. Apotex Inc. (1992), 44 C.P.R. (3d) 289 (Supreme Court of Canada) Ciba-Geigy, the Canadian subsidiary of a well-known multinational enterprise, produced and marketed a pharmaceutical known generically as Metoprolol; it was sold (on prescription) in tablet form, the tablets having a distinctive size, shape, and colour. The defendants, Potex and Novopharm, were generic companies, holding compulsory licences

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under Ciba-Geigy’s patent for Metoprolol; that is, they were entitled to manufacture it on payment of a prescribed royalty fee. They manufactured tablets of the same size, shape, and colour as those produced by Ciba-Geigy. Ciba-Geigy brought an action for passing-off. The question was raised whether, in determining the likelihood of confusion due to the similar get-up of the products, the appropriate user group should be restricted to physicians who prescribed the drug and pharmacists who made up the prescriptions, or should include the general public as the end users; physicians and pharmacists were likely to know the difference between the brand-name product and the generic, whereas the public might easily be misled. The Supreme Court of Canada, reversing the judgment of the Ontario Court of Appeal held that patients must be included in the group. [NOTE: it was in this case that Gonthier J. articulated the test for determining whether there has been passing-off.]

Coca-Cola Ltd. v. Pardhan (1999), 85 C.P.R. (3d) 489 (Federal Court of Appeal) The defendant Pardhan was exporting bottles of Coca-Cola from Canada. The plaintiff held that this was an infringement of its trade-mark, as Coca-Cola bottling manufactured products only for sale in Canada. The Court of Appeal upheld the trial court’s decision to dismiss the action as the activities complained of did not constitute a “use” as per the Act and therefore, no cause of action arose.

Delrina Corp. v. Triolet Systems Inc. [2002] O.J.No.3729 (Ontario Court of Appeal) The plaintiff claimed that the defendant had infringed its copyright in a computer programme. The court found that there were similarities between the two programmes, but that the plaintiff’s entire system was not protected by copyright since not all of it was original. The defendant’s system was not a substantial reproduction of the plaintiff’s.

Edutile Inc. v. Automobile Protection Association (2000), 188 D.L.R. (4th) 132 (Federal Court of Appeal) The case turned on the issue of “originality.” Edutile published a price guide for automobiles, targeted at consumers, listing trade-in, private sale, and retail sale prices in three columns. APA subsequently published its own guide, using the same layout but inserting its own assessment of typical prices, based on its own research. The court held that Edutile’s copyright was infringed; the essence of its work was the layout.

Eli Lilley and Co. v. Novopharm Ltd. (2000), 195 D.L.R. (4th) 547 (Federal Court of Appeal) leave to appeal denied [2001] S.C.C.A. No. 100

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The plaintiffs sold a medicinal product under the brand name “Prozac”. The product was made up in capsule form, the capsules having a distinctive colouring of half green and half cream. The patent for Prozac expired, and the defendant company started to manufacture it (entirely lawfully). The defendants marketed their product in capsules that were similar in colouring and shape to those of the plaintiff. The court held that this constituted the tort of passing off. There was a significant likelihood of confusion.

Eli Lilly and Co. v. Novopharm Ltd. (1998), 161 D.L.R. (4th) 1 (Supreme Court of Canada) A pharmaceutical company (the "patentee") held patents for a medicine. In 1987 the Department of National Health and Welfare granted the company a notice of compliance ("NOC") permitting it to market the medicine. In 1990 a generic drug firm (the "licensee") applied under the Patent Act, R.S.C. 1985, c. P-4, for and was granted a compulsory licence under the patents. The licence permitted the licensee to use the patented process to make the medicine, and to import and sell the medicine made by the process, subject to certain restrictions. In 1992 it seemed likely that the compulsory licence system would soon be abolished, so the licensee and a competitor (the "competitor"), both of which held compulsory licences for a variety of drugs, entered into an agreement, which they called a supply agreement, under which a party holding a licence "shall, at the request of the unlicensed party, use its licence for the benefit of the unlicensed party". The agreement was said to have been drafted by the principals of the two parties, without the benefit of counsel. When the Patent Act was in fact amended, the competitor sought a NOC for the manufacture and marketing of specific capsules of the medicine by filing a notice of allegation ("NOA") as required by the regulations. In the NOA the competitor alleged that the patents would not be infringed by its making, using or selling the capsules. The judge of first instance dismissed the application respecting the licensee, finding that the agreement between the licensee and the competitor did not constitute a sublicence. An appeal from that decision was allowed. The Court held that (1) The agreement between the licensee and the competitor was not a sublicence, but a supply agreement. (2) The Patent Act prohibited the licensee from importing medicine under its compulsory licence, which continued despite the amendments to the legislation, until 10 years after the NOC granted to the patentee. (3) In light of the court's findings, the licensee's requests for declarations that the patentee had failed to show that the NOA was not justified and that it was entitled to terminate the compulsory licence were unnecessary. (4) The reformulation of the bulk medicine into final-dosage form by the competitor would not infringe the patentee's patent. Eye Masters Ltd. v. Ross King Holdings Ltd. (1992), 44 C.P.R. (3d) 459 (Federal Court, Trial Division) The defendants carried on a business under the name “Shopper’s Optical,” selling eyeglasses. One of their advertisements showed a model wearing glasses, frowning, under the heading “Eye Masters—$208 reg. price,” and the same model, smiling, with the heading “Shopper’s Optical—$107 reg. price.” The plaintiffs claimed that the

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advertisement infringed the trademark Eye Masters, of which they were the registered owners. The Federal Court, Trial Division, held that the advertisement constituted a “use” of the trademark and granted an interim injunction, restraining the further publication of the advertisement.

Free Trade Medical Network Inc. v. RBC Travel Insurance Co. (2006), 215 O.A.C. 230 (Ontario Court of Appeal) The plaintiff had a relationship with CCN, a U.S. company that had access to discount medical services in the U.S. The defendant was interested in entering into a contract with CCN. The plaintiff met with both parties to “pitch” CCN’s services to the defendant. No mention was made of the relationship between the plaintiff and CCN. During the course of the meeting, the plaintiff disclosed confidential information about CCN’s services to the defendant. This information enabled the defendant to satisfy itself that it wished to enter a contract with CCN. It did so directly, cutting out the plaintiff. The plaintiff failed to get redress from CCN in the U.S. and so brought this action against the defendant for breach of confidence with respect to the confidential information. The Court held that there could be no breach of confidence brought by the plaintiff as the confidential information in question did not belong to the plaintiff, nor was any misuse made of the information. The Court of Appeal upheld the trial judge’s decision.

Future Shop Ltd. v. A & B Sound Ltd. (1994), 55 C.P.R. (3d) 182 (British Columbia Supreme Court) This case is basically similar to the Eye Masters case, above. The plaintiffs, Future Shop, sought an injunction to prevent the defendants using the name Future Shop in comparative advertising. The court held that the comparative advertisements did not infringe the plaintiffs’ trademark.

Gerhard Horn Investments Ltd. v. Registrar of Trade Marks [1983] 2 F.C. 878 (Federal Court, Trial Division) The Registrar of Trade Marks refused to allow registration of the name "Marco Pecci" as a trade mark for use in connection with ladies' garments, on the ground that consumers would consider it to be primarily the name of an individual. The court allowed the applicant's appeal, on the ground that the use of a name of a fictitious person is permitted; s.12 of the Trade Marks Act forbids only the use of the name of a living person or one who has died within the past thirty years. Gould Estate v. Stoddard Publishing (1998), 161 D.L.R. (4th) 321 (Ontario Court of Appeal) See Case 20.7 at p. 491 in the text.

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Grant v. Commissioner of Patents, [2006] FCAFC 120 (Federal Court of Australia) The Court held that a business method will only be patentable if there is a physical element to the process.

Greystone Capital Management Inc. v. Greystone Properties Ltd., [1999] B.C.J. No. 514 (British Columbia Supreme Court) See Case 20.2 at p. 479 in the text.

Hager v. ECW Press Ltd., [1999] 2 F.C. 287 (Federal Court) See Case 20.11 at p. 495 in the text.

Hanis v. Teevan, (1998), 162 D.L.R. (4th) 414 (Ontario Court of Appeal) A university employee who had been employed since 1972 as a director of a computer laboratory had his employment terminated without notice in 1986. The employee was dismissed because of his continued use for his own purposes of the university's computer, allegedly without the consent or knowledge of the university. The employee brought an action claiming wrongful dismissal. He also claimed infringement of copyright in computer software developed during his employment with the university. Section 13(3) of the Copyright Act, R.S.C. 1985, c. C-42, provides that where the author of a work was in the employment of some other person and the work was made in the course of employment, the employer shall, in the absence of any agreement to the contrary, be the first owner of the copyright. The employee alleged that the software system was his personal research, that the consultants whom he had paid to write the software had assigned copyright to him, and that the university had assigned copyright to him in 1976 correspondence. The court held that determination of the issue of copyright does not depend on whether or not the system is labelled as the personal research project of the employee. Although the employee had obtained assignments of copyright from his consultants, who were the authors of the software, those assignments conveyed no ownership to the employee. The consultants were all employees of the university, so that the university was the owner of the copyright in their work under s. 13(3) of the Copyright Act. The 1976 correspondence did not contain any assignment of copyright from the university to the employee, but only assertions by the employee that he owned the copyright in the software. Harmony Consulting Ltd. v. G.A. Foss Transport Ltd., [2011] F.C.J. No. 451 (Federal Court) The plaintiff claimed copyright infringement on software developed for the defendant. The sole shareholder and director of the plaintiff company was Mr. Chari, who was the Copyright © 2016 Pearson Canada Inc.

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undisputed author of the software. The two companies entered into a Software Licencing Agreement (SLA). Chari developed several programs and continued to fix errors and make modifications to the software for several years. After the relationship broke down, it was discovered that Chari had included “time bombs” in the software that on two separate occasions caused the defendant’s business to be disrupted. The Court reviewed the facts and the law, and noted three issues that needed to be addressed in an action for copyright infringement: (1) Does copyright subsist in the computer programs; (2) who owns the copyright in the programs; and (3) was the copyright infringed? The Court held that some of the programs were not original enough to be subject to copyright; that in some of the programs, the copyright was not held by the plaintiff, but rather the company the author previously worked for; where the plaintiff did hold copyright, there was no infringement as the infringements claimed by the plaintiff did not fall within the description of an infringement as per the Copyright Act; and even if there was infringement the SLA consented to it. Therefore, the defendants were found to be not liable. Harvard College v. Canada (Commissioner of Patents) (2002), 219 D.L.R. (4th) 577 (Supreme Court of Canada) See Case 20.15 at p. 501 in the text.

Inland Revenue Commissioners v. Muller, [1901] A.C. 217 at para 223 (England – House of Lords) This was a passing-off case, in which the Lord Macnaghten of the House of Lords defined “good will” at para 223: What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Jordan & Ste-Michelle Cellars Ltd. v. Gillespies & Co. Ltd., (1985), 6 C.P.R. (3d) 377 (Federal Court, Trial Division) Jordan's were the registered owners of the mark "Toscano" for wines since 1979. In 1982 Gillespies, as agents for an Italian producer, began selling wine in Quebec under the label "Toscano Bianco". Jordan's sued for infringement of their mark. Gillespies attacked the validity of the mark "Toscano”. The court ruled that the registration should be expunged. The word "Toscano" in Italian denotes something, especially a wine coming from the region of Tuscany. In the present case, this was misdescriptive of Jordan's' product. Copyright © 2016 Pearson Canada Inc.

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Jurak Holdings Ltd. v. Matol Biotech Laboratories Ltd., [2006] T.M.O.B. No. 36 at paras 23–7, aff ’d [2008] F.C.J. No. 1367 (Federal Court) The respondent brought an action to oppose the applicant’s trademark registration. The registrar accepted the argument of the respondent that the name was primarily that of a person who died within the last thirty years nor was the mark distinctive. The Court agreed with the registrar and denied the application. Kirkbi AG v. Ritvik Holdings Inc. (2003), 228 D.L.R. (4th) 297 (Federal Court of Appeal) The plaintiffs were members of the LEGO group that sold construction toys comprising self-locking bricks of a distinctive shape. The LEGO system had been patented, but the last patent expired in 1988. In 1991 the defendant started to manufacture its own line of “Mega Bloks”, which used a similar system. The plaintiffs brought an action for passing off under s. 7(b) of the Trade-marks Act, claiming that the LEGO bricks constituted a “distinguishing guise”. The court dismissed the action on the basis that all the features of the LEGO bricks were determined by their function and that the shape of the top surface of a LEGO brick was purely utilitarian. It was therefore not a valid trademark.

LAC Minerals Ltd. v. International Corona Resources Ltd. (1989), 61 D.L.R. (4th) 14 (Supreme Court of Canada) Corona owned the mining rights to certain land on which it was drilling exploratory holes. LAC approached Corona with a view to a possible partnership or joint venture, and Corona revealed the results of the drilling from which it was clear that an adjacent piece of property that Corona was trying to acquire would likely hold mineral bearing deposits. LAC put in a successful competing bid for the adjacent property and developed the mine on its own account. Industry practice imposed an obligation on parties seriously negotiating a joint venture not to act to the detriment of each other. The court held that the information given to LAC was confidential and was revealed only for the purpose of a possible joint venture. LAC was in breach of its duty of confidence and of its fiduciary duty when it acquired the adjacent property. But for LAC's breach, Corona would have obtained the property. The court imposed a constructive trust on the property in favour of Corona.

Law Society of Upper Canada v. CCH Canadian Ltd. (2004), 236 D.L.R. (4th) 395 (Supreme Court of Canada) See Case 20.13 at p. 497 in the text.

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The plaintiff brought an action for breach of confidence amongst other claims. The motions judge struck many of the pleadings as per the Rules of Civil Procedure as not disclosing a cause of action. The plaintiff appealed the decision. The trial judge struck some more of the pleadings. The Court of Appeal allowed the appeal in part only. With respect to the breach of confidence issue, the Court held that the plaintiff did not plead the requirements to make out a breach of confidence action. At para 17, the Court sets out the required elements: (1) that the information conveyed was confidential; (2) that the information was conveyed in confidence; and (3) that the confidential information was misused by the party to whom it was communicated to the detriment of the confider. Masterpiece Inc. v. Alvida Lifestyles Inc., [2011] S.C.J. No. 27 (Supreme Court of Canada) The appellant brought an action to have the respondent’s trademark expunged from the register. The appellant had used the same name as its trademark for several years in the construction of retirement homes in Alberta. The respondent is in the same business in Ontario and registered the name “Masterpiece Living” in connection with its retirement homes. The Supreme Court allowed the appeal as the geographical distance is not a consideration as trademark is national.

Mattel, Inc. v. 3894207 Canada Inc., [2006] 1 S.C.R. 772 (Supreme Court of Canada) Mattel, manufacturer of the doll Barbie and owner of the Barbie trademark, opposed an application to register the trademark "Barbie's" to be used in association with "restaurant services, take-out services, catering and banquet services". The court found that the trademark was registrable as there would not be confusion between the two marks. This conclusion was based on the finding that though Barbie is a famous trademark, it is not famous for use with any products other than dolls and doll accessories. However, the court did establish that a trademark could be so well known so as to carry the mark across product lines. This was not the case with Mattel's Barbie mark; therefore, the casual consumer somewhat in a hurry is unlikely to infer that Barbie's the restaurant is associated with Mattel.

Merck Frosst Canada Inc. v. Canada (1998), 161 D.L.R. (4th) 47 (Supreme Court of Canada) Apotex made an application to the Minister of Patents requesting a Notice of Compliance that it would not be infringing the patent held on a drug called Norfloxacin; Apotex further made a Notice of Allegation that it would not be an infringement as it wold purchase the drug in bulk from Novopharm who held a compulsory licence. The Supreme Court held that Apotex was entitled to the NOC from the minister, in spite of the fact that at the time of application, Novopharm’s compulsory licence was not yet in effect.

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Molson Canada v. Oland Brewery Ltd. (2002), 214 D.L.R. (4th) 473 (Ontario Court of Appeal) The plaintiffs brought an action for passing off, claiming that the defendant’s trademark “Oland Export Ale” was likely to cause confusion with its own “Molson Export”. The court dismissed the action. The defendant’s mark was registered and that gave it the right to market its product throughout Canada. The plaintiff’s only recourse was to attack the validity of the registration.

Molson Companies Ltd. v. John Labatt Ltd., (1984), 1 C.P.R. (3d) 494 (Federal Court, Trial Division) (1987), 19 C.P.R. (3d) 88 (Federal Court of Appeal), leave to appeal to the Supreme Court denied [1988] S.C.C.A. No. 109 Molson’s applied to register the mark "Golden" for use in connection with beer. The application was opposed by Labatt's. The court held that the adjective "golden" is not clearly descriptive, nor deceptively misdescriptive, of the character of beer and should be permitted. This decision was overturned by the Court of Appeal – the word golden was merely descriptive and therefore not registrable. Moreau v. St. Vincent, [1950] Ex. C.R. 198 (Exchequer Court of Canada) The plaintiffs published a sports paper and devised a system of distributing prizes to subscribers in order to boost circulation. The system involved a quiz relating to sporting topics. The defendant commenced publication of a weekly leaflet containing crossword puzzles, which also contained a quiz similar in form to that used by the plaintiffs. In an action for infringement of copyright the court held that there is no copyright in mere ideas, only in the expression of them. (In the editorial note to the headnote of the reported case, it is observed that plagiarism is not necessarily infringement of copyright.)

Molson Cos. v. Moosehead Breweries Ltd. et al. (1990), 32 C.P.R. (3d) 363 (Federal Court) Moosehead made an application to the registrar to have three trademarks owned by the appellants expunged from the register for non-use. The trial judge overturned the registrar’s decision and found that on the evidence supplied by the appellant, the trademarks were still in use; the products were exported and the trademarks licensed out.

National Hockey League v. Pepsi-Cola Canada Ltd. (1995), 122 D.L.R. (4th) 412 (British Columbia Court of Appeal) The defendants advertised a soft drink, during the intervals of NHL league games, which they promoted through a contest called “the $4 million Pro-Hockey play-offs Pool”. The NHL brought an action for passing-off, claiming that the advertisements were misleading

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and suggested that they were approved by the league. This claim was rejected by the court, which further held that there was, in any event, no damage to the league’s goodwill. (If anything, the league was receiving free publicity.) NTP, Inc. v. Research in Motion Ltd., (2005) 418 F. 3d. 1282 (U.S. App.); (2006) 546 U.S. 1157 (United States Supreme Court) See Case 20.17 at p. 504 in the text. Paramount Pictures Corp. v. Howley, [1991] O.J. No. 1921 (Ontario Court – General Division) NB the citation is misquoted in the text as [1992] O.J. No. 1921 The plaintiff, Paramount had obtained the rights of the film “Crocodile Dundee.” The plaintiff brought action against the defendants for copyright infringement, passing-off and conversion. The defendants were selling t-shirts with various designs and the words “Crocodile Dundee” on them. The defendant, Mark Howley had applied to register the trademark “Crocodile Dundee” for his sportswear. He was informed that he would need to make some changes to the design in order to avoid copyright infringement, which he made, but when he notified his manufacturer they had already accepted an order from the Bay in Canada under the old design. The Court held that the defendant had knowledge of the copyright interest and infringed it and further had committed the tort of passing-off. The Court awarded damages and an injunction.

Playboy Enterprises Inc. v. Germain (1978), 39 C.P.R. (2d) 32, aff ’d. (1979), 43 C.P.R. (2d) 271 (Federal Court of Appeal) Mr. Germain attempted to register the name “Playboy Men’s Hair Stylist” and the application was opposed by the appellant. The registrar found that the names were not confusingly similar, because of the difference in the businesses. The Court upheld this decision on appeal.

Philip Morris Products S.A. v. Malboro Canada Ltd., [2010] F.C.J. No. 1385 (Federal Court) The plaintiff brought an action for a declaration that its product did not infringe the trademark of the defendant. The defendant counterclaimed that the plaintiff was in fact infringing its mark. The defendant owned the rights to use the mark “Marlboro” in Canada. The packing was very distinctive. The plaintiff had the right to “Marlboro” in the U.S. and the rest of the world. In Canada, it introduced a brand of cigarette with similar packaging design to that used by the defendant for its product, but there was no name on the package. The Court held that the packaging of the plaintiff does not infringe a trademark right of the defendant.

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Pioneer Hi-Bred Ltd. v. Commissioner of Patents, (1989), 60 D.L.R. (4th) 223 (Supreme Court of Canada) Pioneer filed an application to obtain a patent for a new variety of soybean, developed through artificial cross-breeding. The application was refused, since there was insufficient disclosure of the genetic engineering involved to enable others to reproduce the invention.

Pink Panther Beauty Corp. v. United Artists Corp. (1998), 80 C.P.R. (3d) 247 (Federal Court of Appeal) See Case 20.4 at p. 484 in the text.

Pro-C Ltd. v. Computer City Inc. (2001), 205 D.L.R. (4th) 568 (Ontario Court of Appeal) The plaintiff produced a product called “Wingen.” The plaintiff alleged that the defendant appropriated this trademark and sold it in a non-competitive product; this caused so many searches to the plaintiff’s website, that it was so overwhelmed, that it could not service its own legitimate customers. The Court of Appeal overturned the trial judge’s decision and held that the plaintiff had not demonstrated a “use” of the trademark as based on s. 4 of the Trade-Marks Act and further, the plaintiff had not proven any damages. Ray Plastics Ltd. v. Dustbane Products Ltd. (1994), 57 C.P.R. (3d) 474 (Ontario Court of Appeal) See Case 20.1 at p. 478 in the text.

Re Application of Abitibi Co. (1982), 62 C.P.R. (2d) 81 (Patent Appeal Board) The applicant developed a new process to biodegrade spent sulfite waste liquor from the manufacture of wood-pulp. The patent was rejected on the grounds that part of the process used yeasts (living organisms). The new yeasts were created by the inventor. The Appeal Board held that it was patentable. Registrar of Trade Marks v. Provenzano, (1978), 40 C.P.R. (2d) 288 (Federal Court of Appeal)

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The Registrar refused to allow the registration of the mark "Kold One" for a brand of beer. On appeal, the court held that "cold" is not descriptive of the intrinsic character or quality of beer and the mark was permissible. R. v. Benson, [2009] O.J. No. 239 (Ontario Superior Court of Justice) The accused made an application to a Justice of the Peace to have a former business partner charged with theft under, possession of property under, and mischief under based on allegations that the partner had taken possession of a private email belonging to the accused. The Court held that information is not property and therefore cannot be stolen. Re Broadcasting Act (Can.) [2011] F.C.J. No. 197 (Federal Court of Appeal) This was a reference with respect to the power of the CRTC to establish a system whereby local television stations could negotiate with the broadcast distribution undertakings to obtain fair value for the distribution of the local stations; programming services; a system that would benefit the local stations. The Court of Appeal held that this was within the power of the CRTC as the parties were subject to regulation by the CRTC; and the CRTC had determined that such a regime was necessary to fulfil is mandate. R. v. Stewart, [1988] 1 S.C.R. 963 (Supreme Court of Canada) Stewart was hired to obtain names, addresses and phone numbers of the employees of a hotel. He assumed that the hirer was associated with a union seeking to organize the hotel workers. Stewart approached a security guard at the hotel and offered him money to get the information. The guard reported him and he was charged with counselling the guard to commit fraud and theft. The Supreme Court of Canada ruled that no offence had been committed. Stewart intended only to obtain information; confidential information does not constitute "property" for the purposes of s. 283 of the Criminal Code. Nor did the conduct amount to fraud, since the hotel would not have been deprived of anything. [NOTE: it seems that there might have been fraud if the hotel had been likely to suffer economic loss amounting to deprivation; for example, if the information had been intended for transmission to a trade rival and loss of profit might have resulted.] Robertson v. Thomson Corp. (2004), 243 D.L.R. (4th) 257 (Ontario Court of Appeal) The Court of Appeal decision was affirmed by the Supreme Court of Canada in Robertson v. Thomson Corp., [2006] 2 S.C.R. 363 (Supreme Court of Canada). The plaintiff wrote two articles that were published in the newspaper. She then brought a class action against the defendant for copyright infringement when she discovered that the articles were stored in three databases. The Court dismissed her appeal allowing that newspapers were entitled to copy articles into a database. The plaintiff brought a motion for summary judgment. The Motions Judge held that while the reproductions were reproductions of the articles in question and not reproductions of the collective work of

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the defendant, the motion was dismissed as there were genuine issues for trial. The Court of Appeal and Supreme Court of Canada upheld this decision. Robertson v. Thomson Corp., [2006] 2 S.C.R. 363 (Supreme Court of Canada) The plaintiff wrote two articles that were published in the newspaper. She then brought a class action against the defendant for copyright infringement when she discovered that the articles were stored in three databases. The Court dismissed her appeal allowing that newspapers were entitled to copy articles into a database. The plaintiff brought a motion for summary judgment. The Motions Judge held that while the reproductions were reproductions of the articles in question and not reproductions of the collective work of the defendant, the motion was dismissed as there were genuine issues for trial. The Court of Appeal and Supreme Court of Canada upheld this decision.

Sabre Inc. v. International Air Transport Assn., [2011] O.J. No. 95 (Ontario Superior Court of Justice) The plaintiff claimed for breach of confidence against the defendant with respect to airline booking related data that the plaintiff had supplied to the defendant via an internet contract. After the contract was terminated, the defendant did not return the data to the plaintiff. The Court dismissed the action. The Court held that the plaintiff had not demonstrated that the information relayed to the defendant was in circumstances of confidence. Sanofi -Aventis Canada Inc. v. Hospira Healthcare Corp, [2009] F.C.J. No. 1380 (Federal Court) The applicant, Sanofi objected to the respondent’s application for a Notice of Compliance to produce a drug called docetaxel. The respondent argued that the disclaimed “Claim 8” of the patent was invalid. The Court dismissed Sanofi’s application. Schlumberger Canada Ltd. v. Commissioner of Patents, [1982] 1 F.C. 845 (Federal Court of Appeal) The appellants applied for a patent for a system they had developed whereby data and measurements obtained from drilling boreholes, in the course of exploring for oil and gas, could be analyzed through a computer programme. The application was dismissed, since the system was not an "invention" as all of the calculations could be made and the graphs and charts reproduced by known methods, even though the new system was much more efficient. Schmeiser v. Monsanto Canada Inc. (2004), 239 D.L.R. (4th) 271 (Supreme Court of Canada)

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Monsanto brought an action claiming damages and an injunction against the defendant farmer for infringement of its patent for an invention known as "Glyphosate-Resistant Plants"—a genetically engineered gene, which made canola resistant to certain pesticides. They claimed that the defendant had planted canola fields with seed saved from a crop which they knew to contain the gene protected by the patent, without licence from the plaintiffs. The defendant denied that the planting was deliberate and claimed that the seed in question must have blown over his lands. The defendant also argued that the patent was invalid as it sought to patent a life-form, and could only be protected under the Plant Breeders' Rights Act. At trial, the court found in favour of Monsanto. The Plant Breeders' Rights Act was intended to create a new form of intellectual property in new plant varieties, but did not preclude an inventor from seeking registration under the Patent Act. The unlicenced reproduction of the patented gene and cells constituted an infringement of the patent. Whether the defendant intended to infringe the patent was not relevant. The Federal Court of Appeal dismissed Schmeiser’s appeal, ruling that the infringement of the patent arose from the cultivation, harvest, and sale of the crop, which Schmeiser knew, by that point, contained the patented gene. The fortuitous method by which plants containing that gene may have ended up on his property was irrelevant. Schmeiser’s further appeal to the Supreme Court of Canada was allowed in part. The patent was a valid one, but on the facts found, Schmeiser made no profits as a result of the invention. His profits were precisely what they would have been had he planted and harvested ordinary canola Smith & Nephew Inc. v. Glen Oak Inc. et al. (1996), 68 C.P.R. (3d) 153 (Federal Court of Appeal) The plaintiff was the licensee of the Nivea Trademark in Canada. The defendant imported the same product through a Mexican company that was affiliated with the Germany trademark owner. The Court set aside the injunction set by the lower court. The issue was whether the licensee could assert rights. The Court held that only the owner of the mark could bring such an action. Snow v. Eaton Centre Ltd. (1982), (Ontario High Court of Justice) See Case 20.5 at p. 489 in the text.

Sociedad Agricola Santa Teresa Ltda. v. Vina Leyda Limitada, [2007] F.C.J. No. 1681 (Federal Court)The appellants appealed from a decision of the registrar to allow the applicant to register a trademark in the name of “Leyda.” The trial judge allowed the appeal; the appellants had successfully demonstrated that the name “Leyda” was a geographic area in Chile where wine is grown and is therefore not registrable.

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Source Perrier S.A. v. Fira-Less Marketing Co. Ltd., (1983) 70 C.P.R. (2d) 61 (Federal Court, Trial Division) The defendants started to market ordinary tap water in green bottles, bearing the words "Pierre Eh!" This was intended as a spoof of a well-known political figure. The plaintiffs, who owned the "Perrier" mark, sought an injunction. The court held that there was a prima facie infringement of its trade mark; the similarity of the name and of the shape and colour of the bottle was likely to cause confusion in the minds of the plaintiff's customers. Freedom of expression, as protected by the Canadian Charter of Rights and Freedoms, does not include the freedom to depreciate the goodwill of a registered trademark. Stabilisierungsfonds fur Wein v. T.G. Bright & Co. Ltd., (1985) 4 C.P.R. (3d) 526 (Registrar of Trade Marks) Bright's applied to register the mark "Oberhaus" for use in connection with wines. The application was opposed by a German trade association, on the ground that the word "Oberhausen" was already used, though not as a registered trade mark, and that two wineproducing villages called Oberhausen existed in Germany. The Hearing Officer accepted the application and rejected the opposition, ruling that the proposed mark was not deceptively misdescriptive of the place of origin of the applicant's wines, since the general public in Canada would be most unlikely to have heard of the villages of Oberhausen and would not be misled into thinking that the wines came from that locality. Techform v. Wolda (2001), 206 D.L.R. (4th) 171 (Ontario Court of Appeal) The defendant, a mechanical engineer, worked as a full-time employee for the plaintiffs between 1981 and 1989. In 1989 he resigned as a full-time employee, but continued to work for them as a consultant. In 1992, the defendant presented to the plaintiff a special type of hinge that he had designed in his own time and on his own initiative. The plaintiffs had the defendant sign an Employee Technology Agreement, which provided that in consideration for his continued employment, the defendant agreed to assign to them all rights to inventions that he conceived or made while employed by the plaintiffs. The defendant signed it because he feared that his consulting contract would not otherwise be renewed. The defendant subsequently designed another hinge for the plaintiffs, billing them for one thousand hours’ work. Following some dispute over his remuneration, the defendant’s employment was terminated. The plaintiffs sought a declaration that it owned the hinge design. The court held that the Employee Technology Agreement was valid. There was no duress, and the plaintiffs gave good consideration by prolonging the consulting arrangement. Tele-Direct (Publications) Inc. v. American Business Information, Inc., [1998] 2 F.C. 22 (Federal Court of Appeal) See Case 20.6 at p. 490 in the text.

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Theberge v. Galerie d’Art du Petit Champlain Inc. (2002), 210 D.L.R. (4th) 385 (Supreme Court of Canada) An artist assigned the right to produce a limited number of posters and cards, reproducing some of his paintings, to a poster manufacturer. Four art galleries purchased posters that had been lawfully manufactured under the terms of the assignment. The art galleries then used a special process to transfer the paintings from the posters to canvasses, which they then offered for sale as reproductions. The artist claimed that his moral rights were thereby infringed, because he had not consented to this type of reproduction. A majority of the Supreme Court of Canada held that moral rights are infringed only if the work is modified to the prejudice of the honour or reputation of the author. In this case, there was no damage to his reputation. Use of the Internet to disseminate such works should be facilitated rather than discouraged but this should not be done unfairly at the expense of creators.” Thomas & Betts Ltd. v. Panduit Corp. (2000), 185 D.L.R. (4th) 150 (Federal Court of Appeal) The plaintiff was the owner of a Canadian patent for an electrical cable tie, with a distinctive oval shape. After the patent expired, the defendant started to manufacture cable ties with a similar oval shape. The plaintiff claimed that the distinctive shape was protected as a trademark. The claim was dismissed on the ground that an expired patent could not give rise to a trademark right. On appeal, the Federal Court of Appeal ruled that the motions judge had erred. An element of an expired patent design is not automatically disqualified from trademark protection. The action should not have been dismissed without a consideration of trademark principles, including whether the oval-shaped head was a distinguishing guise. (See Eli Lilly and Co. v. Novopharm Ltd., supra, n. 12)

Toyota Jidosha Kabushiki Kaisha v. Lexus Foods Inc. (2000), 194 D.L.R. (4th) 491 (Federal Court of Appeal) This was an appeal from the trial court’s decision to refuse to register the appellant’s mark “Lexus” on canned goods as being too confusingly similar with the mark “Lexus” as related to the car. The Court allowed the appeal; the marks were not confusingly similar and the trial judge failed to give sufficient weight to the “gaping divergence” in the nature of the products (at para 12).

Veuve Clicquot Ponsardin v. Boutiques Cliquot Ltée, [2006] 1 S.C.R. 824 (Supreme Court of Canada) Veuve Clicquot Ponsardin is a well-known trademark used in association with champagne. The mark is also used on promotional items, including clothing, but those products are not available in Canada. Veuve Clicquot filed an application to stop six clothing stores from using the mark Cliquot in Canada and also to expunge the mark from the trademark register. The court found that the two marks were not confusing based on the fact that luxury champagne and mid-priced women's wear differ significantly. As such, the ordinary consumer is unlikely to make a connection

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between the two marks. Similarly, the court found that in the absence of confusion, use of the Cliquot mark in association with clothing stores is unlikely to depreciate the goodwill of the Veuve Cliquot mark.

Walt Disney Productions v. Fantasyland Hotel Inc. (1998), 85 C.P.R. (3d) 36 (Federal Court), aff ’d (2000), 4 C.P.R. (4th) 370; [1994] A.J. No. 484, aff ’d [1996] A.J. No. 415 (Alberta Court of Appeal) See Case 20.3 at p. 479 in the text. Walt Disney Productions v. Triple Five Corp. (1994), 113 D.L.R. (4th) 229 (Alberta Court of Appeal) The plaintiffs had, since 1955, used the name Fantasyland in connection with its amusement parks in the U.S. In 1983, the defendants opened a Fantasyland in the West Edmonton Mall. The defendants claimed that they had no intention to mislead, but there was evidence that the name was associated with the plaintiffs in the mind of the public. The plaintiffs’ action for an injunction, restraining the defendant from using the name, was granted. The court held that in a passing-off action it was not necessary to show any intent to mislead. Wilkinson Sword (Canada) Ltd. v. Juda, [1968] 2 Ex. C.R. 137 (Exchequer Court of Canada) The plaintiff's parent company, a British company, had marketed razor blades and other products in Canada since 1920. The mark "Wilkinson Sword" was registered in Canada in 1954 and a further mark, bearing a design of crossed swords, was registered in 1964. In 1963, the plaintiff company was incorporated in Ontario as a wholly-owned subsidiary of the British parent and started to market the parent's products in Canada. In 1965 the parent transferred its marks to the plaintiff and the transfer was registered. Three months later the plaintiff commenced an action against the defendant for infringement of the marks. The defendant had, for the previous seven months, been selling in Canada razor blades manufactured by the parent Wilkinson Company which it had purchased in Britain. The defendant counterclaimed for the expungement of the trademarks. The court held the trademarks were not "distinctive" of the plaintiff's products and the registrations were therefore invalid. Rather, they remained distinctive of the goods of the transferor (the parent company); the fact that the plaintiff was controlled by the parent did not establish that it carried on business as agent for the parent.

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CHAPTER 21 INTERESTS IN LAND AND THEIR TRANSFER THE NATURE OF INTERESTS IN LAND This chapter examines the various types of interest that can exist in land. It is important to begin by examining what is meant by “land.” In the common law, land includes everything that is under or above the surface – most especially the buildings that are on the land. Students should understand the legal connection to commonly used phases such as real estate. It may be helpful for students to review Figure 21.1 at p. 484 at this point to familiarize themselves with the complexity of ownership and use of land. ESTATES IN TIME (Source p. 477) Instructors should emphasize the topics most relevant to business – fee simple and leasehold interests. The simplest situation is where a piece of land is owned outright by a single person or entity – he or she owns the fee simple. But ownership of land can be divided up in a number of ways. Two or more people can own the land, either concurrently (for example, joint owners – or ‘joint tenants’), or consecutively (A for life, remainder to B). Again the most applicable way for businesses to share title is in the form of tenancy in common or more likely to incorporate a company to own the land and divide the shares among participating shareholders. GOVERNMENT REGULATION OF LAND (485) Instructors should review this material, and refer students to the Checklist on page 489 which sets out the various interests of the three levels of government. REGISTRATION OF INTERESTS (Source p. 490) Key changes to the systems of registration should be emphasized. Electronic registration and conversion from registry to land titles have changed the nature of conveyancing. Advantages include guaranteed title certificates backed by government compensation funds as well as electronic search capabilities offering speed and accessibility. The registered interest is truly paramount with the elimination of adverse possession and prescriptive easements. Disadvantages include system failure, restricted access to registration, and title fraud.

CONTEMPORARY ISSUE (Source p. 481) Conservation Easements Question 1 - Although the principles of land law have evolved over the best part of a millennium, the possibility of new types of interest in land being created still exists. One

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such interest is the “conservation easement”. The landowner retains ownership, but a conservation authority is given a right of access for the purpose of conservation, restoration, etc. This makes it possible to protect environmentally sensitive land (for example, the breeding grounds for rare species of birds, or a micro-climate in which rare plants exist) while permitting the landowner to carry on normal activities, such as farming, without disturbing that environment. One advantage is that this system is far less expensive than acquiring the land as a conservation area or provincial park. Question 2 - An alternative would be to subject the land to a restrictive covenant – not to carry on activities that might damage the environment. Against this, the conservation easement seems to have the advantage that it is positive step, rather than a negative obligation, and is likely to be more effective in preventing damage before it occurs. Question 3 - It remains to be seen how conservation easements might affect third parties – for example, mortgagees. Does the existence of a conservation easement substantially affect the value of the land? If it affects the land’s value or salability, mortgagees may be less willing to lend against it. ETHICAL ISSUE (Source p. 483) Airing Laundry in Ontario Question 1 - Balancing competing interests is the task and students should identify stakeholders with a vested interest in this issue – homeowners, neighbors, land developers, environmentalists, manufacturers of clothes dryers, manufacturers of clotheslines, and the public at large. Consider the position of renters, tenants in high-rise buildings – will they now be hanging clothes off balconies? Is there a lack of honesty or integrity (trustworthiness) involved in voiding restrictive covenants that municipalities relied upon in approving lot sizes and subdividions? Homeowners purchased homes relying on these same covenants. The enjoyment and marketability of their homes may now be reduced. The ethical values include citizenship, caring (avoiding unnecessary harm), and respect. At the same time, conservation of energy and cost of energy need to be considered as well. ETHICAL ISSUE (Source p. 493) Real estate fraud prevention Question 1 - With its Fraud Prevention Plan the Ontario government is trying to balance the interests of various stakeholders in the land conveyancing industry. Access to the data bank is in the best interests of all stakeholders and will fall under the ethical value of respect (consideration of the rights of others). However, maintaining the integrity of the system and ensuring that only honest, trustworthy parties are able to complete transfers is also in the best interests of all stakeholders. In this context, the “read-only” form of access seems to strike a fair balance, allowing access without doing unnecessary harm (caring). Lawyers are held to a high standard by their Law Societies and face disciplinary measures if they violate their responsibilities. Lawyers are also required to carry liability insurance in case of error, allowing recourse for an injured party. Copyright © 2016 Pearson Canada Inc.

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Question 2 – This question looks at the plan in light of the goals or objectives of the program (as opposed to ethical values discussed above). These are to promote electronic record keeping, electronic search, and electronic registration. If “read-only” access remains widely available then goals one and two seem unaffected. Only the ability to register would be affected in a way that it was never restricted in the physical system. In the days of hard copy registration, anyone could approach the counter and present a document for registration.

INTERNATIONAL ISSUE (Source p. 495) Title Insurance Question 1 - This is a comparative law exercise where students are being asked to evaluate the various differences between the American and Canadian land conveyancing systems and determine if and in what form title insurance could be an effective risk management strategy. Three issues figure prominently – mandatory public liability insurance for lawyers, methods of collating data within registration systems, and private vs. public title insurance. Class discussion should consider a blend of approaches. No one alternative should be presented as the ultimate solution. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 495) The strategies suggested review the use of a Title Registry, Municipal Zoning Files, a survey and purchasing Title Insurance to insure that as a buyer you are not affected by a defective title or have paid too much for the property being purchased.

QUESTIONS FOR REVIEW 1. “Title” is equivalent to ownership. “Property” refers to the thing itself; it comes in many forms: real, personal, or intellectual. “Real” is a short form for “real action” and this is an action to repossess an interest in land. Eventually “real” became a synonym for land. “Land” includes everything under and above the surface of the property. “Estate” refers to the length of time a landowner is entitled to exclusive possession. Interests that are not exclusive are not estates. (Source p. 476) 2. The increased density and size of urban centres and the growing complexities of city life have forced municipal governments into large-scale regulation of land use. Other factors are the growing public awareness and concern about long-term environmental hazards and the protection of historical, architectural, and archeological buildings. (Source pp. 485-486) 3. The two main classifications of interests in land are estates in time (that give someone exclusive possession in land for some period of time) and interests less than estates (rights to use land that are not exclusive). A freehold estate is for either an infinite

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time (fee simple) or an indefinite time (life estate), whereas the leasehold is for a definite time. (Source pp. 477-483) 4. A life estate makes it difficult to sell land as few people would be willing to purchase only the remaining years of a life tenant’s interest which is an uncertain period of time, nor will they purchase the remainder since they cannot predict when it will begin. (Source p. 478) 5. Legislation has expanded property rights of spouses to include assets formally held in the name of the other spouse. Special interests in the matrimonial home include the right to refuse consent to any change in the home or to its sale, even when the property is in the name of the other spouse. This legislation is an expansion of a widow’s historic right to dower. (Source pp. 486-487) 6. Title to land may be acquired through voluntary purchase, through gift or inheritance, or through compulsory acquisition by a creditor or government. (Source pp. 489-490) 7. The distinguishing feature is the right of survivorship. Only in a joint tenancy does the surviving joint tenant automatically receive full title to the property on the death of the other. In a tenancy in common, each owns a half (or designated percentage) share, which can be disposed of independently and forms part of the estate of the tenant in common upon his death. (Source pp. 479-480) 8. The two elements of condominium ownership by an individual unit holder are fee simple ownership of the one’s own unit and undivided common ownership of common elements managed through membership in the condominium corporation. The unit owner is responsible for maintaining his own unit and is also responsible for paying fees to the corporation which maintains the common elements in good repair. (Source pp. 487-488) 9. The special nature of insurance for a high-rise condominium building relates to the difficulty of apportioning loss between each unit and the common elements and the responsibility for subsequent reconstruction. The most common method of dealing with this problem is through an insurance trust where the proceeds of insurance for all units are managed by a trustee. (Source p. 488) 10. In a condominium, each unit is separately owned. However, in a co-operative, a corporation owns the entire building and shareholders in the corporation are entitled to occupy a unit as a right under their share (similar to leasing). (Source p. 488) 11. The policy of the law of limitations is that a person who has a right of action against another must pursue it within a definite period of time or lose the right; he must not keep the other person in indefinite jeopardy of being sued. This has particular application to land in the area of adverse possession and prescriptive easements. Legal land title holders have a fixed period of time to dispute the unauthorized occupancy

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by another. If they fail to do this within the prescribed limitation period, the unauthorized occupant may extinguish the title of the legal owner. (Source p. 490) 12. If a person continuously and openly exercises a right, without fraud or deceit, and without using force or threats against the owner of the land, and at no time acknowledges the right of the owner in writing or pays for the use of the land, she may acquire an easement by prescription, usually after twenty years. A title may be extinguished by a claim of adverse possession when the possessor stays in exclusive possession using the land like an owner and ignores the claims of other persons including the owner. The required limitation periods need not be the same. (Source p. 480, p. 490) 13. First, the agreement permits the lessee to occupy a portion of the surface area of the land. Second, it grants the lessee the right to travel back and forth over the owner’s land, lay pipes, and move equipment. Third, it permits the lessee to remove materials extracted from the ground. (Source pp. 483-484) 14. A restrictive covenant in a grant affects only the specific piece of land included in the grant. A building-scheme covenant regulates land use over an entire neighborhood or shopping centre. A zoning by-law is a municipal regulation that governs the use of land in all or a specified part of a municipality. (Source p. 482) 15. Timson may have acquired an easement by prescription. Is it open and notorious to enter a deserted farm for an hour or two several times a week during the winter when the owner is absent and may not be aware of what Timson is doing? A court may not be sympathetic to Timson since he has no monetary interest in the activity, and to support his claim could significantly affect the market value of the farm for the Abels. (Source p. 481) 16. Expropriation is the compulsory sale and transfer of land to a public body under statutory powers. (Source p. 490) 17. In the registry system the title documents are recorded in the registry; the purchaser’s lawyer examines them to determine whether the vendor has a good title. In the land titles system, each new transaction concerning a piece of land is submitted for registration, the land titles office examines and approves the documents before recording it. In effect, the government guarantees the accuracy of title and the record of registration acts as a certificate of title. (Source pp. 491-492) 18. Storage and access to original documents is vital in the registry system. Documents must be available for inspection by all users. This is not a necessary component of the land titles systems because users rely on the certificate of the government without the need to examine documents. As registry systems undertake the conversion to electronic registry it is necessary to map and identify properties, standardize forms and arrange for distance access; all of which make it a convenient time to convert to the land titles system. (Source pp. 492-493)

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19. A prospective purchaser must arrange for a search of the title to the property to reveal all registered interests, inspect the property to see if there is any evidence of adverse possession, obtain evidence from the municipality of any taxes outstanding, and evidence from the provincial government of any arrears of corporation taxes. She must also make a search for executions in the sheriff’s office to ensure that there are no outstanding creditor’s claims. The types of claims vary from outstanding executions and unpaid taxes, to claims of adverse possession and leasehold interests. Title insurance allows a prospective purchaser to insure against any defects in title - it may cover off title risks as well. (Source p. 494) 20. A survey is a detailed drawing revealing the boundaries of the property and the location of all fixtures, encroachments and overhangs in relation to those boundaries. This confirms the location of buildings and ensures that they comply with zoning bylaws. It also reveals possible claims for adverse possession. (Source p. 493)

CASES AND PROBLEMS 1. Much of this problem is covered in the next chapter. However, in brief, the landlord is correct in that he cannot change a restrictive covenant if it is part of a building scheme, so cannot allowthe neon sign. Nor can he alter the City bylaws concerning outdodor patios. The only thing that could change would be the payment of taxes. Ashley probably wants to do this for tax purposes, as the taxes would be considered an expense. The landlord wants to claim them as an expense himself. 2. The issue in this cases focuses on a restrictive covenant running with the land and binding subsequent owners once it is initially registered on the title to the property even if it is not contained in the subsequent transfers to the other purchasers. If the court recognizes the covenant as running with the land then Upper Developments will be required to comply with the restriction even though it was omitted from its deed. The facts of this case are taken in part from Victoria University v. Heritage Properties Ltd. (1991), 4 O.R. (3d) 655. In a preliminary hearing on a motion to have the case dismissed (not a full trial on the merits) the court found that the restrictive covenant did not run with the land so as to bind subsequent purchasers. (In our case it would not bind Upper Developments as a covenant running with the land.) However, as a contractual restriction the covenant might still bind the original purchasers. (In our case, Townhouse) The court further held that the agreement to permit a third party (in our case, Savvy) to erect a much taller building did not prevent or estop the college from enforcing its contractual rights against the original purchaser of the land. The college made a further, rather unusual argument, which the judge accepted as requiring a trial: The plaintiff's argument that there was a "chaining effect" whereby the successive transferees, when they in turn transferred the lands, were required to obtain, as agents of the plaintiff, an identical covenant from their respective transferees, and that by virtue of such agency there was privity of contract Copyright © 2016 Pearson Canada Inc.

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between the plaintiff and the successive transferees, was a genuine issue for trial. The question whether, even where the burden of a covenant does not run with the subject land, a purchaser of that covenantor may be held liable for a breach of the covenant was also a genuine issue for trial. Accordingly, the defendant lost its motion to have the case dismissed and it was set down for trial. There is no case reported that went to trial. It can be assumed that the parties must have settled without going to trial. We can speculate on the result in our case. It seems certain that Townhouse would have been bound by the covenant on the basis of contract law. Would Upper Developments have been bound? If it could be shown to be a wholly owned subsidiary of Townhouse, or a closely related corporation with many of the same shareholders it very likely would be bound. If Upper Developments were a bona fide purchaser it is unlikely it would be bound by the arguments about agency quoted above. Would the courts enforce a restrictive covenant running with the land once the dominant tenement; that is the principle beneficiary of the covenant, voluntarily broke it to raise money? Despite the judge’s comments about not preventing contractual enforcement between the original parties, it seems unlikely that the court would enforce a covenant running with the land against a subsequent purchaser. 3. This problem concerns the rights and duties of a life tenant (John) and the position of a remainderman (Susan). A life tenant is not required to repair the buildings unless the instrument creating the life estate imposes upon the life tenant an obligation to keep the property in repair. Since Peter's will contained no such provision, Susan cannot force John to keep the buildings in good repair. If John undertook repairs he could not force Susan to contribute to the cost. Since John holds a life estate, his interest in the land ceases automatically upon his death. He cannot pass on any interest in the land by will or otherwise, and Susan is entitled to it as the remainderman specified in Peter's will. As a practical matter, if the property is to be sold, few purchasers would be interested in purchasing a property subject to a life estate. However, John and Susan could combine there interests to convey a fee simple. 4. This problem illustrates the principle of priority of registration of interests in land under the Registry Act. Since Simpson has only an unregistered interest in the land, she would not be able to succeed in her action to have Entwhistle put off the land. Entwhistle is a bona fide purchaser without notice of the fraud perpetrated by Ferrand. However, if Entwhistle had been aware of Simpson's interest in the land before he bought it, he would not be able to resist Simpson's action to put him off the land even if he registered his grant first. Entwhistle would not have been a bona fide purchaser and would not have bought the land free of Simpson's unregistered claim. (Instructors may want to distinguish this situation from the now form of fraudulent conveyance when the validly registered owner’s title is fraudulently conveyed away to an unsuspecting purchaser or mortgagee – see the discussion of Mortgage Fraud in Chapter 23 at p. 584).

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5. The key fact here is that the wife did not share title to the property either as a joint tenant or tenant in common. The property would be considered a matrimonial home and may be subject to special treatment under family law legislation. Spouses are given special rights to possession and division of the matrimonial home. It is possible that the outcome of this case will be decided by the application of specific provincial family law legislation and the law of constructive trust (discussed in Chapter 11). There are two conflicting cases that are similar to the facts of this case. The first is Worobel Estate v. Worobel (1988), 67 O.R. (2d) 151. In that case, the court held that although the husband held legal title to the property and the deceased wife did not formally have an interest in the property as a joint tenant or tenant in common: There is evidence of enrichment on the part of the husband, brought about by a corresponding deprivation on the part of the wife with no juristic reason for such enrichment. Accordingly, all the property held by the defendant in his name is held by him on a constructive trust. By virtue of the work done by the wife, her estate, as a beneficiary, is entitled to a one-half interest in the trust property. In addition, the court held that her estate should also receive one half of all property owned jointly by them that would ordinarily go to the survivor, because of an overriding public policy concern that wrongdoers are not permitted to profit from their actions. In rather stark contrast to the Worobel case is McCarthy Estate v. McCarthy, [1994] S.J. No. 189. In that case, also, the matrimonial home was in the name of the husband only. Moreover, after her murder, the proceeds of an insurance policy on her life were used to pay off the mortgage on the home. An application was made by the administratrix of the wife’s estate to have the home or its value transferred to her estate for the benefit of the deceased’s young son. The judge, quoting from an old case, acknowledged that: It is clear that the law is, that no person can obtain, or enforce, any rights resulting to him from his own crime; neither can his representative, claiming under him, obtain or enforce any such rights … He then went on to say: As matters now stand the respondent, because the residence is in his name, has clearly obtained a significant benefit from his crime. This result is contrary to public policy and should be avoided. The petitioner seeks to achieve this end by way of The Matrimonial Property Act. I have concluded that it cannot be done by reason of s. 36 of that Act which provides: 36 Notwithstanding any other Act or law, but subject to sections 8, 10 and 11 and subsections 26(2) and 30(1), the rights conferred on a person under this Act do not survive the death of that person for the benefit of his estate. The judge found that the Saskatchewan act specifically denied such rights to the estate of a deceased spouse, but added:

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This is not to say that there is no entitlement whatsoever. There simply is no entitlement pursuant to the particular legislation. This being so, the relief requested cannot be granted. Accordingly, the application stands dismissed without prejudice to commence alternative proceedings. There will be no costs of the application Since there are no reports of subsequent action by the deceased wife’s estate, we do not know what ultimately happened. But the case is in stark contrast to the result in the Worobel case above. The public policy concern that a wrongdoer should not profit from his actions, is left in limbo. Nevertheless, in most jurisdictions the courts would not allow a person who had committed such a wrong to retain the benefit. 6. Was Montgomery's use of the road as a right of way sufficient for him to obtain an easement by prescription? Montgomery's lands would be the dominant tenements and Cavendish's the servient tenement. For Montgomery to have acquired the easement by prescription, his exercise of the right must have been open, notorious, without fraud or deceit, without force or threat, without written acknowledgement of the owner's rights and without payment, and for a continuous period of at least twenty years. Unless the annual turkey can be seen as payment for the right of way, Montgomery appears to have obtained an easement by prescription. Purchasers of land benefitting from an easement acquire the former owner's easement rights. Radoja thus acquired the easement over the Cavendish property when she bought Wildwood and Green Gables. That she did not use the right of way regularly did not affect her right to travel over the easement and the court will not grant the injunction. Cavendish's only solution to keep Radoja from using the right of way is to buy the easement from her. The above result applies if the properties are in one of the four Atlantic provinces or in those parts of Ontario and Manitoba using the land registry system. Those provinces using the land titles system of registration do not recognize easements by prescription.

CASE SUMMARIES Amberwood Investments Ltd. v. Durham Condominium Corp. No.123 (2002), 211 D.L.R. (4th) 1 (Ontario Court of Appeal) A developer intended to build two condominium blocks on a parcel of land. There would be shared easements and reciprocal covenants to share certain expenses for utilities and common facilities. The developer experienced financial problems and sold one of the blocks. The new owner admitted that it was bound by the easements and by the negative restrictive covenants, but sought a declaration that it was not bound to share expenses because this was a positive obligation. The court agreed. The rule that positive covenants do not run with the land may in some cases be inconvenient but it is well established and should not be changed.

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Bank of Montreal v. Dynex Petroleum [2002] 1 S.C.R. 146 Page 484 footnote 19 Canada Safeway Ltd. v. Thompson (City), [1997] 7 W.W.R. 565 (Manitoba Queen’s Bench) This was an application for a declaration that certain covenants attached to a registered interest in land. The applicant, Safeway, was a tenant in a shopping mall. The landlord held an option to purchase land adjacent to the mall for expansion. The landlord agreed not to lease any space in the mall or expand in any way that would compete with Safeway's food retail operation. The landlord exercised its option and purchased the adjacent land. The landlord sold the shopping mall and all rights owned by it under the Safeway lease to a third party. It retained the adjacent land. Safeway registered a caveat on the adjacent land, claiming an equitable estate or interest in the land by virtue of the provisions of the shopping mall lease. The landlord then sold the adjacent lands to the respondent city. Safeway argued that the registered covenants bound the city. The city argued that the covenants were a personal undertaking which bound only the parties to the lease. It claimed that the sale of the shopping mall released the landlord from any further obligation under the lease to Safeway. The court held that the covenants agreed to by the landlord bound the city on the adjacent land. It was the intention of Safeway and the landlord to create covenants to protect Safeway's leasehold.

Didow v. Alberta Power Ltd. [1988] A.J. No. 620 (Alberta Court of Appeal) The cross arms on an electrical utility pole line protruded approximately six feet into the airspace of the private property abutting the road allowance. The issue before the court was one of trespass based on the intrusion into the airspace some fifty feet above the land. The court found that a logical compromise must be made between the rights of the landowner and those of the general public. The low level of the intrusion was held to infringe the potential use and enjoyment of the private property.

Fallowfield v. Bourgault (2003), 235 D.L.R. (4th) 263 (Ontario Court of Appeal) The plaintiff and defendant were neighbours. Their houses were four feet apart, each owning a two-foot strip adjacent to their respective houses. Their lands were subject to mutual easements for repairs that were granted at the time the subdivision was created. The two-foot strip adjacent to the house of each of the parties was subject to an easement in favour of their neighbours, and they had the benefit of an easement over the two-foot strip of land adjacent to their neighbours' house. The easements ended at the front corners of the houses. The parties originally had access to their backyards on the non-easement side of their houses, but a predecessor of the plaintiffs had constructed a deck at the back of the house, which prevented access on the non-easement side to their backyard. Copyright © 2016 Pearson Canada Inc.

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The defendants later erected a fence in the front yard of their house which prevented the plaintiffs from gaining access to their backyard with equipment (wheelbarrows, lawnmowers, etc.) that was more then two feet wide. The plaintiffs brought an application for a declaration that the fence interfered with their easement. The application was dismissed. The grant of an easement includes such ancillary rights as are reasonably necessary for the enjoyment of the easement, but an ancillary right cannot be raised simply because it would be convenient. When the easements were granted, both parties had access to their backyards on the non-easement side. The plaintiffs (or their predecessors) had removed that access by building the deck. Herbison v. Canada (Attorney General), 2013 BCSC 2020 Page 477 footnote 5 Forty Ninth Ventures Ltd. v. British Columbia, 2005 BCCA 213 Page 484 footnote 20

Innisfil 400 Group Ltd. v. Ontario, [2007] O.J. No. 2863 (Ontario Superior Court of Justice) The applicants brought an action to have an agreement entered into by its predecessor and the Ministry of Transportation and Communication for Ontario (MTO) in 1972 declared to be a convenant over land and therefore enforceable against the government, and to require the MTO to grant a permit to either of the applicants for a a road access. The Court held that the interest in the land expired when the land was sold from BP to Innisfil as it was a positive covenant and does not run with the land. Further, the Court stated that the MTO had the right to deny road access under s. 38 of the Public Transportation and Highway Improvement Act, R.S.O. 1990, c.P.50. 394 Lakeshore Oakville Holdings Inc. v. Misek, [2010] O.J. No. 4659 at paras 61, 69– 70 (Ontario Superior Court of Justice) The defendants own property abutting the plaintiff’s property. The defendants claim a prescriptive easement on part of the plaintiff’s property as a pedestrian access to the shoreline of Lake Ontario. The plaintiff brought a motion for the purpose of establishing that there is no easement and for injunctive relief against the defendants. The Court held that there was no easement, only a licence, which does not run with the land; the licence provided only a personal benefit and was not reasonably necessary for the enjoyment of the dominant tenement, nor was it meant to burden the servient tenement. Leichner v. Canada (Attorney General) (1996), 31 O.R. (3d) 700 (Ontario Court of Appeal)

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The Ls purchased lands along the Rideau Canal that had been granted by Crown patent in 1873. Although the Crown patent excluded a sixty-six foot strip of land and reserved it for the Federal Crown, the Ls' deed included the Crown Reserve, and this inclusion had been the case in a series of conveyances beginning in 1960 with a deed from H to his successor in title. This apparent defect in the Ls' title was discovered in 1992, and the Crown claimed ownership in the reserve lands. The Ls sued for a declaration that they had acquired title to the reserve by adverse possession. To succeed in this claim, the Ls had to establish that their predecessors in title and those through whom the Ls claimed had been in continuous and exclusive possession of the sixty-six foot strip from June 1, 1890 to June 1, 1950. The reserve lands were stony and unsuitable for crops. The lands including the reserve lands were fenced to keep in the cattle, the fences extending into the water approximately five to eight feet. Members of the public, however, swam from that part of the reserve adjacent to the farm. The Court of Appeal held that to establish a possessory title, the claimant throughout the statutory period must have: (1) had actual possession; (2) had the intention of excluding the true owner from possession; and (3) effectively excluded the true owner from possession. As the Ls had failed to show that their predecessors in title had either actual possession or an intention to exclude the true owner, their claim to adverse possession failed. Mechanical Services Inc. v. Flrsch 2011 ONCA 764 Page 480 footnote 10 Millstone Consulting Services Inc. v. Cleary, [2008] O.J. No. 3106, aff ’d [2009] O.J. No. 4510 (Ontario Court of Appeal) Note: this case is incorrectly cited in the text as: Millstone Consulting Services Inc. Leary, [2008] O.J. No. 3106, aff ’d [2009] O.J. No. 4510 (Ont. C.A.). The plaintiff claimed a prescriptive easement over part of the defendant’s property in a path to get to a beach, as well as loss of the defendant’s rights to another piece of land through adverse possession in that it used it as a driveway to its own cottage property. The defendants argue that they had over the years granted permission to use the property, but maintained a “no trespassing” notice on the property, and that the plaintiff was not entitled to its claim. The Court held that the granting of permission by the defendants defeats a claim of a prescriptive easement. The plaintiff was also found not to have been in continuous and notorious possession of the property that they used as a driveway and therefore no adverse possession was found. The driveway itself was conceded by the defendants as a right of way. Nadherny v. 880474 Ontario Inc., [2010] O.J. No. 2263 (Ontario Superior Court of Justice) The plaintiff made a claim of adverse possession on farm land contiguous and across the road from parcels of land that he owns. The land in question was sold to a corporation for furture development and was left vacant. The plaintiff claimed that he adverse possession

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of the land for more than ten years. The land in question was put under Land Titles in 2003 and therefore, the continuous adverse possession had to be for ten years prior to that date. The defendant states that the use of the land was with its consent. The Court held that the use of the land by the plaintiff, prior to the sale of the land to the defendant, was with his father’s consent (the father being the previous owner of the land in question). The use of the land after the sale was with the consent of the defendant. Therefore, the plaintiff failed to prove open, notorious, uninterrupted possession of the land in question. Nova Scotia v. Walsh (2002), 221 D.L.R. (4th) 1 (Supreme Court of Canada) also referred to as Walsh v. Bona A man and a woman cohabited for several years and had two children. After they separated the woman claimed an equal division of the couple's assets under the Matrimonial Property Act, R.S.N.S. 1988. That Act defined ‘spouse’ as a person married to another. The woman sought a declaration that the definition of ‘spouse’discriminated on the basis of marital status contrary to s. 15(1) of the Canadian Charter of Rights and Freedoms because it included only married persons. She asked that the court extend the definition to include common law spouses. The Supreme Court of Canada declined to do so. The concept of equality is a comparative one. The two groups to compare in this case were married persons to whom the Act applied and unmarried, heterosexual cohabitants to whom it did not. There are significant differences between these groups. Some cohabitants specifically choose not to marry, and so not to take on the obligations associated with marriage. This freedom to choose an alternative family form should not be nullified by treating the two groups in the same way. Re Sekretov and City of Toronto (1973), 53 D.L.R. (3d) 257 (Ontario Court of Appeal) The Village of Swansea sold land to Mr. and Mrs. Oinas for $600. The deed referred to a resolution regarding the use of the land that had been proposed but not yet adopted by the Council. The Council later passed the resolution, which stated that the land should remain undeveloped and in its natural state. The Oinas then sold the land (only two weeks after they bought it) to Sekretov for $7,000. Sekretov agreed to take the land subject to any restrictions which ran with the land, but his lawyer did not discover the Council's resolution (which had been registered against the title) until eight months later. Sekretov wished to develop the land, and applied for a building permit before he found out about the restrictions. He declared on his application that he knew of no reason why the permit should not be granted to him. The permit was issued and Sekretov had completed eighty-five percent of the work on two houses when a stop-work order was issued in response to pressure from local taxpayers. When Sekretov applied to have the order overturned, the court held that the deed did not define the lands to be benefitted by the restriction, and therefore the restriction was unenforceable. Further, the deed referred

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to resolutions that had not been passed when the deed was made; the restrictions were too uncertain to be enforceable. Rose v. Krieser (2002), 212 D.L.R. (4th) 123 (Ontario Court of Appeal) The plaintiff and the defendant owned adjoining cottage properties. Previous owners had entered into an agreement in 1955 whereby they granted each other a mutual right of way over an adjoining eight foot strip of land between their properties. They did not register the agreement on title, but the right of way was clearly evident on the ground. The defendant bought her cottage in 1998 and wanted to fence it, enclosing her half of the right of way. The plaintiff brought an application for a declaration that she was entitled to an easement over that strip. The court held that she had acquired a prescriptive easement after continuous use for over twenty years. Teis v. Ancaster (Town) (1997), 35 O.R. (3d) 216 (Ontario Court of Appeal) The Ts brought an action for a declaration that they had acquired possessory title to two strips of land, the "ploughed strip" and the "laneway", which were located at the western edge of a public park in the Town of Ancaster. The Town had paper title to the two strips of land. The Ts, however, had considered the ploughed strip to be part of the north field of their farm and they had created the laneway to move their farm equipment. Members of the public had used the laneway to gain access to the park. The trial judge declared that they were owners by adverse possession, but that the public was entitled to travel over part of the laneway by foot. The Court of Appeal held that the Town was effectively dispossessed for the statutory period, and the trial judge had found as a fact that the Ts had actual possession of the strips for the statutory period. The Court further noted that for a successful claim of adverse possession, the possession must be open, notorious, peaceful, adverse, exclusive, actual, and continuous.

Tslhoqot’ in Nation v. British Columbia, 2014 SCC 44 Page 477 footnote 5

Wardle v. Manitobe Farm Loan Association, [1956] SCR 3 Page 477 footnote 4

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CHAPTER 22 LANDLORD AND TENANT The focus of this chapter is on commercial leases of land (and buildings), although a few pages at the end of the chapter cover residential tenancies and the legislative protection for residential tenants. (Source pp. 518-519) It should be framed as an in-depth analysis of one of the interests in land identified in Chapter 21. In this way students can incorporate the rules into their overall understanding of land law. A distinction should be made between commercial tenancies and residential tenancies. Most often they are the subject of different pieces of legislation. For business students, in particular, the emphasis should be placed on commercial tenancies; that is, leases of business premises, although students will inevitably be more interested in residential tenancies since most will be tenants at the time. This can present an opportunity to highlight the consumer protective nature of residential tenancies in contrast with the “buyer beware” approach to commercial tenancies. The main topics covered in this chapter are:  The Nature of the Relationship  Classes of Tenancies  Covenants  Remedies of the Landlord  Termination and Renewal of a Tenancy  Fixtures  Oral Leases  Sale of the Landlord’s Interest  Leasebacks  Residential Tenancies  Strategies to Manage the Legal Risks Generally, the parties to a commercial tenancy have almost complete freedom to negotiate the terms of their lease. Residential tenancies, by contrast, raise issues of social policy and are heavily regulated in all provinces. From a business perspective these regulations are of interest only to commercial landlords; that is, those whose business it is to rent out residential accommodation. During the discussion of usual terms, instructors may want to emphasize the “exclusivity” clause. Every entrepreneur searches for the ideal location for its start up business. Preserving that environment is often difficult but obtaining the landlord’s promise not to rent to similar or competing businesses is one possibility. Interpreting and enforcing these clauses raises the same issues discussed in Chapter 8 on Agreements in Restraint of Trade and Chapter 10 on Interpretation. Landlord remedies are a tricky area of the law and instructors should aim for a general understanding of the right of re-entry, termination, and distress.

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STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 521) In setting up a risk management plan, it is important for parties who are tenants to be sure to diarize and follow up on dates regarding termination of the lease. It is vital that an ongoing business, not lose the opportunity to terminate the lease in a timely fashion in the situation where the business chooses to leave; nor miss the opportunity to renew the lease appropriately, where the business chooses to continue as a tenant. CONTEMPORARY ISSUE (Source p. 517) Commercial Condominium Ownership: An Alternative to Leasing? Question 1 - The first kind of business that would benefit most is a stable one looking for the best financial arrangement and not concerned with needing more space, for example a branch office of an international corporation. If the location is right it can establish itself in such a location for the long term. Another kind might be a retail business that provides services for other condominium owners, such as a food caterer. New businesses, starting out for the first time and hoping to expand, would be much better off obtaining a short-to-medium term lease that is renewable. This gives flexibility, and if the business is successful also makes it easier to move to larger premises. Question 2 - A business that would benefit most would be one that can provide goods and/or services to residential as well as commercial condominium owners. Depending on the mix, certain types of restaurants may be suitable. At ground level, a variety of retail businesses may thrive in a large condominium—a food market, take-out restaurant, video rental store. In a very large complex perhaps also clothing shops would be suitable. Much depends on the size of the condominium and where it is on price scale investment level. Certain types of businesses might thrive at the low end (hairdresser, perhaps?) but could not survive at the high end. This can be a good question to discuss with students. Question 3 - The benefits of mixed-use development are that residents can purchase daily needs without using cars or transit systems; many items are within a few minutes reach. Indeed, some employees may reside as well as work in the same development. As well, the level of personal safety is usually high. The drawbacks are very few. Municipalities need to worry about population density but that problem is no different from that in high-rise apartment or office buildings. Just as neighborhoods with mainly large single-family houses may object to high-rise apartment buildings being in erected nearby, they may well object to large condominium developments. These issues are normal in urban planning. In this “green” living, working and shopping in close proximity to ones home is an attractive possibility. In addition, redevelopment of the downtown core strives to keep the core as an active vibrant place seven days a week (not abandoned on nights and weekends when office workers go home). Therefore, mixed-use buildings achieve this goal. ETHICAL ISSUE (Source p. 519) Discrimination

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Question 1 - The protections and exceptions listed in the Ethical Issue box are likely to allow discrimination against students – income criteria being the most effective. In most university towns there are areas that have become dedicated student ghettos. Landlords willing to rent to students make very nice livings off of student rents. Look, for example, at a city like Waterloo, Ontario: there are two universities within blocks of one another and, as a result Waterloo is experiencing a boom in rental property construction, all fueled by the prospect of ongoing student rental incomes. Students looking for nicer accommodation than that usually on offer in “traditional” student housing may face a greater degree of discrimination; landlords dislike the constant turn over of student tenants. Professionals and families often don’t want to cohabit with students, given most students’ “unique” lifestyles, and the landlords of these properties may be wary of taking on student renters for fear of alienating their other tenants. For the most part though, if there is guaranteed money to be made (few landlords will rent to students without a cosignor/guarantor, usually a parent), landlords will accept the risk. In situations where the money is less secure real issues of discrimination may arise (see the next question). Question 2 - The prohibition on discrimination based on source of lawful income does go some way toward protecting the poor – a landlord cannot, for example, discriminate against a potential tenant simply because they are on social assistance. Contrast this with the United Kingdom where it is quite common to see housing ads specifically stating that those on social assistance need not apply. The real discrimination problem faced by the poor is the simple fact that most landlords can easily price their properties out of range for the poor (subject to rent controls as discussed below). People on social assistance get woefully small government cheques each month and therefore have very few affordable housing options; even if they can find a property they can afford with their social assistance benefits they’d probably still like to eat too. The problem is just as acute for those in minimum wage and other low paying jobs. As such, publically subsidized housing fills a vital niche, and this is why increased funding for public housing is always a major plank in the election platforms of left-wing parties like the NDP. For more on these issues, please visit incomesecurity.org.

INTERNATIONAL ISSUE (Source p. 520) Rent Control Question 1 - Arguments in favour of rent control include:  Rent control helps create a stable, affordable rental market.  Rent control keeps people in a city’s core – growing environmental awareness has led to the realization that post-WWII planning techniques – involving sprawling suburbs and huge misuse of resources – are environmentally unsustainable given our post-“An Inconvenient Truth” consciousness. Highdensity, low sprawl urban living is making a comeback in urban planning courses – rent controls may help draw people back into cities in the future.

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Arguments against rent control include:  Rent controls unfairly prevent landlords from maximizing their investments and are unnecessary and unwanted government interference in markets.  Rent controls stifle and inhibit necessary upgrade and improvements to property because why should a landlord make improvements when they cannot reap financial benefits from making those improvements?  It limits the movement of people – people in rent controlled apartments stay in rent controlled apartments – and thus plays further havoc with natural market forces by artificially limiting the demand for other properties and thus messing up the natural role of competition. Question 2 - Ontario’s current system is hailed by some as a fair compromise because it protects the rights of existing tenants by giving them some degree of security and price stability while still allowing landlords to charge new tenants what they feel is a fair market value. As such, it balances the interests of both parties, and fairness and compromise are all about an adequate balancing of interests. QUESTIONS FOR REVIEW 1. Tenancy at Will – a tenancy that does not last for a definite period and can be terminated at any time by the landlord. (Source p. 502) Term Certain – a tenancy that expires on a specific day. (Source p. 501) Overholding Tenant – a tenant who remains on the premises without a new agreement after the term of the lease expires. (Source p. 501) Subletting – a transfer of part only of the tenant’s term. (Source p. 504) Eviction – re-entry by the landlord. (Source p. 509) Forfeiture – the loss to the landlord of the remainder of the term of the lease. (Source p. 551) Surrender – abandonment of the premises during the term of the lease or on expiry of the lease. (Source p. 512) Quiet Enjoyment – non-interference with the tenant’s possession and use of the premises. (Source p. 506) 2. Where there is no exclusive possession then there may not be an estate in land, but rather a lesser interest in land. Exclusive possession gives control over the land rather than a right merely to use the land in common with others. (Source pp. 500-501)

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3. A leasehold interest is an estate in land for an ascertainable period of time and as such is an asset. At the same time it is a liability to the tenant who is required periodically to pay rent. (Source pp. 502-503) 4. If leased premises are destroyed—in the absence of a specific term in the lease dealing with the problem—the tenant is still liable for the rent; it has purchased a leasehold interest and must pay for it whether or not the building or amenities continue to exist for the full term. (Source p. 503) 5. A landlord is often concerned with the reputation of the tenant as well as with its ability to pay the rent. A landlord may also be concerned about the type of business being carried on. (Source p. 504-505) 6. Unless there is a covenant in the lease restricting the activities that the tenant may carry on, the landlord cannot interfere with the tenant’s activities. Although, there is an implied covenant by the tenant to use the premises only for those purposes for which the premises are reasonably intended. (Source p. 504) 7. The landlord who leases only part of a building usually provides certain services to the tenant, such as access by staircases or elevator, heat, water, and electricity. Usually the landlord undertakes to keep the building in good repair. When an entire building is leased, the landlord frequently obtains a covenant from the tenant to keep the property in good repair. (Source p. 505) 8. Turner likely will have a remedy as the landlord has breached the covenant of quiet enjoyment; substantial noise or vibration that interferes with the comfort or convenience of a lessee will be recognized as a breach of the covenant of quiet enjoyment. (Source p. 506) 9. Usually, the landlord insures the entire premises, and each tenant remains responsible for insuring its’ own assets on the premises. A difficult situation arises where damage, for example, a fire on one tenant’s premises damages those of another tenant. (Source p. 507) 10. The landlord had two choices -- to leave the premises vacant and claim the full rent due, or to re-occupy the premises and lease them to another tenant. (Source pp. 508509) 11. The first position is that a landlord may mitigate her loss and not lose her rights against the defaulting tenant; if she chooses to resume possession, she must inform the tenant that she will hold him responsible for any losses during the remainder of the tenancy even if she re-lets the premises to a new tenant at a lower rent. The second is that a landlord has no duty to mitigate if she chooses not to assume control of the premises. However, if the landlord does terminate the lease and seek damages, she must mitigate her damage. (Source pp. 508-509)

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12. While the landlord decides what to do, the tenant, although not paying any rent, is temporarily out of business. If the tenant leases premises elsewhere, it may find when the building is repaired that it is liable to pay rent for both locations. (Source p. 508) 13. Certain personal property; that is, necessary household furniture, limited supplies of food and fuel, and tools of trade are exempt from distress. (Source p. 508-509) 14. The tenant must give six clear months’ notice before the end of any current year of the tenancy to terminate a yearly tenancy at the end of that year. Clear means that the notice must be given on or before the last day of the tenancy period for the tenancy to come to an end on the last day of the next period. (Source p. 513) 15. Since the tenancy was stated to be for a period of five years, and it has been renewed after its expiry by Brenda simply accepting from Oscar the usual monthly rent of $1,200, a court would very likely hold it to be a yearly tenancy. Accordingly, Brenda would have to give Oscar six clear months’ notice to vacate before the end of the year. (Source pp. 513-514) 16. A renewal clause, is an option that permits the business to terminate the tenancy at the end of the original lease or, if the business is successful, to exercise its option to renew. Renewal clauses usually also contain financial protection for the landlord if exercised—an increase in rent based on cost-of-living and municipal increases. (Source p. 514) 17. When a landlord sells land subject to a lease, the purchaser acquires the whole interest in the land subject to the outstanding lease, and succeeds to both the rights and duties of the former landlord. (Source p. 516) 18. If after leasing his land the landlord mortgages it, the mortgagee’s rights are subject to the prior rights of Stroll, the tenant. On default the mortgagee can claim the right to collect rent from Stroll, and will have the reversion when the lease ends, but it may not evict Stroll. However, when Stroll obtains a second lease after the mortgage has been granted, Stroll takes subject to the rights of the mortgagee; that is, if Vernon defaults and the mortgagee forecloses Stroll may be evicted or required to pay a higher rent if allowed to remain. (Source p. 517) 19. (a) The advantages to the lessee are that it need not go through the procedure of issuing securities to raise capital; it may raise more funds than by mortgaging the property; and it may provide a larger deduction for tax purposes. (Source p. 517) (b) The advantages for the financial institution are that the rent provides a reliable return on the investment; it acquires a valuable reversion at the end of the term; and its interests are well protected in case of default. (Source p. 517) 20. Residential tenants are treated as consumers, with limited bargaining power, and in need of legal protection. (Source p. 518)

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CASES AND PROBLEMS 1. Ashley will want to make sure she has the right of surrender (Source p. 512) in case she needs to vacate the premises. She will also want the freedom to assign the premises, in case she needs more space, or less space, or is selling the business. (Source p. 503) One of the clauses necessary is for quiet enjoyment, so that her restaurant can operate without distraction from a conflicting business. She will want a term regarding the fixtures and what she can take with her, as well as an option for renewal if her business is successful and she wants to remain. The rent should be also controlled in the option for renewal. 2. Are the items in question fixtures or not? If they are, they belong to Bone as part of the realty; if they are not, they belong to the trustee in bankruptcy. Whether or not an item is a fixture is a question of fact. Bone, as lessor, would argue that the degree to which the articles in question were attached to the premises rendered them fixtures. 3. The original tenancy between Kruger and Pool for a term certain of eight months expired. Since Kruger accepted a cheque for the month of September, the tenancy then became a monthly tenancy. The party seeking to terminate a periodic tenancy must give notice of at least one clear period of tenancy. In this case, Kruger must give one clear month’s notice. Can Kruger's discussions with Pool on October 1 be considered to be notice of termination? Perhaps not, since Kruger made Pool an offer to continue the tenancy on somewhat different terms. On the other hand, when Pool rejected those terms, Kruger ordered it to leave the premises at once. While he could not legally order Pool to vacate immediately, his words may be taken to imply a notice to quit as soon as legally permissible; that is, December 1. The exchange on October 1 would not give Pool one clear month's notice before November 1, the date Kruger threw Pool out. If Kruger has wrongfully evicted Pool, what is his liability in damages? Does he have any right of set-off? 4. This case is based on the facts in Milne v. Delta Foods Ltd., [1996] P.E.I.J. No. 17 1 R.P.R. 150. While the judge had sympathy for the plaintiff, and for her loss of over $12,000 as a result of the move to another location, he absolved the defendant of any wrongdoing. The defendant had not made any representations about the structural qualities of the building and had no reason to anticipate the unusual problem. He also made his best effort to strengthen the building and to obtain sound professional advice. Nevertheless, he made the following points: It is the business of the tenant, if he does not protect himself by an express warranty, to satisfy himself that the premises are fit for the purpose for which he wants to use them, whether that fitness depends upon the state of their structure, the state of the law, or any other relevant circumstances… … there must be an express collateral warranty or nothing

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… the law is clear; the duty to make enquiries remains with the tenant. Shifting the burden to an equally blameless landlord would not make it any less unreasonable. The judge held that the landlord had not made any promise that the building was fit for the purpose which the tenant intended to pursue. In other words, in commercial leases— unless the tenant obtains an express covenant warranting the fitness of the premises for a specific activity—the landlord is not liable if these activities cannot be safely undertaken. The tenant suffers the loss. 5. The facts in this case, are based in part on those in Streetwise Holdings Inc. v. Alexakis, [1996] O.J. No. 2425. Here, the tenant is left in a very weak position. The landlord spoke about future developments in the immediate region not about the current state of the area. (In Streetwise, he also stated that he personally intended to develop new properties.) These were the landlord’s opinions (or statements about intentions), not misrepresentations about actual facts. Accordingly, they could not be considered material misrepresentations for which the tenant could obtain rescission. Nor could the landlord’s statements be considered auxiliary promises in a supplementary contract; they clearly were not covenants within the lease. In conclusion, the court found that none of the landlord’s assertions provided the tenant with a defence and he remained bound by the terms of the lease. There is evidence that the tenant signed the lease, without obtaining independent legal advice, in the law office of the landlord’s solicitors, a serious mistake in these circumstances 6. This case is based on Hing Yeep Investment Ltd. v. Imasco Retail Inc. [1996] O.J. No. 1673. The court found that apart from the tenant’s express covenant to pay the rent and its share of taxes, insurance and common expenses, there was no implied promise to carry on business for the full term. The landlord relied on an argument used in some U.S. cases that an “anchor tenant” may be bound by such an implied term. However, an anchor tenant “is normally used to refer to a department store, junior department store or supermarket where the shopping mall was designed with such a tenant in mind and where it cannot operate as intended by both parties without such tenant carrying on its business in the mall.” Even a large drugstore would not be described as an anchor tenant. In addition, the court found that an express covenant allowing the tenant to assign the lease—with the consent of the landlord (which consent is not to be unreasonably withheld)—“is inconsistent with an implied obligation on the part of the tenant to continue to operate the business on the premises”. The landlords’ claim that the tenant should continue to pay rent based on sales, and the claim for damages suffered because the tenant ceased operations in the mall, were both dismissed by the court 7. Was Frost's breach of his covenant to provide heat sufficient for Generous Loan Co. to treat the lease as discharged? The breach must amount to an eviction, rendering the entire premises unfit for the tenant's use. The lack of heat in winter with no quick solution in sight probably entitled Generous to vacate the premises and to claim damages for the increased rent and the lost profits.

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However, if the breach were not serious enough for Generous to treat the lease as terminated, then it would only be entitled to damages. Frost would be able to succeed in its counterclaim for at least some of the rent. Can Frost claim that the lease was discharged by frustration, releasing him from his obligation to provide heat? Ordinarily the doctrine of frustration does not apply to commercial leases. The text refers to Head v. Community Estates and Building Co. Ltd., [1944] 3 D.L.R. 189. In that case, the landlord had covenanted to provide a suitable means for heating the apartment building and to furnish heat up to a reasonable temperature between October 15th and May 15th. The landlord was advised repeatedly by the Oil Controller that it was obliged to convert its oil burning furnace to another kind of fuel, since oil was being rationed during the war. Eventually the landlord's supply of oil was cut off and it could not heat the apartments. Eighteen of its tenants moved to new apartments and sued. The court awarded them damages for the cost of finding new accommodation. In Johnson v. Givens, the plaintiff leased an apartment to the defendant for two years and covenanted to supply hot water and heat between October 15th and May 1st. The defendant took possession in October and paid two months' rent but vacated the premises by the end of November and refused to pay any more rent since the plaintiff had not been supplying heat or hot water. The plaintiff was able to re-let the apartment some months later at a lower rent. The plaintiff's breach arose because of impurities in the coal he had bought which affected the operation of his heating system. When the plaintiff sued for the rent owed for the balance of the lease, the defendant counterclaimed for damages arising out of the breach. The court held that the defendant was not entitled to determine the lease since the plaintiff's breach was unintentional. However, the defendant's liability for rent did not extend beyond the date when the apartment had been re-let. 8. The facts in this case are similar to those of Imperial Oil Ltd. v. Robertson [1959] O.R. 655. The issue is whether the junior clerk's accepting the cheque for rent extended Tagom's tenancy. Resolution of this issue depends on the facts of the case. Oil Can's intention was well known to Tagom; that is, he had received a valid notice to quit from Oil Can; he had been visited by representatives of the company; and there was no question that he knew that his lease was up. Can he rely on the error of a clerk who deposited his cheque? The burden is on the tenant to establish a new tenancy. In the Imperial Oil case, the court held that where the lease has expired under a valid notice to quit, payment and receipt of money as rent thereafter is merely evidence of a new tenancy. However, in this case Oil Can made it clear by notice and by personal interview that Tagom must vacate. The clerk did not have authority to enter into new leases on behalf of Oil Can and therefore the evidence of the receipt and deposit of the cheque was not sufficient to establish a new tenancy. Oil Can would be entitled to an order for immediate possession.

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CASE SUMMARIES AGC Flat Glass North America Ltd. v. CCP Atlantic Specialty Products Inc., [2010] N.S.J. No. 140 (Nova Scotia Supreme Court) The plaintiff was a lessee of premises that it sublet to the defendant. The sublease was to expire one day prior to the expiration of the head lease; that is, December 30, 2007. The lessee sublet the premises for less than the cost of the head lease. The sub-lessee advised the lessee that it wished to vacate the premises by April 30, 1997. The lessee was able to terminate the head lease on fifteen days’ notice, but did not feel that this was in its best interest. The sub-lessee vacated the premises as stated. At no time did the plaintiff agree to amend or terminate the sublease or the head lease, before September 1997. The plaintiff sued the defendant for unpaid rent. The issue before the court was whether the refusal by the plaintiff to terminate the head lease was a failure to mitigate. The Court followed the decision by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., [1971] S.C.R. 562, that sated: The developed case law has recognized three mutually exclusive courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely, as was the case here. He may do nothing to alter the relationship of landlord and tenant, but simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force. As a result the Court held that the landlord was not required to mitigate where it did nothing, but insist on performance of the terms, and therefore, the plaintiff was entitled to the rent owing.

Albo v. Concorde Group Corp. (2004), 235 D.L.R. (4th) 465 (Saskatchewan Court of Appeal) A lessee agreed to sell its assets to a competitor, but the agreement did not include an assignment of the lease. On the last day of the month for which the lessee had paid rent, the purchaser removed the entire inventory from the leased premises to its own premises. When the lessor discovered that the leased premises were vacant, it obtained and executed a seizure of the premises. The court held that the removal of the goods was fraudulent, in order to prevent distress, and that the purchaser had knowingly assisted the lessee by fraudulently removing the goods. A penalty, equal to double the value of goods fraudulently removed, was imposed. B.G. Preeco 3 Ltd. v. Universal Exploration, [1987] 6 W.W.R. 127 (Alberta Court of Queen's Bench) Universal Exploration was the tenant of a commercial building where the air-conditioner did not function properly. The tenant vacated the building without giving the landlord a chance to repair the air-conditioner. The landlord brought this action seeking a declaration that the lease was valid and subsisting, and judgment for rent and damages.

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The court found that the faulty air-conditioning did not constitute a fundamental breach of the lease and therefore the tenant’s repudiation was unlawful; consequently, the lease was valid and subsisting. Where a tenant unlawfully repudiates a lease, the landlord may treat the lease as subsisting and bring an action for rent due without a duty to mitigate damages. However, when an action is commenced during the term of the lease, this terminates the lease. Damages sought in such situations are subject to the duty to mitigate. Caldwell v. Valiant Property Management (1997), 145 D.L.R. (4th) 559 (Ontario General Division) A landlord made necessary repairs to a high-rise apartment building over a two year period. The repairs interfered with the enjoyment of the premises by certain tenants in that they could not use their balcony or air conditioner for one year. The pool access and parking rights were also substantially affected. The tenants sued for abatement in rent. The court held that the fact that the interference is caused by the landlord in fulfillment of the duty to repair does not exonerate the landlord, because the tenant is paying rent for something not received. In determining whether abatement is available, the court must look at all relevant factors including the length and severity of the interference and the tenant’s right to enjoyment. In this case the court awarded an abatement of rent. Canadian Western Bank v. 702348 Alberta Ltd., [2009] A.J. No. 481 at para 55 (Alberta Court of Queen’s Bench) aff’d [2010] A.J. No. 784 (Alberta Court of Appeal) The defendants were constructing a commercial building. The defendant entered into leases with a couple of prospective tenants. The defendants fell behind schedule on the construction, and as a result the tenants were unable to take possession. The plaintiff in this action, was the creditor of the defendant, and put the defendant into receivership. The issue for the Court was whether the tenants’ agreements, were frustrated. At para 55, the court stated: The test for frustration was summarized by the court in Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 at para. 18 (B.C.S.C.), where it said: In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.

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The Court held that there had been a fundamental breach on the part of the defendant and that the prospective tenants had thereby properly terminated their leases. Carter v. Irving Oil Co. Ltd., [1952] 4 D.L.R. 128 (Nova Scotia Supreme Court) Carter leased a gas station from Imperial Oil Co. Ltd. He was assured by Irving Oil Co. Ltd. that it would give him vacant possession of one of its stations if he would terminate his lease with Imperial, and the parties reached an oral agreement for a one year lease. Irving Oil notified its current tenant, Leblanc, to be gone by May 18th; Carter terminated his lease with Imperial as of May 17th. He advised his customers that he was moving his business and ran an ad in the local paper to that effect. On May 10th, he signed a lease for the Irving Oil station for one year, but Irving Oil never signed the document. On May 18th, Leblanc refused to vacate the premises and later obtained a court judgment that he was entitled to stay until July 18th by virtue of advance payments of rent. By this time, Imperial had leased its station to Carter's brother. Carter sued Irving Oil for damages. The court held that an oral lease for one year was unenforceable under the Statute of Frauds where there was no proof that the rent amounted to at least two thirds of the annual value of the leased land. The written lease had not been signed by the party to be charged and so there was no memorandum in writing to satisfy the requirements of the statute. Cross v. Piggott, [1922] 2 W.W.R. 662 (Manitoba King’s Bench) The defendant rented an apartment from the plaintiff for a one year term at a rate of $125/month. The defendant remained in the apartment a further six months and one week at which time he vacated the apartment. The plaintiff was unable to rent the apartment for a further five months and claimed against the defendant for the rent and other damages. The defendant claimed that the landlord failed to provide heat and repair the roof that leaked, thereby breached the implied term of quiet enjoyment. The Court held that the breaches by the landlord did not amount to an eviction; at para 11, citing Tipton v. Greenlees (1855), 17 C.B. 30 at p. 51, 139 E.R. 976: I think it may now be taken to mean this,--not a mere trespass and nothing more, but something of a grave and permanent character done by the landlord with the intention of depriving the tenant of the enjoyment of the demised premises. As a result, the Court held against the defendant. Crystalline Investments Ltd. v. Domgroup Ltd. (2004), 234 D.L.R. (4th) 513 (Supreme Court of Canada) The plaintiffs leased commercial properties to the predecessor of the defendant for a twenty-five year term. The leases provided that the lessee should remain fully liable under the leases notwithstanding any assignment. The lessee assigned the leases to another corporation, which subsequently amalgamated a third corporation. The third corporation filed for bankruptcy and the trustee repudiated the lease. In the course of the bankruptcy the plaintiffs were paid an agreed amount of compensation. They then

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sued the defendant for payment of rent. The court held that the repudiation of the lease by the trustee did not end the defendant’s obligations as guarantors. Cunningham v. Whitby Christian Non-Profit Housing Corp. [1997] 33 O.R. (3d) 171 (Ontario General Division) The applicant C was a tenant in a rent-subsidized housing project owned by W Corp., which was a non-profit corporation. It had constructed the project pursuant to a program sponsored and regulated by the federal and provincial governments. Under the program regulations, W Corp., amongst other things, had to rent a specified percentage of units at specified rates to tenants who could not afford market rents. W Corp. was also obliged to restrict the occupation of subsidized units to those members of the tenant's family listed in the lease. C applied for an abatement of rent under s. 113(1)(f) of the Landlord and Tenant Act. Her primary complaint was that W Corp. had breached the implied covenant of quiet enjoyment by serving a notice on her fiancé who had formerly been a tenant in the project and had been the subject of numerous complaints relating to a variety of incidents, some of which involved the intervention of the police and the fire department. Delane Industry Co. Ltd v. PCI Properties Corp., 2014 BCCA 285 Page 510 footnote 24 Emcan Bakey Equipment & Supply Ltd. v. DMI Property Management Inc., [2010] O.J. No. 2315 (Ontario Superior Court of Justice) See Case 22.1 at p. 552 in the text. Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (1971), 17 D.L.R. (3d) 710 (Supreme Court of Canada) The landlord leased premises in a shopping centre to the tenant, to be used for a grocery store and supermarket. The lease was for fifteen years and contained a clause that the tenant would continuously run a business on the premises. The tenant sublet the premises with the landlord's consent. The mall did not prosper; few other stores were leased; the subtenant closed its business. The tenant could not find another subtenant, and other tenants moved out since the closing of the supermarket affected business. The tenant repudiated the lease and the landlord notified the tenant that it would take possession and attempt to re-let the premises on the same terms and conditions as the tenant's lease. The landlord failed in this endeavour and subdivided the space, which it rented to three other stores. It then sued the old tenant for damages. The court held that on repudiation by a tenant, a landlord has a choice: it may either advise the tenant that it proposes to re-let the property on the tenant's account and enter into possession on that basis, or it may terminate the lease without notice to the tenant that it will claim damages for the unexpired portion of the lease. In either case, mitigation does not preclude the lessor from suing the lessee for damages arising from the unexpired term of the lease. The tenant was therefore liable to the landlord for loss of rent during the unexpired term of the lease.

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Gari Holdings Ltd. v. Lanham Credit Union (2005), D.L.R. (4th) 74 at para 37 (Saskatchewan Court of Appeal) The defendant Credit Union held a security interest on a “quonset” which was erected by a tenant of the plaintiff on the plaintiff’s land. The trial court held that the defendant was a tenant at sufferance when it failed to remove the quonset in a timely fashion and therefore was required to pay rent. The trial judge awarded damages. The Court of Appeal overturned the decision and held that the defendant was not in a landlord and tenant relationship with the plaintiff, and merely held a security interest on a fixture attached to the land. The defendant was the lessee of a commercial building, the only access to which was on a particular street. The street had to be closed for an extended period of time, due to the demolition of a derelict building, no longer considered safe. The defendant argued that the lease of its building was thereby frustrated. The House of Lords, upheld the lower courts’ decisions that the doctrine of frustration does not apply to leases, and therefore, the defendant was found liable. Globe Convestra Ltd. v. Vucetic (1990), 15 R.P.R. (2d) 220 (Ontario General Division) The tenant had a five year lease for commercial premises and covenanted to provide twelve post-dated monthly cheques to the landlord each year. The lease contained a clause providing for re-entry on five days' notice by the landlord upon the tenant's failure to pay rent. If the tenant were to abandon the premises, the landlord was entitled to reenter without notice. The lease also provided that if the landlord elected to re-enter the premises it could either terminate the lease or, without terminating the lease, make alterations and repairs as necessary to relet the premises. On the anniversary date of the lease, the tenant failed to deliver the twelve post-dated rent cheques. The landlord attempted unsuccessfully to contact the tenant by telephone at the premises and sent a messenger to collect the cheques, but the tenant would not provide them. The landlord was told that part of the tenant's exterior sign had fallen and thereby creating a hazardous situation. The landlord went to the premises, found them in an "abandoned" condition, and was not able to trace the tenant at the business address provided. The landlord decided that the tenant had abandoned the premises and retained a commercial bailiff to change the locks. The inventory of the store was catalogued, boxed and moved to a warehouse, and later sold. The landlord brought an action to recover rent due under the terms of the lease, as well as other costs. The tenant counterclaimed for loss of his inventory, trade fixtures, business profits, and punitive damages. The landlord's action and the tenant's counterclaim were both allowed in part. The landlord's actions effectively terminated the lease and its claim was to be determined under the principles of contract law since the lease constituted a commercial contract between the parties. The landlord could claim for the charges as stipulated in the lease, but was obligated to mitigate its losses, and the evidence indicated that it had not sufficiently done so. The premises could have been relet sooner if the landlord had not been attempting to sell the property. The landlord was accordingly entitled to damages equal to the rent loss and other charges owing for seven of the twelve months prior to the

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sale of the property. The tenant was awarded $12,000 for the value of his trade fixtures sold by the landlord. Greenwood Shopping Plaza Ltd. v. Beattie, [1980] 2 S.C.R. 228 (Supreme Court of Canada) Greenwood Shopping Plaza Ltd. owned a shopping plaza in Nova Scotia. Neil J. Buchanan Ltd. leased space in the plaza from Greenwood. Under the lease, Greenwood was to insure the buildings against fire, or to allow Buchanan to procure insurance on behalf of Greenwood if Greenwood could not obtain any. Both Greenwood and Buchanan were to arrange not to grant subrogation rights to their respective insurance companies for recovery of any loss through fire occasioned by the acts of the other. Both parties were partially insured but neither took steps towards performing their obligations under the lease with respect to insurance. Beattie and Pettipas were employees of Buchanan. In the course of their employment, they negligently started a fire in Buchanan's store that partly destroyed the shopping centre. Greenwood recovered some money from its insurer. Then Greenwood sued Buchanan and the employees for its uninsured loss, while Greenwood's insurer sued by way of subrogation for the amount that it had paid Greenwood. The court held that Buchanan was not liable to Greenwood for losses against which Greenwood had failed to insure as required by the lease. Nor was Buchanan liable for the insurer's subrogated claim since Greenwood was in breach of its obligation under the lease with respect to subrogation. However, Beattie and Pettipas were strangers to the lease agreement and were not entitled to the benefit of the insurance clauses that Greenwood had breached. They were held liable for the entire loss. The Court did not consider an argument advanced in the Court of Appeal, that the employees should be identified with their employer for the purposes of protection under the lease. As noted in the text at p. 521, the effect of this decision has been severely restricted in areas not involving an interest in land. See London Drugs v. Kuehne & Nagel International Ltd., below, and discussed in Chapter 11. Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (1971), 17 D.L.R. (3) 710 Page 509 footnote 17 Jade Agencies Ltd. v. Meadow's Management Ltd., [1999] B.C.J. No. 214 (British Columbia Supreme Court) This was an action by Jade Agencies against Meadow's Management for arrears of rent plus damages for breach of lease and against Sprague for inducing breach of contract. Sprague was a director of Meadow's. Meadow's began leasing a property from Jade in 1980. Sprague occupied the premises for his law practice. A five year renewal was signed in 1995. Jade had paid Meadow's $10,000 for tenant's improvements as an inducement to sign the extension. In 1996, Sprague informed Jade that Meadow's would be vacating the premises and terminating rent payments due to ongoing problems with the premises. Copyright © 2016 Pearson Canada Inc.

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Sprague alleged that the extension agreement had been induced by Jade's misrepresentations. The court held that the alleged misrepresentations were not proven. The premises were not in such a condition that they were unfit for the purpose for which they were let. Meadow's was not justified in ceasing to pay rent, so it was liable for the unpaid rent as well as damages for future loss to the end of the term. Jade was not required to mitigate its loss. KKBL No.297 Ventures Ltd. v. IKON Office Solutions Inc. (2004), 243 D.L.R. (4th) 602 (British Columbia Court of Appeal) A lessee agreed to a termination of its lease and to a new lease by the new owner of the premises to a third party. In return, the lessee entered into an indemnity agreement with the owner to guarantee the third party's rent obligation up to a specified amount. The third party became bankrupt. The trustee in bankruptcy disclaimed the lease, as it was entitled to do. The owner informed the third party and the lessee that it intended to take possession of the premises in order to re-let it and that meanwhile, it would hold the third party and the lessee liable for the payment of rent. The lessee denied liability and the owner sued for the rent. The court found in favour of the owner. The disclaimer by the trustee terminated the lessee’s liability as lessee, but not as guarantor of the third party’s obligation. Laing Property Corp. v. All Seasons Display Inc. (1998), 53 B.C.L.R. (3d) 142 (British Columbia Supreme Court) The landlord and other tenants of a shopping centre brought actions against the defendants after the defendants’ display caused a fire. The defendants to the tenants’ actions brought their own action for contribution and indemnity against the landlord’s employees. In this case the landlord required the tenants to obtain insurance in joint names of the landlord and tenants which protected the landlord against tenants’ claims except if caused solely by the landlord’s negligence. The court held that generally a contract can not confer rights or impose obligations on anyone other than parties to the contract. Here the landlord’s employees were acting in the course of employment, but there was no intention to give the employees the benefit of the insurance contracts, as the tenants did not obtain the insurance in the employees’ names. Langley Crossing Shopping Centre v. North-West Produce Ltd., 2000 BCCA 107 Page 509 footnote 17 Learmouth v. Letroy Holdings Ltd, 2011 BCSC 143 Page 509 footnote 17

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London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 (Supreme Court of Canada) The defendant agreed to store a transformer for London Drugs. The storage contract contained a clause limiting its liability to $40 on any one packet, unless the bailor chose to purchase additional insurance. Employees of the defendant negligently dropped the transformer while trying to move it, causing damage of almost $34,000. The defendant was held to be vicariously liable in negligence, but was entitled to rely on the contractual provision limiting its liability to $40. The employees were personally liable for their own negligence, but they too were entitled to rely on the contractual exemption even though they were not parties to the contract. It was contemplated that the transformer would be stored by employees, and to uphold the doctrine of privity of contract would have the effect of allowing London Drugs to circumvent a limitation that it had expressly agreed to. Manufacturers Life Insurance Co. v. Executive Centre at Manulife Place Inc., [2011] A.J. No. 320 (Alberta Court of Queen’s Bench) The plaintiffs brought a motion for summary judgment against the defendant for unpaid rent on a commercial tenancy. The defendant argued that the plaintiff had an obligation to negotiate a new agreement with the defendant as a duty in good faith. The Court held that there was no duty to act in good faith, and that, while the plaintiff had an obligation to mitigate its damages and it did so, it had no obligation to renegotiate a new contract with the defendant to pay less rent. McCuaig v. Lalonde (1911), 23 O.L.R. 312 (Ontario Divisional Court) Lalonde rented from McCuaig a small house in the village of Maxville. He said he required the house for his invalid wife, but actually he needed it as a place to quarantine his children, who were suffering from diphtheria. The authorities had threatened to shut down his hotel if he did not remove his children from it. As a consequence of the children's illness, McCuaig had to repaper, repaint and fumigate the house to make it sanitary before re-letting it. She sued and the court awarded her damages for the injury to the reversion, caused by the house being used for a purpose materially different than that for which it had been let. Mundell v. 796586 Ontario Ltd. (1996), 3 R.P.R. (3d) 277 (Ontario General Division) This was an application by the tenant Mundell setting aside the distress exercised by the respondent. The applicant ran a business in the space rented from the respondent. He repeatedly failed to pay the rent. The respondent often forgave large arrears. The respondent refused to renew the lease, and the parties continued on a month-to-month lease. Negotiations between the parties broke down. About seven months after expiry of the lease, the respondent exercised distress. The respondent hired a bailiff to pick the lock and remove all the chattels from the rented space.

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The court held that the applicant could re-enter the premises to reclaim the goods and chattels distrained. The distress was exercised seven months after the expiry of the lease, and the applicant was an overholding tenant. The remedy of distress was open to the respondent. However, distress was a powerful remedy and had to be used within acceptable limits. The respondent was not permitted to both put an end to the tenancy and distrain. By effecting lock change and distress, the right to distress was abused, and was consequently lost. The tenancy was terminated, and the distress was void ab initio. National Carriers v. Panalpina (Northern) Ltd., [1981] A.C. 675 (England – House of Lords) The defendant was the lessee of a commercial building, the only access to which was on a particular street. The street had to be closed for an extended period of time, due to the demolition of a derelict building, no longer considered safe. The defendant argued that the lease of its building was thereby frustrated. The House of Lords, upheld the lower courts’ decisions that the doctrine of frustration does not apply to leases, and therefore, the defendant was found liable. Northern Cartage Ltd. v. Motorway (1980) Ltd., [1999] M.J. No. 323 at para 64 (Manitoba Court of Queen’s Bench) The applicant made a claim against the respondent for four months unpaid rent on a commercial tenancy. The respondent counterclaimed for rent on the use of a dock by the applicant, for which permission to use had been revoked six months earlier. The respondent had informed the applicant in September 1994. That if it continued to sue the dock, the respondent would deduct the use from the rest owed to the applicant at the same rate. The Court held that the respondent was required to pay the four months’ rent, but that the applicant was in turn required to pay the respondent for the use of the dock, for the six months prior to the notice to quit in September 1994 as well as the use after, until the respondent vacated the premises in December 1994. The continued use of the dock amounted to a trespass, but not to an eviction; at para 64: Consequently, Motorways is still obligated to pay rent during this period of time. Nothing short of an act done by the landlord which amounts to an eviction of the tenant will discharge the latter from his obligation to pay rent. A breach of the covenant for quiet enjoyment not amounting to eviction does not work a suspension of rent (Cross v. Piggott (1922), 32 Man. R. 362 (K.B.) at p. 365) The Court held that the applicant was entitled to its rent and cost for utilities, but the respondent was likewise entitled to payment for trespass, which exceeded the amount of rent owing. Smith v. Busler, [1988] B.C.J. No. 2739 (British Columbia Supreme Court) The plaintiffs leased from the defendants a restaurant premises and unfurnished residential premises located above the restaurant. The defendants had put a new gas furnace in the premises the previous April. In October, the furnace caused fumes and soot to be blown through the restaurant premises necessitating the evacuation of the guests; Copyright © 2016 Pearson Canada Inc.

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business could not be resumed until the problem was corrected. The plaintiffs complained to the landlord, and there followed several weeks of attempts to solve the problem without success. The tenant had decided she had to close her business and move. On the 19th of November, the tenant sent a letter terminating the tenancy and on the 29th, handed in the keys. The first issue was whether the failure to repair the furnace quickly was a breach of an implied covenant for quiet enjoyment and whether it was a fundamental breach of the lease. The Court held there was no fundamental breach; there was no eviction and the tenant had no right to treat the lease as at an end, and to refuse to pay rent. The general rule in a commercial lease is that in the absence of an express provision protecting the tenant, the landlord's breaches of covenant do not entitle the tenant to declare the lease at an end. The term and the obligation to pay rent continue notwithstanding the landlord's breach of covenant. The tenants were not justified in quitting the premises and were in breach of the lease by terminating the premises at the end of November. Accordingly, the landlord claimed for the rent for a further fourteen months, until the premises were rented to a new tenant. The Court held that it was no longer sensible to pretend that a commercial lease is simply a conveyance and not also a contract. The landlord's loss was qualified by the duty to take all reasonable steps to mitigate the loss caused by the breach. Since, there was no evidence as to what efforts the landlord made to rent the premises out after the tenants quit; that is, no evidence of efforts to mitigate the loss, the defendants recovery was reduced by the sum the Court found could reasonably have been earned by actively seeking a new tenant promptly. Transco Mills Ltd. v. Percan Enterprises Ltd. (1993), 83 B.C.L.R. (2d) 254 (British Columbia Court of Appeal) The landlord refused to accept cheques from an unauthorized sub-tenant of the tenant’s assignee. The tenant argued that the landlord was obliged to give it credit for those cheques. The trial judge suggested that the landlord present the cheques for payment. The landlord did so and the cheques were dishonoured. On appeal, the issue was whether the landlord was nevertheless required to give credit for the face value of the cheques. The first question was whether the landlord, having consented to the assignment by its tenant of its leasehold interest on terms preserving the tenant’s obligation to pay rent, can be obliged to credit the tenant with the face value of cheques sent to it by a "sub-tenant" of the assignee which was in occupation of part of the leased premises without the consent of the landlord as required by the head leases. The Court said no. Further, the claim of the tenant could only succeed if it were established also that the landlord should be deemed to have done so by reason of its failure to return the cheques, or for some other reason. The Court found that merely by retaining them the landlord should not be deemed to have consented to the new arrangement. The Court awarded judgment to the landlord against the tenant for the full sum of rent owing.

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Telex (A/Asia) Pty Ltd. v. Thomas Cook & Sons (A/Asia) Pty Ltd., [1970] 2 N.S.W.R. 257 (New South Wales Court of Appeal) Telex negotiated a five year lease of part of the second floor of a city building with the agent of the owner, Thomas Cook, who carried on business on the ground floor. Telex informed the agent that it required the premises for purposes of distributing hearing aids and for servicing and testing audiometric equipment and other sensitive surgical equipment. A lease was executed. Later, the lessor installed air-conditioning that was very noisy and produced vibrations which made it impossible for Telex to carry out the testing and servicing of sensitive equipment. The court held that there was an implied term in the lease that the lessor would not do anything to render the premises unfit for the carrying on of the lessee's business, where the nature of such business had been made known to the lessor.

Zurich Canadian Holdings v. Questar Exploration Inc. (1999), 171 D.L.R. (4th) 457 (Alberta Court of Appeal) A lessee sublet part of its premises to a company that later agreed to amalgamate with another company, resulting in the formation of a third company. The sublessee sought the lessee’s consent to assign the sublease to the third company. The lessee refused, and claimed the sublessee was in default. The court held that the refusal was unreasonable. The changes in control of the sublessee, due to the amalgamation, did not result in a transfer. The Court held that C was entitled to abatement for the loss of opportunity to have her fiancé visit as a guest, but not to compensate her for the loss of opportunity to have him occupy the unit with her. In all the circumstances, an abatement of fifteen percent was warranted.

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CHAPTER 23 MORTGAGES OF LAND AND REAL ESTATE TRANSACTIONS THE ESSENCE OF MORTGAGE LAW (Source p. 528) Mortgages are one of the most important methods of raising finance for expansion of a business. Knowledge of the basic principles of mortgages is important in understanding the treatment of creditors’ rights, in Chapters 28 and 29, and in understanding the economic crisis of 2008. This chapter introduces the concept of a mortgage first as a lending contract. Students are already familiar with the rules of contract and so it is a natural entry point for the topic. Next the section examines the concept of a mortgage as an interest in land. The material provides a background for understanding the two key rights: the right of redemption and the right to foreclose. MORTGAGEE’S REMEDIES UPON DEFAULT (Source p. 531) This section is best dealt with in light of the wider economic crisis of 2008 and 2009. Some quick stats on United States Foreclosure Activity in 2008 (Source: RealtyTrac – realtytrac.com) Foreclosures were up in 2008 - 81% (over 2007) and 225% (over 2006) On 2,330,483 properties Leading States homes 1st notice % over 2007 % over 2006 Nevada Florida Arizona California

77,693 = 1/14 homes 385,309 = 1/22 116,911 = 1/22 523,624 = 1/25

126% 133% 203% 110%

530% 412% 655% 498%

See full state data 2008 RealtyTrac Press Release Jan 15, 2009 available at site

Falling real estate values throughout the United States (led primarily by Nevada, Florida, Arizona and California) make foreclosure a losing proposition. Mortgage debts will likely exceed the value of the property. Normally, this would make power of sale an attractive alternative because the mortgagor remains liable for any deficiency. However, power of sale is not without its own challenges given the unprecedented number of homes for sale. There is no guarantee a property will sell at any price.

MORTGAGE FRAUD (Source p. 540)

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The first type of mortgage fraud described is a concern for both mortgagees and homeowners. Mortgagees lend money to the fraudulent ‘purchaser’ relying on a forged signature of the true owner. Often there are one or two fraudulent (or negligent) lawyers involved in the fraud, or the ‘lawyers’ for vendor and purchaser are also impersonators. The lender faces an uncollectible debt and the homeowner risks a long and expensive battle through the courts to clear the title. The best protection for the mortgagee might be to insist on being represented by its own lawyer and adherence to client identification rules. Regular title searches will alert homeowners to any unauthorized activity on their title. Title insurance and government land titles compensation funds are also effective risk management tools. The second type of mortgage fraud primarily affects mortgagees and can best be protected against by insisting on an up-to-date valuation of the property by a professional firm known to the mortgagee. In conclusion, there are precautions that can help protect against fraud. A TYPICAL REAL ESTATE TRANSACTION (Source p. 541) The final part of the chapter outlines a typical real estate transaction. It is helpful for business students to have some idea of steps involved in buying and selling property. A section on the listing process has been added because this contract creates the primary obligation to pay commission. The description of the title search process has been retained with some updating to recognize that most of the process is now electronic (as discussed in Chapter 21).

INTERNATIONAL ISSUE (Source p. 532) Mortgage Crisis Question 1 – This question demonstrates the complexity of the problem. The mortgage industry is intrinsically connected to the wider financial markets. It is too one-sided and simplistic to just give mortgagors more time to pay before foreclosure may begin. Mortgagees must be able to realize on their security in order to recover their capital and grant new loans to new borrowers. As the Wall Street Bailout of 2008 recognizes, banks must have money to lend or the entire economy stalls. Still critics would argue that lenders have created the problem by extending credit to high risk clients with no down payment. This crisis has been building for years and the government has played a role. The U.S. government sponsored the Federal National Mortgage Association (FANNIE MAE) to buy up and “securitize” mortgages in 1938 to free up the capital of lenders during the great depression. The Federal Home Loan Mortgage Corporation (FREDDIE MAC) was formed in the 1970’s for the same purpose. It re-packaged mortgages into mortgage-backed securities offered for sale to the general public. The collapse of the mortgages behind these securities was one of the first events of the catastrophic economic crisis of 2008. Now both FANNIE MAE and FREDDIE MAC are insolvent and under the conservatorship of the Federal Housing Finance Agency. Therefore, a solution to the mortgage foreclosure problem cannot punish banks without punishing the public investor and the economy as a whole. Question 2 – This question re-focuses the discussion on mortgage remedies and asks students to compare foreclosure and power of sale. In the current market a foreclosure (where the lender

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simply takes ownership of the property in full satisfaction of the debt) will likely mean the lender acquires a property worth much less than its appraised value at the time of lending and likely also less than the outstanding debt. Alternatively, a power of sale remedy will allow the lender to sue the debtor on the personal covenant for the almost certain deficiency between the sale price and the existing debt. This appears to be the better remedy but the lender will be faced with a glut of houses on the market when a sale is attempted and may in fact not be able to make the sale at all. Question 3 – The impetus behind the tax rule regarding deducting interest paid on residential mortgages against income tax seems to be to promote home ownership over renting; and so in some small way it may have contributed to the financial crisis in the U.S. However, the reality is, the crisis was mostly caused by poor credit decisions in lending to persons who did not have the ability to repay the mortgages. Therefore, it seems unlikely, that persons with low income would be overly concerned about reducing their personal income tax by taking on an unaffordable debt. Perhaps, as a point of discussion with the class, the question of what motivates people to purchase real property, accrue debt, or pursue tax advantages may be a worthwhile endeavour.

ETHICAL ISSUE (Source p. 541) Money Laundering and Solicitor-Client Privilege Instructors may find it helpful to review the Law Society of British Columbia Benchers’ Bulletin 2008: No. 2 May – Summarizing the Know Your Client Rules, available on their website at lawsociety.bc.ca. Question 1 – This question considers the relative effectiveness of the law societies’ (self regulating organizations) and the government’s anti money laundering initiatives. Certainly, government has sweeping powers at its disposal but the law societies have the confidence of their members. Proposal’s presented by the law societies will take into consideration the unique position of the lawyer rather than the generic approach of the government. The no cash rule is a perfect example. By prohibiting cash transactions of more than $7,500 lawyers avoid the reporting obligation of the government regulation while still preventing the movement of currency. Question 2 - Balancing competing interests is the challenge of this question. In this example deterring and detecting crime is contrasted with the right to independent counsel. Working together for public safety and security is inherent in the ethical value of citizenship and, in this example, is in conflict with the lawyers obligation of loyalty (integrity) to his client (even the guilty client who may be paying for his defence with the proceeds of crime). Instructors will find the arguments justifying the priority of solicitor-client privilege are approved first by the British Columbia Court of Appeal in 2002 and separately affirmed by the Supreme Court of Canada in 2008: Law Society of British Columbia v. Attorney General of Canada, (2002) 207 D.L.R. (4th) 736 (Supreme Court of Canada)

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The below noted case is the one described in the issue box that prompted the government to exempt lawyers from the application of the act: Canada (Privacy Commissioner) v. Blood Tribe Department of Health, 2008 SCC 44 (Supreme Court of Canada) When a former employee was unsuccessful in obtaining access to her personal information collected by her past employer she complained to the Privacy Commissioner. The Commissioner requested production and the employer partially complied. The employer withheld some documents claiming solicitor-client privilege. The Commissioner requested production of the privileged documents. The Federal Court of Appeal and the Supreme Court of Canada both held that the Commissioner was not entitled to demand production of privileged documents: Solicitor-client privilege is fundamental to the proper functioning of our legal system…Solicitor-client privilege must be as close to absolute as possible to ensure public confidence and retain relevance. As such it will only yield in certain circumstances and does not involve a balancing of interests on a case-by-case basis (quoting R. v. McClure [2001] 1 S.C.R. 445)… Without it, access to justice and the quality of justice in this country would be severely compromised. (paras 9 – 10) For more on the FINTRAC Guidelines please refer to the website, fintrac-canafe.gc.ca, and the discussion of digital cash transfers in Chapter 19.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source 589) The discussion in this strategies section provides a general review of the law contained in the chapter, including title insurance and having lawyers involved to insure the accuracy and efficiency of any property transactions.

QUESTIONS FOR REVIEW 1. A mortgage is a loan contract where the debtor (mortgagor) uses his land as security for the debt. It contains terms that require the debtor to repay the loan with interest and default in any single payment triggers an acceleration clause that makes the entire debt due and owing. Other important terms in a mortgage contract establish the interest rate, the term and maturity date, the amortization period. They obligate the mortgagor to pay the taxes, insure and keep the property in a good state of repair. (Source p. 528) 2. A mortgage creates an interest in land entitling the lender (mortgagee) to seize and sell the property if the debtor (mortgagor) defaults. Under the old registry systems this was accomplished by a conveyance of legal title to the mortgagee while allowing the mortgagor to remain in possession as long as the loan was in good standing (equity of redemption). Under the land titles system a mortgage is not a conveyance of legal title, but merely a charge upon the land operating like any other lien or encumbrance. Provincial legislation (as well as

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the terms of the contract) establishes the rights and remedies of the mortgagee (chargee). (Source p. 529) 3. The two harshest rules were, first, that if the mortgagor was delayed in repaying, even without being at fault, the land became the absolute property of the mortgagee; the mortgagor could not reclaim it. Second, the mortgagee could keep title to the land in stiuations where only a small amount of the debt remained upaid. Equity remedied these situations by providing an equity of redemption; allowing the mortgagor to redeem the property on payment in full of the debt. (Source p. 529) 4. A mortgagee rarely takes possession immediately on default by the mortgagor for three reasons: (1) a mortgagee generally wants its money rather than the mortgagor’s property, and it would prefer to encourage the mortgagor to pay off the debt; (2) its possession would be uncertain, since the mortgagor might at any moment tender payment and demand possession; and (3) it must account for any benefits it receives from occupation of the land and deduct it from the amount owing, if the mortgagor tenders payment, thus losing any material advantage from taking possession. (Source pp. 529) 5. Foreclosure – an order by a court which ends the mortgagor’s right to redeem within a fixed time. (Source p. 529) Acceleration clause – a clause stating that on default of any installment the whole principal sum becomes payable. (Source p. 528) Redemption – the right of the mortgagor to have the land reconveyed to it on payment of the debt in full. (Source p. 529) Charge – a mortgage in the land titles system representing a lien or and encumbrance on land. (Source p. 529) Power of sale – a contractual or statutory right to sell mortgaged land on default. (Source p. 532) 6. If the sale produces a smaller sum than the debt owed, the mortgagee may obtain judgment against the mortgagor for the deficiency. If the sale produces a larger sum, the surplus is returned to the mortgagor or his other secured creditors of the land after payment of all expenses associated with the sale. (Source p. 532) 7. The mortgagee may sue the original mortgagor on her personal covenant to repay the debt, unless the purchaser has renewed the mortgage term and signed as the new covenantor. The exception is when the mortgagee has approved the purchaser assuming the mortgage and had the purchaser sign an assumption agreement. (Source p. 534) 8. The second mortgagee may proceed with foreclosure or a sale and destroy the interest of the mortgagor in the equity of redemption without affecting the first mortgagee. If the second mortgagee forecloses, he becomes the sole holder of the equity of redemption wiping out all subsequent interests, but is still subject to the prior interest of the first mortgagee. (Source pp. 535-536)

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9. The other duties a mortgagor assumes are: to keep the property adequately insured in the name of the mortgagee, to pay taxes on the land and buildings, and to keep the premises in a reasonable state of repair. (Source p. 531) 10. You would need to verify the market value of Blackacre, that it is worth well over $16,000, and you would need to check any other claims against Blackacre that might have priority over M’s mortgage, such as an earlier mortgage, arrears of municipal and corporation taxes, any claims in the registry office. (Source p. 537) 11. A general creditor has no security other than the debtor’s promise to pay. A secured creditor has a prior claim to general creditors against one or more specified assets of the debtor. (Source p. 536) 12. You would want in the mortgage a term permitting the mortgagor to prepay a specified portion of the mortgage debt and to obtain a partial discharge—a discharge over a specified portion or portions of the land—upon payment of a sum specified in the mortgage. (Source p. 538) 13. A foreclosure does not give the mortgagor any rights to the value of the property that exceeds the mortgage debt (the equity). However, if there is a surplus on a sale, the surplus must be returned to the mortgagor; that is, a sale is better than foreclosure where the property is worth more than the mortgage debt. (Source pp. 531-532) 14. A reverse mortgage pays the couple either a monthly payment or a lump sum payment that need not be repaid unless and until they sell their house or they die. The payment is based on the market value of their property, prevailing interest rates and actuarial calculations of their life expectancy. The attractiveness of the scheme is that it provides extra cash to a couple that have low pension income while remaining in possession of their home. (Source pp. 539-540) 15. Frequently, a purchaser of a business does not have sufficient cash to pay the difference between the market value of the business and its long-term debt. Vincent is selling his business for $645,000 subject to a first mortgage of $375,000. Therefore, Vincent’s equity is $270,000, a large sum for a purchaser to raise and pay on closing. By agreeing to take back a second mortgage for $125,000 the purchaser need only pay a total of $145,000 (subject to adjustments) on closing. Vincent has a secured debt for $125,000 and will receive both interest and installments repaying the debt. (Source p. 542) 16. Title insurance limits the need to obtain a survey and complete title and off-title searches. Title insurance will compensate for any title defects, zoning non-compliance, or tax arrears that are discovered after closing. (Source pp.543-544)

CASES AND PROBLEMS 1. In order to keep the payments as low as possible, Ashley and Michael will want a long amortization period, at least 25 years. Then they will want to select a short term for the mortgage, perhaps 1 year, so that if rates do go down, they are not bound to a long-term

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mortgage and can re-negotiate at the lower rate. The payment schedule should be monthly, not weekly or bi-weekly, in order to have as few payments per term as possible. The bank on the other hand will be concerned that the value of the home could go down – is there enough equity to consider a further debt of $50,000? 2. The proceeds of sale of the building ($425,000) are sufficient to pay the claim of the first mortgagee ($296,000), but are insufficient to pay the second mortgagee in full. The second mortgagee ranks with the general creditors for recovery of the deficiency, that is, the portion of the second mortgage ($151,000 - $129,000) or $22,000 not available from the sale of the building. Therefore the assets would be distributed as follows: Reliable (sale of bldg.) Sharpe (sale of bldg.) + 22,000 × 78,000 161,000 General creditors 139,000 × 78,000 161,000

Secured 296,000 129,000

425,000

General

Total 296,000

10,658

139,658

67,342

78,000

503,000

3. The issue in this problem is whether the partial discharge by Manor Mortgage Co. varied the original mortgage contract guaranteed by Bowes to the extent that Bowes was discharged from her liability under the guarantee. The result would depend upon the relative value of the ten acres sold. If the sale of the ten acres represents a significant reduction of security, which it appears to do, Bowes would be discharged from her liability. This was the result in Farmer's Loan and Savings Co. v. Patchett, (1903), 6 O.L.R. 255, in which the facts were roughly the same as here. The text also mentions Molson's Bank v. Heilig (1895) 26 O.R. 276. In that case, the bank held a number of promissory notes given by Paterson & Co. and endorsed by various people, as well as a mortgage from Paterson and Co., to secure its indebtedness. Heilig had endorsed one of the notes. The bank released certain of the mortgaged lands without Heilig's consent and later tried to sue Heilig on the note he had endorsed. The court held that the bank was entitled to recover from him on the note since the security was part of a contract between the customer and the bank. Endorsers do not stand in the position of sureties. However, Heilig could require the bank to account for its dealings with the mortgaged property when the security had answered its purpose, or when the debt had been paid by the sureties, or in any other event that the application of the money from the security could be ascertained. Any variation of the security held by a creditor without the consent of the guarantor is likely to result a total discharge of guarantor: Bank of Montreal v. Wilder [1986] 2 S.C.R. 551 Alternatively consider a partial discharge as described in the legislative intervention by Manitoba: The Mercantile Law Amendment Act, C.C.S.M. c. M120 s. 4: Giving tine to a principal debtor, or dealing with or altering the security held by the principal creditor, does not of itself discharge a surety or guarantor, in such cases a surety or guarantor is entitled to set up the giving of time or dealing with or alteration of the

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security as a defence, but the defence shall be allowed in so far only as it is shown that the surety has thereby been prejudiced Most guarantees now include a term allowing the principal to deal with the security or principal debtor without the consent of the guarantor. 4. This case is based on Price v. Letros et al. (1973), 42 D.L.R. (3d) 536. After the mortgagee obtains a final order of foreclosure and owns the land absolutely, he could still sue Pender for the amount outstanding on the mortgage debt, but only if he can still reconvey the land. Here Quincy obtained a final order of foreclosure and then purported to sell the land “under the mortgagee’s power of sale”. But Quincy was already the absolute owner—there was no longer a power of sale. The law is well summarized in the following quotation from the Price case: When a final order of foreclosure is entered, the mortgagee becomes the owner of the property and may dispose of it without accounting to the mortgagor. However, if he then seeks to enforce payment on the covenant he may do so only if he is in a position to reconvey. Once a sale has taken place following a final order of foreclosure, the mortgagee has placed himself in the position where he cannot reconvey the property and it is well settled that he cannot claim for any resulting deficiency. By contrast, if there is no foreclosure but only a sale under a power of sale, the mortgagor’s interest still exists; he is responsible for any deficiency in the sale price and is entitled to any surplus after the mortgage debt has been satisfied. 5. The facts here are from Geidlinger et al. v. Hierans et al., [1967] 1 O.R. 217. As the courts point out, while it is true that the second mortgagee can no longer reconvey her interest to the mortgagor, all this was brought about by the mortgagor’s default and the decision of the first mortgagee to exercise its right to foreclose. The fact that the second mortgagee subsequently quit-claimed to the first mortgagee for the sum of $100 in order to avoid a foreclosure action, does not preclude recovery by the second mortgagee against the mortgagor in an action on the mortgagor’s covenant. In other words, the second mortgagee acted reasonably to minimize the costs of the action by reaching agreement with the other two parties, but that did not extinguish Jepson’s debt obligation. The court decided in favour or the second mortgagee enforcing the mortgagor’s covenant to repay the debt, and quoted from another case: … the second mortgagee had consented to a foreclosure by the first mortgagee; and, notwithstanding this and his inability to reconvey, it was held that he could proceed on his covenant, upon the ground, principally, that it was not in his power to prevent foreclosure, and, therefore, foreclosure was due to the default of the mortgagor. 6. Lawlor, the mortgagor, had an insurable interest in the mortgaged property; her interest was the full value of the property. Even though she had parted with the legal title, she retained the equity of redemption and had a right to regain legal title to the property on repayment of the mortgage debt. This is enough of an interest in the property to give her an insurable interest. Cloutier, the mortgagee, also had an insurable interest in the property to the extent of the unpaid balance of the mortgage. However, since the insurance policy contained no mortgage clause, the insurance company is not required to pay Cloutier.

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Since the order of foreclosure had just been obtained and was not final, Lawlor is still in the position to redeem and accordingly still had an insurable interest at the time of the fire. The insurance money should be paid to Lawlor. If the foreclosure had been absolute before the fire, Lawlor's interest in the property would have ceased and she would not have had an insurable interest. Cloutier still would have had no basis for recovery from the insurance company since the policy would have been in Lawlor's name. In the case of Hanson v. Queensland Insurance Co., Ltd. (1966), 56 W.W.R. 215, Hanson mortgaged his property to Harwood. When Hanson failed to pay the mortgage debt, Harwood put the property up for sale by tender. Hanson obtained a series of orders staying the sale as he made payments on the mortgage. He took out insurance on the property in the meantime. The property was later damaged by fire and the insurance company repudiated liability. The court held that Hanson had an insurable interest in the property. However, he was not entitled to be paid by the insurance company since he had breached a statutory condition of the policy when he filled out his application. 7. The facts of this case are those of Huddersfield Banking Co., Ltd. v. Henry Lister & Son, Ltd., [1895] 2 Ch. 273. This case illustrates the importance of defining precisely what comprises the real property in a real estate mortgage. As a secured creditor in the liquidation of Lister Company, the bank will be anxious to assert its priority over as much property as possible. The trustee in bankruptcy, on the other hand, must be concerned with the interests of other creditors as well as of the bank. A larger amount will be realized in liquidation for the benefit of the unsecured creditors if the expensive machinery in the mortgaged building is not regarded as a fixture. Our concern here is not with the original mortgage, but with the subsequent compromise agreement reached between the bank and the trustee. Since both parties were lacking information about the history of the machine, the case appears to be an example of what the text refers to as "mistakes in assumptions" in Chapter 8. The bank will argue that the difference between a mortgage that includes the machinery and one that does not is a basic mistake in assumptions underlying the formation of the compromise agreement, and is important enough to entitle it to rescind the compromise agreement. In reply, the trustee can argue that the compromise agreement was one in which each party "took its chances" and that the terms of the compromise agreement were a genuine attempt to allocate the risks as the parties saw them at the time of their agreement. Hindsight should not be allowed to upset an agreement arrived at reasonably. In the Huddersfield case, the court set the compromise agreement aside on grounds of mistake. However, a more modern approach to the problem would probably involve closer analysis of the degree to which the parties did allocate risk in their agreement. 8. The facts of this case are drawn from 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd. (1978), 20 O.R. (2d) 401. The case illustrates a very common type of transaction; that is, the sale of land that is subject to an outstanding mortgage. We can understand why the mortgagee, Rail Canada Pension Fund, would insist as a condition for lending money that its consent be required if the mortgagor (Victor Contractors) wished to sell the mortgaged land to a purchaser who would assume the mortgage obligations. The mortgagee wants to be in a position to veto the

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sale to Steel City if it is not satisfied that Steel City is financially sound and capable of honouring the mortgage obligations. What might Steel Canada argue in defence now that Victor Contractors is suing it for breach of its agreement to buy the apartment tower? It can argue that a condition precedent of the sale (Rail Canada Pension Fund's consent) was not fulfilled and the agreement was therefore discharged. What argument or arguments might the plaintiff, Victor Contractors, offer in rejoinder? Steel Canada, by refusing to supply the financial statements, rendered its own performance impossible and it cannot therefore rely on the defence that the condition precedent was not met. Alternatively, was there an implied term in the agreement to sell the land—a term required to give the whole agreement efficacy—that the purchaser would cooperate with the vendor in obtaining the mortgagee's consent? In the actual case, the court held that the agreement contained an implied term that the purchaser would cooperate with the vendor in obtaining the mortgagee's consent. This cooperation extended to disclosure of confidential financial statements since it was reasonable to expect a prudent mortgagee to be concerned about the purchaser's financial situation. The purchaser had breached this term and was liable for damages.

CASE SUMMARIES Aros Investments Ltd. v. Picchi, 2003 BCSC 78 (CanLII) (British Columbia Supreme Court) The respondent granted a second mortgage to the petitioner in the amount of $110,000 inclduing a personal covenant. A further grant was made to the petitioner as assignment of timber. The respondent fell into default and the pettitioneer commenced a foreclosure action. Tow other creditors of the respondent obtained judgement and enacted a seizure and sale of the timber. The value of the timer was estimated at $86,000. The creditors argued that by obtaining the absolute order of foreclosure, the petitioner had given up its rights to collect personally from the respondent. The Court held that while the granting of the absolute order of foreclosure precluded the petitioner from making personal claims against the respondent, it did not preclude it from realizing on its collateral security agreement. Dicker v. Angerstein (1876), 3 Ch. D. 600 (England – Chancery Division) Angerstein mortgaged his property to Tidy. The mortgage contained a power of sale if Angerstein defaulted on the mortgage and provided that, under any sale purporting to be made pursuant to the power of sale, Angerstein's only remedy would be damages. Tidy sold the property to someone else and Angerstein challenged that sale, claiming he had been discharged from the mortgage prior to the sale. The court held that the sale was made to a bona fide purchaser for value without notice, and was valid even if Angerstein could prove that the mortgage was discharged. Household Realty Corp. v. Liu (2005), 261 D.L.R. (4th) 679 (Ontario Court of Appeal)

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Ms. Chan, spouse of the property owner Liu, registered a fraudulent power of attorney and then used that power of attorney to mortgage the property first to CIBC, and second to Household Realty without Mr. Liu’s knowledge. The mortgages secured lines of credit used by Ms. Chan to finance her gambling addiction. When the both mortgages fell into arrears, the mortgagees sought to possession and sale of the property. The argument that the fraudulent mortgages were void failed before the Court of Appeal. The Land Titles Act validated the mortgages and Liu was dispossessed L-Jalco Holdings Inc. v. Marino, [2011] O.J. No. 419 at paras 67–73 (Ontario Superior Court of Justice) The defendants had signed guarantees on mortgages that had gone into default. The mortgagee had foreclosed on the properties and proceeded to sue the defendants for the deficiencies of some $2.7 million. The defendants brought a motion for to dismiss the plaintiff’s claims. The Court held that as the property was sold under foreclosure, the right of redemption was lost, and therefore, the plaintiff could no longer pursue the mortgagor or the guarantors. National Trust Co. v. Mead [1990] 2 S.C.R. 410 (Supreme Court of Canada) Remai Construction (1981) Inc. borrowed money from the plaintiff lender in return for a mortgage on a condominium unit. Remai promised to pay the mortgage loan and, as a corporation, it waived its protection under the Saskatchewan Limitation of Civil Rights Act. Remai then sold the condominium to the defendants, who promised the plaintiff to assume the loan and pay it off. The defendants also purported to waive their protection under the Act. When the defendants defaulted on payment, the plaintiff sued both Remai and the defendants for the full amount of the loan. (It later discontinued its action against Remai, probably because Remai had no assets to seize.) The Supreme Court of Canada held that the defendants' waiver was ineffective—they had not surrendered their protection under the Act. Although the Act allowed a subsequent purchaser to waive its protection, that provision was to be narrowly construed as applying only to an assignee corporation that waived protection. Since the Act did not permit individuals to waive their protection, the purpose of the provision would be defeated if individuals lost that protection merely because they were subsequent purchasers. Price v. Letros, [1973] O.J. No. 2260 at paras. 7–9 (Ontario Court of Appeal) The plaintiff held two mortgages in which the defendants were either principal mortgagor or guarantor. The plaintiff foreclosed on the properties and a deficiency remained after the sale of the properties, in the amount of $8,000. The plaintiff sued to recover the deficiency. The court held that the right of the mortgagee to sue for any deficiency is lost on a foreclosure action; at paras 9-10: In dealing with the submissions of the appellant with respect to the merits of the appeal, it appears to be well settled that while sales under power of sale in a mortgage give a right to sue for a deficiency, no such right remains if the mortgagee obtains and enters a final order of foreclosure. Thus, in the circumstances before the Court the mortgagor lost his right of Copyright © 2016 Pearson Canada Inc.

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redemption and at the same time the mortgagee was deprived of his right to proceed against the mortgagor on the personal judgment. The liability of George Letros on his guarantee exists only as long as there is an outstanding debt. The mortgagee's right of recovery on the guarantee was extinguished when the debt was extinguished.

Reviczky v. Meleknia (2008), 88 O.R. (3d) 699 (Ontario Superior Court of Justice) R was the owner of a home. M was approached by a fraudster, purporting to be a relative of R’s selling the property under power of attorney. M purchased the property financed by HSBC Bank; all three were victims of the fraud. The Court held that because the bank relied on M’s solicitor to act for it, and it chose not to scrutinize the power of attorney prior to closing; or ahd the bank verified that R had not revoked the power of attorney, or was mentally competent at the relevant times, it could have avoided the fraud. Having the opportunity to avoid the fraud makes the interest defeasible in favour of the true owner.

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CHAPTER 24 SOLE PROPRIETORSHIPS AND PARTNERSHIPS Business organizations normally take one of three forms—the sole proprietorship, the partnership, or the corporation. Corporations are legal persons, brought into existence by compliance with prescribed legislative conditions and by registration. They are the subject of Chapters 25-27. Sole proprietorship and partnerships are "unincorporated" forms of carrying on business. A sole proprietorship, as its name implies, is a single individual. A partnership, as described below, is an association of two or more individuals. Sole proprietorships are not, as such, regulated by law. It is true that a number of laws apply to a sole proprietorship when it carries on business, but these laws generally apply to any entity or organization that carries on the same business. PARTNERSHIPS (Source p. 554) A partnership is a joint business enterprise carried on for the purpose of earning a profit. In determining whether or not a relationship does in fact constitute a partnership, the courts look at the substance rather than the form of the relationship. Usually, partners will draw up a formal partnership agreement setting out their rights and obligations among themselves. If no such agreement exists, or where an agreement is silent on a particular issue, the provincial Partnership Acts provide that certain terms are to be implied, in much the same way as the Sale of Goods Acts imply terms in contracts of sale (see Chapter 14). It is important that students understand that these implied terms apply only if there is no express agreement to the contrary—and that normally there is such an agreement. For example, there is an implied term that partners share profits equally, but in many partnerships the more senior partners—or those who have contributed the larger shares of the firm’s capital—will receive a larger share than a new, junior, partner. However, partners may not alter the terms of the Partnership Act in a way that could affect third parties, for example, they may not limit each partner’s liability, thus altering that each partner is liable fully to the full extent of their assets. A crucial feature of partnership is that each partner becomes the agent of each of the other partners. Accordingly, acts undertaken by one partner bind all others as well as the partner herself. Although partners may wish to restrict authority by an internal agreement, such restrictions are not binding upon third parties unless those third parties have actual notice of the restrictions. Each partner is liable to creditors personally to the full extent of her assets. Her contribution and share of the profits is irrelevant. It should also be noted that partnership assets are available to personal creditors of a partner. Thus, if one of the partners in a firm becomes insolvent, her share may have to be sold to satisfy the claims of her personal creditors. In some cases this may lead to the winding-up of the partnership business. It is consequently most important to choose one's partners carefully. LIMITED PARTNERSHIPS, LIMITED LIABILITY PARTNERSHIPS, JOINT VENTURES, AND INCOME TRUSTS (Source pp. 569-573) Copyright © 2016 Pearson Canada Inc.

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The sections on Limited Partnerships, Limited Liability Partnerships, Joint Ventures, and Income Trusts describe specialized vehicles that address specific characteristics (drawbacks) of general partnership. Students should be particularly interested in Limited Liability Partnerships since LLPs are becoming increasingly important to several professions. Instructors should review pp. 570-571 and note that provincial legislation affects the personal liability of partners. It should also be made clear that LLPs and Limited Partnerships are entirely different types of organization. Most business students will already have general familiarity with the basic characteristics of partnerships and corporations. This course should provide an extra layer of depth focusing not only on personal liability and separate legal existence, but also continued legal existence, ease of transfer, fiduciary duties, agency obligations, participation in management, creation, dissolution, and taxation. Instructors may find it beneficial to deal with the specialized vehicles as a comparative discussion identifying what characteristic each vehicle addresses, possibly in checklist format as in Chapter 25 at p. 580. Both the International and Ethical issue boxes can be helpful in this regard. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 573) Before a company can set up a risk management plan, the parties to the business need to determine what form of business it will take. Once a decision is made, it needs to be put in writing; not necessarily just for legal purposes, but for the purposes of identifying the risks associated with the business organization chosen; as well as making future determination as to whether the form needs to be changed; for example, commencing a business as a partnership and then later deciding it is more advantageous to incorporate. It may be a useful exercise for business students to create a partnership agreement and list the terms that would be important to them.

INTERNATIONAL ISSUE (Source p. 569) Enron and Limited Partnerships Instructors may want to use this topic as a transitional discussion between Chapters 24 and 25 as it introduces many of the characteristics of corporate status the distinction between private and publicly offered securities. Question 1 - The simplest answer here is that, by layering limited partnerships on top of a corporation Enron was able to nullify the general partner’s liability (the general partner being itself a corporation), because corporations are only liable to the extent that they have assets – the shareholders in the corporation are not personally liable, because the separate legal identity of the corporation insulates the shareholder from responsibility. Once creditors had exhausted the corporate assets of Enron they had no further recourse. Students should be asked to consider why Limited Partnerships are required to have one general partner whose liability is not limited – if layering limited partnerships on top of corporations contradicts these reasons ask them to consider whether this loophole was simply an oversight? Why would creditors lend to such an entity? In the Enron case there

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were few creditors, only investors as partners. Again partners would not have the right to go behind the corporate status of their fellow partners. Finally, students should be reminded that this is the normal rule for contractual debts but once the conduct of the individual human beings became fraudulent, deceitful, and based on fraudulent misrepresentations, corporate status no longer protected the natural persons. As we have seen in previous chapters, liability for the torts of the employees and agents lies with the employees and agents and their respective employers and principals (usually corporate entities). Question 2 - The two most important advantages are:  an expanded pool of investors (unlimited number) and therefore increased availability of capital to the partnership; and  an opportunity to provide some transparency and regulatory supervision to limited partnerships by forcing them to register with the Securities and Exchange Commission. Considering these two advantages together leads to the major disadvantage of such a scheme – apparent securities regulator oversight may lead to unwarranted investor confidence and public “partners” may not take the appropriate amount of care in deciding to make this investment. Look at the December 2008 scandal surrounding Bernard Madoff and the collapse of Madoff Investment Securities LLC. Despite multiple complaints to and investigations by the Securities and Exchange Commission throughout the previous two decades, the Commission failed to uncover the massive fraud that is now valued in the tens of billions. Securities commission regulation and oversight may in fact have created a false sense of security for the arms’ length investor. When there is no public offering of limited partnerships, one can be relatively confident that those involved have some connection to and familiarity with the project being undertaken. They will have access to information not unlike the shareholder in a private corporation. But there is no such access for the publicly solicited investor and the ability of the securities regulator to detect and expose fraud becomes very important. Current market conditions have created a lack of confidence in securities regulation. See:  Joanna Chung, “SEC flaws exposed by Madoff Scandal” FT.com Financial Times, February 13, 2009,  Stephen Lendmen, “Early Suspicions about Bernard Madoff”, Global Research, December 28, 2008,  SEC Press Release 2008-297, “Statement Regarding Madoff Investigation”, December 16, 2008, Instructors may want to incorporate the Canadian history with Income Trusts (Source p. 572) into this discussion because some would see this vehicle as not only a tax friendly format, but also a vehicle that reached the public investor with less governance oversight than a publicly traded corporation.

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ETHICAL ISSUE (Source p. 571) To Limit or Not to Limit? Question1 - There is no clear “right” answer to this question. As such, this question provides a good opportunity for students to hone their argumentation and debating skills – can they take the pros and cons listed and expand them in order to craft coherent arguments for their side? Some points that the instructor may want to raise before turning the students loose in debate are: (1) Given the unlimited liability of partners, and the fact that partners are jointly liable for the acts of their co-partners, why would any group of persons choose to form a partnership rather than a corporation; (2) Why are some professions not allowed to incorporate; (3) Instructors may want to introduce Professional Corporations (discussed in Chapter 25) as part of this discussion – are professionals willing to expose themselves to liability in order to save tax; (4) Why should LLPs be restricted to professions; and (5) Why should some professions be allowed to form LLPs, but not others? Now that some professions are allowed, in most provinces, to form LLPs, a further question is whether they should choose to do so. Many of the larger accounting and law firms have done so, and LLP status may have come to be regarded as a mark of success. But could it also act as a deterrent to dealing with the firm? Question 2 - Again, this question doesn’t necessarily have a right or wrong answer. In general, however, one would expect students to suggest that larger partnerships where there may be substantial variation in the type of practice may wish to limit their liability. Some partners may deal with large sums of money as in commercial financing; or potentially be subject to major “malpractice” lawsuits and therefore large liabilities; while other partners are exposed to relatively low risk. In such circumstances it makes sense to have each partner assume only his own liability and that of those he supervises. As well when partnerships span the globe and include hundreds if not thousands of partners, partners do not all know each other as with historic partnerships. Partners are unable and unwilling to assume the massive liability for unknown partners involved in unknown deals. QUESTIONS FOR REVIEW 1. There is no distinct body of law regulating sole proprietorships, but they are subject to many regulations that apply to all forms of businesses; for example public health and zoning laws. A sole proprietor may have to obtain a licence to carry on a particular type of business. (Source pp. 553-554) 2. No. A partnership may come into existence without formality. A partnership agreement may be oral, or may be implied from conduct. (Source p. 555)

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3. The advantages of a partnership are that partners working together can pool their knowledge and skills, and their physical and financial resources. The disadvantages to a partnership are that disagreements may lead to stalemate, and that dishonesty or incompetence of one member may lead to losses suffered by other members. (Source p. 557) 4. The four basic elements to the partnership relationship are as follows: (1) a relationship; (2) between two or more persons; (3) for carrying on business in common; and (4) with a view to profit. (Source p. 555) 5. The sharing of gross receipts does not create a partnership; the receipt of a share of the profits of the business, however, is strong evidence tending to establish a partnership. (Source p. 556) 6. A person may receive a share of the profits of a partnership business without herself being a partner in the following situations: (1) to pay an employee or agent of the business as part of his remuneration; (2) to pay an annuity to a widow, widower, or child of a deceased partner; (3) to repay a loan under which the lender is to receive a rate of interest varying with the profits; and (4) to pay the seller of a business an amount for the goodwill that varies according to the profits. (Source p. 556) 7. It is important to distinguish between partnership property and the personal property of individual partners since partnership creditors have first call against the partnership assets before the personal creditors of an individual partner. The distinction is also important when a partnership is dissolved, since it determines what each partner is entitled to receive. (Source p. 557 and Illustration 24.1) 8. Registration requirements vary from one province to another. In some provinces, only certain types of partnership are required to register; for example, trading or manufacturing; in others, a partnership is required to register unless it carries on business solely under the names of the partners. (Source p. 559) 9. The phrase “every partner is an agent of the firm” means that for the purpose of the business of the partnership, the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member will bind the firm and its partners, unless the third party knew of some restriction on his authority. (Source pp. 559-560) 10. A partner who does not possess actual authority may nevertheless have apparent authority as a result of: (1) a past manner of transacting business; (2) trade custom; or (3) holding out. (Source p. 559, and see Chapter 17) 11. The rule of joint liability is that each partner is personally liable for the full amount of the firm’s debts. (Source p. 560) 12. To protect herself against ongoing liability when a partner retires that partner should: (1) place an advertisement in the Official Gazette of the province; (2) give notice to all persons who have dealt with the firm before the partner’s retirement; and (3) Copyright © 2016 Pearson Canada Inc.

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ensure that the retiring partner’s name is removed from the register, letterhead, and firm name. (Source pp. 560-561) 13. The Partnership Act provides that “no partner is entitled to remuneration for acting in the partnership business.” Partnership agreements frequently do provide for the payment of a “salary” to one or more partners. Entitlement to this “salary” is normally considered as a first call on the partnership profits rather than a salary in the traditional sense. (Source p. 564) 14. The three principal fiduciary duties imposed on partners are: (1) partners are bound to render true accounts and full information of all things affecting the partnership to any partner and his legal representatives; (2) every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection; and (3) where a partner without the consent of the other partners carries on a business of the same nature as and competing with the firm, he must account for and pay over to the firm all profits made by him in that business. (Source pp. 565-566) 15. Partnership property is distributed on the dissolution of a partnership in the following sequence: (1) payment of the debts of the firm owed to non-partners; (2) repayment of loans made to the firm by partners; (3) repayment of the capital contributed by partners; and (4) sharing any surplus among the partners according to their entitlements to share in profits. (Source pp. 568) 16. The difference between a partnership and a joint venture is that the venture is usually for a specific project and of a limited duration. However, a partnership may be formed for a specific project and, in practice joint ventures are governed by the same principles as are partnerships. (Source p.572) 17. A joint venture may be a contractual relationship among the participants for a specific undertaking (contractual joint venture), or the parties may incorporate a separate corporation (a joint subsidiary) for the venture with each participant holding shares in it (equity joint venture). (Source p. 572) 18. The principal advantage of a limited partnership is that a limited partner has a liability limited to the amount paid by her to the partnership as capital. The principal disadvantage is that a limited partner is prohibited from taking an active part in the management of the partnership. (Source p.569) 19. A limited liability partnership is a partnership where a partner remains liable for his own negligent acts or omissions, and for those of a person who is under the partner’s direct supervision or control, but not for the negligence of other partners. A limited partnership is one where at least one partner is fully liable, but other partners are not liable beyond their capital contributions, provided they do not participate in the management of the firm. (Source pp. 570-571)

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20. The liability varies from province to province. In Alberta, for example, a member of a LLP is not liable for the “negligence, wrongful acts or omissions, malpractice or misconduct” of a partner, unless he knew of the act in question and failed to take reasonable steps to prevent its commission. His liability for the acts of those partners or employees who are under his supervision is restricted to those cases where he failed to exercise appropriate supervision. In Ontario, liability is somewhat narrower. (Source p. 570-571) 21. Income trusts have become a popular Canadian business entity largely due to favourable tax treatment and their unique liability structure. An operating company manages the assets and all profit is distributed through a trust. Trustees are governed by the creating trust document and the law of trust. New governance laws are being developed. (Source pp. 572-573)

CASES AND PROBLEMS 1. Ashley is not in a partnership with her mother. She merely borrowed money and is repaying the debt owed. (Source p. 575). Is she in a partnership with her father? To be a partnership, there needs to be a relationship of carrying on business together with a view to profit. It doesn’t appear that Jim is in this kind of relationship with Ashley. While he has done certain tasks about the restaurant, and signed papers, Ashley has said she will pay him back, so there is not the sharing of profits as there should be in a partnership. If it were a partnership, it would be a general partnership and they would share equally as there is no written or other form of partnership agreement to determine the share for each of them. No registration is necessary. If either person dies, the partnership would terminate. 2. According to the Partnership Act, every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member, bind the firm and its partners, unless the authority of the partner has been restricted by an agreement with the other partners and the third party knows of this restriction. That is to say, acts done by a partner within the scope of his apparent authority and relied upon by an outsider bind the firm and all the partners. Here, Giovanni is acting outside the scope of his actual authority, because he is incurring expenditure in excess of $500 without the agreement of his partner, Leporello. However, there is nothing to suggest that Elvira knew of the restriction. The rental of the cruiser seems to be within the scope of the business usually carried on by a firm that provides adventure tours. Although Giovanni signed the rental agreement and the cheque in his own name, the rental contract was made in the name of the firm and the cheque drawn on the firm’s account. Thus Elvira presumably thought she was dealing with the firm, rather than with Giovanni personally. 3. The Partnership Act makes the firm liable for any wrongful act or omission of any partner acting in the ordinary course of the business of the firm (B.C., s.12; Ont., s.11; Copyright © 2016 Pearson Canada Inc.

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N.S., s.13). Thus the firm, and the other partners, would be liable for injuries or damage caused by a partner through negligence in dealing with a client’s affairs (except in the case of a LLP). The firm is also liable for breaches of trust committed by a partner, in particular for any misapplication by a partner of funds that have been placed in the care of the partner while acting within the scope of his apparent authority, or that have been entrusted to the firm. The firm will be liable to compensate the sisters for their loss provided Watson was acting in the ordinary course of the business of the firm, notwithstanding that his acts were negligent or, quite probably, fraudulent; evidence that Watson had used the firm’s letterhead in his correspondence with the sisters, or that their funds had passed through the firm’s bank account, would support a finding that Watson was acting in the ordinary course of business. The case is based on McDonic v. Hetherington (1997), 142 D.L.R. (4th) 648, a decision of the Ontario Court of Appeal. The court held that the partner who dealt with the sisters was acting in the ordinary course of business of the firm, and within his apparent authority as partner. The sisters were clients of the firm and the other partners were liable. 4. Under the Ontario legislation, a partner in a limited liability partnership is not liable for debts, obligations and liabilities of the partnership or any partner arising from the negligent acts or omissions that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is a limited liability partnership. A partner remains liable for his own negligent acts or omissions, and for those of a person who is under the partner’s direct supervision or control. The firm itself remains liable, but an injured party may not look beyond the assets of the firm to the assets of the individual non-negligent partners. On the above principles it would seem that: (a) Adders LLP is liable, to the extent of its assets, for the loss suffered by Norne; (b) Counter may be personally liable, if Turner can be considered to have been under his “direct” supervision; (c) the other partners are not personally liable, though they stand to lose their shares of the firm’s assets. (Their own personal assets are protected.) Norne may be held to be contributorily negligent, in failing to detect the activities of Plotter (see Capital Community Credit Union Ltd. v. BDO Dunwoody, [2001], O.J.No.4249—case 4.4 at p. 91, in Chapter 4). 5. The following points are important here:   

All debts of the partnership must be paid before profits are distributed The partners’ capital contributions are debts of the firm (though they rank after the claims of outside creditors) Drawings are an advance share of the partners’ profits. If there are no profits, they must be repaid.

In the present case, the assets of the firm are really $130,000 ($100,000 plus the $30,000 drawings): that is to say, the drawings should be added back to calculate profits. 1) The firm must pay—

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$10,000—external creditors $10,000—advance to Albinoni $40,000—repayment of capital This leaves profits of $70,000, to be shared as follows: $28,000—Albinoni $28,000—Bonporti $14,000—Corelli Thus, Albinoni receives 10,000 + 20,000 + 28,000 less the 8,000 she has already drawn = $50,000 Bonporti receives 20,000 + 28,000 less 7,000 = $41,000 Corelli receives 14,000 less 15,000 = ($1,000) In other words, Corelli has to pay back $1,000 of the drawings he has received. 2) The firm must pay$90,000 (external creditors) + 10,000 + 40,000 = 140,000 The drawings must be repaid since there are insufficient funds to pay all the debts. That still leaves a shortfall of $10,000, to which the partners must contribute $4,000 each (Albinoni and Bonporti) and $2,000 (Corelli). Thus, Albinoni receives $10,000 + 20,000 – 4,000 less the 8,000 she has already drawn = $18 000 Bonporti receives $20,000 – 4,000 less 7,000 = 9,000 Corelli receives $0 – 2,000 less 15,000 = ($17,000) 3) The firm must pay $150,000 + 10,000 + 40,000 = $200,000 There is a shortfall of $70,000. Thus, Albinoni receives $10,000 + 20,000 – 28,000 less the 8,000 she has already drawn = ($6 000) Bonporti receives $20,000 – 28,000 less 7,000 = ($15,000) Corelli receives $0 – 14,000 less 15,000 = ($29,000)

CASE SUMMARIES

A .E. Le Page Ltd. v. Kamex Developments Ltd. (1977), 78 D.L.R. (3d) 223, aff ’d [1979] 2 S.C.R. 155 (Supreme Court of Canada)

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See Case 24.1 at p. 600 in the text. Backman v. Canada (2001), 196 D.L.R. (4th) 193 (Supreme Court of Canada) See Case 24.2 at p. 600 in the text. Bet-Mur Investments Ltd. v. Spring (1994), 17 B.L.R. (2d) 55, aff’d [1999] O.J. No. 342 (Ontario Court of Appeal) See Case 24.3 at p. 606 in the text. Blue Line Hockey Acquisition Co. v. Orca Bay Hockey Limited Partnership, [2008] B.C.J. No. 24 at paras 57–77 (British Columbia Supreme Court) Three parties attempted to acquire ownership in the Vancouver Canucks hockey franchise. One of the parties left the other two, and shortly thereafter, acquired ownership of the hockey franchise in his own name. The other two parties claimed a breach of a fiduciary duty under a joint venture. The Court held that there was no partnership or joint venture between the three parties, and therefore no breach. The Court further added that even if there was a joint venture, it ended when the one party gave notice of its intent to leave and any fiduciary obligations ended at that time. NB this decision was affirmed by the British Columbia Court of Appeal [2009] BCCA 34 Brown Economic Assessments Inc. v. Stevenson [2003] S.J. No. 295, aff’d [2004] S.J. No. 377 (Saskatchewan Court of Appeal) The plaintiffs provided consulting services to the first defendant, a lawyer, and were called by him as an expert witness in a trial. The plaintiffs were not paid the agreed fee and brought an action against the first defendant and against other lawyers who worked out of the same office. These other lawyers were not in partnership with the defendant, though they all shared office expenses and occasionally helped each other out. The court held that they gave the appearance of being in partnership and had held themselves out as such. Consequently they were jointly liable with the first defendant. Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999] 1 S.C.R. 142 at para 30 (Supreme Court of Canada) The predecessor to the plaintiff owned the trademark for Clamato and licensed the use of the trademark to a company called Caesar Canning. In order to make Clamato juice, the confidential formula was passed on to Caesar. Caesar entered into a contract with the defendant to make Clamato juice and revealed the formula to it. When the plaintiff purchased the predecessor company, it informed Caesar that it would be revoking the licence. Caesar had previously agreed to a non-competition agreement, however, using the formula Caesar and the defendant produced a new product immediately, called Caesar Cocktail. The plaintiff mistakenly believed that it had not right to sue, because the non-

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competition agreement was with respect to using clams and tomatoes, something the defendant did not do. The plaintiff did not bring an action for several years. The trial judge refused to grant a permanent injunction against the defendants, but did award “head start” damages. The Court of Appeal granted the injunction. The Supreme Court of Canada restored the trial judge’s decision. The Court stated that in a commercial context such as this, the trademark holder was not in a vulnerable position to the licensee and therefore no fiduciary duty existed. Canlan Investment Corp. v. Gettling (1997), 37 B.C.L.R. (3d) 140 (British Columbia Court of Appeal) The defendants were interested in developing some property that they owned in B.C. They approached the plaintiff and discussed a joint venture. No formal contract was entered into, although negotiations proceeded with the City, for permits and the two parties attempted to negotiate an agreement. At some point, the defendants believed that the plaintiff was not acting in good faith with them. The defendants then sought another party to enter into the joint venture with. The third party agreed and the defendants then broke off negotiations with the plaintiff. The Chambers Judge allowed a summary dismissal of the issue that the plaintiff and defendant were in a joint venture. On appeal, the Court agreed with the Chambers Judge and stated that no joint venture existed between the parties; at para 35: While a joint venture may take many forms and may be described in many ways, I am of the view that for legal consequences to arise as between the co-adventurers on the ground their association has become a joint venture there must be a contractual underpinning of some description. Central Mortgage and Housing Corp. v. Graham (1973), 43 D.L.R. (3d) 686 (Nova Scotia Supreme Court, Trial Division) CMHC proposed the building of a housing project in Sydney, N.S., and employed a construction company, Bras d’Or, to carry out the project. CMHC undertook to provide financing to approved-purchasers. The Grahams purchased one of the houses, which turned out to have a number of serious defects. They eventually stopped payment on the mortgage and CMHC commenced an action for foreclosure. The Grahams counterclaimed for damages against Bras d’Or and CMHC, alleging that they were parties to a joint venture and were consequently jointly liable for the defects. The court found that the relationship between CMHC and Bras d’Or was one of joint venture and (after an extensive review of the jurisprudence) that the principle of joint liability applies to joint ventures in the same way as it does to partnerships.

Chitel v. Bank of Montreal [2002] O.J.No.2170 (Ontario Superior Court) C owned a half share in a joint venture property with A. C got into financial difficulties and defaulted on a mortgage held by her bank. The bank sold the half share to A, under a power of sale. Two years later, A sold the property at a large profit. C brought a claim against the bank, alleging that A had been in breach of a fiduciary duty owed to her and

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that the bank had knowingly assisted him in that breach. Her action was dismissed on the ground that she had failed to establish the existence of any fiduciary duty. The relationship between C and A was governed by the joint venture agreement which did not expressly provide for any fiduciary relationship and none was implied in the circumstances. Davis v. Ouellette (1981), 27 B.C.L.R. 162 (British Columbia Supreme Court)

See Case 24.7 at p. 612 in the text. Dockrill v. Coopers & Lybrand (1994), 111 D.L.R. (4th) 62 (Nova Scotia Court of Appeal) The defendant accounting firm decided that they needed to downsize their operation in Halifax and to terminate one partner. The managing partners consulted in-house counsel as to how to go about the termination. After receiving counsel’s advice, they notified the plaintiff, Dockrill, that they were seeking his resignation. Dockrill brought proceedings for wrongful dismissal, and requested production of the correspondence with the counsel. The court held that he was entitled to have the correspondence produced. Each partner is an agent for the firm and for his other partners. As a rule, the knowledge of one partner is regarded as the knowledge of them all. Consequently, partners have a right to have access to any information received by the firm. Ernst & Young v. Stuart (1997), 144 D.L.R. (4th) 328 (British Columbia Court of Appeal) The defendant was a partner in the plaintiff’s accounting firm. The defendant left the firm to work for another accounting firm. The plaintiff sued the defendant for breach of contract; that is, the defendant did not give the required one years’ notice and breached the non-competition clause of the partnership agreement. The plaintiff furthered sued the new accounting firm for inducing breach of contract. The Court of Appeal held that the partner was required to give one years’ notice and as such had to pay the plaintiff the funds in lieu of notice. The Court further ordered a damages award against the accounting firm for inducing breach of contract, but would not award punitive damages. Garner v. Murray, [1904] 1 Ch. 57 (England—Chancery Division) Garner, Murray and Wilkins went into partnership under an oral agreement that they would contribute unequal shares of the capital of the business but would share the business' profits equally. The partnership was later dissolved. All the creditors were satisfied as were the loans of two of the partners to the business, but the remaining assets were insufficient to repay in full the capital contributions. Garner had contributed a larger amount of capital than the others, and sued Murray when Wilkins defaulted on his share of the deficiency. The court held that a capital deficiency is a loss, to which each partner must contribute.

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Hayter v. Canada, [2010] T.C.J. No 175 (Federal Tax Court) The appellant appealed from a decision by the Ministry of Revenue with respect to monies owed for taxes. The matter arose, because the appellant entered into a business deal to purchase laptop computers and resell them. The money used came from a corporation owned by the appellant and/or his sons. The money was advanced to the appellant and recorded as a management fee by the corporation and so was assessed as part of his personal income. The appellant maintained that the investment was made by the corporation and not him personally, and therefore the advances should not have been considered personal income. The Court held that the advances did constitute a fee paid by the corporation to the appellant, but declared that the purpose of the funds was for a joint venture and that losses arising from that joint venture were deductible. The Court ordered that the appellant’s taxes be reassessed on that basis. Korz v. St. Pierre (1987), 43 D.L.R. (4th) 528 (Ontario Court of Appeal) Korz was solicitor for St. Pierre (a druggist) and Woods (chief of police). In 1979, Korz and the other two entered into a business arrangement under which a company was incorporated. Each of the three was to deposit $30,000 with the bank to secure a loan for the financing of the venture. All three signed a joint agreement and several guarantees to support the bank loan. Korz never deposited his money, nor did he disclose to St. Pierre and Woods that he had made himself judgment proof (he had transferred all his assets to his wife; his practice was held by a service company, the shares of which were held by the wives of the partners). All the meetings took place at Korz's office and he never advised the other two to seek independent legal advice. St. Pierre and Woods continued to commit themselves to the company even though it was failing. Eventually the company made an assignment in bankruptcy and the bank sued on the guarantees of the loans. Korz did not defend the action and judgment was had against him by default. St. Pierre and Woods defended and settled the action. Korz then commenced an action for a declaration that he was not liable to contribute anything to his co- guarantors. St. Pierre and Woods counterclaimed for breach of the duty owed by a solicitor to his client or for breach of a fiduciary duty. The court held that the parties did stand in a solicitor-client relationship. Korz was in breach of his duty of care to his clients, and of his fiduciary duty to disclose his financial position. Korz's former partner was also held liable since Korz had done the acts in the ordinary course of the firm's business. LAC Minerals Ltd. v. International Corona Resources Ltd. (1989), 61 D.L.R. (4th) 14 (Supreme Court of Canada) Corona owned the mining rights to certain land on which it was drilling exploratory holes. LAC approached Corona with a view to a possible partnership or joint venture, and Corona revealed the results of the drilling from which it was clear that an adjacent piece of property that Corona was trying to acquire would likely hold mineral bearing deposits. LAC put in a successful competing bid for the adjacent property and developed the mine on its own account. Industry practice imposed an obligation on parties seriously negotiating a joint venture not to act to the detriment of each other. The court held that

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the information given to LAC was confidential and was revealed only for the purpose of a possible joint venture. LAC was in breach of its duty of confidence and of its fiduciary duty when it acquired the adjacent property. But for LAC's breach, Corona would have obtained the property. The court imposed a constructive trust on the property in favour of Corona. Lansing Building Supply (Ontario) Ltd. v. Ierullo (1990), 71 O.R. (2d) 173 (Ontario, District Court) Three individuals and three corporations controlled by them carried on a business under a collective name, and described themselves as a "joint venture". They acquired some real property and entered into a co-ownership agreement which expressly declared that the business was not a partnership. They also did not register their business under the Partnerships Registration Act (the predecessor of the Business Names Act). One of the participants obtained credit and materials for the business from the plaintiff. The court held that despite the express declaration that the business was not a partnership, and the failure to register, the business was in substance a partnership as defined by s. 2 of the Partnership Act. The defendants were jointly liable. Marsh v. Stacey (1963), 103 Sol. J. 512 (England) See Case 24.5 at p. 610 in the text. McDonic v. Hetherington (1997), 142 D.L.R. (4th) 648 (Ontario Court of Appeal) Two elderly sisters retained a partner of the defendant’s law firm to make various investments on their behalf. The investments were either unsecured, or poorly secured. The plaintiffs sued for negligence and breach of fiduciary duty. The Court of Appeal overturned the trial judge’s decision and allowed the appeal. The Court held that the partners were liable as the lawyer who made the deals acted either within the scope of his authority, or within the scope of his apparent authority. McKnight v. Hutchison, [2002] B.C.J.No.2211 (British Columbia Supreme Court) M and H were partners in a law firm. The partnership agreement provided that the partners were allowed to engage in other business activities provided they gave notice and the activities did not compromise the law practice. H served on the board of directors of a private company and received an honorarium, but did not disclose this to M. He was also paid fees for acting as a trustee of a family trust that was a client of the firm. M sought an accounting for the profits made by H. The court held that, by failing to disclose his earnings H was in breach of his fiduciary duty to his partner and was liable to account.

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Mercantile Credit Co. Ltd. v. Garrod, [1962] 3 All E.R. 1103 (England –Queen’s Bench Division) See Case 17.2 at p. 397 in the text.

M. Tucci Construction Ltd. v. Lockwood [2000] O.J. No. 3192 (Ontario Superior Court of Justice); 8 B.L.R. (3d) 113 (affirmed [2002] O.J. No. 423, Ontario Court of Appeal) The owners of a motel entered a contract with the plaintiff contractor, who provided financing. The owners and contractor were both advised by the same accountant. The project fell through and the contractor lost most of the funds provided. The court held that there had been negligent misrepresentation by the accountant, who was in breach of fiduciary duty to the contractor. However, the plaintiff contractor was found to be 40% contributorily negligent, in failing to obtain independent advice, or to read the terms of the agreement. Olson v. Gullo (1994), 113 D.L.R. (4th) 42 (Ontario Court of Appeal), leave to appeal refused (1994), 20 B.L.R. (2d) 47 (Supreme Court of Canada) See Case 24.8 at p. 612 in the text.

Pinteric v. People’s Bar and Eatery Ltd., [2001] O.J. No. 499 (Ontario Court of Appeal) The plaintiff was asked by the defendants to assist in their establishing a new restaurant. He agreed to do so, and performed various administrative and managerial duties for the following six months. He received no salary, but took cash “advances.” Following a disagreement, the plaintiff left the restaurant and claimed a breach of an oral agreement that he would become a partner. The court held in his favour on the grounds that his conduct in working for cash advances instead of salary was consistent with his belief that he would have a part ownership interest in the business.

Public Trustee v. Mortimer (1985), 16 D.L.R. (4th) 404 (Ontario High Court) See Case 24.4 at p. 607 in the text.

Rochwerg v. Truster (2002), 212 D.L.R. (4th) 498 (Ontario Court of Appeal) See Case 24.6 at p. 612 in the text. Spire Freezers Ltd. v. Canada (2001), 196 D.L.R. (4th) 211 (Supreme Court of Canada)

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The appellants appealed against a tax assessment disallowing losses incurred in a partnership transaction with a U.S. partnership. The appellants purchased a luxury condominium with an ancillary low-income apartment. The purpose of the purchase was to then sell at a loss and claim a deduction on their taxes. The Supreme Court of Canada allowed the appeal and stated that the enterprise had all of the hallmarks of a partnership, in spite of the existence of the partnership for only a brief period of time.

Stow v. Canada, [2010] T.C.J. No. 322 (Federal Tax Court) Two corporations entered into partnership. The appellant purchased all of the shares of one of the corporations at a time where the partnership was already in a loss position. The respondent maintained, that at the time the appellant purchased the shares, the partnership ceased to exist, because there was no view to a profit, and therefore the appellant could not claim the business loss. The Court held that at the time of the purchase of the shares, the appellant and the other corporation had a view to a profit and therefore the partnership existed.

Strother v. 3464920, [2007] 2 S.C.R. 177 (Supreme Court of Canada) Stother was a lawyer retained by a film production business that provided investors with tax sheltered investments. In 1996 the loophole in the tax legislation that was used to shelter those investments was amended. Strother advised his client that there was no way to avoid the amendment; the film production business started winding up as they could no longer operate. Strother subsequently found a way around the tax legislation amendment. He left his law firm and created a business that competed with his former client. The client brought an action against Strother and Strother’s former law firm for breach of fiduciary duty. Strother was found to be in breach of his fiduciary duties and was ordered to account for and disgorge all profits personally made from his new business. The law firm was also ordered to disgorge fees paid to the law firm by the new business while the conflict of interest existed. The law firm was liable because s. 12 of the Partnership Act results in firms being vicariously liable for a wrongful act of one of the partners. Zawadzki v. Matthews Group Ltd., [2001] O.J. No. 3808 (Ontario Court of Appeal) A corporation purchased 50% of the interest of a partner, and took a security interest in the remainder of his partnership interest. The other partners were not aware of the transaction and did not give their consent to it. The court held that the transfer of the partnership interest did not make the corporation a partner, and it owed no fiduciary duty to the other partners.

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CHAPTER 25 THE NATURE OF A CORPORATION AND ITS FORMATION This chapter considers the legal nature of a corporation and the consequences that flow from incorporation. As mentioned in Chapter 24, business students usually have a general familiarity with the separate legal identity of a corporation and the business law course should deepen their understanding of particular characteristics. Instructors should find it helpful to contrast partnerships and corporations. In particular, the consequences of the separate legal personality of a corporation should be examined, as should the importance and effect of limited liability. With regard to limited liability, comparisons may be made between LLPs, professional corporations and “normal’ corporations. The Checklist on page 580 can be expanded to include the specialized vehicles of Chapter 24 and Professional Corporations introduced in this chapter. The concept of limited liability is frequently misunderstood and should be explained clearly. A corporation is fully liable for its debts to the last penny of its assets. It is the liability of the shareholders that is limited—to the amount paid on their shares. Instructors should emphasize the fact that we are making an owners-to-owners comparison with partnerships. It is important to emphasize that limited liability will not protect a shareholder from personal liability for her own acts in an alternate capacity such as director or employee. METHODS OF INCORPORATION (Source p. 584) The sections dealing with the creation and structure of the corporation are an introduction to the broader topic of corporate governance which is the focus of Chapter 26 and parts of Chapter 27. Students should understand the corporations are governed by the legislation of the incorporating jurisdiction and the specific rules adopted by each corporation in their incorporating documents (including by-laws). The concept of corporate governance should be viewed as a sliding scale. The rules described in Chapter 25 are the base minimum applicable to all corporations. Additional or specialized standards will be applied to charities, not for profit corporations, and most importantly those corporations that wish to offer shares for sale to the public. CORPORATE CAPTIAL (Source p. 591) The nature of a corporation’s capital should be explained, in particular the distinction between debt and equity. The difference between a shareholder and a creditor is important not only for the purposes of the order of repayment and participation in surplus but also for the purpose of corporate governance obligations and protective remedies. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 596) In setting out a risk management plan, the prudent business person needs to understand that advantages and risks in the different forms of business organization; for example tax advantages need to be weighed against liability risks. Often small businesses start out as

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sole proprietorships or partnerships and once they grow, look to incorporate; recognizing the changing risks and being able to make the appropriate decision on if or when to incorporate needs to be considered. Finally, a risk management plan for a corporation also needs to consider the advantages and disadvantages of different share structures (including becoming a distributing corporation); bylaws to conform with the desires of the originating parties; and especially compliance with the incorporating statute. INTERNATIONAL ISSUE (Source p. 583) Foreign Investment in Canadian Corporations Instructors will want to talk about foreign control of Canadian corporations in conjunction with the content in Chapter 30 on Competition. The important distinction is between investment and control. Investment is discussed here as a positive thing but both Chapters 30 and 31 describe too much foreign investment as a negative that must be contained. Question 1- There are a number of potential impacts that provincial variations concerning ULCs might have on foreign investment – these include, but are not limited to: 

There may be increased speculation in provinces with ULCs.



Foreign investment money may be drawn out of provinces that don’t allow ULCs into provinces that do.

Instructors should pose the question: what benefits do students think these three provinces foresee by allowing ULCs? Instructors should also ask students whether they think it is relevant that the three provinces that allow ULCs rely heavily on industries that export natural resources to the U.S.A., particularly Nova Scotia and Alberta (the cost of oil exploration, discovery, and exploitation is very high, and these natural resources are destined to be the engine of those provincial economies well into the future). By offering investors the ULC option are these provinces trying to draw in more speculators and sustain their boom? In the case of British Columbia, might ULCs be an attempt to draw investors into a dying industry (softwood lumber) by inducing an injection of capital to jumpstart the industry? This debate can help students see the role of law in policy and business strategy. ETHICAL ISSUE (Source p. 591) Undermining Professional Standards? Question 1 - Legislation, introducing both LLPs and professional corporations, combined with events such as the Enron and Madoff affairs*, call into question the governance of the professions and the role of regulatory supervision in modern society. Professional firms have expanded, in the number of their partners and employees, and in the range of activities that they undertake. Large accounting and law firms are now far more like business corporations except in their legal form, and even that is changing. Do these changes undermine the traditional professional-client relationship? If so, does that matter? Is there any likelihood that professional standards will suffer as a result? Is it Copyright © 2016 Pearson Canada Inc.

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the risk of personal liability that motivates a professional to comply with ethical standards? Or is it more likely that the client will benefit from a more efficient organization of the professions? In any event, why should professionals not enjoy the same tax benefits, and the protection of limited liability, as do incorporated businesses? Is the professional corporation the appropriate compromise, providing beneficial tax treatment without immunity from liability? * The Enron affair refers to the 2002 collapse of the Enron Corporation amid allegations of fraud and misrepresentation by its management. It is now well accepted that the auditors and accounting consultants of Arthur Anderson played a key role in the ability of the Enron management to perpetrate the fraud. Weak accounting and reporting standards were identified as a problem. The Madoff affair refers to the fraud perpetrated by Bernard Madoff through Madoff Investment Securities LLC over a number of decades culminating in criminal charges in late 2008. The most controversial part of the scandal that resulted in losses in the tens of billions of dollars was the failure of the SEC to uncover the fraud despite repeated complaints and investigations during the preceding decades. See the discussion of Chapter 24’s International Issue at page 616 of this manual. Question 2 - Students should be able to come up with several reasons why certain professionals should not be allowed to incorporate in the “normal” way. Instructors should try and get students to think about the concept of fiduciary duty as it applies to these professions (as opposed to the fiduciary duty of a Board of Directors to their shareholders); the listed professionals have a different sort of fiduciary duty in their dealings with the public – while they too are money-making enterprises, they are also professionals in an unequal position of trust vis a vis their clients. To allow these professionals to escape liability for breaches of their fiduciary duty by incorporating would make a mockery of the values listed at the beginning of this issue. Instructors should prompt students to consider the fact that many of these professions are selfregulating – do they think this fact plays any role in professionals’ inability to incorporate in the “normal” way? Is there some sort of trade-off effect whereby government allows self-regulation, while denying the liability shelter of incorporation? Clearly the self regulation of public accountants allowed at the time of Enron (since revised to a public regulatory format) provided little or no deterrence to the accountants of Arthur Anderson. Alternatively, the public securities regulator was no more effective in preventing the Madoff affair. When discussing this question remind the students that the professional will always be responsible for his or her own criminal acts. For the purposes of discussion consider the relative positions of the uninvolved partners of Arthur Anderson and the arms length shareholders in Madoff Securities. Question 3 – It seems unlikely that the relationship between compliance with professional standards and personal liability is that strong. Most, if not all professionals, carry liability insurance. Even if a professional is found liable for a professional breach, there may not be financial sanctions against the professional, but rather disciplinary action by the body

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that oversees that profession, including losing one’s licence to practice in the profession. While a concern to avoid personal liability may have a role in compliance with professional standards, it does not seem to be major factor. Instructors should ask students, what motivates them to follow rules?

QUESTIONS FOR REVIEW 1. A legal person is an entity (as distinct from a natural person) recognized by law as having rights and duties of its own. (Source p. 578) 2. Limited liability means that the liability of shareholders is limited to the amount of their capital contributions. (Source p. 578) 3. The principal differences between partnerships and corporations are that: (1) a partnership does not have a separate legal personality while a corporation does; (2) partners are personally liable for the debts of the firm whereas shareholders of a corporation are not; (3) ownership may not be transferred freely in a partnership while it can in a corporation; (4) partners normally participate in management, shareholders (as such) do not; (5) the death or bankruptcy of a partner dissolves a partnership, where a corporation can remain in existence for perpetuity; (6) partnerships are not taxable entities but corporations are; (7) partners owe a fiduciary duty while shareholders do not; and (8) partners are agents of the firm while shareholders are not. (Source p. 580) 4. The principal arguments made by the creditors in Salomon’s Case were that the corporation was merely a sham and Salomon was the true owner of the business (and thus the true debtor); alternatively, the corporation was simply the agent of Salomon. (Source p. 581) 5. Corporations may be associated either vertically, as where one corporation controls the other, or horizontally, as where both corporations are controlled by the same person. (Source p. 582) 6. The expression “lifting the corporate veil” refers to the occasions where courts have been prepared to disregard the separate existence of corporations and (usually) to hold the controlling individuals responsible for the acts of the corporation. (Source p. 583) 7. Under the articles of incorporation system, persons wishing to form a corporation sign and deliver articles of incorporation to a government office and in turn are issued with a certificate of incorporation. (a) In the letters patent system, a general statute regulates the conditions under which the letters patent may be issued and in theory this system is discretionary. (b) In the memorandum and articles system, applicants must register two documents (memorandum and articles) that set out the fundamental terms of their agreement. (Source p. 685)

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8. The information that must be set out in the articles of incorporation is: (1) the name of the corporation; (2) the place where the registered office is situated; (3) any maximum number of shares that the corporation is authorized to issue; (4) if there are two or more classes of shares, the rights and restrictions attached to each class; (5) any restriction on the transfer of shares; (6) the number of directors; and (7) any restrictions on the business that may be carried on. (Source p. 586) 9. Care must be taken in choosing the corporate name to avoid having the application to register rejected or violating some other trademark or intellectual property right (see the section on trademarks in Chapter 20). Even if the corporation is registered there may be subsequent problems where the name is misleadingly similar to that of another corporation. The problems can be avoided by using a “number name” – where the registry simply assigns a number to the new corporation. (Source p. 587) 10. The main function of a corporation’s by-laws is to set out the detailed operating rules for the corporation’s day-to-day affairs. (Source p. 587) 11. The principal characteristics of closely held corporations are that restrictions are placed on the transfer of shares; that is, they are not offered for sale to the general public; and the owners are usually the managers as well. (Source pp. 589-590) 12. The principal advantages of professional corporations are to obtain a degree of limited liability (depending upon the specific provincial legislation), and most importantly to enjoy a number of tax advantages that are not available to sole proprietorships and partnerships. (Source p. 590) 13. The function of a corporation’s stated capital account is to provide a record disclosing the consideration received for each share issued by the corporation. (Source p. 592) 14. The special rights normally attached to preferred shares are the right to receive a dividend before any dividend is paid on the common shares, and the right to be redeemed on the dissolution of the corporation before the common shares. (Source p. 594) 15. Bondholders are creditors of the corporation and, as such, they are normally entitled to receive interest on the debt. They are also entitled to have their debt repaid before any capital is returned to the shareholders. Usually, a trust deed confers on them other rights; for example, to intervene in the management if interest is not paid when due. (Source p. 593) 17. The investor’s risk tolerance is a key factor influencing the choice between shares and bonds. Bonds provide a fixed investment and guaranteed return (provided the corporation remains solvent), in the form of regular interest payments, and the right to be redeemed in full at their maturity date. Common shares carry no guarantee that their holders will receive anything, either in the form of dividends or on dissolution; but their shareholders participate in growth of the corporation. Preferred shares fit somewhere in between. (Source p. 593)

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18. On liquidation of a corporation its assets must be distributed in the following sequence: (1) secured creditors; (2) unsecured creditors; (3) preferred shareholder; and (4) common shareholders. (Source p. 594) 19. Restrictions on share transfer must be set out in the articles and must be noted on the share certificate – otherwise they are not binding on a purchaser. (Source pp. 594595)

CASES AND PROBLEMS 1. Ashley could incorporate 2 companies, and have the debt to her mother be the debt of the corporation for Ashley’s Too. Or Ashley could give her mother bonds which would pay interest and be paid off as a loan of the company. This way her mother would not be able to vote or control the company under normal circumstances. It is best to incorporate provincially, as Ashley can still operate in other provinces. She would have to choose a name, or could operate as numbered companies doing business as Ashley’s and Ashley’s Too. Ashely should offer her chefs shares, but insure that there are restrictions on the transfers of shares so that she can control who the voting shareholders are. . 2. Oakdale, as the owners of the premises, would be liable to Hill for injuries caused by the dangerous state of the premises, under occupiers’ liability legislation or in negligence (being vicariously liable for the negligence of its employees). However, since Oakdale appears to be insolvent, that may not be of much help to Hill. The limited liability principle ensures that shareholders are not liable for the debts of their corporation. However, it is important to remember that the limited liability principle does not protect a person, who happens to be a shareholder of a corporation, against personal liability for his or her own negligent acts. This case is based on Berger v. Willowdale (1983), 41 O.R. (2d) 90, a decision of the Ontario Court of Appeal. In that case an employee who was injured when she slipped and fell on snow and ice while leaving her place of employment was held to have an action in negligence against the president of her employer corporation, which had failed to have the snow and ice removed when it was or ought to have been obvious that it was present and that it created a dangerous situation. The president was or ought to have been aware of the problem for several days prior to the accident. He was in total control of the situation at the place of work. He was in a position to remedy the dangerous situation; he could have instructed employees to remove the ice and snow, and was negligent in failing to do so. [NOTE: in that case, the reason why the plaintiff did not sue the corporation was that she was precluded from suing her employer under workers’ compensation legislation.] 3. Ross, as agent for Macbeth, was in breach of his fiduciary duty in not disclosing his personal interest in the contract with Burnam Wood. Macbeth should therefore be able to recover the $14,500 commission paid to Ross. The profit of $160,000, however, was not made by Ross but by Burnam Wood. The issue is whether the court will lift the corporate

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veil to show that Ross was the real purchaser from Macbeth. The courts are willing to lift the corporate veil in circumstances where not to do so would assist the commission of fraud. Macbeth would be entitled to recover not only the commission that he paid Ross, but also the profit which Ross, as sole shareholder of Burnam Wood, made on the resale of the property. [NOTE: an alternative approach is to treat the knowledge of Ross as the knowledge of the Burnham Corporation. Burnham would then be accountable for the profit that it had knowingly received as a consequence of Ross’ breach of trust.] 4. Professional corporations are relatively new in most of Canada and issues such as this have not yet been considered by the courts. As regards the liability of the corporation, both the client and the landlord would seem to have valid claims. The client handed over the $200,000 to Twist, a director of the corporation, who was acting within the scope of his apparent (and probably his actual) authority to invest funds for clients. The landlord is owed rent by the corporation, and the rent has not been paid—the reason it has not been paid is immaterial. The problem, for both the client and the landlord, is that the corporation has very few assets and is unable to pay them more than a fraction of what is owed. They will consequently wish to look to Stick for payment. As regards the client, the Ontario act provides that, “The liability of a member of an association to a person who receives services from the member is not affected by the fact that the services were provided by the member as an employee of, or on behalf of, a professional corporation.” It is clear from this that Twist is not protected by limited liability; but did the client “receive services” from Stick? It seems that Stick did not know about the $200,000, and he is therefore probably not liable personally; that is, Stick is in the same position as a partner in a LLP. As for the landlord, the relationship is not that of professional-client, and the principle of limited liability should apply. 5. The bondholders are secured creditors and must be paid first, leaving $3,500,000 to be distributed among the shareholders. The preferred shareholders are entitled to have their shares redeemed before any distribution is made to the common shareholders. They will receive the full redemption price of $100; that is in total 20,000 x $100 = $2,000,000. The remaining $1,500,000 can then be distributed rateably among the common shareholders, with each share receiving $1,500,000 / 50,000 = $30. CASE SUMMARIES Bank Leu AG v. Gaming Lottery Corp. (2003), 231 D.L.R (4th) 251 (Ontario Court of Appeal) The plaintiff bank loaned the defendant corporation $5 million, taking share certificates as security. The share certificates incorrectly stated that the shares were fully paid-up. The share certificates also referred to a U.S. regulation which related to share transfers. The court held that the share issuer was estopped from claiming that the shares were not Copyright © 2016 Pearson Canada Inc.

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fully paid. The reference to the U.S. regulation did not amount to a sufficient notice that there were restrictions on the transfer of the shares. Berger v. Willowdale (1983), 41 O.R. (2d) 89, leave to appeal denied [1983] S.C.C.A. No. 353 (Ontario Court of Appeal) The plaintiff was an employee of a corporation, for whom the defendant was president. The plaintiff slipped and fell on ice outside of her place of employment. She was unable to sue her employer directly, because the worker’s compensation legislation precluded her from suing it. The Court held that while there was a duty of care on the employer, there was no reason not to impose a duty of care in negligence on the president of the corporation as the person who ought to have known of the hazard and failed to have it removed. Blacklaws v. 470433 Alberta Ltd. (2000), 187 D.L.R. (4th) 614 (Alberta Court of Appeal) The plaintiffs purchased a timeshare from a corporation that entitled them to golf at the corporation’s resort. The golf resort was closed for two summers due to inadequate sewage facilities. The plaintiffs claimed damages from both the corporation and from its controlling shareholder (who was also the manager of the resort). The trial judge held both liable; the shareholder/manager knew of the deficiencies in the sewage system, but did nothing about them. On appeal, the Alberta Court of Appeal held that the shareholder/manager was not personally liable. He owed no duty to the plaintiffs. He had no personal duty to install a new sewage system even though he knew of the problem. It was not negligent for a corporate shareholder to fail to inject money into a corporation in which he had an interest, even if the result of failing to do so would mean that the corporation could not meet its obligations. Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd. (1997), 153 D.L.R. (4th) 385 (Supreme Court of Canada) See Case 25.2 at p. 629 in the text. Canadian Imperial Bank of Commerce v. Melnitzer (Trustee), [1993] O.J. No. 3021, aff’d [1997] O.J. No. 3021 (Ontario Court of Appeal) The bank brought an action for a declaration of possession of a security interest in certain shares held by the bankrupt estate. The bankrupt, Melnitzer (M) had previously pledged these shares as collateral security on a debt with the bank. The bank had returned these shares to M in exchange for other shares; these new shares turned out to be either forgeries or worthless. The Court held this was not an appropriate case for a constructive trust; the bank had not perfected its security interest under the PPSA; nor did the bank have a possessory claim as it had given up possession of the assets.

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Catalyst Fund General Partner I Inc. v. Hollinger Inc. [2004] O.J. No. 4722 (Ontario Superior Court), aff ’d [2006] O.J. No. 944 (Ontario Court of Appeal) See Case 26.6 at p. 665 in the text. This was the first of a series of actions brought by shareholders in Hollinger Inc. to have its directors removed. By the end of 2005 there had been fourteen separate reported cases in Ontario alone. The case is notable for its explanation of the complex structure of the corporate group. Gilford Motor Company v. Horne, [1933] Ch. 935 (England – Court of Appeal) Mr. Horne was an employee of the plaintiff and while employed signed a noncompetition agreement. He was later fired and started his own business in competition with his former employer. He was informed that this was mostly likely a breach, and so he incorporated his business and set up his wife and friend as sole shareholders and directors. The plaintiff brought an action alleging the corporation was a merely an instrument to perpetrate a fraud. The Court of Appeal held in favour of the plaintiff. The Court stated that the corporation was merely a sham or device, and being used to defeat the legitimate claim of the plaintiff. Investments v. Saskatchewan Telecommunications, [2009] 9 W.W.R. 15 Page 581 footnote 16 Kosmopoulos v. Constitution Insurance Co. of Canada (1987), 34 D.L.R. (4th) 208 (Supreme Court of Canada) The plaintiff incorporated his sole proprietor leather goods business, but continued to operate as if he was a sole proprietor; that is, the lease continued in his name rather than the corporation’s name and the fire insurance policy showed the business as a sole proprietorship, even though the insurance company knew of the incorporation. The building next door to the plaintiff’s caught fire and damaged the plaintiff’s goods and premises. The insurance company refused to pay the claim, because the corporation was a separate legal entity from the plaintiff. The Supreme Court held, that the corporate veil could not be lifted in this case, as a person who accepts the benefits of incorporation, must also bear the consequences; however, as the sole shareholder and director of the corporation, the plaintiff did have an insurable interest in the continuation of the business and was therefore entitled to recover under the insurance policies. Martin v. Goldfarb (1998), 163 D.L.R. (4th) 639 (Ontario Court of Appeal) The plaintiff was an owner and operator of nursing homes. He went into business with a disbarred lawyer who had been convicted and imprisoned on numerous counts of fraud and who referred him to a solicitor. The plaintiff engaged the solicitor to act for him in various financial transactions arranged on the advice of the disbarred lawyer. The solicitor knew the plaintiff’s partner was a disbarred lawyer, but did not tell the plaintiff. The disbarred lawyer siphoned off most of the value of the properties owned either by the plaintiff personally or by corporations controlled by the plaintiff. The plaintiff went bankrupt and sued the solicitor, his firm, and the in-house lawyer who had acted for the Copyright © 2016 Pearson Canada Inc.

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group controlled by the disbarred lawyer. The Ontario Court of Appeal held that the solicitor was responsible only for the direct personal losses suffered after the date he breached his fiduciary duty and thus could not be held to have caused all the losses suffered by the plaintiff in his dealings. Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 220 D.L.R (4th) 611 (Ontario Court of Appeal) The plaintiff corporation owned a national mail-order pharmacy business, which it operated through subsidiaries in each province. It claimed that the defendants had conspired to destroy its business. The motions judge held that any injury caused was sustained by the subsidiaries, not by the plaintiff directly. There was no case for piercing the corporate veil, and the plaintiff could only bring a derivative action on behalf of each subsidiary. [NOTE: the judgment was upheld on appeal, except that a claim for loss of goodwill could be brought since that loss was suffered directly by the plaintiff.] R. v. Melnitzer, [1992] O.J. No. 1363 (Ontario Court of Justice) See Case 25.4 at p. 644 in the text.

NBD Bank of Canada v. Dofasco Inc. (1999) 181 D.L.R. (4th) 37 leave to appeal denied [2000] S.C.C.A. No. 96 (Ontario Court of Appeal) NBD Bank brought an action against a corporation and one of its officers, alleging negligent misrepresentation regarding the corporation’s financial position. The trial judge found both defendants liable. On appeal, the officer claimed that he should not be held personally liable for acts performed on behalf of the corporation. The Ontario Court of Appeal held that the officer owed a duty of care to the bank in his personal capacity. He should have foreseen that the bank would rely on his statements. Re Noel Tedman Holdings Pty. Ltd., [1967] Qd. R. 561 (Queensland Supreme Court) Mr. and Mrs. Tedman were the only shareholders and directors of a corporation. The consent of the directors was required for any transfer of shares. They and two of their three children were killed in a car accident. The executor's of Mr. Tedman's estate sought an order from the court for the calling of meetings of the corporation at which the deceaseds’ personal representatives could elect new directors to authorize the transfer of shares to the beneficiaries of the estates. The court issued the order, noting that the corporation did not cease to exist merely because its directors and shareholders had died.

R.L.T.V. Investments Inc. v. Saskatchewan Telecommunications, [2009] 9 W.W.R. 15 (Saskatchewan Court of Appeal) leave to appeal denied 2010 CanLII 11392 (Supreme Court of Canada)

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The plaintiff was sole shareholder of a corporation called Wireless Image (WI). WI held several contracts with the defendant. The plaintiff claimed that due to actions by the defendant, WI was forced into receivership. The plaintiff sold off all of the shares at a loss to another corporation, Yourlink (Y). Y amalgamated with WI under the name Y. The defendant brought a motion to strike the plaintiff’s statement of claim as disclosing no real cause of action. The Court of Appeal upheld the trial judge’s decision and that the plaintiff could not bring a derivative action as a shareholder in order to claim losses on the shares; any wrong committed was done to the corporation WI and not to the shareholder. Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd. (1972), 27 D.L.R. (3d) 651 (Ontario Court of Appeal) See Case 25.3 at p. 629, in the text. Salomon v. Salomon & Co. Ltd. [1897] A.C. 22 (England – House of Lords) See Case 25.1 at p. 628 in the text.

Scotia McLeod Inc. v. Peoples Jewellers Limited et al. (1995), 26 O.R. (3d) 481, leave to appeal denied [1996] S.C.C.A. No. 40 (Ontario Court of Appeal) Various banks brought an action as plaintiffs against the defendant corporation and against the individual directors of the corporation personally, for negligence in not disclosing certain debt information on an issuance of debentures to the plaintiffs. The Court discussed the liability of individuals: The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are factspecific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. et al., (1989), 70 O.R. (2d) 42 and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.

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W.D. Latimer Co. Ltd. v. Dijon Investments Ltd. (1992), 12 O.R. (3d) 415 (Ontario Court, General Division) R was a stockbroker for the plaintiff corporation, a stock brokerage firm. The defendant was the controlling shareholder of P. Ltd., a public company whose shares were listed on the Toronto Stock Exchange, and also owned and controlled two private companies. R knew F personally, and knew of his shareholdings. On a number of occasions, F asked R to purchase shares for him in P. Ltd., the shares to be put in the name of his private companies. In doing so, F was avoiding the disclosure and insider trading provisions of the Securities Act. Following the stock exchange crash, in October 1987, F’s private companies refused to pay for shares which the plaintiffs had acquired for them. The plaintiffs claimed the money from F personally, alleging that the companies were merely agents for F or, alternatively, because of F’s wrongful conduct, this was a proper case in which to lift the corporate veil and hold him personally liable. The action was dismissed. in doing so, Mandel J. articulated the threefold test in particular, he held that F’s misconduct was not the cause of the plaintiff’s loss; that is, the loss was caused by the stock exchange crash and the private companies’ inability to pay for the shares; F’s own misconduct was immaterial.

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CHAPTER 26 CORPORATE GOVERNANCE: THE INTERNAL AFFAIRS OF CORPORATIONS Standards of corporate governance regulate the internal organization of the corporation and impose external obligations. The internal organization of a corporation is considered in this chapter. The external relations of a corporation are the focus of Chapter 27. Although the emphasis of this chapter is on legislation, students should be made aware of the following sources of corporate governance standards: 

Government legislation/regulation;



Common law principles (pre-CBCA and post);



Incorporating documents (articles, bylaws, resolutions, etc.); and



Codes of Conduct (internal/external, voluntary/compulsory).

Students should also be aware of the relationships between: 

the corporation and its directors;



the corporation and its stakeholders (shareholders, employees, creditors and the public); the directors and the shareholders; the directors and other stakeholders (suppliers, lenders, employees, and the general public); and majority and minority shareholders.

  

CORPORATE GOVERNANCE OF PUBLICLY TRADED CORPORATIONS (Source p. 600) Obviously, the rules regulating publicly traded companies can be quite overwhelming (the Checklist at p. 605 may be of some assistance), but instructors may find it helpful to approach the regulations from the perspective of the general themes listed on page 614: independence of decision makers, transparency, disclosure, accountability and organizational checks and balances. These themes can be linked easily to the ethical values discussed in Chapter 1 and so this chapter can demonstrate the linkage between law and ethics, as well as, the challenge of trying to legislate ethical behaviour: Corporate Governance Strategy Ethical Value Regulatory Example Independence of Decision Maker = Trustworthiness Conflict of Interest: s.120 Transparency = Fairness Nomination Committee Disclosure = Respect for others Annual Report Contents Accountability = Responsibility Directors Liability s. 122 Organizational Checks & Balances = Responsibility, Audit Committee Caring, Citizenship

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There are other topics from Chapter 1 that can be of assistance when introducing corporate governance to students. First, the theory of Corporate Social Responsibility, with its ethical, legal and economic components, provides a contextual framework for students. (See: Mark S. Schwartz and Archie B. Carroll, “Corporate Social Responsibility: A Three Domain Approach” (2003), Business Ethics Quarterly, 13(4): 503-530). Legislators are clearly struggling to find the right mix of regulations that will encourage legal and ethical behaviour without hindering the ability to make a profit. Finally, as Chapter 27 stresses, all the tools for obtaining legal compliance are visible in corporate governance legislation:  civil liability – (example - primary and secondary liability for misrepresentation in public disclosures see securities legislation)  regulatory liability – (example - failure to properly report or disclose)  criminal liability – (example - whistleblower retaliation, insider trading) Liability is imposed on the corporation itself and on directors and officers as shown in the Checklist on Director’s Personal Liability at p. 667. Insider trading liability can be used as an example of conduct triggering all three forms of liability. For an interesting analysis of Canadian Corporate Governance see Randall Morck & Bernard Yeung, “Some Obstacles to Good Corporate Governance In Canada and How to Overcome Them,” Task Force to Modernize Securities Legislation in Canada, August 18, 2006, available online at tfmsl.ca THE STRUCTURE OF THE MODERN BUSINESS CORPORATION (Source p. 601) This section, together with the two following sections entitled Director (p. 654) and Officers (p. 605) respectively, are designed to outline the roles and responsibilities involved in the internal organization of the corporation. Figure 26.1 at p. 602 and the Corporate Governance Legislative Overview Checklist at p. 605 are tools to:  summarize the rules;  distinguish between requirements of universal application and those that apply to public companies only; and  differentiate between recommended practices and mandatory requirements. Instructors may find it necessary to limit the detail they expect students to master but students should understand the progressive nature of the requirements beginning with the minimal CBCA rules for private companies, then the CBCA rules for distributing companies, and finally the most onerous standards for public companies contained in securities legislation. DUTIES OF DIRECTORS AND OFFICERS (Source p. 606) The Supreme Court decision in Peoples v. Wise is the corner stone of the material under this section and instructors may want to note that the Supreme Court has affirmed

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Peoples in its recent judgment dealing with the BCE sale (now aborted): BCE Inc. v. 1976 Debentureholders 2008 SCC 69 (December 19, 2008) – directors may but are not obligated to consider particular stakeholder interests and the fiduciary duty transcends any such consideration in favour of the best interest of the corporation as a whole. An interesting comment on Peoples was written by Ian Lee, “Peoples Department Stores v. Wise and the ‘Best Interests of the Corporation,’” 41 Canadian Business Law Journal 212 (2005). THE PROTECTION OF MINORITY SHAREHOLDERS (Source p. 621) The interests and wishes of the majority must be balanced against the need to protect the minority from oppressive conduct. The traditional view in company law is that shareholders owe no duty to each other and are fully entitled to exercise their votes in their own selfish interests; the majority are not required to take account of the interests of the minority. The law imposes certain limits on what the majority may do; for example, they cannot ratify improper share issues. But otherwise, it is questionable as to what extent the law should intervene to protect the minority where the majority has acted entirely lawfully. In this context, a distinction may be drawn between the large, public corporation and the small, private corporation. In a public corporation, shareholders who do not like the way their corporation is being run can always “get out” by selling their shares; this is usually not possible in small private corporations. Emphasis should be placed on the oppression remedy as it has become the tool of choice for minority shareholders and is also available to other stakeholders. Consider using such as examples as: 

Conrad Black and Hollinger Inc. – Summarized at Case 26.11 of Text



Maple Leaf Foods and Schneider Corp. – Pente Investments Management Ltd. v. Schneider Corp. (1998) 42 O.R. (3d) 177; Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (C.A.). Also see: Markus Koehnen, “Business Judgment and Majority Shareholders: Are Canadian Courts Too Deferential?”Queens Business Law Symposium 2006, available online at: <law.queensu.ca/events/eventsArchive/queensBusinessLawSymposium/formerPu blications/businessLawSymposium2006/koehnen.pdf>.



BCE and its Debentureholders – BCE Inc. v. 1976 Debentureholders (summarized in case summaries) where the Supreme Court held that the debenture holders were not entitled to an oppression remedy. It held that in assessing an oppression remedy a court may consider not only what is legal but what is fair and should answer two questions: o Does the evidence support the reasonable expectations of the claimant? (this involves determining if expectations are reasonable) o Does the evidence establish that said expectations were violated? (this violation must involve unfair conduct or prejudicial consequences)

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A helpful summary of the BCE facts was prepared by Kent E Thomson, Maryse Bertrand, and Jordan Vaeth, “The BCE Litigation: Principles of Corporate Law Reaffirmed”, ABA Business Law Fall Meeting, Washington D.C. November 21-22, 2008, available on line at www.icd.ca STRATEGIES TO MANAGE THE LEGAL RISK (Source p. 627) In preparing a risk management plan, students will want to consider the statutory obligations set out for directors and officers. Even in a closely held corporation, abiding by the rules set out for distributing corporations may be useful, particularly where the possibility of “going public” may be an issue for the future. INTERNATIONAL ISSUE (Source p. 602) SARBANES-OXLEY ACT OF 2002 Question 1 - The Enron affair came as a shock to the investing public. So long as stock prices continued to rise, investors seemed largely unconcerned about the way in which their corporations were being managed. When the bubble burst attitudes changed and faith in stock markets – perhaps even in the free enterprise system – was undermined. Instructors may want to recommend that students view the documentary film: Enron, the Smartest Guys in the Room (2005) by Alex Gibney as background for the 2008 economic crisis. The response from the American regulatory sector was the enactment of SOX requiring more independence, disclosure, transparency and accountability. This theme box focuses on two key issues surrounding its implementation – the high cost of compliance and the international reach of the regulations. When considering this question, discussion should start with compliance costs. The cost of new committees, additional reports and filings, change in auditor, lost time, etc., all detracted from the bottom line. The international reach means that affected Canadian corporations will have to comply with both Canadian and American standards, doubling their costs. Justification at the time was that some cost to business would be worth it to protect the public stakeholder. Given the events of 2008 and 2009 it is clear the SOX did not protect the public from major economic crisis. History may show the years between 2000 and 2010 as the decade that changed the way the world did business. The solution offered in 2008 is the “government bailout”. Rather than regulating, government is behaving as a lender attaching conditions to the advance of funds. Shareholders must recognise that there is an element of gambling in all investing. Investors who were delighted to see the value of their stocks rising to dizzy heights should not be surprised when the market swings in the opposite direction.

ETHICAL ISSUE (Source p. 606)

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Who is “Independent”? Independence is a hall mark of modern corporate governance and recognizes the ethical value of trustworthiness (integrity and honesty). Not only must some directors be independent, but certain committees must be controlled by independent directors and auditor independence is essential. This theme box targets the challenge of defining independence. An arbitrary list of relationships will inevitably miss the subtle connections that often affect decision making. An abstract criterion requires a subjective value judgment that will vary from decision maker to decision maker. The securities legislation combines these two approaches by designating some relationships together with a catch all criterion. Question 1 – This question focuses on the impossibility of ensuring complete independence of directors. Director compensation is the easiest example – since the director is often paid by the corporation, every director is in a conflict of interest at least as far as compensation is concerned. Consider stock options routinely given to directors. Students should understand that independence is a relative term. Question 2 – This question deals with conflict of interest and the obvious answer is no. The compensation issue discussed in question 1 is usually resolved by establishing a compensation committee or hiring a consultant to remove the issue from the directors, thereby eliminating the conflict. Is this the right approach for the assessment of independence generally? By setting up a transparent process for making such designations other stakeholders can be sure that the process is undertaken fairly and does not disadvantage them (respect for the rights of others). Question 3 – This question looks at the most common processes adopted by corporations. Nominating committees (dominated by existing independent directors) are often used to make initial recommendations for board appointments. An established code of ethics is followed when making the determination of independence. Codes often include definitions of conflicts of interest.

QUESTIONS FOR REVIEW 1. The affairs of a corporation are the internal arrangements among those responsible for running a corporation and its shareholders; the business of a corporation consists of the external relations between a corporation and those who deal with it. (Source p. 600) 2. The rules of corporate governance are found in the incorporating documents – the articles of incorporation and the bylaws – and in the corporation and securities legislation of the incorporating jurisdiction (and listing jurisdiction). Courts may interpret these rules and create common law principles applicable to corporate

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governance and many corporations also adopt codes of conduct applicable to corporate governance. (Source p. 600) 3. Section 102 of the CBCA provides that the directors shall manage the business and affairs of the corporation. Other specific powers include the powers to issue shares, declare dividends, adopt by-laws, and to call meetings of shareholders. (Source p. 603) 4. The first directors are named in the incorporating documents. Thereafter directors are elected by the shareholders at the annual general meeting, that is, a simple majority vote or ordinary resolution. Except where cumulative voting is provided for, an ordinary resolution of shareholders voted on at a special meeting is sufficient for the removal of any director. (Source pp. 604-605) 5. Primarily directors’ and officers’ duties are owed to the corporation as a whole. Section 122 of the CBCA imposes two duties. The Supreme Court considered these duties in Peoples v. Wise and determined that the fiduciary duty (duty of honesty and good faith) is owed to the corporation exclusively. The second duty of care (diligence and skill, not to be negligent) is owed not only to the corporation but to other stakeholders including shareholders, creditors, employees, and the public. Ontario students should note the difference in the OBCA. (Source pp. 607-608) 6. Directors and officers are not required to be perfect. There are legislative and common law defences available to directors and officers accused of breach of duty. The CBCA includes a due diligence defence (s. 123(4)) when the director can establish that the required degree of skill was brought to the task and a good faith reliance defence (s. 123(5)) when the officer can show that an expert report was obtained and relied upon. The common law defence known as the business judgment rule is available when it can be established that the decision was arrived at using the appropriate degree of prudence and diligence (following an acceptable process). Risk management strategies to protect against such claims are described in section 124; such as corporate indemnity and directors’ and officers’ liability insurance. (Source pp. 609-610) 7. When a director enters into a contract with her own corporation she must disclose this fact (and the nature of her interest in the contract) at the meeting of the board of directors that considers the contract, and must not vote on the matter (s. 120 CBCA). (Source p. 610) 8. If it is a director’s duty to acquire a particular item of property for the corporation, or to give the corporation the chance of first refusal, and if instead she acquires the property for herself, then she has intercepted an opportunity belonging to the corporation and has committed a breach of duty. (Source p. 611) 9. A director may have a conflict of interest where, (a) he enters into, or has an interest in, a contract with his own corporation; or (b) where he is a director of two or more

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corporations which may have conflicting interests; or (c) he carries on a competing business with the corporation. (Source p. 612) 10. Insider trading occurs when a director or officer of a corporation or some other “insider” buys or sells the corporation’s shares or other securities, making use of confidential inside information in order to make a profit or avoid a loss. (Source p. 613) 11. For the purpose of the legislation, “insider” includes a director or officer, an employee, any shareholder who holds more than a prescribed percent of the corporation’s securities, and a “tippee”—that is, a person who knowingly receives confidential information from an insider. (Source p. 613) 12. A minority shareholder is “locked in” when he cannot sell his shares, or cannot sell them except at a small fraction of what he believes they should be worth. He is “frozen out” by being fired from his job with the corporation, removed from the board of directors, and deprived of a share of profits (due to the non-payment of dividends). (Source p. 615) 13. The principal rights attached to shares in a corporation include: the right to vote at any meeting of shareholders; the right to receive any dividend that has been declared; and the right to receive the remaining property of the corporation (after payment of its debts) on dissolution. (Source pp. 615-616) 14. An ordinary resolution is passed by a simple majority of votes cast, whereas a special resolution requires a two-thirds majority. (Source p. 616) 15. Class rights are special rights attaching to a particular class of shares. They may relate not only to voting but also to other matters such as rights to priority in payment of dividends or to receive the surplus on liquidation of the corporation. (Source p. 617) 16. A proxy is a person appointed to attend a general meeting of shareholders and to cast the votes of the shareholder appointing him or her. (Source p. 617) 17. No. Whether dividends are declared is a matter entirely within the discretion of the board of directors; shareholders normally have no right to be paid a dividend even when the corporation makes large profits. (Source p. 617) 18. A pre-emptive right is the right to have the first opportunity to purchase a proportionate part of any new shares to be issued. (Source p. 618) 19. The directors have the right to issue new shares, subject to any provision in the articles that restricts the maximum number of shares that may be issued. However, they must issue shares only for the purpose of raising capital or for purposes that are in the best interests of the corporation, and may not do so for the purpose of affecting voting control. (Source p. 617)

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20. The basic information that must be provided in the corporation’s annual financial statement includes: (1) the income statement, showing the results of operations for the financial year; (2) the balance sheet, showing the corporation’s assets as of the financial year-end; (3) a statement of changes in financial position; (4) the statement of retained earnings showing changes during the year; and (5) the statement of contributed surplus. (Source p. 619) 21. The role of the auditor is to assist in the analysis and evaluation of the financial statements, and to confirm their accuracy as far as is possible. The auditor represents the shareholders’ interests, but his or her duty is owed to the corporation. In a public company the auditor must be registered with the Canadian Public Accountability Board and is supervised by an audit committee (a committee made up of independent directors that receives reports of financial irregularities from all sources) (Source p. 620) 22. The corporation’s documents of record include: the minute books of the proceedings at meetings of the shareholders; a register of all transfers of shares; a copy of the corporation’s charter; a copy of all by-laws (or articles) and special resolutions; a register of shareholders; and a register of directors. (Source p. 620) 23. Canadian courts have consistently held that shareholders owe no duty to act for either the welfare of the corporation or the welfare of other shareholders. However, such a duty may be imposed if the shareholder holds some additional position such as officer or director. (Source p. 621) 24. The appraisal remedy is the right to have one’s shares bought by the corporation at a fair price. This remedy is limited to specific actions by the majority such as: changing the restriction on the issue, transfer, or ownership of shares; changing any restriction on the business that the corporation may carry on; amalgamating or merging with another corporation; selling, leasing, or exchanging substantially all of the assets of the corporation. (Source p. 622) A derivative action is a proceeding brought by one or more shareholders in the name of the corporation in respect of a wrong done to the corporation. This can only be done with the permission (leave) of the court (s. 239). (Source p. 623) 25. Under the “just and equitable” winding up remedy a court has broad discretion to make a winding up order whenever it is “just and equitable” to do so. In practice, this remedy is only effective for small family businesses in deadlock. By contrast, the oppression remedy is the choice for large businesses and anyone with an interest may seek the remedy. The court must find (1) that the complainant’s expectations about how their interests would be managed are reasonable; and (2) that the complainant has been treated unfairly or oppressively. This is not necessary in the winding up process. Finally, the remedy available to the complainant goes well beyond “winding up” and the court may make any order that it considers appropriate. (Source p. 623)

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26. While each shareholder agreement must be custom-tailored to the needs of the individual business, some of the matters commonly dealt with include: the right to employment, the right to participate in management, and the right to a fair price for a share interest. (Source p. 626)

CASES AND PROBLEMS 1. Kristen, as a director, has breached her fiduciary duty and has not acted in the best interests of the corporation. She has an interest in a contract with the corporation, which she has not disclosed nor gained permission for. As Jim and Ashley form a quorum, they can vote to rescind the contract upon learning of Kristen’s interest. What is Kristen liable for? The Checklist on p. 614 sets out the civil liability of a director for a breach. She could be liable for any damages. As well, there may be internal documents which could affect her, such as the right of the other directors by majority vote to remove a director who has committed a breach. At the very least, the contract will be rescinded and she will be liable for any expenses incurred in relation to this. 2. The problem, from Eriksen’s perspective, is that Farmer and his niece, Greenberg, now effectively control the corporation. They are the directors and they own fifty-one out of the one hundred and one shares. Eriksen risks being frozen out, even though she owns almost half the shares. Her first line of attack should be to question the appointment of Greenberg to the board of directors. Directors are normally elected by the shareholders at a general meeting. Do the corporation’s articles or by-laws, or the relevant statute permit a sole surviving director to fill a vacancy on the board? Even if they do, Eriksen may argue that the issue of the new share to Greenberg was invalid. Although directors have the power to issue shares this must be done only for proper purposes and a change of control appears to be an improper purpose. (The new share seems to have been issued for a fair price, but there was clearly no need to raise extra capital.). Eriksen should also check the class rights that are attached to her share. Is there a pre-emptive right (that is the right to maintain her percentage position out of any new issue)? If so she is entitled to an additional share. Finally, if there has been no wrongdoing on the part of Farmer and Greenberg, Eriksen may nevertheless seek a remedy on the grounds that the affairs of the corporation have been conducted in a manner oppressive to her. The case is based on Daniels v. Fielder (1988), 52 D.L.R. (4th) 424, a decision of the Ontario High Court of Justice. There, the court held that the conduct was oppressive, and directed the defendants to buy out the plaintiff’s shares at a fair price. [NOTE: in Daniels v. Fielder, the court also held that appointment of a new director was invalid for lack of a quorum, since the by-laws of the corporation required at least two directors to constitute a quorum. Hence, the share issue was also invalid and should be cancelled.]

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3. Slater owes a fiduciary duty to the company as a director of Lockley. Slater must act honestly with respect to his duties as director. Although he did not come by the information about the gravel pit in his capacity of director of Lockley—he heard about it from an old friend—he knew that it was the sort of property that Lockley was seeking and he kept the information secret from the corporation. First he had a duty to disclose the opportunity to the corporation and if the board so directed to try to acquire it for Lockley. Instead, he acquired a half share in it for himself, without the knowledge or consent of Lockley; that is, of his fellow shareholder and director, Mason. In doing so, he placed himself in a position of conflict of interest, intercepted a corporate opportunity, and was in breach of his fiduciary duty to the company. Therefore, Lockley may challenge Slater’s behaviour. However, Mason is not entitled to challenge for his personal benefit. As a shareholder in Lockley he is not entitled to participate in all new ventures undertaken by another shareholder or director. The cause of complaint is solely based on the obligations owed to the company. There is no fiduciary duty owed to shareholders only a duty of diligence and skill (s. 122(b) of CBCA). The case is based on Slate Ventures Inc. v. Hurley (1997), 74 A.C.W.S. (3d) 958, a decision of the Newfoundland Court of Appeal. On similar facts, the court in that case held that the purchase on his own account was in direct conflict with the director’s duty to his corporation. He was accountable to the corporation for the profit he had made. 4. This case is developed from Illustration 26.2, at p. 666. In parts (a) and (b) Banks and Melville, as directors, are clearly "insiders" by the definitions in s. 126 (1) of the CBCA. In (a), if sellers who transferred their shares to Banks' broker learned what happened, they could sue under s. 131 (4)(a) for compensation for the "loss" they suffered. "Loss" would be held to be an amount representing the difference between their selling price and their price at the end of the trading day—more or less. It is not always simple to quantify the loss because it is by no means certain that the seller would have sold at the very highest price. On the other hand, the courts usually wish to deprive the wrongdoer of any benefit he might gain from his conduct: giving full compensation to the innocent seller based on the whole gain made by the wrongdoer accomplishes that purpose. If the sellers do not sue, the corporation itself can require Banks "to account... for any benefit or advantage obtained," under s. 131 (4) (b). In part (b), Parry would clearly have a right to recover from Melville under s. 131 (4)(a) and if he did not sue his sister, Normin Inc. could do so. Section 131 (1)(f) states that "a person who receives specific confidential information from... [an insider such as a director or senior officer]" is deemed to be an insider. Accordingly, in part (c), Frobisher as a "tippee" would be liable to provide the same type of compensation as would Banks and Melville, even though she is not herself a director or officer of Normin Inc., if she knew that Hudson was an officer of Normin. All insiders and tippees would also be subject to regulatory and criminal liability under securities legislation and the criminal code. Under the legislation fines could go as high as $5 million dollars and imprisonment can be as long ten years. 5. This is a common pattern for family businesses and there does not appear to be any illegal behaviour—in the sense of a breach of corporate law—involved in this case. Oleg

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resigned from his employment and, it seems, from the board of directors. It is not clear if Sergei and Tanya are acting improperly by failing to provide Oleg with information about the corporation. As a shareholder Oleg is still entitled to some information – financial statements, documents of record and auditors’ report (if any). However, there is clearly some sort of breakdown in the relationship and this may compromise the future of the business. This being a small family company, Oleg is most likely to request a winding-up order. He may justify the making of a winding-up order on the just and equitable ground. Alternatively, the oppression remedy may be available, even if there has been no actual wrongdoing but Oleg can establish that he has been treated unfairly. In hindsight, this would have been a perfect situation for a unanimous shareholders agreement protecting each shareholder’s right to employment The case is based (rather loosely) on Eiserman v. Ara Farms Ltd. (1988), 52 D.L.R. (4th) 498, a decision of the Saskatchewan Court of Appeal. There, the court held that in the case of a small closely-held family corporation, with restrictions on share transfer, dependent on mutual confidence, and joint participation in the corporation's affairs, a breakdown of mutual confidence tends to be sufficient reason to give relief, even where there is no intention on the part of the corporation to act unfairly or oppressively. The corporation was ordered to purchase the plaintiff's shares for a fair price. 6. This question combines various aspects of a director’s fiduciary duties. The failure of the directors to tell Swallow about the permission to develop would normally not constitute a breach of their duties. Directors are under no duty to keep shareholders informed of every development (though it might be something that should be included in their annual report). Indeed, given that Aldeburgh wishes to acquire as much property in the area before the price rises, they are probably justified in keeping the information as confidential as possible. However— (a) When Balstrode approaches Swallow and persuades him to sell his shares to her, she is guilty of insider trading. Under s.131 of the CBCA, she is liable to account to the corporation (Aldeburgh) for the profit she makes on the resale of the shares. She is also liable to compensate Swallow for the direct loss he has suffered; that would seem to be the difference between the price he received from Balstrode and the price that Maltings paid Balstrode for the shares. (The law is unclear as to whether a director can be liable on both counts.) As discussed in Question 4, regulatory and criminal liability is also applicable. (b) Crabbe has made use of a corporate opportunity for his own benefit. He obtained the information in his capacity as director and is accountable (to Aldeburgh) for the profit he has made. He has also put himself in a position of conflict of interest, because he bought the property for himself when his duty was to acquire it for the corporation. (c) Orford has breached her duty in the same way as Crabbe, since she bought the property for herself when she should have bought it for her corporation. Thus she is liable to account for her secret profit. In addition, when the property was re-sold to Aldeburgh, she did not disclose her interest in the numbered company, as required by s.120 CBCA, and the contract was therefore voidable. However, since the property has increased in

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value, the corporation will not wish to rescind the contract, but will prefer to claim an accounting of the profit made by Orford. (d) Grimes is not a director or officer of the corporation and owes it no duty. (He is not a tippee—he is the one who gives the tip, not receives it.) [NOTE: only part (a) is covered by the insider trading rules. Those rules apply only to trading in securities of the corporation.]

CASE SUMMARIES Air Canada v. M & L Travel Ltd. (1993), 108 D.L.R. (4th) 592 (Supreme Court of Canada) The appellant was one of two directors and shareholders of a travel agency. He was not active in the business, but was fully aware of its details. The respondent airline entered into an agreement with the agency, permitting the agency to sell tickets on behalf of the airline. The agreement provided that all moneys, less commissions, collected by the agency for tickets sold by it, would be held in trust by the agency until it accounted for them to the airline. The agency had an operating line of credit from a bank and the moneys advanced thereon and interest on advances constituted a demand loan. The directors personally guaranteed the loan. The agency set up trust accounts with the bank for the deposit of the proceeds of ticket sales, but never used them. Instead, it deposited the proceeds into its general operating account with the bank. When a dispute broke out between the two directors, they both stopped payment on cheques. Subsequently, they both sought to pay the airline the amount owed it for ticket sales, but the bank refused to honour their cheques because of the dispute. The bank then demanded payment of its loan and, when it was not paid, withdrew the amount of the loan from the general operating account. The airline sued the agency and the two directors personally for the amount owed it for ticket sales. The Supreme Court of Canada held that the relationship between the airline and the agency was not one of debtor and creditor, but one of trust. The intent to create a trust, the subject-matter and the object of the trust, were all clearly defined in the agreement between the parties. The absence of a requirement to keep the trust moneys separate from the agency's own was not determinative and did not indicate that the relationship was a debtor-creditor relationship, since the intention to create a trust relationship was clear. They also held that the agency breached its trust by failing to account to the airline for moneys collected from the ticket sales. The appellant, along with the other director, were personally liable for the breach of trust because they were constructive trustees, they knowingly assisted in the trustee's dishonest and fraudulent design. Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, [1906] 2 Ch. 34 (England – Court of Appeal) See Case 26.1 at p. 655 in the text.

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BCE Inc., Re, 2008 SCC 69 at para 66; BCE Inc. v. 1976 Debentureholders 2008 SCC 69 (Supreme Court of Canada) See Case 26.10 at pp. 679-680 in the text. A group of BCE debenture holders sought an oppression remedy to block a proposed leveraged buyout of BCE by a group of investors led by the Ontario Teachers’ Pension Fund and some foreign investors. They argued that the proposed buyout was not fair or reasonable because the value of their debentures were likely to fall by 20%. The vast majority of shareholders (97.93%) approved of the buyout. The Supreme Court overturned the Quebec Court of Appeal and held that the debenture holders were not entitled to an oppression remedy. It was appropriate for the board of directors to consider the best interests of the corporation as a whole in order to resolve conflicting interests of stakeholders. It held that in assessing an oppression remedy a court may consider not only what is legal but what is fair and should answer two questions: o Does the evidence support the reasonable expectations of the claimant? (This involves determining if expectations are reasonable). On the facts, it was that the debentureholders expectations were unreasonable. It was reasonable to expect that the board of directors would consider the interests of the debentureholders but it was enough to ensure that contractual commitments were honoured. It was not reasonable to expect that trading value of debentures could remain unaffected or that leveraged buyouts were unforeseeable at the time of contracting. o Does the evidence establish that said expectations were violated? (this violation must involve unfair conduct or prejudicial consequences) On the facts it was held that the directors considered the contractual commitments. In the course of its reasons the Supreme Court affirmed Peoples v. Wise. Bonisteel v. Collis Leather Co. Ltd. (1919), 45 O.R. 195 (Ontario High Court) See Case 26.7 at p. 672 in the text. Brant Investments Ltd. v. Keeprite Inc. (1991), 3 O.R. (3d) 289 (Ontario Court of Appeal) The board of directors of Keeprite proposed to purchase the assets of a subsidiary. The plaintiffs, minority shareholders, objected and gave notice under s.184 (now s.190) of the CBCA requiring the corporation to buy their shares at a fair price. They also instituted proceedings under s.234 (now s.241), claiming that the majority had unfairly disregarded their interests and attacking the transaction as oppressive. The oppression action was dismissed. The plaintiffs were not "squeezed-out"—they simply disagreed with a change in the affairs of the corporation agreed to by the majority. Majority shareholders owe no duty to consider the interests of the minority. The plaintiffs were entitled to dissent and receive a fair price for their shares, under s.184. Copyright © 2016 Pearson Canada Inc.

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Canada Safeway Ltd. v. Thompson, [1951] 3 D.L.R. 295 (British Columbia Supreme Court) See Case 26.3 at p. 664 in the text. Canadian Aero Service Ltd. v. O’Malley (1973), 40 D.L.R. (3d) 371 (Supreme Court of Canada) See Case 26.5 at p. 665 in the text. Catalyst Fund General Partner I Inc. v. Hollinger Inc., [2004] O.J. No. 4722, aff ’d [2006] O.J. No. 944 (Ontario Court of Appeal) See Case 26.6 at p. 665 in the text. Cook v. Deeks, [1916] A.C. 554 (England – Privy Council) From Hillcrest Housing Ltd. (Re), 1998 CanLII 4787 (Princ Edward Island Supreme Court) at paras 266-267: [In Cook v. Deeks], the plaintiff and the three defendants were the directors of a company involved in the construction of the Canadian Pacific Railroad. After a falling out, three of the defendants decided to exclude the plaintiff from future business dealings. While still acting as managers of the original company, and with their duties to the original company unchanged, they proceeded to negotiate a new contract with the Canadian Pacific Railway. After obtaining the contract in their own names, they then formed a new company to carry out the construction. In finding the defendants were required to account to the original company for the profits they made out of the transaction, Lord Buckmaster stated at p. 563: ... men who assume the complete control of a company s business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent. Daniels v. Fielder (1989), 52 D.L.R. (4th) 424 (Ontario High Court of Justice) The applicant is the widow of Janis Daniels. Daniels and the respondent were shareholders and directors of a golf club. They operated more like a partnership than a corporation. When Daniels died, his wife inherited his 50% share in the corporation. A falling out seemed to have occurred betweent he applicant and the respondent as a shareholders meeting was called. The applicant put forth a late of three members from her firm of solicitors as directors, were all defeated, because the respondent took the casting vote as president. Instead he elected himself, his wife, and his son to the board of

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directors. The respondent transferred one share to his son after the death of Daniels, and claims that the transfer was approved at a directors’ meeting. The court held on that point, that the transfer was invalid, because as the sole remaining director, there was no quorum. The applicant brought an application for a winding up under the oppression remedy. The Court held that there was no real evidence of mismanagement and that no dividends were paid, because the money was being put back into the corporation. As a result the Court ordered that the corporation buy back the applicant’s shares at a fair price, rather than winding up of the corporation. Dovey v. Cory, [1901] A.C. 477 (England—House of Lords) Cory was a director of National Bank of Wales, Ltd. The board of directors resolved to pay dividends out of capital and to accept advances on improper security, relying on the judgment, information, and advice of the chairman and general manager of the bank, who made misleading statements. Cory and his fellow directors had no reason to doubt their integrity, skill, or competence. The court held that Cory had not been negligent and was not liable to the company. Dylex Ltd. v. Anderson (2003), 63 O.R. (3d) 659 (Ontario Superior Court) The court held that a trustee in bankruptcy of a corporation was entitled to bring an action against the former directors under the oppression rule and was not restricted to the remedies provided by the Bankruptcy and Insolvency Act. Eiserman v. Ara Farms Ltd. (1988), 52 D.L.R. (4th) 498 (Saskatchewan Court of Appeal) This action is brought by the son and minority shareholder in a family corporation, of which the applicant was formerly a director. The applicant worked for the corporation with his father running the farm. When the the applicant’s brother returned after his business failed, to work on the farm, relations between the parties began to deteriorate. Finally, the applicant met with the members of his family and declared that he was being treated unfairly and that he would quit. The family accepted his resignation. The Court of Appeal held that the conduct taken by the majority shareholders reduced the applicant’s voice in the management of the business to a point that he found intolerable. This was sufficient to be considered prejudicial behaviour and warranted the oppression remedy; there did not have to be wrongdoing on the part of the majority. Hercules Managements Ltd. v. Ernst & Young (1997), 146 D.L.R. (4th) 577 (Supreme Court of Canada) See Chapter 4. Shareholders in two corporations brought an action against a firm of accountants, alleging that audits of the corporations' financial statements had been negligently prepared, and that in consequence, they had incurred investment losses and

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losses in the value of their shareholdings. The accountants argued they owed no duty of care to the shareholders in tort, and that any action should have been brought in the names of the corporations. On appeal, the Supreme Court of Canada held, dismissing the appeal, that the accountants had an initial burden of showing that the case was one in which the existence of a genuine issue was a proper matter for consideration, but the shareholders then must establish that the claim had a real chance of success. Reliance by shareholders on a corporate audit was foreseeable, and consequently, there was a prima facie duty of care. However, the purpose of an audit was to enable the shareholders collectively to exercise control over the directors. Losses caused to shareholders as individuals were not within the scope of the accountants' duty, and any action should therefore be brought in the names of the corporation. Consequently, the prima facie duty of care was negated by policy considerations. Icahn Partners LP v. Lionsgate Entertainment Corp., [2010] B.C.J. No. 2130, at paras 128–54 (British Columbia Supreme Court) The petitioners brought an oppression remedy and sought to set aside an issue of shares by the respondent to an investment funds affiliated with Mark Rachesky. The effect of the issuance was to convert debt into equity thereby deleveraging the respondent and at the same time to dilute the pettitioners holdings in order to prevent a takeover by the petitioners. The Court held that the directors acted in the best interest of the corporation and that they did not act oprressively or in an unfairly prejudicial manner. Journet v. Superchef Food Industries Ltd. (1984), 29 B.L.R. 206 (Quebec Superior Court) Superchef was incorporated in 1977 by M, who was its sole director and officer. M held one hundred shares, his wife five hundred and his mother four hundred. The business was successful, though two other corporations owned by M got into financial difficulties. In an attempt to resolve those difficulties, M entered into an agreement with K, which involved the issue of a further one thousand shares to K. M and K were to be the sole directors and, effectively, the management of the corporation required their unanimous agreement. Difficulties soon developed between M and K. K did not carry out some of his promises and, partly as a result, M was forced to declare bankruptcy. As a bankrupt, he was automatically disqualified from acting as a director of Superchef. That left K in sole charge. Instead of calling a shareholder meeting to appoint a new director in M’s place, he continued to run the corporation by himself. In doing so, he committed numerous improprieties, treating Superchef’s funds as his own and diverting its property to other corporations which he controlled. He removed M from his position as president of Superchef (so that M no longer received remuneration). He even purported to cancel the shares owned by M’s mother and to re-issue them to his own girlfriend (who happened to be M’s sister). He then called a shareholders’ meeting, and purported to have the girlfriend appointed as a director (she voted in favour) and to ratify the various improper actions he had taken.

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The court had little difficulty in finding his actions burdensome, harsh, and wrongful. As for the purported ratification of his wrongdoings, the resolution was invalid, since the shares voted by the girlfriend had been improperly allotted to her. In any event, s. 235 of the C.B.C.A. (now s. 242) provides that the court may disregard the fact that a wrong complained of has been approved by the shareholders. The court ordered that K be removed from his position as director, that a temporary receiver-manager be appointed with instructions to recover all moneys owed to Superchef (including those wrongfully diverted by K) and that, once that had been done, K should buy out all the other shareholders at a fair price. Kerr v. Danier Leather Inc. 2007 SCC 44 (Supreme Court of Canada) Danier included a forecast of fourth quarter results in a prospectus prepared for an initial public offering of shares. After the release of the prospectus, but before the public offering closed, Danier became aware that the forecast in the prospectus was overly optimistic and unlikely to be realized; it did not disclose this new assessment. Shareholders brought an action for misrepresentation pursuant to s. 130 of the Securities Act and were successful at trial. The Court of Appeal overturned the trial judgment and the Supreme Court dismissed the appeal. The forecast was accurate at the time of filing. Subsequent disclosure was not required by statute because the new information did not qualify as a “material change” under s. 57 of the Securities Act. The Supreme Court held that forecasting was a matter of business judgment, but the business judgment rule could not be used to limit a statutory duty to disclose (in this case none was found). The Court also ordered costs and made interesting comments about the use of class actions by shareholders and the role of costs in class action litigation. MacMillan-Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255 (British Columbia Supreme Court) MacMillan Bloedel was Canada's largest forest products company. From time to time, it had an excess of logs which it sold or traded through its log marketing section. Binstead was manager of log trading and his job was to dispose of the excess logs. While he held this position, he also held a secret one-third interest in Anderson-MacKinnon Log Sales Ltd., a company which purchased excess logs from MacMillan Bloedel. Anderson and MacKinnon held the remaining shares in Anderson-MacKinnon Log Sales, and were also the sole shareholders in another log trading company which purchased excess logs from MacMillan Bloedel. When MacMillan Bloedel discovered this state of affairs, it sued for the profits made on the deals between it and the two Anderson-MacKinnon companies. The court held that Binstead had made a secret profit for which he had to account, since his position of control put him in a fiduciary relationship with MacMillan Bloedel. Anderson, MacKinnon, and their two companies knowingly participated in Binstead's breach of duty and received profits from that breach. Therefore they were constructive trustees of and liable to account for the profits they had made.

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Motherwell v. Schoof, [1949] 4 D.L.R. 812 (Alberta Supreme Court) The parties entered into an agreement to vote their respective shares in Duro-Lite Products of Canada Ltd. to elect each other as directors of the company, to control to some extent their discretion as directors, and to use their shares to limit the number of directors to three. The plaintiff later sought a declaration that the agreement was void. The court held that an agreement between shareholders to vote as a unit so as to elect certain persons as directors and so as to limit the number of directors is lawful. But where an agreement purports to bind them in their capacity as directors, it is invalid. The valid portions of the agreement were severable and remained in force. MNR v. Corsano (1999), [1999] F.C.J. No. 401 (Federal Court of Appeal) A corporation failed to submit employee wage deductions to the Minister of Revenue. The tax court judge held that the directors were not de jure directors as defined by the incorporating legislation, but rather de facto directors, and were therefore not liable personally under the Act for unpaid taxes. The Court of Appeal held that the Act does not distinguish between de jure and de facto drirectors; that the Act in fact suggests that persons not qualified to be directors, can act as directors; and that the lack of qualifications should not ablsolve them of the responsibility they assumed. The Court held that the directors were personally liable for the unpaid deductions. North-West Transportation v. Beatty (1887), 12 App. Cas. 589 (Judicial Committee of the Privy Council) A maritime shipping company, North-West Transportation, incorporated in 1869, owned a number of ships. The defendant, together with some associates, held a small but controlling majority of shares, and elected the whole board of directors. The plaintiff, who was related to the defendant, was a large minority shareholder. In the fall of 1882, North-West lost one of its steamers at sea and a second ship was found unsuitable to continue. At the time, the defendant in his personal capacity, quite separate from his role in the company, owned a ship under construction and near completion. It was proposed that North-West purchase the ship from the defendant. A motion to buy the vessel, disclosing all details of the transaction, was presented to the board. The directors, over the strenuous objections of the plaintiff, passed a motion to proceed with the purchase. The motion was sent to a special meeting of shareholders where it was read, and after the price was reduced it was adopted by a majority of three hundred and six to two hundred and eighty-nine votes, with the plaintiff casting one hundred and twenty of the dissenting votes, and then suing to have the purchase rescinded. Before the case was heard, the ship went into regular service for North-West. At trial, the contract was set aside; the defendant was in a conflict of interest and should not have been allowed to vote on the resolution. This decision was overturned by the Ontario Court of Appeal, restored by the Supreme Court of Canada, and finally overturned again by the JCPC. It held that, even in the absence of a statutory provision (such as we now have in s. 120 of the CBCA), at common law directors would not be

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allowed to approve of a transaction in which they had a material interest, because they were in a clear conflict of interest situation: on the one hand they were under a duty to get the lowest price possible for the company; on the other, as owners of the vessel they could not ignore their self interest to get the highest price. However, the Court also held that shareholders are not bound by the same high standard of duty to act only in the company's best interests. They could properly vote in favour of such a sale, "unless the adoption was brought about by unfair or improper means". And voting as a majority is not in itself unfair or oppressive. It is important to note that the Court reviewed the transaction to make sure it was not unfair, even if there might be some difference of opinion about the exact price. Sir Richard Baggallay stated: "It is proved by uncontradicted evidence, and is indeed now substantially admitted, that at the date of the purchase the acquisition of another steamer to supply the place of the Asia [the lost ship] was essential to the efficient conduct of the company's business; that the United Empire [the defendant's ship] was well adapted for the purpose; that it was not within the power of the company to acquire any other steamer equally well adapted for its business; and that the price agreed to be paid for the steamer was not excessive or unreasonable." NPV Management Ltd. v. Anthony (2003), 231 D.L.R. (4th) 681 (Newfoundland and Labrador Court of Appeal) The plaintiff shareholder brought an action alleging oppression by the defendant directors. The plaintiff alleged that the directors had dissipated the assets of the corporation, had a conflict of interest, had failed to keep adequate records, and had made false representations. The court held that none of the matters alleged gave rise to a personal action. The claims could only be made by a derivative action, with leave of court.

Pasnak v. Chura [2004] B.C.J.No.790 (British Columbia Court of Appeal) The plaintiff alleged wrongful acts committed by the defendant director in the management of a corporation in which the plaintiff was a shareholder. The court held that any claim for harm done by the defendant was in relation to his management and control of the corporation, and since the plaintiff could not show that he had been affected by the alleged misconduct in any way different to than any other shareholder, then the claim would have to be pursued by the corporation itself through a derivative action. Patheon Inc. v. Global Pharm Inc., [2000] O.J. No. 2532 (Ontario Superior Court of Justice) See Case 26.9 at p. 678 in the text.

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Peoples Department Stores Inc. v. Wise (2004), 244 D.L.R. (4th) 564 at 582 (Supreme Court of Canada) See Case 26.2 at p. 660 in the text.

Peso Silver Mines Ltd. v. Cropper (1966), 56 D.L.R. (2d) 117 (Supreme Court of Canada) See Case 26.4 at p. 664 in the text.

Piller Sausages & Delicatessen Ltd. v. Cobb International Corp. [2003] O.J. No. 2647 (Ontario Superior Court) affirmed 40 B.L.R. (3d) 88 (Ontario Court of Appeal) The applicant purchased a piece of machinery from the respondent corporation and paid the full price of $70,000. The respondent failed to deliver the machinery and the applicant recovered judgment for the price paid. In attempting to execute the judgment it found that the owners of the corporation had engaged in asset stripping, by declaring dividends, bonuses, etc., and by selling off its assets. The court held that the applicant was a creditor and was entitled to claim under s.241 of the CBCA (oppression remedy)

Proulx v. Sahelian Goldfi elds Inc. (2001), 204 D.L.R. (4th) 670 (Ontario Court of Appeal) The plaintiffs sued the directors of the corporation personally for unpaid wages under s. 131(1) of the Ontario Business Corporations Act. The amount claimed included unpaid wages, vacation pay, and expenses, as well as interest. The Court of Appeal upheld the trial judge’s interpretation of the Act to include vacation pay and expenses as “wages.” Re Ferguson and Imax Systems Corp. (1983), 150 D.L.R. (3d) 718 (Ontario Court of Appeal) Imax Systems was incorporated in 1967 to exploit a patented film projection system. Initially, it had six shareholders—the Fergusons, the Kerrs and the Kroiters. Each of the three husbands held seven hundred Class A common shares, and their three wives each held seven hundred Class B preferred shares. The Class B shares were entitled to a first dividend, but had restricted voting rights. During the early years, Mrs. Ferguson worked hard to establish the business. Then in 1972 her marriage broke down and she divorced her husband in 1974. By that time the ownership of some of the shares had changed, but the three husbands still owned between them over 70% of the common shares, and Mrs. Ferguson owned 24% of the Class B shares. After the divorce, the corporation ceased to pay any dividends despite the fact that it was making substantial profits. The evidence was that Mr. Ferguson did not want his wife to receive any of the profits of the business and was hoping to force her to sell her shares for

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a very low price. He apparently was able to convince the other two directors to go along with this strategy. (They, presumably, were able to enjoy the corporation’s profits through the payment of directors’ remuneration, without receiving dividends.) The court held that the affairs of the corporation were being managed in a manner that was oppressive and unfairly disregarded the rights of Mrs. Ferguson; the corporation was ordered to purchase her shares at a fair price. R.v. Harper (2003), 232 D.L.R. (4th) 738 (Ontario Court of Appeal) The accused was convicted of two counts of insider trading, having sold shares knowing of material circumstances that had not been made public, thereby avoiding a loss. The loss (that would otherwise have been made) was estimated to be about $1.35 million. It was appropriate to add a “deterrence factor” and, on appeal, the fine of $2 million was held to be reasonable.

Re Olympia & York Enterprises Ltd. and Hiram Walker Resources Ltd. (1986), 59 O.R. (2d) 254, at 271 (Ontario Divisional Court) Hiram Walker was the target of a hostile takeover by an Olympia & York subsidiary. The Hiram board attempted to block the takeover by a number of measures including the buy back of shares (allegedly with company assets) It was suspected that the goal of the opposition was to entrench existing management and Olympia & York sought an injunction. The remedy was refused holding that the directors acted in good faith and in the best interests of the shareholders. Appeal was dismissed. Reference is made to Teck Corp. Ltd. v. Millar et al. (1972), 33 D.L.R. (3d) 288. This decision was relied upon by the Supreme Court of Canada in Peoples v. Wise as approving the principle that shareholder (and other stakeholder) interests may be relevant to, but not determinative of, the best interests of the corporation. Roman Corp. v. Peat Marwick Thorne (1992), 8 B.L.R. (2d) 43 (Ontario Court, General Division) Auditors were alleged to have been negligent in preparing a corporation's annual financial statements and in failing to advise the shareholders of the corporation's financial difficulties. The court held that the auditors' duties are owed to the corporation, not to its individual shareholders.

Slate Ventures Inc. v. Hurley (1998), 37 B.L.R. (2d) 138 (Newfoundland Court of Appeal)

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The defendant appealed the decision of the lower court finding him in breach of his ficduciary duty to the corporation, Newfoundland Slate (NS). The defendant was the founder, sole director and sole shareholder of NS. The plaintiff invested in NS by purchasing 49% of its shares; it further entered into a shareholder agreement with the defendant. In breach of his duty as a director, the defendant purchased a quarry personally. Teck Corp. v. Millar (1973), 33 D.L.R. (3d) 288 (British Columbia Supreme Court) See Case 26.8 at p. 672 in the text. Tilley v. Hailes (1992), 7 O.R. (3d) 257 (Ontario Court of Appeal) In 1980, Tilley founded a corporation, Tilley Endurables, of which he was the sole shareholder. In 1987, the corporation became indebted to a corporation owned by Hails, and Tilley subsequently transferred half of his shares to Hails; they also entered into a shareholders' agreement. In 1991 relations between the two deteriorated seriously and they refused to speak to each other. Tilley applied for a winding-up order. Because this would be a drastic remedy, especially for a corporation that employed over one hundred people, the court ordered instead that Tilley should be given the opportunity to buy out Hails' shares.

UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002), 214 D.L.R. (4th) 496; affirmed (2004), 250 D.L.R. (4th) 526 (Ontario Court of Appeal) An American lawyer introduced the corporate defendant to an investor, which bought a block of the corporation’s shares and became its largest shareholder. The lawyer was appointed a director and chairman of the board and proposed that he replace the existing CEO. He negotiated a compensation package that included a signing bonus of twenty-five million shares, stock options for a further seventy-five million, and various other benefits, worth in all about $27 million. The corporation’s management and board opposed the agreement and referred it to a compensation committee. Two of the directors then resigned (one being the chairman of the compensation committee) and were replaced. A further board meeting approved the package with little discussion. A number of shareholders were opposed to the arrangement, and at the next general meeting they were successful in removing the board. Subsequently, the plaintiffs acquired control of the corporation and brought an oppression action to have the compensation package set aside. The court found for the plaintiffs. The defendant lawyer was in breach of his duty to make full disclosure, under s.120 of the CBCA, and was also in breach of his fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation. He knew or ought to have known that the compensation package was not in the best interests of the corporation and failed to ensure that the mostly new board had the opportunity to

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inform itself about the details of the agreement before considering it. The Court of Appeal approved the trial judge’s reasons and specifically rejected the submission that oppression requires proof of fraud or that internal corporate machinery must be exhausted before an oppression remedy was available.

Valastiak v. Valastiak, [2010] B.C.J. No. 233 (British Columbia Court of Appeal) The defendant held 50% of the shares in a family business. There was a resulting trust to the plaintiff and on those grounds the defendant was held to be in a fiduciary position to the plaintiff as the beneficial shareholder, and therefore, personally liable to the plaintiff as a director for a misappropriation of funds. (Note: the issue in this case was whether a family law compensation order of payment to the plaintiff of misappropriated funds survived a personal assignment in bankruptcy by the defendant. The Court held that the debt was not discharged by bankruptcy.) Waxman v. Waxman [2004] O.J.No.1765 (Ontario Court of Appeal) The case concerned a long and bitter fight between two brothers, C and M, and their sons, over the conduct of a multi-million dollar family business. The lawsuits began in 1988 and continued over the following sixteen years. Both parties alleged various wrongdoings and disputed each other’s allegations. As the Court of Appeal stated, “Although the trial judge had to grapple with many difficult legal issues, this was first and foremost a factual dispute. Resolution of factual disputes to a large extent determined the outcome of the trial. The trial judge's findings of fact on many crucial factual issues reflected stark conflict in the versions of events presented in evidence of M. and C. and in arguments made at trial.” Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alberta Court of Appeal) Westfair had a long-standing policy of retaining a significant proportion of its earnings, while paying a regular dividend to its common shareholders. In 1985, the corporation adopted a new policy of distributing its entire net annual earnings as dividends, thereby effectively capping the retained surplus at the 1984 level. The main reason was that its surplus had grown quite large. The complainants were some of the holders of class A shares who sought relief for oppression. Their shares, issued in 1946, carried no direct claim on profits beyond a $2 dividend in priority to the common shares, but in the event of liquidation they shared equally with the common shares in surplus assets, including retained earnings. The Court of Appeal upheld the trial judge's order for a compulsory purchase of the complainant's shares. Section 241(2) of the CBCA requires corporations and their directors to treat all security holders fairly. It held that the action of the corporation was not oppressive because the expectation of the holders of the class A shares to share in the future success of the corporation beyond the dividend promised them was not a

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reasonable expectation. None the less, the court could protect them from unfair actions by the corporation, as found by the trial judge. These were of a procedural nature and included a failure to consult or inform the shareholders, arrange for an independent review, make a careful study, and consider the position of the shareholders. The circumstances did not call for a liquidation order, but the compulsory purchase should be upheld. However, the respondents were not entitled to have the shares valued as if all the assets of the corporation were being distributed, but only on a valuation related to the more limited share rights while the corporation was carrying on business.

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CHAPTER 27 CORPORATE GOVERNANCE: EXTERNAL RESPONSIBILITIES LIABILITY ARISING FROM BUSINESS RESPONSIBILITIES (Source p. 633) This chapter introduces students to the growing and diverse range of external obligations of business enterprises. The first part of the chapter reviews the various measures introduced to protect the major stakeholders groups: creditors, consumers, employees, competitors, investors, and the public at large. The second part of the chapter focuses on the types of liability that enforce the aforesaid measures. The obligations are enforced using all three categories of legal liability. The first is civil liability arising in contract, tort, and statute. Secondly regulatory liability offers protection for creditors and investors. The third is criminal or quasi-criminal liability arising from the most serious violations. It is important to stress the potential for liability of the corporation itself and its directors and officers for acts and omissions committed in the course of performing their duties. In this third context, the text examines environmental protection legislation. The term "quasi-criminal" is used because enforcement has become very aggressive under regulatory schemes; the risks to public health and safety have created an increased level of personal liability for directors and senior officers from beyond fines to include imprisonment. The Checklist on Classification of Offences at p. 634 is meant to demonstrate the role of intention for various offences. PROTECTION OF CREDITORS (Source p. 634) Specific tests are in place to ensure that the corporation remains able to meet its debts as they become due. It is important to remember that creditors may also use the general oppression remedy to protect themselves from unfair behaviour that affects their security. BCE Inc. v. 1976 Debentureholders 2008 SCC 69 is relevant to this discussion (see Case Summary Chapter 26). Chapters 28 and 29 provide more detail on remedies available to secured and unsecured creditors. PROTECTION OF EMPLOYEES and PROTECTION OF CONSUMERS AND COMPETITORS (Source p. 637) These two sections were added (in very brief form) to round out the list of stakeholders. It is important that students see these three groups as stakeholders to whom business owes some obligation. Chapter 18 provides the details of business’s obligations to employees and the government regulatory schemes in place to monitor compliance. Chapter 30 reviews government regulations implemented to protect consumers and level the playing field among competitors.

PROTECTION OF INVESTORS (Source p. 637)

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The public investor is the focus of this section. Although there is some overlap with Chapter 26, the emphasis should be placed on the external regulatory regime set up to ensure disclosure, transparency and integrity; that is the securities commissions. The requirements for the internal structure of the corporation should be presented as one part of a larger over-arching scheme to meet the goals of the legislation. Instructors may want to use Kerr v. Danier Leather 2007 SCC 44 from Chapter 26, p. 610, n. 33 to integrate the prospectus, continuing disclosure, material change and secondary market liability topics. This is the Supreme Court of Canada decision denying civil liability for an inaccurate forecast contained in a prospectus. The Court held that Danier was not required to disclose new factual information that came to its attention after the release of the prospectus. CIVIL LIABILITY OF CORPORATIONS (Source p. 642) The separate legal personality of corporations and the artificial nature of their existence, raise interesting philosophical issues. However, this does not present a major obstacle in the law of contract. We have already encountered in Chapter 17 the concept of agency. The corporation, as principal, is liable on the contracts made by its agents, but who gives those agents authority? In the law of torts, too, the principle of vicarious liability (which was studied in Chapter 3) seems to provide an answer to the question of corporate liability, but can a corporation itself commit a tort? CRIMINAL LIABILITY OF CORPORATIONS (Source p. 645) It is criminal liability that presents the greatest obstacle. How can a corporation have a guilty mind—mens rea? When can the guilty intention of a corporate officer be attributed to the corporation? Should corporations be criminally liable at all? The text retains some of the material on the “directing mind” test because most cases relate to this standard. The new test (s. 22.1 & 22.1 Criminal Code) can best be understood by considering how it changes the old test. As yet there are few cases interpreting the new test. Students should be made aware of the wider definition of “organization” (s. 2). The list of possible criminal offences is included to give students an idea of the range of offences in the Criminal Code. Too often students are only aware of offences causing bodily harm or involving violence. LIABILITY FOR ENVIRONMENTAL OFFENCES (Source p. 648) This section should be presented as an example of one area of government regulation that lifts the corporate veil to impose quasi-criminal liability and penalize directors and senior officers. If a more detailed review of environmental regulation is desired, focus on the International Issue box and combine this material with that contained in Chapter 30 on Government Regulation and Chapter 21 on Interests in Land. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 653)

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At this stage students should be aware that legal risks faced by businesses, can also affect individuals personally. Sole proprietors, partners, and senior personnel in corporations can all attach personal liability. It is important in a risk management plan, to protect the business and any individuals that may exposed; due diligence in making decisions is key. It is also important to have a firm grasp on legislation that affects the business, even minimally. CONTEMPORARY ISSUE (Source p. 637) One Federal Securities Regulator The economic collapse of 2008 has put the issue of a single national regulator back on the front burner as the quote from Minister Flaherty indicates. An expert panel commissioned by Mr. Flaherty recommended a single regulator in its report released in January 2009 (Hockin Report). (See Kevin Carmichael and Brian Laghi, “Expert panel backs single regulator” Globe and Mail” January 12, 2009) The mandate of the committee, panel members, final report and draft legislation are all available on the Panel’s website. Question 1 - In addressing this question, students should start with another question: what is the purpose of the legislation? It is most likely, that there is no cut and dry answer to this issue. If amalgamating into a National Securities Exchange improves capital markets for all Canadians, or that is the claim, then it appears to be a financial issue. If on the other hand, it is to centralize the regulation of securities to prevent fraud on the Canadian public, then perhaps it is more properly considered a National Security issue. Either way however, there is a constitutional legal issue in determining which level of government has the authority to act with regard to securities. Question 2 – This question asks students to reflect back to the s. 91 and 92 subject matter jurisdiction discussion of Chapters 1 & 2. Federal jurisdiction over trade and commerce is the most likely justification for a national regulator. Several provinces oppose a single regulator (most strongly Quebec, Manitoba and Alberta) and are threatening a jurisdictional challenge. The draft legislation has been reviewed by the Supreme Court of Canada to obtain an answer to the constitutional question. The judgement was not yet available at the time of writing this manual. Question 3 – With respect to this question, the Canadian Bankers Association (CBA) supports a single regulator and argues that if Canada’s security market were viewed as one market it would rank 6th in the world – behind the U.S., the U. K., Japan, France, and China as opposed to its current ranking which places Ontario below Italy and B.C. equivalent to Ireland. As well, mutual agreements for access to foreign securities would be more easily negotiated. The CBA reports that the International Monetary Fund, the OECD and the Canadian Competition Policy Review Panel all support a national securities regulator. Visit the CBA website at www.cbc.ca.

ETHICAL ISSUE (Source p.642) Corporate Social Responsibility and Executive Compensation

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During the 1990s, the prevailing view seemed to be that there was nothing wrong with “corporate greed”—indeed, it was to be encouraged, since it created wealth for the community as a whole. Scandals such as the Enron affair, and the collapse of some major corporations such as Lehman Brothers and Merrill Lynch in 2008, have caused a rethinking of the role of large corporations in society. Suddenly, the uncontrolled quest for wealth seems to be less attractive. Corporate executives have pocketed vast sums by way of remuneration and stock options, while their corporations collapse, leaving employees and creditors to bear the burden. Question 1 – In answering this question, the discussion should consider the SOX regulations implemented after Enron. They were supposed to inspire ethical behaviour in and by corporations. The economic collapse of 2008 would seem to indicate that the SOX measures did not achieve their goals. Corporate greed at the expense of shareholder interests prevailed. Question 2 – This question asks students to consider the expectations and interests of shareholders. Too often we assume only corporate executives suffer from greed. But shareholders expect the value of their shares to rise each year and dividends to be paid. They punish non-performing corporations by selling their shares at a loss. Therefore, it is up to the shareholder to change their expectations before a corporation can prioritize corporate social responsibility. Shareholders must be willing to support a corporation that emphasizes corporate social responsibility or it is not in the company’s best interests to do so. This involves the ethical values of respect (for the rights and interests of others) and citizenship (supporting a better society). Consumers as well play a role in supporting companies that show social responsibility by purchasing their products and services, and by avoiding those that ignore it. Question 3 – This question deals with the prevailing belief that tying executive compensation to the financial performance of the company motivates executives to inflate financial outcomes. If self-interest caused executives to maximize profit, then (sadly) self-interest may also be the way to refocus executives on corporate social responsibility. This logic questions the integrity (trustworthiness) of executives and assumes executives are motivated by their own self-interests and not by the interests of the corporation or the public as a whole. INTERNATIONAL ISSUE (Source p. 652) International Environmental Regulation Question 1 - Students should understand the magnitude of the challenge facing environmental regulators. Jurisdictional limitations create a patchwork of approaches. There is no one approach that will work. Kyoto remains relevant because it demonstrates that even after ratification a country can simply announce that they will not comply and there are few consequences. Canada has now withdrawn from the Kyoto Protocol. Similarly, the United States can sign a treaty and then simply never ratify it. In light of this, industry specific imitative and voluntary standards may have just as great an impact environmental behaviour.

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STRATEGIES FOR MANAGING THE LEGAL RISK (Source p. 653) The strategies recommended include reviewing what the company does to see if there are any areas which could create a concern for health, safety or the environment, then reviewing the applicable insurance coverage, and finally, to be aware that concerns must be examined and reviewed, as directors cannot ignore areas of concern. QUESTIONS FOR REVIEW 1. In the absence of notice of an irregularity or of suspicious circumstances, everything that appears regular on its face may be relied upon by an outsider and will bind the corporation. The rule is an application of the apparent authority principle in agency law; that is, an innocent third party may rely on the regularity of a corporate act if it is reasonable for him to do so in the circumstances. (Source p. 643) 2. No. Section 17 of the CBCA provides that “No person is affected or is deemed to have notice or knowledge of the content of any document that has been filed by the Director or is available for inspection at an office of the corporation.” (Source p. 643) 3. A corporation can adopt a pre-incorporation contract under the CBCA and the various provincial statutes. The effect is to make the corporation liable, and to give it rights, under the contract. (Source p.644) 4. Knowingly falsifying a prospectus is a criminal offence and also triggers civil liability on behalf of the corporation and personal liability for the directors, officers, underwriters, and any person that signed the prospectus. (Source p. 641) 5. As per s. 42 of the CBCA, a corporation may not pay a dividend if (1) there are reasonable grounds for believing that the corporation is, or would after the payment be, unable to pay its liabilities as they become due; and (2) if the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities plus its stated capital of all classes. (Source p. 636) 6. There are restrictions against a corporation returning capital to its shareholders because the return of capital reduces the funds available to meet the claims of creditors and, if the corporation should subsequently become insolvent, this would give a preferred repayment to shareholders before the creditors’ claims are met. (Source p.636) 7. The two main objectives of securities legislation, common to all provinces, are (1) to ensure the integrity, fairness, and efficiency of the markets; and (2) to promote investor confidence in the market. To accomplish these goals regulations control the securities industry, the distribution of securities to the public and the exchanges that distribute the securities. (Source p. 638)

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8. A prospectus is the document that a corporation is required to publish when inviting the public to subscribe for its securities. The document must be filed with and approved by the Securities Commission. (Source p. 639) 9. It is a strict-liability regulatory offence to produce a false or misleading prospectus punishable by a $5 million dollar fine and/or five years in prison. Doing so “knowingly” is a criminal offence. There is also civil liability for the corporation and individuals involved in its creation. (Source pp. 639-640) 10. A strict liability offence is an offence where there is no necessity for the prosecution to prove the existence of mens rea; the accused may avoid liability only by proving that he took all reasonable steps to prevent the commission of the act in question. An absolute liability offence is one where the absence of fault is no defence. (Source p. 634) 11. Yes. Under the Criminal Code requirements, the acts of virtually any employee or contractor or combination of employees or contracts may be treated as the acts of the corporation itself. The mental intent (mens rea) may also be found in more than one person, but this persons or persons must be a senior officer with either policy or operational responsibilities. (Source p. 646) 12. The principle of limited liability (which protects shareholders from liability for the corporation’s debts) does not protect directors (even if they also happen to be shareholders) from criminal liability. Legislatures have enacted express provisions making senior officers and directors liable. (Source p. 647) 13. The director must demonstrate that the corporation had an effective system to prevent offences from occurring, and that proper supervision was exercised. The directors are required to possess sufficient expertise to be aware of the potential risks, or they should employ someone with the required expertise, where they do not possess it themselves. (Source p. 648) 14. Only public accountants recognized by and in good standing with the Canadian Public Accountability Board may audit public corporations for the purposes of securities legislation compliance. (Source p.639)

CASES AND PROBLEMS 1. As a director of the company, Ashley could be found liable for the environmental breach of the corporation. She was aware of the actions of the employee Ryan, which will be treated as an action of the corporation. It is unlikely Ashley has any defences of due diligence, so will be liable for the cleanup costs. Ashley, in the words of the offence “ directed, authorized, assented to, acquiesced in, or participated in the commission of an offence” . (Source p. 649)

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It is likely that Erin was fired without cause, and while Ashley will not have to re-hire her, she will be required to give her the equivalent of reasonable notice. 2. The arrangement which MacIntosh negotiated with Occidental was made in the name of “AJP Enterprises Inc.” and purported to be a contract between AJP and Occidental. That was also the intention of both Occidental and of MacIntosh. However, no such corporation as AJP Enterprises Inc. existed. Whether or not MacIntosh had actual authority or apparent authority, she purported to be an agent for a non-existent principal. At common law, such a purported contract would be a complete nullity, and MacIntosh would not be liable on the contract. It is possible, however, that MacIntosh would be liable in damages to Occidental for breach of warranty of authority. She (at least impliedly) represented that there was such a corporation as AJP and that she was a director and had authority to contract on its behalf. (That is, in fact, what she believed to be the case.) Under s.14 of the CBCA, and similar provincial statutes, the person who enters into a pre-incorporation contract in the name of a corporation that has not yet been formed is personally liable on the contract. It is not clear, however, whether that provision would apply in the present circumstances because it anticipates that the corporation will eventually come into existence (by the use of the word “before”). Where no corporation comes into existence at all, it is difficult to know how the CBCA could apply. The case is based on Westcom Radio Group Ltd. v. MacIsaac (1989), 70 O.R. (2d) 591, a decision of the Ontario Court of Justice (General Division). There, the court held that the statutory rule did not apply because there was no contract at all. However, doubt has been cast on that decision in subsequent cases, and the section (in the CBCA) could result in liability. MacIntosh could have protected herself from possible liability by including a statement in the contract that she “was not in any event bound by the contract” (s. 14(4) CBCA). 3. A corporation can enter into contracts only through its human agents, normally its employees and sometimes its directors. The corporation will be bound by the contract if the director is acting within the scope of his or her authority - actual or apparent. White acts as CEO and this is a position that would normally have agency authority. Mermaid would be entitled to rely on the doctrine of apparent authority when dealing with White. There would be no reason to expect the Mermaid should know that no formal appointment as CEO was made. When White entered into the first contract with Mermaid, accepting a power boat in exchange, he was acting outside the scope of his actual authority because of the prohibition on dealing in power boats. However, Mermaid had no reason to know of the restriction. The contract appeared to be quite normal for a business such as Rainbow, and White would seem to have had apparent authority to make the contract. Relying on the “indoor management rule” the first contract is enforceable. The second contract is also one that is outside White’s actual authority, since it involves expenditure in excess of $5,000, and White did not obtain the consent of his fellow directors. Here, it is not clear whether such a contract is within the scope of White’s normal authority. However, by paying up on the first contract, Rainbow may have held

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White out as having authority to make contracts on behalf of the corporation. If so, that would make Rainbow liable on the contract. As well, Mermaid is not deemed to be familiar with restrictions in the articles of incorporation (s. 17 CBCA). White is in breach of his duty to the corporation, to conduct its affairs in conformity with the articles. He might consequently be sued by the corporation and be liable to compensate it for the loss caused by his breach. 4. The question here is whether the corporation can be held criminally liable for the actions of Murphy, their used car division manager. Normally, to be convicted of a criminal offence the defendant must have the necessary mens rea (mental intent) and completed the actus reus (criminal act). Under the new Criminal Code test the act and intent need not be found in the same person. Here the act was committed by Ferreira a relatively low level employee probably without criminal intent (he was merely following orders). This is sufficient for the new test. The mental intent must be found elsewhere, probably in Murphy. He knows changing the odometer is against the law and he orders that it be done. There remains the question whether Murphy can be considered the controlling mind of the corporation, so as to make the corporation liable for his intent. Is Murphy senior enough to have his intent bind the company? Again the new test allows the intent of operational supervisors to bind the company; Queensville will be found guilty. The case is based on R. v. Waterloo Mercury Sales Ltd. (1974), 18 C.C.C. (2d) 248, in which it was held that the division manager was in full control of that department and his actions rendered the corporation liable under the previous (more narrow) directing mind test. 5. The facts in this problem are based on R. v. Canadian Pacific Forest Products Ltd., (1992) B.C.J. No.1339, but the last two paragraphs were added as a blend from other actual cases. The question focuses on which directors or officers “directed, authorized, assented to, acquiesced in, or participated in”… the offence. Not all directors and officers are treated the same; their individual responsibilities will be used to subjectively evaluate their conduct. Blinkov has an obligation to see that careful, up-to-date systems for monitoring environmental hazards are in place at all the corporation's mills, but to detect specific problems he must, of necessity, rely on the reports of assistants and supervisors who work mainly on-site. Accordingly, if the Court found that Blinkov had shown due diligence in establishing and reviewing the systems in place, and nothing had come to is attention to alert him to a problem, then he would not be personally liable, nor would other members of the board of directors. On the other hand, Charbonneau, as manager, was responsible for on-sight environmental safety at Grizzly River. If her failure to follow up immediately at 22:00 hours, when she was informed of the spill, was found to be negligent—especially in view of the fact that for several months she had not examined the facilities designed to prevent spills—then she might well be found personally at fault and fined. The degree of her carelessness and the seriousness of the spill would be taken into account. (In the Canadian Pacific case, no charges were brought against any of the directors, and on appeal the fines against the corporation were reduced substantially.)

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CASE SUMMARIES

ADGA Systems International Ltd. v. Valcom Limited (1999), 43 O.R. (3d) 101 (Ontario Court of Appeal) The plaintiff corporation claimed that the defendant corporation, Valcom had devised a recruitment program to lure away valued employees from its competitors, persuading them to breach their contracts of employment and their fiduciary duties. The plaintiffs sued both the corporation, Valcom, and the officers and directors personally involved, as joint tortfeasors. Although the individual officers and directors were acting in the course of their employment they were held liable. Delta Construction Co. Ltd. v. Lidstone (1979), 96 D.L.R. (3d) 457 (Newfoundland Supreme Court, Trial Division) Lidstone and others wished to form Algo Enterprises Ltd. They began the process on April 2, 1975 when they signed the memorandum and articles of association, but the company was not incorporated until October 22, 1975. In the interim, Lidstone requested the plaintiff to do work for Algo. The work, which consisted largely of the rental and use of earth-moving equipment, was done between May 26 and September 26, 1975 at a cost of $17,845. The plaintiff was paid $3,187 before Algo was incorporated, by cheques drawn on an account in Algo's name. The project for which Algo was being incorporated foundered, and the plaintiff was not paid the balance it was owed. The court held that the plaintiff believed the work was being done for Algo. The defendants were liable to the plaintiff for breach of warranty of authority (no contract was formed with Algo since it was not incorporated when the plaintiff was requested to do the work). However, the measure of damages was that which the plaintiff could have recovered from Algo. Since Algo was insolvent, the plaintiff could recover only nominal damages. Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd. (1993), 107 D.L.R. (4th) 169 (Supreme Court of Canada) The plaintiff construction company won a contract to build a section of highway for the province. It suffered loss because the specifications and construction drawings prepared by the defendant firm and their engineers were faulty. The firm was held to have owed a duty of care to the plaintiff company, which had relied on the drawings and specifications. The individual engineers who prepared the drawings were not liable: the plaintiff had relied on the reputation of their firm, not on their individual expertise. Kelner v. Baxter (1866), L.R.2 C.P. 174 (England—Court of Common Pleas) Baxter and two associates operated a hotel. They decided to incorporate the business. Baxter entered into a contract with Kelner to supply wine “on behalf of the proposed Royal Alexandra Hotel Company Ltd.” At the time, the corporation had not been formed.

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It subsequently came into existence, and purported to ratify the contract, and shortly afterwards became insolvent. Kelner claimed payment for the wine he had supplied. The court held that the purported ratification by the corporation was ineffective; a person cannot ratify a contract that he himself could not make, and the corporation could not have made the contract because it was not then in existence. However, Baxter was personally liable. At the time of the purported contract, both Kelner and Baxter knew that the corporation had yet to be formed. the obvious intention of the parties was that Baxter was purchasing the wine for use in the future corporation, and not as agent for it. According to Willes J., when Baxter signed the contract “on behalf of” the hotel, it was the same as ordering “corn on behalf of my horses”. Kerr v. Danier Leather Inc. 2007 SCC 44 (Supreme Court of Canada) Danier included a forecast of fourth quarter results in a prospectus prepared for an initial public offering of shares. After the release of the prospectus but before the public offering closed, Danier became aware that the forecast in the prospectus was overly optimistic and unlikely to be realized; it did not disclose this new assessment. Shareholders brought an action for misrepresentation pursuant to s. 130 of the Securities Act and were successful at trial. The Court of Appeal overturned the trial judgment and the Supreme Court dismissed the appeal. The forecast was accurate at the time of filing. Subsequent disclosure was not required by statute because the new information did not qualify as a “material change” under s. 57 of the Securities Act. The SCC held that forecasting was a matter of business judgment, but the business judgment rule could not be used to limit a statutory duty to disclose (in this case none was found). The Court also ordered costs and made interesting comments about the use of class actions by shareholders and the role of costs in class action litigation. Kettle v. Borris (2000), 100 A.C.W.S. (3d) 1011 (Ontario Superior Court of Justice) The plaintiff advanced money to the defendant for the purpose of incorporating a corporation under the CBCA. There was no written contract. Consequently, s.14 of the CBCA did not apply and the case was governed by the common law. Thus, the corporation could not ratify the contract and, in the circumstances, the individual defendant was personally liable; that is, the result was as in Kelner v. Baxter. Lana International Ltd. v. Menasco Aerospace Ltd. (2000), 190 D.L.R. (4th) 534 (Ontario Court of Appeal) The plaintiff brought an action for damage to its business reputation, resulting from the supply and subsequent recall of aircraft components, against the supplier corporation and its president. The statement of claim alleged that the president personally was involved in the decision to supply, that he negligently failed to supervise the operations of the corporation, that he deliberately made false statements about the plaintiff’s business, and that he caused his corporation to cancel certain business arrangements with the plaintiff. The president contended that he could not be personally liable for acts done in the course

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of his corporate duties. The Ontario Court of Appeal ruled that corporate officers have no automatic immunity in respect of tortious acts in the course of their corporate duties, and allowed the plaintiff’s claim to stand. Lennard’s Carrying Company Ltd. v. Asiatic Petroleum Company Ltd., [1915] A.C. 705 (England—House of Lords) Asiatic chartered a ship from Lennard’s. The ship was unseaworthy and the cargo was lost. Asiatic sued Lennard’s for the loss, alleging negligence. The Merchant Shipping Act provided that a ship-owner was not liable without his actual fault. The court held that Mr. Lennard, the managing director and major shareholder of Lennard’s, was the directing mind and will of the company and his fault was the fault of the company, which was consequently liable. 1394918 Ontario Ltd. v. 1310210 Ontario Inc. (2002), 57 O.R. (3d) 607 (Ontario Court of Appeal) The plaintiff brought a claim against the defendant for the repudiation of a sale of land. At the time of contract formation the, corporate plaintiff did not exist. The offer to purchase was completed by “Raymond Stern in trust for a company to be incorporated and not in his personal capacity.” When the vendor repudiated the contract for sale, Mr. Stern accepted the repudiation and then incorporated the company to bring the action. The defendant brought a motion to have the action dismissed as the plaintiff did not have the capacity to bring the action. The motions judge held that the plaintiff did have legal standing, and the matter was appealed. The Court of Appeal upheld the decision based on s. 21(2)(a) of the Ontario Business Corporations Act; at para 25: Further, and returning from the common law to this statutory “contract”, s. 21(2)(a) provides that the corporation is entitled to all the benefits as if it had been in existence at the date of the contract.

Peoples v. Wise (2004) 3 S.C.R. 461 (Supreme Court of Canada) Wise Stores Inc. (Wise) bought Peoples Department Stores Inc. (Peoples). The three sons of the Wise founder (Wise brothers) were the majority shareholders, officers, and directors of Wise. After the purchase they also became the sole directors of Peoples. The integration of the two operations did not go smoothly, especially in the area of inventory control and bookkeeping. The Wise brothers reviewed the inventory problems and accepted the recommendation of the Vice-President of Administration and Finance. They implemented a joint inventory procurement policy which divided purchasing responsibilities between the two operations. Peoples would make purchases from North America and Wise would make all other international purchases. Within a year of implementation the inventory system was in total chaos; suppliers went unpaid. Eventually both Wise and Peoples declared bankruptcy and Peoples’ bankruptcy trustee sued the Wise brothers personally, claiming they breached the duties owed to Peoples’ creditors. Copyright © 2016 Pearson Canada Inc.

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The Supreme Court of Canada held that there was no fiduciary duty owing to the creditors or other stakeholders, stating “At all times directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders.” However, the Court held that the duty of skill and care was not limited to the corporation: “the identity of the beneficiary of the duty of care is much more open-ended, and it appears obvious that it must include creditors.” On the facts, the Court held that the Wise brothers met the required objective standard of skill and care by acting prudently and on a reasonably informed basis. The creditors were denied a remedy. R. v. Bata Industries Ltd. (1992), 9 O.R. (3d) 329 at 362 (Ontario Court Provincial Division) See Case 27.2 at p. 707 in the text. R. v. Canadian Dredge & Dock Co. Ltd. (1985), 19 D.L.R. (4th) 314 (Supreme Court of Canada) Four companies were convicted of Criminal Code offences. The four companies appealed the decision claiming that the managers responsible for the criminal acts were acting contrary to the instructions of the companies, and for their own benefit. Several companies also challenged the notion of corporate criminal liability for mens rea offences. The Supreme Court upheld the convictions based on the directing mind principle.

R. v. City of Sault Ste Marie (1978), 85 D.L.R. (3d) 161 (Supreme Court of Canada) The City was charged under the Ontario Water Resources Act, of discharging or permitting to be discharged in a creek and river in the City, material likely to impair the quality of the water. The City's defence was that it had had nothing to do with the actual disposal operations, which were the work of an independent contractor. The Court held that the offence fell within the second category of strict liability offences, and the City could escape liability by proving that it had acted with due diligence in its supervision of the independent contractor. The Court ordered a new trial to be decided on that basis. R. v. Kanda (2008) 88 O.R. (3d) 732 Page 634 footnote 3 R. v. MacMillan Bloedel Ltd. (2002), 220 D.L.R. (4th) 173 (British Columbia Court of Appeal) The accused corporation was charged with the offence of discharging a harmful substance into water frequented by fish, contrary to the Fisheries Act, R.S.C. 1985, c. FCopyright © 2016 Pearson Canada Inc.

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14. The corporation admitted that fuel had leaked from its pipes into the ocean. The corporation was acquitted. It had demonstrated that it had taken all reasonable steps to avoid leakages, which was not due to defective pipes, but to an unforeseen microbiological process. R. v. Placer Developments Ltd., (1983), 13 C.E.L.R. 42 (Yukon Territory – Territorial Court) The defendant company was charged with polluting water inhabited by fish with diesel fuel. The defendant argued that the spill was caused by an independent contractor. The Court held that the negligence of subcontractors did not discharge the obligation on the principal and found the corporation guilty of the offence. R. v. Romaniuk (1993), 112 Sask. Rep. 129 (Saskatchewan Queen’s Bench) Romaniuk operated a battery salvage business, disposing of old car batteries on an open lot. He was convicted of charges that he, while he was in control of a dangerous pollutant, namely sulphuric acid, failed to report a spill and failed to take reasonable steps to prevent further discharge or spills. The trial judge, after reviewing all the circumstances and Romaniuk's apparent lack of care, sentenced him to thirty days' imprisonment and fined $76,000. The appeal court dismissed Romaniuk's appeal both against his conviction and sentence. R. v. Safety-Kleen Canada Inc. (1997), 145 D.L.R. (4th) 276 (Ontario Court of Appeal) The accused corporation and one of its employees were convicted by a justice of the peace of two offences under the Environmental Protection Act, R.S.O. 1980, c. C-141. The first count alleged that they were in possession of waste for which the generator of the waste had not completed a manifest. The second count alleged that the accused corporation and its employee had knowingly given false information in a return made to a provincial officer. The charges arose out of a single incident during which the employee transferred waste from a disabled truck to one of the corporation's trucks. On appeal by the accused corporation to the Court of Appeal, the court held, the appeal on the first count should be dismissed, but allowed an appeal on the second count and entered an acquittal. The second count was a mens rea offence requiring proof of a culpable state of mind. Absent a statutory basis for that liability, corporate liability for crimes involving a culpable mental state is determined by the application of the identification theory. The inquiry is a fact-driven one which looks beyond titles and job descriptions to the reality of any given situation. The employee, a truck driver, had authority over matters arising out of the performance of the task he was employed to do. There was no evidence that he had authority to devise or develop corporate policy or make corporate decisions which went beyond those arising out of the transfer and transportation of waste. He was not a directing mind of his corporate employer.

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R. v. Transport Robert (1973) Ltee (2003), 234 D.L.R. (4th) 546 (Ontario Court of Appeal) The accused corporation was the owner of a truck, which lost a wheel on the highway. It was charged with an offence under the Highway Traffic Act. The offence was one of absolute liability and it was convicted although it sought to show that it had taken proper care of the vehicle. The corporation appealed on the ground that the relevant section of the Act was contrary to the Charter. The court held that the Charter did not apply as there was no “liberty” issue involved. R. v. Varnicolor Chemical Ltd., [1992] O.J. No. 1978 (Ontario Court Provincial Division) See Case 27.3 at p. 708 in the text. R. v. Waterloo Mercury Sales Ltd. (1974), 49 D.L.R. (3d) 131 (Alberta Court of Queen’s Bench) See Case 27.1 at p. 702 in the text. R. v. Wilson 2014 ONCA 2012 Page 634 footnote 4

Reference Re Securities Act (Canada), Quebec (Procureure generale) v. Canada (Procureure general), 2011 ABCA 77; 2011 QCCA 591 (Alberta Court of Appeal and Quebec Court of Appeal) The Alberta government challenged securities legislation proposed by the federal government as being ultra vires the federal constitutional powers. The Alberta Court of Appeal held that the Federal Government did not have the legislative authority under the Constitution Act, 1867 to pass the proposed securities legislation. The Quebec government likewise challenged the same proposed legislation and the Quebec Court of Appeal also found that the proposal is ultra vires the authority of the federal government to enact it. Note: the draft legislation has been presented to the Supreme Court of Canada to answer the question of constitutionality, but as of writing, the decision had not yet been published.

Royal British Bank v. Turquand (1856), 119 E.R. 886 (England—Exchequer Court) The directors of the defendant company were authorised, by the company’s deed of settlement, to borrow money on bond, under the common seal of the company, such sums as might be prescribed from time to time by a resolution of the shareholders, passed at a

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general meeting. A resolution was actually passed giving them a general power to borrow, but did not prescribe any amount. The directors borrowed £1000 from the plaintiff bank, on a bond under the company’s seal, signed by the directors. It was later claimed that they had no authority to do so, since no resolution had been passed as required by the company’s deed of settlement. (The law in England at that time provided that persons dealing with a company were deemed to have notice of the contents of the company’s constitution; the bank, therefore knew that a resolution of the general meeting was required in order to authorise borrowing.) The court held that the bank was entitled to presume that the appropriate resolution had been duly passed; the passing of the resolution was a matter of indoor management. Absent knowledge to the contrary, a person dealing with a corporation is entitled to assume that the corporation has been managed in accordance with its own constitution. Szecket v. Huang (1999), 168 D.L.R. (4th) 402 (Ontario Court of Appeal) An individual entered into a contract "on behalf of a company to be formed". The company never was formed and an action was brought against the individual defendant. The defendant was held liable, under s.21 of the OBCA. The intention of the legislature was that a person contracting on behalf of a corporation to be formed should be personally liable in the absence of express agreement to the contrary. Here there was no such express agreement.

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CHAPTER 28 SECURED TRANSACTIONS This chapter deals with the various devices for securing credit and their relative priorities when secured to the same personal property. Legal issues can arise in two situations under collateral security agreements. First, they can arise in relation to the respective rights and obligations of the secured creditor and its debtor. Secondly, they can arise as between the secured creditor and a third party (as where the debtor has sold goods to an innocent purchaser, or where another creditor challenges the validity of the secured creditor's security). This is an area of law now dominated by legislation. Since security devices fall largely within provincial jurisdiction, there are significant variations in legislation designed to regulate security devices and to specify their legal effect for the parties concerned. However, all of the provinces have comprehensive personal property security legislation so that, although there are still differences in detail, the same basic principles are common to all. It is with those principles that the chapter is mostly concerned. TYPES OF SECURITY INTEREST (Source p. 658) The checklist on page 663 lists seven different types of security interests. It is important for students to identify the characteristics of each type and understand how they might best suit particular situations. However, it is equally important that students recognize that despite its form each agreement becomes a security interest and has its priority established using the common rules set out in the provincial legislation. PERSONAL PROPERTY SECURITY LEGISLATION (Source p. 663) The rules can best be understood by keeping in mind the purposes of the legislation 

Standardization of remedies



Creation of a complete public record of interests (through registration)



Determination of priority among competing creditors’ interests.

Priority is determined using three criteria: creation, attachment and perfection; see Figure 28.1 at page 666. This diagram should give students a visual image of the complicated interrelationship between the concepts. It should be stressed that this is for determination of priority not validity. A lack of perfection does not invalidate an attached security interest and such an interest will still have priority over all unattached interests. Registration creates a comprehensive list of interests for other creditors to search. Quick registration is rewarded with priority; that is, if all competing interests are perfected by registration, priority goes to the earliest registrant. Exceptions are made for particular types of financing (purchase money security interests) and particular types of transactions (consumer sales in the ordinary course of business. The Checklist on page 671 is helpful to summarize these rules. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 732)

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It is an important part of the risk management plan to consider whether as a creditor it is desirable to obtain security. Creditors will want to weigh the cost of recovery under a security agreement against possible losses caused by default. If security is desirable, then perfection of security registration is vital for establishing priority. Risk management plans need to include systems for creating the registration, verifying the accuracy of the information registered as follow up, as well as procedures to maintain priority through proper renewal of interests.

INTERNATIONAL ISSUE (Source p. 671) Mobile Equipment Instructors may want to introduce the discussion with an overview of the material in Chapter 31 (International Business Transactions) relating to recognition of foreign judgments. It may not be difficult to obtain a judgment in your jurisdiction, but foreign recognition of that judgment (necessary for enforcement) is not automatic. Factors such as real and substantial connection to the jurisdiction may be contested. Question 1 - The rationale for allowing international interests to override domestic rules of priority are to provide certainty for lending institutions and thereby secure the free flow of credit to the mobile equipment industry. The Canadian government has clearly recognized the mobile nature of these pieces of equipment and decided that it is better to have a uniform, international standard that is adhered to in multiple jurisdictions than to give priority to domestic arrangements – without the international interest rules, many Canadian secured creditors would have no recourse if the equipment they have an interest in were located offshore. This would increase the risk of such a loan and the cost would reflect this risk. Some lenders would decide not to lend to this industry or restrict where its equipment could be moved. This is yet another example of the law reflecting government policy for both economic and social reasons. Students should recognize the role of law in business strategy. Question 2 - This Convention gives a degree of certainty to lenders; they will have a better idea of their priority (where they stand “in the queue”) and exposure to risk They will be able to use this information when making their lending decisions and, one would hope, adjust their terms to reflect where they fall in terms of priority and security. Without these rules cost of borrowing would be higher to reflect the potential loss of security if the equipment is based in a non-reciprocating state. Aircraft may be restricted from flying to particular locations as a condition of the lender. Question 3 - The incentive for developing nations to adopt this convention is the potential for greater foreign investment; if international lenders know a developing country is a signatory and will respect and enforce a priority claim, they may be more likely to invest in developing countries because their exposure to risk is lessened. As mentioned above it would be natural for lenders to restrict the movement of mobile equipment to participating states. This could further isolate a developing nature by slowing construction projects and restricting access through limited air access.

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ETHICAL ISSUE (Source p. 675) Is the Law Too Favourable to Secured Creditors? Question 1 - To answer this question students should first ask themselves: Who benefits from the system? What is the rationale for giving some creditors preference over others? Some countries do not recognize the concept of personal property security at all or, if they do so, make very little use of the device. It is often argued that, without security interests, credit would be much more difficult to obtain. This raises the question of would that necessarily be such a bad thing, considering the 2008/2009 economic crisis? In a number of recent corporate collapses the persons that really suffer are the employees. Should claims for unpaid wages rank before those of secured creditors? Should more be done to secure pension rights? Instructors may want to identify recent bankruptcy reforms that offer wider protection to employees. It may also be valuable to discuss the Ontario Government Pension Benefits Guarantee Fund designed to provide some protection for employees in private pension plans. Quebec is considering a similar plan. Still this places the burden on the taxpayer not the business owner or lender who were arguably involved in the decisions that led to the downfall of the plan. Question 2 - Instructors should refer students to Salomon’s case (Chapter 25) which seemed to establish that there was no objection to shareholders – even controlling shareholders – also being secured creditors of their corporation (that that was not the point at issue in the case, and Salomon walked away with nothing). But there is no reason why the law should not provide that shareholders – or perhaps just substantial shareholders – cannot claim to be secured creditors and that their claims would rank after those of other creditors. Would such a rule be (a) workable, and (b) reasonable?

QUESTIONS FOR REVIEW 1. Collateral security is an interest in property of a debtor that gives a creditor the right to seize and sell it in the event of non-payment of the debt. (Source p. 658) 2. A creditor might choose not to take security for a debt if the risk or the amount is relatively small. Unsecured transactions are simpler, the expense and effort of registration is avoided, and it may be bad policy to offend customers by demanding security. (Source p. 658) 3. Security devices act as a form of incentive to pay the money owing in order to avoid repossession of the article in question. (Source p. 658) 4. The principal types of security interest are: conditional sales, chattel mortgages, floating charges, chattel leases, consignments, pledges, and assignments of accounts receivable. (Source pp. 660-661) Copyright © 2016 Pearson Canada Inc.

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5. Leases are commonly treated as a security device, because they are employed as a method of acquiring items of personal property on credit. (Source p. 660) 6. An acceleration clause is a provision whereby the full outstanding amount of a debt becomes immediately payable if the debtor defaults in making any installment payment. (Source p. 661) 7. In a chattel mortgage the buyer retains possession of the mortgaged property; a pledge is a form of bailment, where the lender takes possession of the assets. (Source p. 661, and Chapter 15) 8. In a conditional sale the article remains the property of the vendor until the debt is paid, whereas in a chattel mortgage it is transferred to the buyer. (Source pp. 660661) 9. A creditor can obtain a security interest in property that the debtor does not yet possess through the use of a chattel mortgage that includes after-acquired property (for example, inventories). (Source p. 662) 10. A floating charge is a form of mortgage on all of the assets of a corporation other than those already specifically charged. (Source p. 662) 11. Generally, priority is assigned to the creditor that first perfects their interest, who is also usually the first to register. (Source pp. 666-667) 12. A financing statement sets out the details of a security interest that must be filed in order to protect that interest. (Source p. 664) 13. Perfection is the moment in time when a creditor’s security interest becomes protected. It normally occurs when a creditor files a financing statement. (Source p. 665) 14. A purchase-money security interest is an interest that arises when a seller reserves a security interest in the actual goods sold to the debtor. It is given special priority, because otherwise it might be subordinated to a prior security interest that includes after-acquired property. (Source pp. 667-668) 15. The PPSA provides that when a conditional seller delivers goods to a conditional buyer, who resells them in the ordinary course of business, a retail buyer acquires a good title to the goods. If the dealer fails to meet its obligations, the manufacturer or a finance company holding a registered wholesale installment account receivable cannot seize the goods from the retail buyer. (Source p. 669) 16. Section 427 of the Bank Act empowers Canadian chartered banks to lend to the following type of borrower: (1) wholesale or retail purchasers or shippers of, or dealers in (i) products of agriculture, etc., and “wares and merchandise”; (2) manufacturers; (3) aquaculturalists; (4) farmers; and (5) fishermen. (Source p. 672)

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17. A security interest is protected under the Bank Act by filing a standard form of notice with the Bank of Canada. (Source pp. 672-673)

CASES AND PROBLEMS 1. Each creditor would obtain maximum protection for its security under the PPSA by following the correct procedures for registration, following the required steps. The first to register would have priority. Here, since the chattel mortgage, previously registered four years ago, was secured with the proviso that it be over all existing and future restaurant equipment, the chattel mortgage would include the refrigerator. The bank would therefore have priority for the refrigerator and other restaurant equipment. Even if the renovation had been secured by a separate bank loan, the bank still had priority over the refrigerator under the clause covering future restaurant equipment. 2. This case is concerned with the conflicting claims of two creditors—SIS, the owners of the structures, and the bank, a creditor with a security interest in the debtor’s property. The crucial question is whether the bank’s security interest extends to the structures. The case is based on Sprung Instant Structures Ltd. v. Caswan Environmental Services Inc. [1997] A.J. No. 22, a decision of the Alberta Court of Appeal. The trial court had found in favour of the bank. On appeal, it was held that the bank’s general security agreement did not extend to the structures, and the owner/lessor was entitled to re-possess them. The structures were not the “property” of the debtor. Even if the word “acquired” (in the general security agreement) was broad enough to cover leased goods, the phrases containing that word referred to after-acquired goods. As the structures in question were acquired by the debtor, if at all, before the agreement was signed, the agreement would not cover them. And even if the agreement could be read to include, as property the lessee's interest in the structures, that interest had become worthless due to the lessee’s failure to pay the rent, and had been terminated. Since the agreement did not cover the structures, the question of priority under the PPSA did not arise. 3. This case is based on VFC Inc. v. Tomax Corp. [1998] O.J. No. 5100, a decision of the Ontario Court of Justice (General Division). Two lenders had conflicting claims to the vehicle in question. The finance company claimed to have a perfected security interest under the PPSA, having registered a Purchase Money Security Interest (PMSI) within the requisite ten days of the debtor obtaining possession of the vehicle. Subsequently, the supplier of the stereo equipment registered a lien against the vehicle under the Repairs and Storage Liens Act (RSLA). The court held that the stereo supplier had a valid lien, registered as prescribed by the RSLA. As for the question of priority, the court ruled that, where a person in the ordinary course of business furnishes materials or services with respect to goods that are subject to a security interest, any lien that the person has in respect of the materials or services has priority over a perfected security interest unless the lien is given by an Act that provides that the lien does not have such priority. The (Ontario) PPSA, s.31, gives priority for what is commonly called the “artisan's lien.” It adopts the policy that claims to enhance

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the value of the property should take priority over an earlier security interest even though the artisan's services or materials are furnished without the knowledge or approval of the secured party. However, this decision was overturned in VFC Inc. v. Tomax Corp., [2000] O.J. No. 5640 because the court found that there was no signed acknowledgment of the indebtedness, which is necessary to enforce a non-possessory lien. 4. As noted in Chapter 14, the Sale of Goods Act implies a condition that the seller has the right to sell the goods, a warranty of quiet possession, and a warranty to the effect that the goods will be free of any prior encumbrance. Better Buy Motors Ltd. breached the implied warranty of quiet possession which was so fundamental to the contract of sale that Avila was entitled to rescind the contract. Accordingly, the conditional sale contract between Avila and Better Buy Motors is voidable by Avila and she is entitled to recover any amounts she paid under it. This was the result in McNeill v. Associated Car Markets Ltd. (1962), 35 D.L.R. (2d) 581, from which the facts of the problem are drawn. All of these difficulties could have been avoided if Better Buy Motors Ltd. had searched for the registration of a prior security agreement in respect of the Cadillac before buying it for resale. 5. The facts of this problem are roughly those of General Motors Acceptance Corp. v. Feraday, [1952] O.W.N. 650. Since the conditional sale contract was not registered either by Watts Electric or by Domestic Finance, the rights of the parties must be determined under the Sale of Goods Act, which provides that a conditional seller gives the conditional buyer the power to transfer title to a third party who does not have notice of the conditional seller's interest in the property. The seller is prevented from denying the validity of the sale to Fischer, who is an innocent third party. Accordingly, Fischer would succeed in his action for wrongful seizure. This was the result in the General Motors Acceptance Corp. case. If the conditional sales contract had been properly registered, the effect would depend on the legislation of the particular province in which the transactions took place. 6. Hardy's assignment of the conditional sale contract to Vanguard was a breach of the agreement with Oliver. However, Vanguard will argue that Oliver is estopped from asserting against the assignee any equities between himself and Hardy by virtue of his negligence in failing to respond to Vanguard's notice and in paying Hardy directly. Oliver cannot set up the defence of non est factum because that only applies where the writer was unaware of the nature of the contract: Oliver knew what the documents were that he signed. He will therefore be liable to pay Vanguard under the conditional sales agreement. This was the result in Ostrikoff v. Vancouver Finance Co. Ltd. (1956) 1 D.L.R. (2d) 179, from which the facts of the problem are taken.

CASE SUMMARIES Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994), 111 D.L.R. (4th) 493 (Ontario Court General Division)

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The debtor leased trucks from various parties for use in its business. The debtor subsequently became bankrupt. The lessee brought the action to recover the leased vehicles from the trustee in bankruptcy. The issue for the court was whether the leases needed to be registered under the PPSA. The Court held that the purpose of the lease was to supply vehicles as inventory to the bankrupt company, as such, this type of lease required registration under the PPSA. Bank of Montreal v. Hall, [1990] 1 S.C.R. 121 (Supreme Court of Canada) Hall, a Saskatchewan farmer, contracted for loans from the Bank of Montreal and as security granted two mortgages on his real property in favour of the bank. Hall also gave the bank a security interest in a “swather” under s. 178 of the Bank Act, R.S.C. 1985, c, B-1. Hall defaulted on the loans and the bank seized the swather and commenced an action to enforce its real property mortgages. Hall defended by saying that the bank had not served him with a Notice of Intention to Seize as required under the Saskatchewan Limitation of Civil Rights Act, R.S.S. 1978, c. L-16. The court held that the operation of s. 178 of the Bank Act cannot be made subject to provincial legislation. The relevant sections of the Limitation of Civil Rights Act were declared inoperative in respect of security taken pursuant to the Bank Act. Bank of Montreal v. Innovation Credit Union, [2010] 3 S.C.R. 3 (Supreme Court of Canada) The debtor provided collateral security on much its farm equipment to the applicant, Credit Union under the PPSA in October of 1991. The Credit Union did not perfect its interest in the security by registration until June 2004. Sometime between 1998 and January 2004, the debtor provided essentially the same collateral as security to the respondent Bank. The Bank registered its security interest under the Bank Act, after searches of both the PPSA and the Bank Act revealed no prior security interests. When the debtor defaulted, the Bank seized some of the assets and sold them. The Credit Union brought an application to obtain a declaration that it had priority. The Supreme Court held that while the federal Bank Act has paramountcy over the provincial PPSA, the combined effect of ss. 427(2) and 435(2) is that the a creditor cannot obtain a better interest in the collateral then the debtor has at the time the security is granted. [From footnote 57, at p 734: The Supreme Court held that Bank Act priority provisions would apply. However, a pre-existing PPSA interest in the property at the time the debtor gave the Bank Act security required examination to determine the interest available to be pledged. The Court went behind the label of security agreement to assess the characteristics of a fixed charge as a matter of property law in order to determine a priority question under the Bank Act.] As a result, the Court held that the Credit Union had priority. Bank of Montreal v. Pulsar Ventures Inc. and City of Moose Jaw, [1988] 1 W.W.R. 250 (Saskatchewan Court of Appeal)

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In January 1984, Campro Oilfield Services Ltd. assigned to the Bank of Montreal, under s. 178 of the Bank Act, S.C. 1980-81-82-83, c. 40, a security interest in all products stored at its place of business. The bank registered this security under the Saskatchewan Personal Property Security Act, S.S. 1979-80, c. P-6.1, and under the Bank Act. In November of 1984, Pulsar registered a financing statement under the Personal Property Security Act in which it claimed a purchase money security interest in all of Campro's property, including after-acquired property. Later that month, Pulsar and Campro entered into a conditional sales agreement. In January of 1985, Campro made a further assignment to the bank which was also registered under the Personal Property Security Act, although not under the Bank Act. The bank did not release its earlier security under the Bank Act but simply extended it to cover new advances. In May of 1985, Pulsar seized all of Campro's inventory and stock in trade. The bank applied for an order of priority. The court held that the bank did not give up its rights under the Bank Act by registering under the Personal Property Security Act. Federal law is paramount and so cannot be subjected to provincial priority rules under the Personal Property Security Act. The bank had complied fully with the requirements of the Bank Act and took priority because it had registered its interest earlier.

BMP & Daughters Investment Corp. v. 941242 Ontario Ltd. (1993), 7 B.L.R. (2d) 270 (Ontario Court General Division) See Case 28.5 at p. 725 in the text. Canadian Imperial Bank of Commerce v. Kawartha Feed Mills Inc. [1998] 41 O.R. (3d) 124 (Ontario Court, General Division) The lien claimant, a repairer performed services on a continuing basis to the truck fleet of the bankrupt, a carrier. The repairer gave up possession of the trucks on which it performed work and services, but obtained acknowledgements for the unpaid amounts. The carrier subsequently made an assignment in bankruptcy, and a trustee was appointed. The repairer then filed a non-possessory claim for a lien under the Repair and Storage Liens Act (RSLA) and the Personal Property Security Act. There then arose a dispute between the trustee and the repairer over the priority to be accorded to the latter's lien. The court held that the repairer's non-possessory lien had priority over the security interests of the bankrupt's other creditors. The court noted that the RSLA is designed to protect persons who bestow a benefit on an article without requiring such persons to undertake a whole range of searches before the work is commenced. Once the lien is created, a priority exists not only as against the owner, or one claiming under the owner, but in relation to others, including secured creditors. Canadian Imperial Bank of Commerce v. Otto Timm Enterprises Ltd. (1995), 130 D.L.R. (4th) 91 (Ontario Court of Appeal)

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A distributor supplied ten tractors to a farm equipment dealer. The bank provided finance and held a general security agreement covering existing and future property of the dealer, which it registered. The distributor failed to register a financing statement for the first delivery of tractors, although it did register in respect of the second and third deliveries. The dealer got into financial difficulties and the distributor repossessed the tractors. The bank appointed a receiver, claimed return of the tractors, and brought an action for an order determining the respective priorities between it and the distributor. The court found in favour of the bank. Its interest attached as soon as the tractors were delivered to the dealer, and its interest was perfected at that time because it had already registered a financing statement (covering future property). The distributors’ interest in the first delivery was not perfected until the tractors were repossessed, since it was not protected by registration. Its interest in the later deliveries was protected by registration, but that registration was later than the bank’s. General Electric Capital Canada Inc. v. Interlink Freight Systems Inc. (1998), 42 O.R. (3d) 348 (Ontario Court, General Division) The debtors purchased a motor vehicle from a dealer and entered into a conditional sales contract that was later assigned by the dealer to a lending institution. The lender advanced the debtors funds to purchase the vehicle and registered a Purchase Money Security Interest pursuant to the Personal Property Security Act. The debtors then entered into a second conditional sales contract with the respondent corporation for the purchase and installation of stereo equipment in the vehicle. The second contract was entered into without the knowledge of the lender. The respondent registered a lien against the vehicle under the Repair and Storage Liens Act. The Ontario Court (General Division) held that the respondent had a valid nonpossessory lien, and that this lien took priority over the PMSI held by the lender. The Court relied on section 31 of the PPSA, which provides priority for what is commonly called the artisan's lien. In doing so, the PPSA adopts the policy that claims to enhance the value of property should take priority over an earlier security interest, even though the artisan's services or materials are furnished without the knowledge or approval of the secured party. [NOTE that the respondent received a non-possessory artisan's lien priority over any prior perfected security interest]. General Motors Acceptance Corp. of Canada v. Cardinali (2000), 185 D.L.R. (4th) 141 (Ontario Court of Appeal) See Case 28.4 at p. 723 in the text. Gimli Auto Ltd. v. BDO Dunwoody Ltd. (1998), 160 D.L.R. (4th) 373 (Alberta Court of Appeal) The debtor leased three trucks from Gimli Auto out of Manitoba. The trucks were brought to Alberta, where the debtor’s office and business were located. The security interests in the trucks were not registered under the Manitoba PPSA, as at that time, true Copyright © 2016 Pearson Canada Inc.

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leases, such as these, did not have to be registered. The debtor leased another vehicle in B.C.; a car that was located in B.C. and used by employees at the staff office in B.C. This car was leased from Eagle Ridge who registered its security interest under the B.C. PPSA. The debtor subsequently went bankrupt and the issue before the Court was a matter of priority. The Court held that the trustee had priority over all of the vehicles, because none of them were registered in Alberta, prior to the bankruptcy, according to the provisions of the Alberta PPSA. GMAC Commercial Credit Corp. v. TCT Logistics Inc. (2004), 238 D.L.R. (4th) 487 (Ontario Court of Appeal) Page 664 footnote 19 Leese v. Martin (1873), L.R. 17 Eq. 224 (England—Court of Chancery) Leese was a stockbroker in London who used Martin as his banker. He deposited with the bank, for safekeeping, various deeds and documents of his own and of his customers in locked boxes to which the bank did not have the keys. The bankers did not know the contents of the locked boxes. The bank advanced money to him on the security of other deeds and documents which he deposited with the bank specifically for that purpose. Leese was declared insane, and the bank obtained a judgment against his estate for the money that Leese owed them. It then opened up the locked boxes and refused to give the contents to Leese's representatives. The court held that the bank had no general lien on the boxes and the contents that were merely stored for safekeeping. G.M.S. Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd. (1995), 121 D.L.R. (4th) 278 (Ontario Court of Appeal) A trust company, NT, held a first mortgage on certain premises. R-W held a security interest in kitchen cabinets, which were installed on the premises (and became fixtures) before NT made a final advance under the mortgage. Subsequently, another company, GMS, took a second mortgage on the premises, without notice of the security interest in the cabinets. The question arose as to priorities. The Ontario Court of Appeal held that there was circular priority problem and a conflict between the provisions of the Mortgages Act, the Personal Property Security Act and the Registry Act. It ruled that the first mortgagee (NT) had priority for its final advance and then for the balance of its mortgage, but out of that balance it should pay the claim of R-W, then the second mortgagee (GMS) followed in priority, and finally NT’s claim for the amount paid to RW. (The Divisional Court had reached a different conclusion!) Massey-Ferguson Industries Ltd. v. Bank of Montreal (1983), 4 D.L.R. (4th) 96 (Ontario High Court of Justice) Massey-Ferguson supplied agricultural machinery to Guelph Equipment Co. Ltd., one of its dealers. Massey-Ferguson retained a security interest in the machinery and filed a

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financing statement under the Personal Property Security Act, R.S.O. 1980, c. 375 that included a reference to "all proceeds" from the equipment. Guelph sold the equipment and, in breach of its agreement with Massey-Ferguson, deposited the proceeds in its general account, where they were mixed with other funds. Guelph went into receivership and Massey-Ferguson sought to trace the proceeds of the machinery and claimed priority to that extent over the Bank of Montreal, Guelph's principal creditor. The court held that under s. 27 of the Personal Property Security Act, the proceeds were protected from general creditors. They were still identifiable and traceable, and Massey-Ferguson had priority to them. Merchants Bank of Canada v. Thompson (1912), 26 O.L.R. 183 (Ontario Court of Appeal) The bank held a promissory note for $2,000 that Living had made in favour of Fox, who had endorsed the note to the order of the bank. At the time that Fox endorsed the note to the bank, he was only indebted to them for $500 under a note that had not yet fallen due. Fox claimed to have endorsed the large note to the bank merely for collection and not as collateral security. The court held that even if Fox had only endorsed the note to the bank for collection, under a banker's lien the bank had a right to retain the note for any debt due to it. The bank was entitled to a lien on the note for the amount of Fox's indebtedness to it.

Murano v. Bank of Montreal (1998), 163 D.L.R. (4th) 21 (Ontario Court of Appeal) See Case 28.1 at p. 716 in the text. 859587 Ontario Ltd. v. Starmark Property Management Ltd. (1999), 42 B.L.R. (2d) 16 (Ontario Court of Appeal) SPM Ltd. was the landlord of premises rented to HK Auto Centre. Under the lease, all improvements except trade fixtures became the property of SPM Ltd. The trade fixtures were to be removed by the tenant at the expiration of the lease. In March 1996, HK Auto Centre purchased a spray booth from AIE Sales under a conditional sales contract under which ownership of the booth remained with AIE Sales until all payments had been made. The booth was twenty-eight feet by fourteen feet and weighed some three thousand, five hundred pounds. It was attached to the floor by numerous small nails that could be easily removed and it was connected by various pipes to the electrical, water, and air systems within the leased premises. AIE Sales did not register its conditional sales agreement under the Personal Property Security Act ("PPSA"). In September 1996, SPM levied distress for arrears of rent owing by HK Auto Centre and sold the spray booth to a new tenant. The Court of Appeal held that a trade fixture is a thing that has become part of the property, is used by the tenant in the tenant's business, and is removable at the instance of the tenant. It followed that SPM Ltd. did not have any right to seize the spray booth. AIE Sales, however, did have the right to take possession of the spray booth. The case was Copyright © 2016 Pearson Canada Inc.

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governed by s. 34(1)(a) of the PPSA, which provides that a security interest in goods that attached before the goods became a fixture has priority as to the fixture over the claim of any person who has an interest in the real property. This section applied to trade fixtures. Even though AIE Sales did not perfect its security interest until after the distraint, it had under s. 11 of the PPSA an attached security interest at the time the spray booth was installed. SPM Ltd. had no interest in the spray booth before it became a fixture. Thus, AIE Sales had priority and was entitled to reacquire the property under s. 34. Re Bank of Nova Scotia and International Harvester Credit Corp. of Canada Ltd. (1990), 73 D.L.R. (4th) 385 (Ontario Court of Appeal) In 1981, Howe (a farmer) purchased farm machinery from United Co-Operatives of Ontario (a dealer of International Harvester's) under conditional sales contracts that were assigned to International Harvester. International Harvester registered a financing statement under the Personal Property Security Act, R.S.O. 1980, c. 375, in which Howe's middle initial was omitted. In 1983, Howe borrowed money from the Bank of Nova Scotia and gave as security an assignment under s. 178 of the Bank Act, S.C. 1980-81-82-83, c. 40, of all the farm machinery on his land. The bank registered a financing statement under the Personal Property Security Act that also omitted Howe's middle initial. On June 8, 1984, a financing change statement (designed to correct clerical errors) was registered by the bank to add the missing initial. On June 15, 1984, the bank obtained an order under the Personal Property Security Act to extend the time period for registration and on June 21, 1984, it registered a new financing statement that included Howe's middle initial. Howe defaulted on his payments and International Harvester seized and sold the machinery as assignee of the conditional sales agreement. The bank applied for a declaration that its interest had priority. The court held that the bank was entitled to register its interest under the Personal Property Security Act, the right that it had acquired under the Bank Act. However, that right consisted only of an assignment of Howe's own interest in the farm machinery, which was subject to the claim of International Harvester, the conditional seller. Re Giffen, [1998] 1 S.C.R. 91 (Supreme Court of Canada) See Case 28.3 at p. 722 in the text. Re Lambert (1994), 119 D.L.R. (4th) 93 (Ontario Court of Appeal) The appellant had a security interest in a motor vehicle owned by L., who was now bankrupt. It had registered its security interest, but made an error in spelling L’s full name. The statement did correctly identify his date of birth, and the vehicle identification number (V.I.N.). The trustee in bankruptcy took possession of the vehicle. The appellant filed a claim, to the effect that it had a secured interest in the vehicle. The trustee searched the claim in the computer registration system, searching against the bankrupt’s name; the search did not reveal the financing statement and the trustee moved to disallow Copyright © 2016 Pearson Canada Inc.

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the claim. The court held that the appellant’s interest had been perfected; the trustee should also have searched against the VIN number. Re Williams (1903), 7 O.L.R. 156 (Ontario High Court) Williams made two promissory notes payable to the Standard Bank, with which he had accounts. When Williams died, his account balance with the bank was $311.83 and he owed the bank $1,050.38 under the notes. The bank charged the amount due under the demand note against the account, and Williams' estate sued. The court held that the bank was entitled to do what it had done by way of a lien on the general balance of the account. Riddell v. Bank of Upper Canada (1859), 18 U.C.Q.B. 139 (Upper Canada, Court of Queen’s Bench) The plaintiffs drew a note, payable at the Bank of Upper Canada in their own favour, on Jardine, which Jardine accepted. The plaintiffs endorsed the note to the Gore Bank with which they had a debt. Gore Bank then endorsed the note to McNab, an agent of the Bank of Upper Canada, for collection from Jardine. Jardine was unable to pay the note when it fell due. Jardine then drew a note on the plaintiffs with their consent in order to be able to pay the first note. Jardine endorsed the second note to McNab and instructed him to apply it to the first note that had fallen due. McNab instead paid the second note to the Bank of Upper Canada against Jardine's own account. The plaintiffs paid both notes and sued the Bank of Upper Canada for the proceeds of the second note. The court held that they were entitled to recover the proceeds of the second note, which should have been paid to the Gore Bank to retire the first note. Riordan Leasing Inc. v. Veer Transportation Services Inc. (2002), 61 O.R. (3d) 536 (Ontario Superior Court of Justice) Riordan leased seven trailers to Veer. The trailers were sent for repairs that were not paid for. Jap Truck and Trailers Inc. registered a non-possessory lien under Repair and Storage Liens Act. Before the registration by Jap was complete, Veer either defaulted or the leases expired and Rirodan repossessed the trailers and released them with a provision that at the end of the lease term the third party lessee could purchase the trailer for $1.00. The Court held that non-possessory liens had to be registered to be enforceable against third parties. If the third parties exercised their option to purchase, the liens would not be enforceable. But, if the third parties did not exercise their option, then the trailers would revert to Riordan who would be liable to the lienholder. Rogerson Lumber Co. Ltd. v. Four Seasons Chalet Ltd. and Bank of Montreal (1980), 113 D.L.R. (3d) 671 (Ontario Court of Appeal) Rogerson supplied lumber to Four Seasons on oral terms that title was to remain in Rogerson until payment in full by Four Seasons. Subsequently, a written agreement was executed to give effect to this agreement and a financing statement was registered under

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the Personal Property Security Act, R.S.O. 1970, c. 344. Before the lumber was supplied, Four Seasons had given a security to the Bank of Montreal under s. 88 of the Bank Act, R.S.C. 1970, c. B-1 (now s. 178) and the bank seized the lumber under the security after the execution of the written conditional sale agreement but before the registration of the financing statement. In an action to determine the priority of claims, the court held that the bank's security could only attach to Four Seasons' interest in the lumber, which was of no value since title remained in Rogerson. No provision of the Personal Property Security Act subordinated Rogerson's interest to that of the bank. Rogerson had priority.

Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd. (1982), 135 D.L.R. (3d) 1 (Supreme Court of Canada) The Listers were the sole shareholders in R.E. Lister Ltd., which signed a franchise agreement with Dunlop Canada Ltd. Lister Ltd. gave a debenture to Dunlop to secure its obligations. When Lister Ltd. ran into financial difficulties, Dunlop presented a formal demand for the amount due and immediately seized the assets of Lister Ltd., along with personal assets of Mr. Lister that were not covered by the debenture agreement. Mr. Lister reached a settlement agreement with Dunlop, but Lister Ltd. then brought an action for damages for wrongful seizure and to have the settlement set aside. The court held that Dunlop was bound to allow a reasonable time for compliance with its demand. While the settlement agreement could not be set aside (since it was made by experienced parties with independent legal advice and since it met the general requirements of law), punitive damages for Dunlop's high-handed conduct were appropriate. Royal Bank of Canada v. Lions Gate Fisheries Ltd. (1991), 76 D.L.R. (4th) 289 (British Columbia Court of Appeal) The Royal Bank agreed to advance a line of credit to Tourelles Fisheries and filed a Notice of Intention under s. 178 of the Bank Act (the predecessor to the present section 427). A week later, Tourelles executed two security agreements in favour of the bank—a general assignment of inventory and a general assignment of debt. Some two years later, Tourelles entered into a number of contracts with the defendant, Lions Gate. In one transaction, Tourelles bought a quantity of halibut, paying part of the price, and leaving $22,000 owing. In another, Lions Gate bought shrimp from Tourelles for $30,000, which remained unpaid. Shortly after, the bank demanded repayment of its advances from Tourelles and appointed a receiver to collect Tourelles' accounts receivable, which had been assigned to it under the general assignment of debt. When the receiver claimed the $30,000 from Lions Gate owing under the shrimp contract, the defendant claimed to be entitled to deduct the $22,000 owing to it by Tourelles under the halibut contract. The priority of the defendant's right of set-off depended on whether it accrued before it received notice of the bank's claim. It did not receive actual notice until sometime after the bank appointed a receiver. However, the defendant was deemed to have had constructive notice from the time of filing the Notice of Intention, some two years before.

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As a result, the bank was able to claim payment of the $30,000, leaving the defendant to claim repayment of its $22,000 from Tourelles, along with other unsecured creditors. Royal Bank of Canada v. Sparrow Electric Corp. [1997] 1 S.C.R. 411 (Supreme Court of Canada) The Royal Bank secured a loan made to Sparrow Electric with a general security agreement (GSA) covering Sparrow's present and after-acquired property and with Bank Act security (BAS) created by an assignment of inventory under s. 427 of the Bank Act. When Sparrow experienced financial difficulties, a standstill agreement was executed that allowed Sparrow to continue its business but permitted the bank, on default, to appoint a receiver and enforce its security. The bank later appointed a receiver at which time it was discovered that Sparrow had not been remitting its payroll deductions as required by s. 153 of the Income Tax Act (ITA). In January 1993, the receiver received court permission to sell Sparrow's assets, but an amount from the proceeds of sale equivalent to that owing the federal government was ordered to be held in trust pending resolution as to entitlement. The bank and the Federal government disagreed as to who had priority in this situation. Royal Bank of Canada v. W.Got & Associates Electric Ltd. (1999), 178 D.L.R. (4th) 385 (Supreme Court of Canada) A bank granted a debtor a revolving line of credit secured by a floating charge debenture payable on demand. The debtor engaged in stalling tactics when the bank sought additional security. The bank then cut off contact with the debtor and intentionally avoided telling the debtor that it would be calling in the debenture. The bank served a letter of demand on the debtor and immediately thereafter brought an application for the appointment of a receiver. The receiver took control of the debtor’s assets and arranged for the sale of the assets. The bank brought an action to recover the debt and the debtor counterclaimed for damages for breach of contract and conversion. The court held that the bank was liable for breach of contract because it failed to give the debtor reasonable notice of its intention to enforce its security and reasonable time to pay. The bank’s conduct was egregious and an award of exemplary damages was justified.

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CHAPTER 29 CREDITORS' RIGHTS This chapter examines the various ways in which the rights of creditors are protected and enforced. The main focus is on the Bankruptcy and Insolvency Act, but we also consider other statutes such as the various provincial statutes that protect builders’ liens—or mechanics’ liens or construction liens, as they are called in some provinces. Instructors should draw students’ attention to the principal acts covered in this chapter:  Bankruptcy and Insolvency Act  Companies’ Creditors Arrangement Act  Builders’ Lien Acts Of particular interest to students will be cases 29.1 and 29.2, concerning fraudulent conveyances to avoid the loss of assets in a bankruptcy proceeding. The enforcement of creditors’ rights gives rise to two distinct types of problem. The first concerns the mechanisms that are available for collecting debts; these were discussed briefly in Chapter 14. Most businesses do pay their debts, if they are able to do so and wish to stay in business, without the need to resort to these collection methods. The real problems arise in the second type of case, where a debtor does not have sufficient funds to pay all of its creditors. It is then that the question of priorities arises. Creditors can be divided into two main classes—secured creditors and unsecured creditors. In Chapter 28 we examined the various ways in which secured interests may be created. Unsecured creditors sometimes must be further classified as preferred creditors, general creditors, and deferred creditors. The economic crisis of 2008 has made this topic extremely relevant to today’s business environment. Instructors may find statistical information is of interest to students:

United States Bankruptcy Filings Time Period

Business

Non-business *

12 months ending December 2007

28, 322

822,590

6 months ending June 2008

18,456

503,749

(20% increase)

(11% increase)

* counts joint filings by husbands and wives as one. Consumer bankruptcies peaked in 2005 (nearly 2,000,000) Business remained relatively even. Source: U.S. Courts, The Federal Judiciary, Bankruptcy Statistics, available online: <www.uscourts.gov/bnkrpctystats/statistics.html>

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Canadian Bankruptcy Statistics* Time Period

Business

Non-business *

12 months ending December 2007

6,307

79,796

6 months ending June 2008

3,270

42,878

(only 1.8% change)

(only 3.73%)

Source: Office of the Superintendent of Bankruptcy of Canada, Industry Canada: <strategis.ic.gc.ca/eic/site/bsf-osb.nsf/eng/home> * Bankruptcy counted separately from proposals. This is a subject that is often best learned by using practical examples—such as those provided in the Cases and Problems.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 702) Debt management is very important whether the business acts as a creditor, debtor, or both. Prompt attention to unpaid invoices is vital and should form part of a risk management plan. When applying for credit, it is important to state a true and accurate financial position. Any inaccuracies at the application stage may result in a bankruptcy offence. INTERNATIONAL ISSUE (Source p. 680) Cross-Border Insolvency Question 1 - International cooperation is important because business, particularly large corporations now operate in a borderless world. Without international cooperation it is possible that corporations facing bankruptcy could park assets and cash in uncooperative off-shore locations in order to protect these assets from claims of domestic creditors (students should feel free to debate the extent that this type of behaviour already takes place). Governments need to coordinate their actions in order to adequately protect the rights of creditors and ensure that bankruptcy doesn’t become any more of a “get out of jail free” card than it already is. Instructors might want to prompt students to think about policy reasons governments might have for working to protect creditors – is it for reasons of fairness, or are there also legitimate business reasons? Question 2 - Discharging alimony, child support payments, and judgments for sexual assault are a few examples of matters that could be considered contrary to public policy, as might enforcing an order so harsh that it might cause undue hardship.

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Question 3 - These limitations give Canadian courts the discretion to protect Canadian laws and values; Canadian courts aren’t simply beholden to the rulings of foreign courts in jurisdictions that may have different legal values, punitive or lax laws, or radically different social values.

ETHICAL ISSUE (Source p. 693) Discrimination Against Students Question 1 - This is a fine question for class debate. Instructors can probably expect students to be outraged at being likened to deadbeat parents and criminals and say that they should under no circumstances be lumped in with that group. The instructor should play Devil’s Advocate by asking students to consider that:  Students have never typically had full time careers prior to graduation and many former students drift after they finish school before settling down. Combine this with the fact that young people, just starting their careers, have no assets to lose (no house, often no car, no savings, or investments). This is a dangerous combination; most students have nothing to lose by declaring bankruptcy The instructor should as students whether they think this implies that government thinks that students, generally, are fundamentally untrustworthy, disrespectful, irresponsible, and possessed of questionable values of citizenship? Would government be entirely wrong in holding this belief? The instructor should ask the class how many of them had ever blown a bursary or portion of their student loan on pizza, booze, or a spring break vacation? Further, should students who carry loans and pay them off promptly be penalized by paying higher rates to compensate for losses incurred by students who choose bankruptcy to avoid paying their loans? Who bears the loss when a student does not pay back a student loan? Question 2 - The Charter protects members of specific enumerated and analogous classes. Can students claim to be a “class” of persons protected by the equality rights in the Charter? Is being a student, or ex-student comparable to “race, national or ethnic origin, colour, religion, sex, or mental or physical disability”? The answer is most likely (and properly!) “No.” Students choose to become students, whereas all the other enumerated and analogous classes are defined by immutable characteristics; that is, they cannot be changed at will. Question 3 - Responses to this question can incorporate many of the “Devil’s Advocate” arguments from Question 1 above. Could one rationale be an attempt by government to ensure that students are forced to learn and accept the values of respect, responsibility, and citizenship? Or is it simply a tacit recognition by government that the exorbitant cost of higher education would result in massive default? Government claims it can’t really afford to make higher education cheaper, but it also knows that a more knowledgeable workforce results in higher GDP, therefore bank and student loans are required to fund university education, but government needs to protect students’ creditors (that is, the banks and itself) since, for the reasons listed above, chances of default are very high.

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QUESTIONS FOR REVIEW 1. The objectives of the Bankruptcy and Insolvency Act are (1) to establish a uniform practice in bankruptcy proceedings throughout the country; (2) to provide an equitable distribution of the debtor’s assets among his various creditors; (3) to provide a framework for preserving and reorganizing the debtor’s business or affairs by working out an arrangement with the agreement of his creditors; and (4) to provide a release of an honest but unfortunate debtor from his obligations and so permit him to make a fresh start free of debts. (Source p. 680) 2. (a) The function of the Superintendent of Bankruptcy is to keep a record of all bankruptcy proceedings in Canada and to exercise a general supervisory function over all bankrupt estates. The Superintendent is responsible for investigating the character and qualifications of persons applying for licenses to act as trustees and has the power to suspend or cancel a trustee’s licence. The Superintendent may also issue directives to trustees or receivers regarding the administration of a bankrupt estate, may intervene in any court proceeding and may investigate situations where a bankruptcy offence may have been committed. (b) The Official Receiver is a public official responsible for the supervision of bankruptcy proceedings and is also an officer of the court required to report to the Superintendent all bankruptcies originating in their division. (c) The function of a trustee in bankruptcy is to administer a debtor’s estate. The trustee must be licensed, is normally an accountant, and is normally appointed by the court or the official receiver. (Source pp. 681-682 3. A bankrupt is a person who has made a voluntary assignment in bankruptcy or a person against whom a receiving order has been made. An insolvent is a person who is unable to meet (or has ceased to pay) his or her debts as they become due, or whose debts exceed the value of his or her realizable assets. (Source p. 682) 4. A consumer debtor is defined as an individual who is insolvent but whose aggregate debts do not exceed $250,000. (Source p. 684) 5. An assignment is a voluntary declaration of bankruptcy whereas a receiving order is a court order, made in proceedings instituted by creditors, whereby a debtor is declared bankrupt. (Source pp. 684-685) 6. A proposal is an offer made by the debtor to his creditors, providing for the orderly repayment of debts, or some part of his debts, over a period of time. The effect of a proposal, if accepted, is that it allows the debtor to retain control of his property. Monies payable under the proposal must be paid to the trustee for distribution to the creditors. (Source p. 683)

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7. An act of bankruptcy is an act of a debtor that must be proved before the debtor may be declared bankrupt. These acts are listed in s. 42 of the act: the most common are failing to pay debts as they become due, and failing to redeem goods seized under execution. A bankruptcy offence is an offence committed by the debtor; for example, making a fraudulent disposition of property, giving untruthful answers to questions put to him at an examination, concealing, destroying or falsifying books or documents, or making false representations before or after bankruptcy. (Source pp.685-686) 8. An arms’ length transaction is made to a party not related to the bankrupt; a transfer to an arm’s length, but for undervalue made within one year prior to bankruptcy may be void as against even an unsuspecting, good faith purchaser. A non-arms’ length transaction is one made a person related to the bankrupt, and these transfers may be void if made within five years prior to the bankruptcy. (Source p. 687) 9. A transfer undervalue refers to any sale, gift, trade, or disposition of property or supply of services by the debtor before becoming bankrupt, where the transfer is made for free or for payment that was obviously below fair market value. (Source p. 687) 10. An unpaid seller of goods has the right to repossess goods sold and delivered to a bankrupt in relation to his business. The supplier must make a demand within thirty days of the delivery of the goods. (Source p. 690) 11. A preferred creditor is an unsecured creditor whose claims are given preferences over those of other unsecured creditors. The principal categories of preferred claims include funeral expenses, expenses and fees of the trustee in bankruptcy, up to six months’ arrears of wages of employees of the bankrupt debtor, municipal taxes levied within two years preceding bankruptcy, and arrears of rent for up to three months. (Source p. 691) 12. A bankrupt becomes “discharged” when the court issues an order that he ceases to have the status of a bankrupt person. (Source pp. 692-693) 13. The aim of the CCAA is to allow a corporation in financial distress to seek court protection in order to reorganize its affairs and to avoid what might be an unnecessary and undesirable bankruptcy. (Source p. 695) 14. The purpose of a holdback under builder’s lien legislation is to protect the owner against liens of the subcontractors and suppliers by retaining an amount of the payments made to the principal contractor. (Source p. 697) 15. A builder’s lien protects the interests of creditors who participate directly as workers or who supply material for use directly in the construction work. (Source p. 696) 16. The Business Corporations Act may allow a corporation’s creditors to use the “oppression remedy”. The remedy may be granted where the court is satisfied that the

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actions of a corporation have been oppressive or unfairly prejudicial to the interests of “any security holder, creditor, director or officer” of the corporation.” (Source p. 700)

CASES AND PROBLEMS 1. Ashley will have to prove the debt owed to her, by filing a claim. She is neither a secured creditor, nor a preferred creditor as set out in the Bankruptcy Act. The lunch truck will have priority, as it is a secured claim under the PPSA. Then the wages will be paid, as they are a preferred claim up to $2000. Then the general creditors, like Ashley, will be paid on a pro-rata basis out of any remaining funds, if there are funds left over after payment of the secured and preferred claims. It is unlikely Ashley’s debt could survive – only certain debts like student loans survive the discharge of a bankrupt. Ashley will probably receive very little, if any, of what she is owed. 2. In the present case, the car belongs to Vic’s Karsales, although it is leased to Griffiths. The question is whether Vic’s was required to register a security interest and, if so, whether their failure to do so gives Griffiths’ trustee in bankruptcy a right to retain the car. The case is based on Re Giffen, [1998] 1 S.C.R. 91, a decision of the Supreme Court of Canada. The court found in favour of the trustee in bankruptcy. Although the car was owned by the lessor, the definition of "security interest" in the PPSA explicitly includes leases for a term of more than one year. Since the lessor did not have possession of the car and did not register its security interest, it held an unperfected security interest in the car prior to the bankruptcy. The bankrupt's right to use and possession of the car constitutes "property" for the purposes of the Bankruptcy and Insolvency Act, which passed to the trustee on bankruptcy. According to s. 20(b)(i) of the PPSA, the lessor's interest in the car was ineffective against the trustee. Although bankruptcy legislation provides that a trustee shall step into the shoes of the bankrupt and as a general rule acquires no higher right in the property of the bankrupt than that which the bankrupt enjoyed, it is a policy choice of the legislature that an unsecured creditor's position, as represented by the trustee, is more meritorious than the unperfected security interest of a secured creditor. Thus, the trustee was entitled to sell the car and confer good title. 3. One of the most important changes introduced by the 1992 reforms to the Bankruptcy and Insolvency Act was to give unpaid sellers a right to repossess goods sold and delivered to the bankrupt. Additional rights are given to farmers who have supplied their products to the bankrupt and have not been paid. Normally, in this case, the bank would have priority because its general security interest has been perfected. However, in the present problem: (a) Snow White is out of luck. As an unpaid seller it would be able to repossess the gnomes, but only if it makes a demand within thirty days of the delivery of the goods (s. 81.1). Thirty-one days have now passed since delivery. Snow White is consequently just another unsecured creditor.

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(b) Spreaders may be more fortunate. So long as the claim is made within thirty days of the sale, the goods are still in the possession of the purchaser, are identifiable, and are in the same condition as when sold, they can be recovered. (c) Bauer can take advantage of the special rights given to farmers (under s. 81.2). A farmer’s claim extends not only to the actual goods supplied, but is secured by a charge on the entire inventory of the purchaser; this charge ranks above any other claim against that inventory, except that of an unpaid seller of specific goods. Thus, Bauer may not only claim the return of the unsold trees but may also claim a first secured interest in other property of the debtor; that is, his claim has priority over that of the bank. However, his claim does not have priority to that of Spreaders in respect of the fertilizer. 4. Buckhouse is owed rent by Justitia, which has virtually no assets and is unable to pay. Most of the money that Justitia had received as an inducement to enter into the lease had been paid out to its two shareholders and directors, but Buckhouse has no direct claim against them. A possible course would be for Buckhouse to petition Justitia into bankruptcy and for the trustee in bankruptcy to then seek to recover the amounts paid out in dividends to its director/shareholders. However, that would probably succeed only if it could be shown that they had acted fraudulently or otherwise in breach of their duty to Justitia. The case is based on First Edmonton Place Ltd. v. 315888 Alberta Ltd.,[1988] A.J. No. 511, a decision of the Alberta Court of Queen's Bench. There, the plaintiff tried a different course and sought an oppression remedy under the Alberta Business Corporations Act. As discussed in the text, such a remedy is available in certain circumstances to a creditor of a corporation. McDonald J. concluded that there was at least some evidence to suggest that the directors had acted in breach of their duty to the corporation. If there had been a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant was a proper person to make an application for an oppression remedy and should be granted leave to bring the action. 5. Balance of Realized Assets Less: Secured Creditors Bank Loan Mortgages

$152,000 $40,000 - First - Second

$50,000 24,000

Preferred Creditors Trustee Liquidation expenses Wages Taxes Available for general creditors Balance of outstanding claims: Trade accounts Wages (remaining balance) Second mortgage (remaining balance)

74,000 3,000 5,000 9,000 5,000

136,000 16,000

65,000 6,000 1,000 $72,000

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The general creditors received about 22 cents on the dollar; that is $16,000 of $72,000. 6. Rodwell clearly has a claim against Yorkville, but since Yorkville is now insolvent that claim may be worthless. Its only recourse would seem to be to claim against Mayfair, the owner of the land, on the basis that it should have withheld a holdback from its payments to Yorkville, or against the Yorkville directors personally for having used all the amounts received to pay general expenses. The case is based on Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 42 O.R. (3d) 292, a decision of the Ontario Court of Appeal. The court held that the claimant (the piping company) was a beneficiary of the trust created by s. 8(1) of the Construction Lien Act in favour of subcontractors and other persons who have supplied services or materials to an improvement. Section 10 of the Act provides that a payment made by a trustee to a person for services or materials supplied to the improvement discharges the trustee's obligations to all beneficiaries of the trust to the extent of the payment. The question, therefore, was whether the payments made for general overhead expenses were payments to persons who supplied services or materials to an improvement. If not, then the payments were made in breach of trust. The court decided that question in favour of the piping company. The recipients of the overhead expenses were not qualified as beneficiaries and the payments to them did not reduce the main contractor’s liability to the claimant. Consequently, the payments were made out of trust funds and in breach of trust and the directors of the main contractor were personally liable. [The owner of the property would also be liable to the extent of the statutory holdback.]

CASE SUMMARIES Abraham v. Canadian Admiral Corp. (1998), 39 O.R. (3d) 176 (Ontario Court of Appeal) Employees of a bankrupt company claimed priority in respect of vacation pay and pension benefit contributions over the bank's security interest in the company assets. The Ontario Court of Appeal held that the basis of the action was a simple contract debt owed by the employer to the employees and therefore the proper limitation period was six years, pursuant to s. 45(1)(g). Therefore the action was commenced in time. However the court found that s. 178(6) of the Bank Act gave priority over bank security to vacation pay accruing within three months previous to bankruptcy and found that the employees were entitled to judgment for $147,529, being the amount calculated by the trial judge as due under s. 178(6) of the Bank Act. Bank of Montreal v. Bray (1997), 36 O.R. (3d) 99 (Ontario Court of Appeal) See Case 29.1 at p. 748 in the text. Bank of Montreal v. Giannotti (2000), 197 D.L.R. (4th) 266 (Ontario Court of Appeal)

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The bankrupt applied for discharge from bankruptcy and despite numerous complaints regarding, dishonesty, lack of disclosure, and lack of cooperation on the part of the bankrupt received a conditional discharge from the bankruptcy court. The Court of Appeal overturned the discharge on the grounds that the purpose of the BIA was to assist unfortunate and honest debtors. The bankrupt here did not act honestly and therefore was not entitled to discharge under the BIA until he cooperated with his trustee and provided the information required under the Act. BCE Inc. v. 1976 Bondholders, 2008 SCC 60 (Supreme Court of Canada) See Case 26.10 at pp. 679-680 in the text. A group of BCE debenture holders sought an oppression remedy to block a proposed leveraged buyout of BCE by a group of investors led by the Ontario Teachers’ Pension Fund and some foreign investors. They argued that the proposed buyout was not fair or reasonable, because the value of their debentures was likely to fall by 20%. The vast majority of shareholders (97.93%) approved of the buyout. The Supreme Court overturned the Quebec Court of Appeal and held that the debenture holders were not entitled to an oppression remedy. It was appropriate for the board of directors to consider the best interests of the corporation as a whole in order to resolve conflicting interests of stakeholders. It held that in assessing an oppression remedy a court may consider not only what is legal but what is fair and should answer two questions: o Does the evidence support the reasonable expectations of the claimant? (This involves determining if expectations are reasonable). On the facts, it was that the debentureholders expectations were unreasonable. It was reasonable to expect that the board of directors would consider the interests of the debentureholders but it was enough to ensure that contractual commitments were honoured. It was not reasonable to expect that trading value of debentures could remain unaffected or that leveraged buyouts were unforeseeable at the time of contracting. o Does the evidence establish that said expectations were violated? (this violation must involve unfair conduct or prejudicial consequences) On the facts it was held that the directors considered the contractual commitments. British Columbia v. Hanfrey Samson Belair Ltd. (1989), 59 D.L.R. (4th) 726 (Supreme Court of Canada) Tops Pontiac Buick Ltd. pledged its assets to the bank to secure a debt to the bank. In the course of its business, Tops collected sales tax for the province, which it mingled with its own assets. Later, the bank appointed a receiver of Tops and its assets, and Tops made an assignment in bankruptcy. The receiver sold Tops' assets and applied the full proceeds to the reduction of Tops' bank debt. The province claimed that the Social Service Tax Act, R.S.B.C. 1979, c. 388, which deemed all tax money to be kept separate and apart, created a statutory trust of Tops' assets in the amount of the collected taxes. The receiver ought to have given the province priority over the bank. The court held that s. 67(a) of the

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Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 exempts trust property from distribution to the trustee's creditors. However, the statutory trust created under the Social Service Tax Act could not fall within s. 67(a) of the Bankruptcy and Insolvency Act without in effect allowing the province to create its own priorities, which is not permissible. Further, no trust existed under the general principles of law because the trust money was no longer identifiable once it was mingled with Tops' own money. C.C. Petroleum Ltd. v. Allen [2003] O.J. No. 3726 (Ontario Court of Appeal) Payrite was a business operated by two brothers, supplying gasoline to retailers. All its shares were owned by the wives of the brothers, who were also secured creditors. Payrite obtained its gasoline from Budget with which it had a large line of credit. Payrite got into severe financial difficulties and the brothers started to “kite” cheques to disguise their financial situation. The wives, as secured creditors, demanded repayment of their loans to Payrite. By then, Payrite owed more than $500 000 to Budget. The brothers had $400 000 paid out to themselves and their wives (and their lawyers), most of the money coming from the sale of gasoline supplied by Budget – and not paid for. Payrite was eventually declared bankrupt. Budget alleged fraud and sought relief under the oppression provisions of the Business Corporations Act, R.S.O. 1990 c. B.16. The court agreed with the trial judge’s finding of fraud and the award of damages. However, Budget, as a creditor, did not have an automatic right to bring an oppression action. [Thus Budget would have to rely on the bankruptcy proceedings, along with other creditors.] Century Services Inc. v. Canada (Attorney General), [2010] 3 S.C.R. 379 (Supreme Court of Canada) The debtor company commenced proceedings under the CCAA for reorganization. The Crown sought to recover outstanding GST taxes. The chamber’s judge ordered a payment to the secured creditor, the plaintiff. The judge further ordered that the GST portion owed by the debtor company be placed in trust pending the outcome of the reorganization. The reorganization failed and the debtor company requested that the stay be lifted so that it could file for bankruptcy under the BIA. The Crown moved for immediate payment of the GST, but the judge denied the claim and allowed the bankruptcy, thus putting the Crown in the position of general unsecured creditor under the BIA. The Court of Appeal allowed the appeal, on the basis that the Excise Tax Act held priority once reorganization failed and before the BIA was invoked; further, by segregating the funds in trust, the judge had created an express trust in favour of the Crown. The Supreme Court restored the trial judge’s decision; no express trust was created and the CCAA and BIA were created to act in tandem. Even though the stay of proceedings had to be temporarily lifted to allow the debtor to file in bankruptcy, there is no gap in time, in which the creditors can enforce their claims. Chenier v. Canada (Attorney General), 2005 CanLII 23125 (Ontario Superior Court) The applicant brought a constitutional challenge against the validity of sections 178(1)(g) and 178(1.1) of the Bankruptcy and Insolvency Act. The impugned sections deal with the

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treatment of student loans under the Act. The applicant argued that the survival of student loans after bankruptcy is a Charter violation, specifically sections 7 and 15(1). The Court held that there were no personal characteristics or enumerated grounds that distinguished student loans to fall within the Charter; the application was dismissed. Chaston Construction Corp. v. Henderson Land Holdings (Canada) Ltd. (2002) 214 D.L.R. (4th) 405 (British Columbia Court of Appeal) The plaintiffs (an engineer and an architect) performed pre-construction services for conversion of the defendant’s property. The defendant (a lessee) ran into financial difficulties and did not proceed with the conversion project. The lessor, however, carried out work in accordance with the plaintiffs’ designs. The plaintiffs claimed builders’ liens against the lessor. The court held that no right to a lien arises until construction begins. However, the lessor had commenced construction and was an “owner” for the purposes of the legislation and the plaintiffs were "contractors" who were entitled to claims for a lien. Crowell Bros. Ltd. v. Maritime Minerals Ltd., [1940] 2 D.L.R. 472 (Nova Scotia Supreme Court) Maritime Minerals owned a mine on which Crowell Bros. sought to put a lien under the Mechanics' Lien Act, R.S.N.S. 1923, c. 250, for material supplied, for the rental of a drill sharpener and for services and materials used to remove the drill sharpener from the mine when it was repossessed by Crowell after the mine was shut down. The court held that gas and oil used to supply power to remove a rented machine after the construction and operation of the mine ceased was not subject to a lien, nor was the rental of the drill sharpener itself.

Dickerson v. 1610396 Ontario Inc., 2013 ONCA 653 Page 693 footnote 30 Far East Food Products Ltd. v. 1104742 Ontario Ltd., [2009] O.J. No. 1153 (Ontario Superior Court) The plaintiff supplied bakery goods to the defendant corporation on credit. The plaintiff learned that the defendant had gone out of business when it attempted to deliver an order and found the defendant’s premises vacated. The plaintiff then discovered that the director of the defendant had opened a new bakery in a different location and under a different numbered company. The new bakery had the same staff and same equipment from the old bakery. The plaintiff sued both corporations and the director personally. The Court awarded the plaintiff judgment against both the defendant numbered company and the director personally; the plaintiff as creditor was owed money by a company that was stripped of all its assets leaving the debt uncollectible, and as a result personal liability attached to the director responsible. Copyright © 2016 Pearson Canada Inc.

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First Edmonton Place Ltd. v. 315888 Alberta Ltd., [1988] A.J. No. 511(Alberta Queen’s Bench) The applicant was a corporation which constructed an office building in Edmonton. The three individual respondents were lawyers in practice in Edmonton. The corporate respondent, which was named as lessee in a lease entered into with First Edmonton Place, was a "shelf company" (a numbered company which had already been incorporated by the three lawyers for an undefined purpose). The corporate respondent had no assets. As an inducement to enter into the lease, First Edmonton Place granted the corporate respondent an eighteen months rent-free period, a leasehold improvement allowance of $115,900 and a cash payment of $140,126. The three lawyers occupied the premises without entering into a written lease with the numbered company. The numbered company paid rent only for the three months after the expiry of the rent-free period. The three lawyers then vacated the premises and no further rent was ever paid to First Edmonton Place. Some time following the payment of the cash of $140,126, those funds were paid out by the numbered company to the three lawyers. The Court held that, for a person who is not a security holder to be recognized as "a proper person to make an application", he must show that justice and equity clearly dictate such a result. There are two circumstances in which justice and equity would entitle a creditor to be regarded as "a proper person". The first is if the act or conduct of the directors or management of the corporation, which is complained of, constituted using the corporation as a vehicle for committing a fraud upon the applicant. The second is if the act or conduct of the directors or management of the corporation, which is complained of, constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant's relationship with the corporation arose. In this case the court held that the applicant was a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation.

Flightcraft Inc. v. Parsons (1999), 175 D.L.R. (4th) 642 (British Columbia Court of Appeal) A debtor transferred his home to his family trust in 1991. In 1993 and 1994 two creditors obtained judgments against the debtor. The debt of one was incurred before the conveyance, the debt of the other after. When their judgments remained unsatisfied, each creditor brought separate actions against the debtor and against the trust to set aside the transfer as a fraudulent conveyance under the (B.C.) Fraudulent Conveyance Act. Shortly before trial, the debtor made an assignment in bankruptcy. For procedural reasons, the trustee in bankruptcy opted to proceed under the provincial legislation. The court held that a trustee’s right to pursue the bankrupt in respect of a fraudulent conveyance are not restricted to s. 91(2) of the federal Bankruptcy and Insolvency Act, and that the trustee may make use of provincial legislation to supplement the rights conferred by the federal Act.

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Hamm v. Metz (2002), 209 D.L.R. (4th) 385 (Saskatchewan Court of Appeal) A house owned by Metz was destroyed by fire, and an adjacent building, owned by Hamm was also destroyed as a result. Metz was charged with arson and convicted. While being investigated Metz began a liquidation of her properties. She sold one of her properties to Hickmore with whom she was in a “romantic relationship”. Hamm commenced an action in tort against Metz for damages arising out of the fire and also brought an action under the (Saskatchewan) Fraudulent Preferences Act and Fraudulent Conveyances Act, to have the transfer to Hickmore set aside. The court held that the Fraudulent Preferences Act gave standing to sue only to creditors, and Hamm was not a creditor because his tort claim had not yet been decided. However, the Fraudulent Conveyances Act gave standing to “creditors and others”. That gave Hamm standing. Kreuchen v. Park Savannah Development Ltd. (1999), 171 D.L.R. (4th) 377 (British Columbia Court of Appeal) A developer engaged a land use consultant to undertake research regarding re-zoning. The development failed because the re-zoning took too long. The developer did not pay the consultant's invoice, so the consultant filed a claim for lien under the (B.C.) Builders Lien Act. The court held that, although the work done by the consultant contributed to the total project, it was not so directly related to the construction process as to fall within the words "any work on an improvement”. The consultant was therefore not entitled to a lien.

Lefebvre (Trustee) v. Tremblay, [2004] 3 S.C.R. 326 at para 40 (Supreme Court of Canada) Two debtors leased vehicles and subsequently both went bankrupt. The reservations of ownership by the lessee were not published according to article 1852 of the Civil Code of Quebec. The Supreme Court held that the leased vehicles were never owned by the bankrupts and therefore the claims of the lessee should have been allowed. The Court differentiated the case from Re Giffen, [1998] 1 S.C.R. 91 in that the British Columbia PPSA differed from the CCQ; and the CCQ did not provide for a similar consequence of failure to publish. Levy-Russell Ltd. v. Shieldings Inc., [1998] O.J. No. 3932 (Ontario Court, General Division) The respondent, Levy-Russell, was granted a judgment against Shieldings and its directors. The Court found that there was a conspiracy between Shieldings and the directors which allowed Shieldings to acquire Levy-Russell for less than its true value. Levy-Russell became a creditor of Shieldings by virtue of the judgment and was never a Shieldings shareholder. Shieldings's only other major creditor was the bank, which Copyright © 2016 Pearson Canada Inc.

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owned thirty percent of Shieldings's shares. Levy-Russell brought an oppression action on the ground that the bank exercised significant influence over Shieldings and was given preferential interest over other shareholders. The application was dismissed as the alleged oppressive acts took place before Levy-Russell became a judgment creditor. However, Levy-Russell's interest in Shieldings was not too remote to prevent it from seeking an oppression remedy. There was no evidence of bad faith on the part of Levy-Russell. Levy-Russell's interest in Shieldings was analogous to that of a minority shareholder and it had a reasonable expectation that Shieldings and its major shareholders would not hinder satisfaction of the judgment. The oppression remedy was broader than remedies available for fraudulent conveyances. It was not appropriate to prevent Levy-Russell from seeking an oppression remedy at a relatively early stage of the proceedings. Michael Katz (Re) 2013 ONSC 7426 Page 694 footnote 34 McPherson v. Gedge (1883), 4 O.R. 246 (Ontario High Court, Common Pleas Division) A number of unregistered lienholders brought an action under the Mechanics' Lien Act, R.S.O. c. 120, to enforce their liens against Gedge. The case was dismissed with the plaintiffs' consent when the parties reached a settlement agreement. Pearson, an assignee of a registered lien, had taken no action to enforce the lien since he was relying on the pending suit. When he learned that the action was dismissed, he applied to be allowed to intervene and prosecute on his own behalf. The court held that Pearson was allowed to do so since he was of the same class of creditors as the plaintiffs and had not consented to the action being dismissed.

Re Dowswell (1999), 178 D.L.R. (4th) 193 (Ontario Court of Appeal) A bankrupt took a loan from a friend, which he used to purchase a property in the friend's name in trust for his (the bankrupt's) wife. The trustee in bankruptcy brought an application for a declaration that the purchase was void against the trustee as a fraudulent settlement under s. 91(2) of the Bankruptcy and Insolvency Act. The court held that the purchase in the friend's name was not a settlement, since it was not a gratuitous transfer, but rather a business transaction between a debtor and creditor, and the property was put in the friend’s name to give him security for the loan. Thus, s. 91(2) did not apply to that transaction. However, the acquisition of the beneficial interest in the property by the bankrupt's wife was void, for the disposition of a beneficial interest in property under a trust amounts to a settlement. Hence, it was void against the trustee.

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See Case 28.3 at p. 722 in the text. Re Green Gables Manor Inc. (1998), 41 B.L.R. (2d) 299 (Ontario Court of Justice – General Division) See Case 29.3 at p. 750 in the text.

Re Ouellet, [2004] 3 S.C.R. 348 (Supreme Court of Canada) The debtor bought property under an instalment plan, and vendor of the property assigned its rights to the appellant bank. The debtor subsequently became bankrupt. The bank submitted a claim for its reservation of the property, but the trustee disputed the claim as it was not published within the time limit. The Supreme Court held that the trustee could is vested with the rights of the bankrupt, and not as a third party and so art. 1852 of the Civil Code of Quebec regarding time, did not apply to the trustee and the bank was entitled to the property. Royal Bank of Canada v. North American Life Assurance Co. (1996), 132 D.L.R. (4th) 193 (Supreme Court of Canada) Two years before declaring bankruptcy, a husband transferred part of his RRSP funds into an RRIF, under which his wife was designated the beneficiary. He was solvent at that time. The trustee in bankruptcy sought to have the transfer set aside, under s. 91(2) of the Bankruptcy and Insolvency Act, on the ground that it was a settlement made within five years before bankruptcy. The Supreme Court of Canada agreed that the designation of his wife as beneficiary constituted a settlement for the purposes of s. 91, and was void as against the trustee. However, by virtue of Saskatchewan legislation, the RRIF was exempt property and could not be seized by the trustee.

Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411 (Supreme Court of Canada) The Royal Bank secured a loan made to Sparrow Electric with a general security agreement (GSA) covering Sparrow's present and after-acquired property and with Bank Act security (BAS) created by an assignment of inventory under s. 427 of the Bank Act. When Sparrow experienced financial difficulties, a standstill agreement was executed that allowed Sparrow to continue its business but permitted the bank, on default, to appoint a receiver and enforce its security. The bank later appointed a receiver at which time it was discovered that Sparrow had not been remitting its payroll deductions as required by s. 153 of the Income Tax Act (ITA). In January 1993, the receiver received court permission to sell Sparrow's assets, but an amount from the proceeds of sale equivalent to that owing the federal government was ordered to be held in trust pending

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resolution as to entitlement. The bank and the Federal government disagreed as to who had priority in this situation. Royal Trust Corp. of Canada v. Hordo (1993), 10 B.L.R. (2d) 86 (Ontario Court of Justice – General Division) The plaintiff corporation sued the defendant on an outstanding debt. The defendant brought a motion as shareholder for an oppression remedy against the plaintiff. The defendant owned approximately $65 worth of shares in the plaintiff corporation and these shares were purchased after the plaintiff had brought its action. The Court held at para 14: In my view a person who is a shareholder is not automatically ensured status to bring an oppression proceeding simply because he owns or formerly owned shares in a corporation. In my opinion the court retains a discretion to deny status to such a person where the shares were purchased with a view towards bringing an application under the oppression remedy or in full awareness of the circumstances alleged to constitute oppression. The Court dismissed the defendant’s motion and stated that the defendant had proceeded in a frivolous, vexatious manner, and that he had abused the process of the court. Rudco Insulation Ltd. v. Toronto Sanitary Inc. (1998), 42 O.R. (3d) 292 (Ontario Court of Appeal) The defendant corporation (TSI) was a subcontractor on a number of construction projects and the plaintiff corporation (Rudco) were sub-contractors to TSI. Upon payment for the projects, TSI applied the funds to pay overhead expenses rather than Rudco. TSI became insolvent and Rudco remained unpaid. Rudco sued TSI and the directors and officers of TSI to recover the funds. The defendant brought a motion to determine whether the payments made reduced the trust obligation of the defendant to the plaintiff. The motion’s judge held that they did not. On appeal, the Court of Appeal upheld the motions’ judge’s decision. The payments were made to an engineer and for management expenses. The Court held that the persons to whom these payments were made, did not qualify under the Construction Liens Act as persons who performed services in respect of an improvement. Therefore, the monies received by the general contractor and paid for overhead expenses, were properly trust funds and should have been paid to the subcontractor first.

SCI Systems, Inc. v. Gornitzki Thompson & Little Co. (1997), 147 D.L.R. (4th) 300 (Ontario Superior Court) See Case 29.5 at p. 763 in the text. Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. (1995), 131 D.L.R. (4th) 399 (Ontario Court of Appeal)

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A sole shareholder and director arranged for letter of credit to secure judgment, but inadvertently failed to ensure that the letter was automatically renewable and the proceeds of bulk sale after expiry of letter were applied to pay other debts and obtain release of substantial personal guarantee by shareholder. The court held that the act of the sole shareholder in obtaining release from substantial personal guarantee was properly held to constitute oppression under s. 248 of the Ontario Business Corporations Act, and it was not necessary to show bad faith.

Sheraton Desert Inn Corp. v. Yeung (1998), 168 D.L.R. (4th) 126 (British Columbia Court of Appeal) The plaintiff sued Mrs. Yeung in the U.S.A. for gambling debts owed in the amount of $137,200 U.S and obtained judgment against her. Mrs. Yeung conveyed her home to the defendant Dorothy Yung for $520,000. Yeung owed Yung $90,000 which was deducted from the purchase of the home. Further, Yung agreed to lease the house to Yeung for two years for $30,000, which was also deducted from the purchase price. The remaining $390,239.64 was paid to Yeung by a series of certified cheques. Most of the money was used to pay off Yeung’s other creditors. The plaintiff registered a certificate of pending litigation against the house. The Motion’s judge ordered that the certificate be discharged as there was no fraudulent preference made to Yung. The Court of Appeal upheld the motions’ judge’s decision; under the Fraudulent Preferences Act, this conveyance qualified as a payment to a creditor and therefore the Act did not apply.

Stone v. Stone, [2002] W.D.F.L. 615 (Ontario Superior Court of Justice) Mr. Stone transferred his assets to his children prior to dying. Mrs. Stone brought an action claiming that the transfers to the deceased's children were made to defeat her entitlement under the Family Law Act and were therefore void under the Fraudulent Conveyances Act. The court found that Mr. Stone’s intention in making the transfers was, in fact, to deprive Mrs. Stone of her entitlement under the Family Law Act and therefore the transfers were void at the time they were made. The court ordered the assets to be transferred back to the Estate.

Stone v. Stone (2001), 203 D.L.R. (4th) 257 (Ontario Court of Appeal) The respondent was the second wife of the deceased, who had adult children from his first marriage. The deceased had made a will leaving the respondent $250,000 and a life estate in the matrimonial home. Subsequently, he transferred all his business assets and a condominium in Florida to his children, without informing his wife. After his death the respondent elected, under the (Ontario) Family Law Act, not to take her legacy under the will but instead to take her entitlement to equalization under the Act. She claimed that the transfers to the deceased's children were made to defeat her entitlement under the Family Law Act and were therefore void under the Fraudulent Conveyances Act. The court held

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that the respondent was a “creditor or other”, within the meaning of the Act, and was entitled to have the transfer set aside.

Thomson Consumer Electronics Canada, Inc. v. Consumers Distributing Inc. (1999), 170 D.L.R. (4th) 115 (Ontario Court of Appeal) See Case 29.4 at p. 751 in the text.

XLO Investments Ltd. v. Hurontario Management Services (1999), 170 D.L.R. (4th) 381 (Ontario Court of Appeal) The debtors conveyed their home to the defendant corporation. The plaintiff creditor brought the action to have the conveyance set aside pursuant to the Fraudulent Conveyances Act and the Fraudulent Preferences Act. The Court held that the debtors were insolvent at the time of the conveyance and further that the suspicious circumstances and the “badges of fraud” surrounding the conveyance supported the conclusion that the transaction was done with the intent to defeat the creditor as per the Act. The Court of Appeal upheld the trial judge’s decision.

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CHAPTER 30 INTERNATIONAL BUSINESS TRANSACTIONS CANADIAN BUSINESS IN A GLOBAL ECONOMY (Source p. 706) Canada has always been one of the most “open” economies in the world, and the first part of the chapter provides some data that illustrates just how important the international element is to Canadian business. The global economy is undergoing dramatic change so instructors may want to update these stats each year by accessing the federal government’s State of Trade Report referenced in footnote 1 of Chapter 30. It becomes available each year around April. Industry Canada website has additional trade data capable of being sorted by product or industry. LAW AND INTERNATIONAL BUSINESS (Source p. 706) International business introduces another complication in legal issues, since the laws of more than one country are involved. No book—and certainly not a single chapter of a book such as this—can deal comprehensively with the business laws of all Canada’s important trading partners. The aim of this chapter, consequently, is to provide an introduction to international business transactions and an overview of the various types of legal issues that are involved in such transactions. The Chapter focuses on the following areas: 

The nature of foreign trade



How domestic and international rules control import & export



Foreign Investment and its regulation (domestic & international)



The Resolution of International Disputes



Private sector disputes - Courts /ADR



Public sector disputes (government) – Treaty Process (WTO, NAFTA)

Students should be able to identify two distinct sources of law controlling international business and their major limitations. One is ‘domestic law’ governing the jurisdiction of each country enforced through the domestic courts using civil, regulatory, and criminal liability. Its major limitation is the geographic boundary of its jurisdiction. The other is ‘international law’ (sometimes referred to as soft law) made up of treaties and conventions which purport to extend beyond jurisdictional borders. The major limitation here is that there is no one supervising body capable of demanding compliance. Conformity with this type of law depends largely on the willingness of the domestic government to honour it (hence the word ‘soft’). In addition, only in rare circumstances may a private party initiate compliance efforts (with international law). Most often domestic governments must be willing to become involved. One exception is Chapter 11 of NAFTA.

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This edition has updated the discussion of the law of jurisdiction and forum non conveniens, as a result of recent Supreme Court of Canada cases. DISPUTES INVOLVING GOVERNMENTS (Source p. 728) Instructors may want to deal with this section together with the section on Government Regulation of International Trade (Source p. 712) and emphasize that most disputes between governments are not resolved using exclusively legal processes. Resolution often comes from political pressure or intervention and transcends the specific dispute in recognition of the general relationship between nations. The Softwood Lumber dispute described in Case 30.9 at p. 730 is a good example of this. BUY AMERICAN The “Buy American” provision attached by the U.S. Congress to the Economic Stimulus Legislation of 2009 provides an obvious example of non-tariff barriers and the dual approach to inter-government trade dispute resolution. The House of Representatives attached a limitation that no stimulus funds would be available to projects using foreign steel or iron. Naturally, foreign trading partners were upset by the “protectionist” approach to recovery but reaction varied. The European Union took a legalistic approach saying it violated WTO trade treaties and threatened a WTO complaint and a retaliatory trade war if the protectionist position prevailed. Canada took a more political pressure approach saying the United States would lose its “moral authority” to lead in the global recovery if protectionism was adopted. Both President Obama and the Senate addressed the legal minimum: - In an interview with ABC news President Obama said that the U.S. should not “send a protectionist message” ….”I want to see what kind of language we can…work on this issue” (Interview with ABC news on February 3, 2009 quoted in all the articles below). - Senate subsequently amended the House bill, inserting a phrase that all the ‘Buy American’ conditions should comply with international trade agreements. Critics suggest this represents compliance with the letter but not the spirit of the law. Resources: Neil King Jr. and John Miller, “Obama Risks Flap on ‘Buy American’ The Wall Street Journal, February 4, 2009, <online.wsj.com/article/SB123370411879745425.html?mod=rss_Politics_And_Policy> David Charte, Rory Watson and Phillip Webster, “President Obama to water down “Buy American” plan after EU trade war threat”, The Times, February 4, 2009; (<www.timesonline.co.uk/to/news/world/europe/article5655115.ece>); Sheldon Alberts and Mike Blanchfield, “Obama Slams ‘Buy U.S.’” National Post, Febriaru 4, 2009, p.1 BBC News, US Senate eases ‘trade war bill, February 5, 2009, (<news.bbc.co.uk/2/hi/business/7871219.stm> ); Lee-Anne Goodman,

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“U.S. Senate clings to Buy American”, The Canadian Press, Waterloo Region Record, February 6, 2009, A5.

STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 732) Students should be aware at this stage that creating a legal risk management plan is vital for any business, but particularly for businesses that deal internationally. The complexities of all of the risks considered to this point are multiplied in the international context. A risk management plan must include a strategy to become familiar with the local laws of the foreign country being traded with, systems for interpretation of contracts to minimize later disputes, and pre-contractual dispute resolution, including the proper law of the contract. CONTEMPORARY ISSUE (Source p. 720) BCE and the Ontario Teachers’ Pension Fund Instructors will want to make students aware that the BCE deal collapsed in December 2008 when BCE could not obtain a financial opinion from its auditors (KPMG) that was acceptable to the purchasers. (This is a good example to be used in the condition subsequent and option to terminate discussions of Chapter 12). Discussion of the Supreme Court of Canada’s decision on BCE relating to the claims of oppression by debenture holders is contained in Chapter 26 of the Manual (BCE Inc. v. 1976 Debentureholders 2008 SCC 69). Question 1 - This question presents an opportunity for an interesting class debate about the concept of sovereignty and nationalism – and whether or not business can or should be bound by a need to protect one nation’s sovereign existence. Can, or should, we expect business to be loyal to a place on the map? Is the global economy weakening or strengthening notions of sovereignty and nationalism? How does this effect business? In specific terms, the Canadian telecom industry is required to be under Canadian control for any number of reasons; besides being something of a symbol of national identity, telecommunications control access to, and the flow of, information. An industry controlled by foreign interests may not act in the best interests of Canada or the Canadian public. Moreover, if the Canadian telecommunications industry were controlled, say, by American interests, then any proprietary data passing out of Canada into corporate offices in the U.S. becomes subject to American regulation and law. For example, the Canadian government has protocols in place to ensure that no Canadian government data is stored on, or passes through, servers in the United States. These rules are to prevent Canadian government data from being subject to seizure by the U.S. government. If the Canadian telecommunications industry were to fall into U.S. hands, similar problems would arise; private, protected personal data of Canadian subscribers could be subject to subpoena by U.S. courts. For students who find such a scenario overly paranoid, particularly in light of the close relationship between Canada and the U.S., remind them of the ongoing campaign of the warrantless wiretapping of U.S. citizens being conducted by the U.S.

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Department of Justice – if the U.S. government is willing to eavesdrop on their own citizens, what is to stop them from eavesdropping on Canadians? Question 2 - Ask students to explain what they consider to be the differences between control and ownership: are these mutually exclusive concepts, or are they necessarily linked? Do students see any potential issues for foreign owners whose investment is controlled by Canadians? Can there be ownership without control – or, at the very least, the ability to make the final decision about who is in control? Does the idea of keeping Canadian “control” of BCE despite foreign ownership really just amount to a clever way of saying that BCE can have huge amounts of foreign investment, but is always subject to Canada having the final say? In other words, is ownership without control really “ownership” as students understand the concept? Would any savvy foreign investor really agree to such terms, or would reality step in and would the provisions relating to Canadian control eventually just fade away? ETHICAL ISSUE (Source p.722) Weapons in Peace Question 1 - This is a question that could raise heated debate. Instructors might consider having the class list the pros and cons of such a sale and come up with their own calculus to determine whether they see a “net benefit” to Canada. Instructors should prompt students to consider whether the values of trustworthiness, respect, fairness, and citizenship come into play at all: does the fact that there was public Canadian money used to develop the Canadarm impose an ethical obligation on MacDonald Dettwiler to show respect for Canadian values when considering who to sell to? By taking public money, does MacDonald Dettwiler tacitly acknowledge that it must act as a good Canadian “citizen”, thereby not selling technology to a firm whose business revolves, in large part, around an industry Canada has deemed unconscionable? Does the injection of public money give the Canadian public an “ownership” interest in the product? Question 2 - Again, this is a difficult question to answer. On the one hand, using Canadian money, and then selling out to the highest foreign bidder show a lack of trustworthiness and respect. On the other hand, the Canadian government generally makes grants in order to grow Canadian industry and facilitate job creation – if these goals are accomplished, and then a sale is made, can we, as taxpayers, really complain? QUESTIONS FOR REVIEW 1. Foreign Trade occurs when a firm located in one country sells its goods or services to a customer in another country. Foreign investment occurs when the firm undertakes activities abroad, usually through a branch or subsidiary. (Source pp.706-707) 2. Public international law refers to laws involving relations between states; private international law refers to the principles of law that apply to resolve questions concerned with private relationships that are affected by the laws of two or more countries. (Source p. 707)

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3. The “proper law of the contract” is the law of the country or jurisdiction by which the provisions of a contract are to be interpreted and its effect determined. (Source p. 708) 4. Incoterms are a set of standard contractual terms adopted by the International Chamber of Commerce. Examples of Incoterms include: ex works (EXW), free on board (FOB), cost, insurance, and freight (CIF) and delivery duty paid (DDP). (Source p. 709) 5. The documentation involved in an international sale of goods includes at least the following four items: the contract of sale, the bill of lading, the insurance policy or certificate, and the invoice. (Source p. 709) 6. The purpose of foreign exchange risk management is to reduce the risk involved in currency fluctuations. (Source p. 711) 7. Services can be exported in a number of ways: (1) where a buyer comes to the seller; (2) where a seller goes to the buyer; or (3) where the service is “transmitted” to the customer in another country. (Source p. 711) 8. (1) Governments attempt to promote exports by providing services to their own producers in order to assist them to compete in the global market; for example, by providing commercial information about other countries, by providing support in the form of insurance, guarantees, and financial services, and by “tying” foreign aid to the purchase of goods or services from Canadian firms. (Source pp. 712-713) (2) Export subsidies are generally regarded as unfair trade practices, and are mostly prohibited under GATT/WTO rules. (Source p. 713) 9. Non-tariff barriers are national rules, other than import duties, that restrict or prevent the importation of goods. Examples of non-tariff barriers are import quotas on certain products, restrictive licensing rules, or discriminatory restrictions on marketing. (Source p. 714) 10. Dumping is the selling of products abroad at prices below those charged on domestic sales. (Source p. 714) 11. Countervailing duties are special duties imposed on imported products to counter the advantage obtained from dumping or export subsidies. (Source p. 715) 12. The GATT is the principle instrument (an agreement) that lays down the rules for international trade; the WTO is an international trade organization. The GATT forms part of the rules of the WTO. (Source p. 715) 13. The term “TRIM” is an acronym for trade-related investment measures. TRIMs are national measures regulating investment that have an impact upon international trade. (Source p. 716)

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14. Most-favoured-nation treatment is the principle that goods imported from one country should not be treated less favourably than those imported from any other country; national treatment is the principle that goods from another country should not be treated less favourably than domestic goods. (Source p. 716) 15. Portfolio or capital investment is essentially “passive” investment, normally in government or corporate bonds or listed securities. Foreign direct investment (FDI), by contrast, occurs as part of active business operations. (Source p. 718) 16. (a) A branch is where a business is carried on by the owner in its own name at a location distinct from its head office. The branch is an integral part of its business. (b) A subsidiary is a separate corporation owned or controlled by its “parent” corporation. The investor owns shares in the subsidiary but not its assets. (c) A joint venture is a form of partnership between two or more independent enterprises (contractual joint venture), or a corporation jointly owned by them (equity joint venture). (Source p. 719) 17. Performance requirements are conditions attached by the host country in granting approval to a foreign investment (for example, that the investor must use local raw materials or components). (Source p. 721) 18. Bilateral investment protection treaties normally provide that foreign investment should receive national treatment, that it should be given full legal protection and be protected against arbitrary or discriminatory measures that interfere with its management and operation, and that investors should have the right to repatriate their capital and profits. They usually also provide that a host country may not expropriate or nationalize the property of an investor from the other country “except for a public purpose, under due process of law, in a non-discriminatory manner,” and that any such expropriation “must be accompanied by prompt, adequate and effective compensation.” (Source p. 721) 19. “Forum shopping” occurs when a plaintiff attempts to seek out a jurisdiction most likely to view its claim favourably. It is considered objectionable because there should be some “connecting factor” between the issue and the country in which a party seeks to bring the action. (Source p. 722) 20. A court of a country may decline jurisdiction; that is, refuse to hear an action even though the issue has a “real and substantial connection” with that country, if it considers that there is some other jurisdiction that is more appropriate or is more closely connected to the matter in dispute. (Source p. 723) 21. The principal advantages of commercial arbitration (as opposed to litigation) are: (1) commercial arbitrators normally have greater experience of international commerce than have the judges of regular courts; (2) since arbitration is consensual; that is the parties to the contract have agreed to submit the dispute to arbitration and abide by the award, it is generally easier to enforce the award; (3) the proceedings are private Copyright © 2016 Pearson Canada Inc.

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and confidential, and trade secrets are better protected; and (4) usually costs are lower and proceedings swifter. (Source p. 727) 22. The WTO contains two types of proceedings for the settlement of disputes— consultation between the parties and, if necessary, a conciliation procedure (essentially a diplomatic solution), or by the appointment of a “Panel” to adjudicate the dispute. Similarly, Chapter 20 of the NAFTA provides for the holding of consultations at the request of either party; if no mutually satisfactory agreement is reached, the dispute is then referred to a Free Trade Commission, with a further referral to an Arbitral Panel. Chapter 19 provides separate provisions for the resolution of disputes concerning the imposition of anti-dumping and countervailing duties. (Source pp. 728-729) 23. Students should answer this question by making use of the facts contained in Case 30.8 at p. 827 and applying the facts of the softwood lumber dispute to the discussion of the WTO and NAFTA dispute resolution procedures. (Source pp. 729-730) 24. Chapter 11 is novel in that it provides a means (other than by a normal action in the courts of the host country) whereby investors (from NAFTA countries) may sue the government of the country in which they invest. Normally, international agreements only provide a means of resolving disputes between governments. (Source p. 730)

CASES AND PROBLEMS The Cases and Problems at the end of the chapter are intended primarily as exercises in recognizing the relevant issues. To give precise answers would require detailed knowledge not only of Canadian law but also of international law and the laws of other countries. The important thing is to be able to recognize when issues of international law, or the laws of another country, may arise. 1. The acronym DDP means delivery duty paid, so the seller delivers the goods to the buyer’s location. In Ashley’s case, she is responsible for the goods until delivery to the buyer, so the problem is hers. She may be able to recover from the crane operator later on, or his employer. If EXK had been on the purchase order, this would mean that the buyer would pick up the goods from the seller’s factory gate and make his or her own arrangements for transportation, Ashley should probably commence her lawsuit where the defendant resides, which appears to be Ontario, so the law of Ontario would apply. In order to insure she is not in this situation again, she must word the risk and title and delivery terms so that she is not liable for the goods once they leave her premises, and state which province’s laws apply in the contract. 2. Governments have the right to regulate the marketing of natural resources and the actions of the Utopian government do not technically amount to expropriation of XYZ's investment, though the end result is effectively the same.

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As a first step, XYZ should enquire whether it has any right to compensation, or to be exempted from the operation of the new law, under the terms of its joint venture contract with the government of Utopia, or under general principles of Utopian law. Alternatively, it may be that the Republic of Utopia is a party to a multilateral convention, such as that established in 1985 under the auspices of the World Bank, or to a bilateral convention with Canada, under which XYZ might be protected against action of the type described. The Utopian government might argue that its new law is not arbitrary, since it applies to the marketing of natural resources generally, and is not discriminatory, since it applies to domestic as well as foreign-invested firms. Nevertheless, an investment protection treaty may provide a right to compensation in such circumstances, and will probably contain a provision for the submission of disputes to arbitration in a neutral country. Failing that, XYZ's best hope may be to bring its complaint to the attention of the Canadian government and hope that it will put pressure on the government of Utopia to rescind or modify the new law. It could be pointed out that measures such as the one in question are likely to deter any other potential foreign investors from investing in Utopia, and might even jeopardize that country's ability to obtain future credits and foreign aid. 3. The complaint made by U.S. widget manufacturers is that Canadian widget production is subsidized by the Nova Scotia and Ontario governments, in that producers receive low-interest loans, grants and tax exemptions. On the stated facts, there does not seem to be dumping (since there is no evidence that Canadian prices are higher than the export price), nor is the subsidy specifically related to export production. Consequently, it may be that the action of the U.S. Department of Commerce, in imposing a countervailing duty, may not be valid under American law. Chapter 19 of the NAFTA entitles Canadian producers, against whom countervailing duties are imposed, to challenge the validity of such duties before a Special Panel. Although the countervailing duty may be valid under U.S. law, it is possible that it offends against the provisions of the NAFTA or of the GATT. The Canadian firms should seek to have the Canadian government intervene on their behalf. Altawidge should also be able to complain that, even if the actions of the Nova Scotia and Ontario Governments amount to improper subsidies, no such subsidy is provided by the Alberta Government and no countervailing duty should be imposed on its products. See the IPSCO Inc. & IPSCO Steel Inc. v. United States & Lone Star Steel Co. (1990) 899 F.2d 1192 (U.S. Court of Appeals). 4. At issue in this case is whether the Manitoba court will enforce the judgment of the Texas court. It is significant that Maxrevs did not enter an appearance in the Texas proceedings. The case is based on a leading Canadian case, Moses v. Shore Boat Builders Ltd. (1993), 106 D.L.R. (4th) 654, a decision of the British Columbia Court of Appeal. In that case, a shipbuilder based in British Columbia, built a boat for a client in Alaska. He was sued in Alaska, did not defend the action, and damages were awarded against him. The British Columbia court held that the judgment was enforceable in British Columbia. The shipbuilder had sold its product directly to an Alaska purchaser. As a result, it ought to

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assume the burden of defending that product in Alaska. The Alaska forum was one which the appellant ought reasonably to have had in its own contemplation when it tendered its goods. Under Canadian law, the court should recognize that the forum in which the respondent suffered damage is entitled to exercise judicial jurisdiction over a foreign defendant.

CASE SUMMARIES Amchem Products Inc.v. British Columbia (1993), [1993] 1 S.C.R. 897 (Supreme Court of Canada) The plaintiffs were mostly resident in Canada, particularly British Columbia. The defendant corporations were incorporated in various U.S. States. The plaintiffs alleged that they had been injured by exposure to asbestos and that the defendants had committed various torts with respect to the manufacture of asbestos. The plaintiffs commenced an action in Texas. The Texas court found that it had jurisdiction to hear the matter, although none of the defendants were incorporated there, nor were any of the plaintiffs located there. The defendant companies did carry on business in the State of Texas in the form of asbestos manufacturing plants. The defendants filed special appearances in the Texas court seeking a stay on the grounds that Texas was forum non conveniens, however, the defendants claim that they were unable to appeal the decision of the Texas court until after the trial as that was the law in Texas. The defendants brought an application in British Columbia seeking anti-suit injunctions. The plaintiffs likewise brought suit in Texas for the same. The Supreme Court dismissed the injunctions. The trial judge had held that the defendants had no connection to British Columbia and some connection to Texas. The trial judge had allowed the injunctions not on the issue of convenient forum, but rather because the Texas court did not apply the forum non conveniens rule. The Supreme Court held that the Texas Court had to comply with s. 1 of the Fourteenth Amendment to the Constitution of the United States with respect to nonresident defendants and that due process requirements were satisfied. Ann of Green Gables Licensing Authority Inc. v. Avonlea Traditions Inc. (2000), [2000] O.J. No. 740 (Ontario Superior Court of Justice) The plaintiffs brought an action for unpaid royalties against the defendant with respect to the Anne of Green Gables copyright and trade-mark. The Court held that the plaintiffs had a valid reversionary copyright and a valid trade-mark. Beals v. Saldanha (2003), 234 D.L.R. (4th) 1 (Supreme Court of Canada) See Case 31.7 at p. 823 in the text. A Florida plaintiff obtained a default judgment in Florida against a Canadian couple arising from the sale of a Florida vacation lot for $8,000. A mistake in the legal description of the deed led to the construction of a model home on the wrong lot. The Canadians defended the first action that was withdrawn. They entered an unsigned copy of the first defence when a second action was commenced. The claim was amended several more times without reply. A jury awarded

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$210,000 plus $50,000 in punitive damages even though there was limited evidence of harm. After post judgment was added the value of the judgment had risen to $800,000 (CDN) when the plaintiff sought recognition of the judgment in Canada. The Supreme Court (in a split decision) recognized the judgment based on substantial connection to the granting jurisdiction. The procedural inequities did not rise to a level that justified a lack of recognition.

Bisaillon v. Concordia University, [2006] 1 S.C.R. 666 (Supreme Court of Canada) An employee of the university brought an application to commence a class action suit on behalf of various union members with respect to the administration of a pension plan set up by the university. One of the nine unions disagreed with the class action and brought a motion that the court did not have jurisdiction to hear the matter. The court held that it did not have jurisdiction and that the matter should be referred to a grievance arbitrator. The Quebec Court of Appeal overturned the decision stating that the matter was not a union matter as the pension was not part of any collective agreement. The Supreme Court restored the trial judge’s decision; all of the collective agreements expressly referred to the pension plan and proper grievance procedures should be followed. Brower v. Sunview Solariums Ltd. (1998), 161 D.L.R. (4th) 575 (Saskatchewan Court of Appeal) A company resident in Minnesota purchased a solarium from a company resident in Saskatchewan. The foreign company alleged the solarium was defective and obtained judgment in a Minnesota court. It then applied successfully for a default judgment in the Saskatchewan Court of Queen's Bench. The chambers judge held that the solarium company had been ordinarily resident in Minnesota when the sale was made, and that the foreign court's findings were unimpeachable on that point by virtue of s. 5 of the Foreign Judgments Act, R.S.S. 1978, c. F-18. The solarium company appealed to the Saskatchewan Court of Appeal, which held the appeal should be allowed. The chambers judge erred in finding that the test for summary judgment had been met, because there were possible defences on the merits based on factually contested matters that ought to be determined at a trial. Buck Bros. Ltd. v. Frontenac Builder [1994] O.J. No. 37 (Ontario Court of Justice – General Division) Two companies entered into a joint venture; the venture was to be a 50/50 split with each partner contributing $2,400,000. The Frontenac group was unable to come up with the funds, and so the other party, the Newport Group loaned the Frontenac group the money to continue the project. The loan was not paid. Some eleven years later, the Frontenac Group attempted to obtain further financing from a bank, however, the bank required the Newport Group to guarantee the debt, effectively making them liable for 200% of their investment. Not surprisingly, Newport declined to guarantee the debt. An arbitration agreement was eventually reached stating that the Frontenac Group would obtain financing and repay the capital contributed by the Newport Group, as well as the loan

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from the project. The issue before the Court was whether the arbitrators had the power to determine its own jurisdiction in making a decision regarding a disagreement over interpretation of the arbitration agreement. The Court held that s. 17(1) of the Arbitration Act conferred such power on the arbiters. Canadian National Railway Co. v. Lovat Tunnel Equipment Inc. (1999), 174 D.L.R. (4th) 385 (Ontario Court of Appeal) The parties entered into a contract for the purchase of a tunnel boring machine. The plaintiffs brought an action in damages alleging the machine was defective. The defendant brought a motion to have the matter referred to arbitration as per the contract. The Court of Appeal held that as per the contract the defendant had the choice of acquiescing to the litigation or electing for binding arbitration; the matter was referred to arbitration. Club Resorts Ltd. v. Van Breda, [2012] SCC 17 Page 723 footnote 54 Consolidated Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company, [1980] 1 S.C.R. 888 (Supreme Court of Canada) The plaintiff was a manufacturer of paper products and suffered a loss due to a required shut down of its facilities due to a failure of heat exchangers. Part of the loss was to due to direct damage done to tubes in the heaters. The defendant insurance company refused to pay the loss for the damage to the tubes based alleging that the tubes were already damaged and that the type of loss was not covered by the insurance policy. The Supreme Court held that the rule of contra proferentum applied, but that in any case, the normal rules of construction of a contract require interpreting a contract in its entirety to determine the true intent of the parties. Council of Canadians v. Canada (Attorney General), [2006] 277 D.L.R. (4th) 527 (Ontario Court of Appeal) The plaintiffs brought an application to challenge the constitutionality of Canada in agreeing to set up arbitration tribunals under NAFTA to resolve claims by foreign investors. The trial judge dismissed the application. The Court of Appeal upheld the decision. The power conferred on NAFTA tribunals is not analogous with one exercised by the superior courts. Deluce Holdings Inc. v. Air Canada [1992] O.J. No. 2382 (Ontario Court – General Division) Air Canada acquired shares in Air Ontario and entered into a unanimous shareholder agreement with the other major shareholder, the Deluce family. Air Canada originally agreed to allow the Deluce family to continue the day to day operations of the Air Ontario without interference. At some point in 1991 Air Canada decided to acquire 100% interest in its connectors. One of the provisions in the USA allowed Air Canada to acquire the remaining shares when the two remaining Deluce members were no longer

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employed. The plaintiffs brought a motion in the oppression remedy alleging that Air Canada improperly exercised its majority control of directors by not renewing the employment contracts of the Deluces in order to buy out the minority interest of the Deluces. Air Canada argued that under the terms of the USA it is entitled to obtain the shares, and further, that any disputes are subject to arbitration. The Court held that the plaintiffs had demonstrated a prima facie case that Air Canada’s actions were oppressive and therefore, Air Canada could not rely on the agreement for the purpose it had in mind. Dell Computer Corp. V. Unions des consommateurs, [2007] SCC 34 Page 727 footnote 69 Diamond & Diamond v. Srebrolow, [2003] O.J. No. 4004 (Ontario Court of Appeal) The defendants were lawyers, formerly with the plaintiff firm. When the defendants left a dispute arose, and in the minutes of settlement the parties agreed to binding arbitration in the case of a breach of the settlement. When the plaintiff brought the suit, the defendants brought a motion to have the matter referred to arbitration. The Court held that the arbitration clause of the settlement agreement was too broad and did not contemplate the dispute now before the court and could therefore, not be referred to arbitration, but could only be decided by a court. The Court of Appeal upheld the decision.

Easthaven Ltd. v. Nutrisystem.com Inc. (2001), 202 D.L.R. (4th) 560 (Ontario Superior Court of Justice) See Case 31.4 at p. 821 in the text. A Barbados corporation (Easthaven) owned an Internet domain name of which an Ontario corporation was the registrar. A Delaware corporation (Nutrisystem.com) with the same trademark tried to acquire the domain name but the Barbados corporation demanded huge compensation. The Delaware corporation obtained an order from the Pennsylvania courts (where it had its principle place of business) that the Barbados corporation transfer the domain name to it. The Ontario registrar honoured the order and transferred the name to the Delaware corporation. The Barbados corporation responded by bringing an action in Ontario for damages from the Delaware company and an order that the Ontario registrar transfer the domain name back to it. The Ontario court declined jurisdiction because it was not the appropriate forum to hear the dispute; the Delaware corporation had not done any act or completed any transaction in Ontario. In addition, it would be unreasonable for an Ontario court to exercise jurisdiction over a Delaware corporation at the request of a Barbados corporation. Even if Ontario could exercise jurisdiction, it should not do so, since none of the factors to be considered in determining the issue of forum non conveniens established Ontario as the convenient forum. Group Canada Inc. v. Icer Canada Corp. [2010] N.S.J. No. 699 (Supreme Court of Nova Scotia)

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The plaintiff was a New York Company. The defendants were Quebec companies. The companies entered into a joint venture, whereby they incorporated a company in Nova Scotia for the purpose of distribution of a clothing line in Canada. The plaintiff brought an action in Nova Scotia for breach of the terms of the joint venture. The defendants brought a motion claiming that the Nova Scotia court did not have jurisdiction to hear the matter or it was an issue of forum non conveniens. The action was brought under the Nova Scotia Companies Act and so the Court held that it did have territorial jurisdiction to hear the matter. As to the issue of forum non conveniens, the Court held that the defendants did not successfully demonstrate that Quebec was a better forum, and therefore held that Nova Scotia was the appropriate forum. Hamlyn & Co. v. Talisker Distillery, [1894] A.C. 202 (England—House of Lords) A contract between a Scottish firm and an English firm, to be performed in Scotland, contained a clause providing for arbitration by members of the London Corn Exchange. The Court held that the clause evidenced an intention that the contract be governed by English law; that being so, the arbitration clause was valid and deprived the Scottish courts of jurisdiction. Herman v. Alberta (Public Trustee), 2002 ABQB 255 (Alberta Court of Queen’s Bench) An Alberta company was chartered to fly the plaintiffs to Saskatchewan. The plane crashed in Saskatchewan. The parties did not dispute the fact that Alberta was the proper forum for the action. The question for the Court was what was the proper law to apply in the situation, that of Alberta or Saskatchewan. The parties had elected to proceed by way of contract law rather than tort, and under the circumstances, the Court held that the proper law of the contract was Alberta as per the Alberta Fatal Accidents Act R. S. A. 2000, c. F-8 Imperial Life Assurance Co. of Canada v. Colmenares, [1967] S.C.R. 443 (Supreme Court of Canada) In 1942 and in 1947 the respondent, Colmenares, took out two life insurance policies with the appellant company, Imperial Life. Colmenares was at those times resident and domiciled in Cuba. The policies were issued through Imperial Life's branch office in Havana, pursuant to applications addressed to the head office in Toronto. Colmenares later became resident in the U.S.A. and, in 1961, applied for payment of the cash surrender values of the policies. The sole issue was whether the policies were governed by the law of Cuba or that of Ontario. If Cuban law applied, then payment to a resident of the U.S.A. was illegal except with the permission of the National Bank of Cuba. If Ontario law governed, payment could lawfully be made. The Court held that the issue could only be resolved by considering the contract as a whole in the light of all the surrounding circumstances. The place where the contract was made was not decisive in determining the proper law, but neither did it necessarily depend on where the insurer's head office was situated. It was significant that the decision Copyright © 2016 Pearson Canada Inc.

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to accept the risk could only be taken at the company's head office, and not by the branch in Havana. It was also an important factor that the policies, although translated into Spanish, were in a common standard form that complied with Ontario law. Taking all factors into consideration, the contracts were governed by the law of Ontario. IPSCO Inc. & IPSCO Steel Inc. v. United States & Lone Star Steel Co., 899 F.2d. 1192 (1990), (United States, Court of Appeals) In 1985 (i.e. before the Canada-United States Free Trade Agreement and the NAFTA came into effect), an American steel producer, Lone Star, filed a petition with the U.S. International Trade Administration (ITA), alleging that Canadian steel manufacturers received subsidies from the federal and from some provincial governments causing material injury to U.S. producers. The ITA conducted an investigation of eleven Canadian firms that exported to the United States and concluded that some Canadian firms received subsidies under an investment tax credit programme and a regional development incentive programme, and that there was a threat of material injury to the U.S. industry. It consequently ordered the imposition of countervailing duties on Canadian products, though it exempted from the operation of the order those firms that had satisfactorily demonstrated that they were not in receipt of a subsidy. The decision of the ITA was challenged by a Canadian producer, IPSCO, which was found to have been in receipt of a subsidy. IPSCO maintained that the method used by the ITA to calculate the level of subsidies in Canada was inappropriate. It should have taken into account the fact that other Canadian companies received little or no subsidy, with the result that the overall level of subsidy was minimal and not such as to cause material injury. The Court of Appeals agreed. The overall level of subsidies in Canada was too low to have a significant effect. Consequently, countervailing duties were not appropriate even though a few ailing firms did receive support.

Lemmex v. Bernard (2002), 213 D.L.R. (4th) 627 (Ontario Court of Appeal) The plaintiff, resident in Ontario, purchased a cruise package vacation from an Ontario travel company, which contracted with a cruise operator resident in Florida. The cruise operator, in turn, arranged with a company in Grenada to provide a shore excursion. The shore excursion included a trip in a dilapidated taxi. The plaintiff claimed to have suffered carbon monoxide poisoning as a result of the exhaust fumes, necessitating extensive medical treatment on his return to Ontario. He brought an action, in the Ontario Superior Court, against the Ontario travel company and the Florida cruise operator. The cruise operator brought a third party claim against the Grenadian company and the taxi driver. The Grenadian company and the taxi driver brought a motion to stay proceedings on the grounds that the Ontario courts had no jurisdiction. The Ontario Court of Appeal allowed the motion. There are eight factors to be considered in determining whether the real and substantial connection test and the principles of order and fairness had been satisfied. There were two factors in favour of assuming jurisdiction: the plaintiff had suffered significant damages in Ontario, and there were

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advantages in dealing with all the issues in one action. However, the other factors did not support the assumption of jurisdiction; that is, the Grenadian defendants had no connection with Ontario; it would be unfair to the defendants to assume jurisdiction, since they had confined their activities to Grenada, and it would be unduly onerous to require them to defend actions in the home jurisdictions of each of their customers; refusing jurisdiction would not result in significant unfairness to the plaintiff, who had chosen to go on the Caribbean cruise and take the excursion; the assumption of jurisdiction would require Ontario courts to recognize and enforce the judgments of foreign courts for damages arising from the provision of tourism services to tourists in Ontario; the assumption of jurisdiction was more difficult to justify in international cases than in interprovincial cases; and there was no reason to think that Grenadian rules were less restrictive than the rules that prevailed elsewhere. Consequently, the real and substantial connection test had not been satisfied. Methanex Corporation v. United States of America, Page 731 footnote 78

Momentous.ca Corp. V. Canadian American Association of Professional Baseball Ltd., [2012] S.C.J. No.9

Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 (Supreme Court of Canada) The respondents were mortgagees of properties in Alberta. The appellant was the mortgagor of the properties. The appellant moved to British Columbia. When the mortgages went into default, the mortgagees commenced foreclosure actions in Alberta. The mortgagor did not defend, nor appear in Alberta. The mortgagees then proceeded to claim on the shortfall of the mortgages after the sale of the properties. They again obtained their judgments in Alberta. The respondents then sought to have the Alberta judgments enforced in British Columbia. The Court held that there was a real and substantial connection to the Alberta jurisdiction and that the actions were properly brought there. The Court further held that Alberta judgments should be recognized and enforced in British Columbia.

Moses v. Shore Boat Builders Ltd. (1993), 106 D.L.R. (4th) 654 (British Columbia Court of Appeal) See Case 31.6 at p. 823 in the text. M.W. Hardy Inc. v. A.V.Pound & Co. Ltd., [1956] A.C. 588 (England—House of Lords) Copyright © 2016 Pearson Canada Inc.

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A contract was made in London, England, by English buyers, to buy Portuguese turpentine to be shipped from Lisbon to Rostock, in East Germany. The contract contained a clause providing for arbitration in London. Portuguese law prohibited the export of turpentine except with a licence, and the Portuguese authorities refused to grant a licence for export to East Germany. The Court found that the contract was not an illegal contract under Portuguese law, because a licence might have been granted; that being the case, it then applied English law (the arbitration clause evidencing an intention that the contract should be interpreted according to English law) in holding that the shippers were not liable for breach so long as they used their best endeavours to obtain the necessary licence. Onex Corp. v. Ball Corp (1994), 12 B.L.R. (2nd) 151 (Ontario Court of Justice – General Division) The applicant and respondent companies were involved in a joint venture and had a very complex joint venture agreement drawn up. The applicant brought an application to enforce a certain “put” clause in the agreement; the respondents requested a stay of proceedings based on a clause of the agreement requiring mandatory arbitration. The Court referred the parties to arbitration as per the joint venture agreement. Ontario Hydro v. Denison Mines Ltd., [1992] O.R. No. 2948 (Ontario Court of Justice –General Division). The parties had a dispute under an agreement for the supply of uranium; the agreement contained an arbitration clause. The court granted a stay of the court action pursuant to the provisions of what was then a new domestic arbitration statute. The decision represents a change in approach to the enforcement of arbitration clauses as stated at paragraph 8: …. sections of the new Act also confirm a legislative directive in favour of arbitration over litigation, where the parties have so provided by agreement. Thus, the new Act provides a forceful statement from the Legislature signaling a shift in policy and attitude towards the resolution of disputes in civil matters through consensual dispute resolution Pope & Talbot Ltd. (Re), [2009] B.C.J. No. 2248 at paras 29–41 (Supreme Court of British Columbia) Three insurers who issued Directors and Officers liability insurance policies in favour of the bankrupt company sought a declaration that the proper law of the contract to be applied with respect to the insurance policies was the State of Oregon. Certain employees of the bankrupt company made a claim personally against the directors for unpaid wages. The Court held that the proper law of the contract is determined by the express intention of the parties, and where no express intention is made, the Court may infer the proper law of the contract from the circumstances. Further, the proper law of the contract is determined at the time the contract is made. In this case, the Court held that the proper law of the contract was British Columbia.

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Robertson v. Thomson Corp. (2004), 190 O.A.C. 231 (Ontario Court of Appeal), appeal all’d in part 2006 SCC 43 (Supreme Court of Canada) The plaintiff wrote two articles that were published in the newspaper. She then brought a class action against the defendant for copyright infringement when she discovered that the articles were stored in three databases. The Court dismissed her appeal allowing that newspapers were entitled to copy articles into a database. The plaintiff brought a motion for summary judgment. The Motions Judge held that while the reproductions were reproductions of the articles in question and not reproductions of the collective work of the defendant, the motion was dismissed as there were genuine issues for trial. The Court of Appeal and Supreme Court of Canada upheld this decision. Sears Canada Inc. v C&S Interior Designs Ltd., [2012] ABQB 573 Page 723 footnote 55 Seidel v. TELUS Communications, 2011 SCC 15 (Supreme Court of Canada) The plaintiff brought an action against the defendant for breach of the British Columbia consumer protection legislation. The defendant counterclaimed requesting a stay of proceedings as the contract between the parties included an arbitration clause. The Supreme Court held (in a 5-4 decision) that the stay of proceedings should be lifted in part as the consumer protection legislation should be interpreted generously in favour of consumers and that Seidel should be allowed to bring her action to court. The alternative complaints of the plaintiff were still subject to arbitration. The dissenting opinion stated that all of the claims by the plaintiff should first be submitted to arbitration; that access to justice is fully preserved by arbitration. Sincies Chiementin S.p.A. (Trustee) v. King, [2010] O.J. No. 5124 at para 88 (Ontario Superior Court of Justice) The plaintiff was a trustee for the bankrupt Italian company. It brought a motion for summary judgment to recognize and enforce a judgment issued by an Italian court against the defendant in favour of the bankrupt. The defendant claimed that the judgment was obtained by fraud with respect to the jurisdiction and that there was no real and substantial connection to the Italian court. The Court held that the Italian court did have jurisdiction, that it had considered the necessary factors in determining that it had jurisdiction, that the materials presented to the court were sufficient to reach the decision it had, and that the defendant had no viable defence to the action. Teck Cominco Metals Ltd. v. Lloyd’s Underwriters, 2009 SCC 11 at para 22 (Supreme Court of Canada) See Case 31.5 at p. 822 in the text. Trillium v. General Motors, 2013 ONSC 2289 Page 723 footnote 55

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Unifund Assurance Co. v. Insurance Corp. of British Columbia, [2003] 2 S.C.R. 63 (Supreme Court of Canada) The plaintiff was the insurance company of a couple of Ontario residents who were injured in a car crash in British Columbia. The car the injured parties were driving was a rental vehicle licenced in British Columbia. The driver of the truck that struck the injured parties was a resident of British Columbia and the vehicle was also licenced there. The injured parties were paid statutory accident benefits from their own insurance company; they received a further sum from a negligence claim against the driver that struck them. The defendant insurer deducted the amount of funds paid to the injured parties from the negligence action from the monies owed to the plaintiff insurance company. The plaintiff brought an application in the Ontario courts to have an arbitrator to determine the question of indemnification. The defendant made a cross-motion for stay of proceedings in Ontario or that the Ontario was forum non conveniens. The motions judge held that Ontario was not the convenient forum. The Court of Appeal overturned the decision, stating that the court should have appointed an arbitrator, and the arbitrator could deal with the jurisdictional issue. The Supreme Court restored the motion judge’s decision; the Ontario regulatory scheme did not apply to the out-of-province defendant and an arbitrator therefore would not have authority to decide anything in this case. United Parcel Service of America, Inc. (UPS) v. Government of Canada See www.international.gc.ca United States v. Canada: Certain Measures Concerning Periodicals, WTO panel report WT/ DS31/ R, March 14, 1997 See Case 31.1 at p. 813 in the text. United States v. Canada: Administration of the Foreign Investment Review Act (Case No. 108, GATT Doc. l/5308) (GATT Panel) A complaint was made by U.S. corporations that, as a condition for the approval of their investments in Canada, they were required to purchase a certain proportion of goods and materials in Canada for use in their business operations, and were also required to export a proportion of their production. The United States government brought the complaint to the secretariat of the GATT, claiming that the local-sourcing conditions constituted a restriction on trade, because the U.S. investors were prevented from importing similar goods from the U.S. or elsewhere. The Canadian government argued that the entire foreign investment field lay outside the scope of the GATT. The Panel ruled that the "buy-Canadian" requirements formed a restriction on imports and constituted a violation of article III of the GATT. There was no provision of the GATT, however, that prohibited export performance requirements. United States and New Zealand v. Canada: Commercial Export Milk Program, WTO panel report WT/ DS103/ 33, May 15, 2003 See Case 31.2 at p. 813 in the text.

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Van Breda v. Village Resorts Ltd., [2010] O.J. No. 402 (Ontario Court of Appeal), leave granted [2010] S.C.C.A. 174 (Supreme Court of Canada) See Case 32.14 at p. 858 in the text. The plaintiffs were residents of Ontario. The defendants were located in Cuba. The plaintiffs had arranged for vacations in Cuba. One of the plaintiffs specifically requested scuba diving as an activity and subsequently died while scuba diving at the defendant’s resort. The other plaintiff was injured when equipment she was using to do chin-ups collapsed on her, leaving her a paraplegic. She and her husband had since moved to British Columbia after the accident. In both of these cases, the motions judges held that Ontario was the proper jurisdiction to hear the matter, but not as against the personal defendants. The defendants appealed the decision. The Court of Appeal reviewed the decision in Muscutt v. Courcelles (2002), 60 O.R. (3d) 20 (Ontario Court of Appeal) and the Uniform Law Conference model Court Jurisdiction and Proceedings Transfer Act and held that Ontario was the proper forum. Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] A.C. 277 (Judicial Committee of the Privy Council) Goods were shipped in Newfoundland under bills of lading that did not conform with the Newfoundland Carriage of Goods by Sea Act, 1932, but which provided for exemption from liability for damage due to negligence of the ship owner’s employees. The bills of lading contained a clause that the contracts should "be governed by English law". An action was brought in Nova Scotia against the ship owner in respect of damage to the goods. The ship owner pleaded the exemption clause. The court held that the proper law of the contract was that intended by the parties, namely English law; applying that law, the ship owner was entitled to rely on the exemption clause, notwithstanding that the clause was contrary to the Newfoundland statute. Wang v. Lim,[2012] PMSC 3374 Page 723 footnote 55 Z.I. Pompey Industrie v. Ecu-Line N.V. (2003), 224 D.L.R. (4th) 577 (Supreme Court of Canada) The defendant was a shipping company that carried equipment ordered by the plaintiffs on one of its ships from Belgium to Montreal. The equipment was then transported by rail to Seattle and was damaged while in transit. The plaintiffs brought an action for damages in the Federal Court of Canada. The bill of lading contained a provision that the contract was governed by Belgian law and that any dispute should be referred to the courts in Antwerp. The Federal court held that the bill of lading only applied so far as Montreal and not to the onward shipment, and dismissed the defendant’s motion to have the action dismissed. The Supreme Court of Canada allowed the defendant’s appeal. Forum selection clauses should normally be upheld, since they create certainty in international

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commercial transactions. It was for the Antwerp court to decide whether the bill of lading had come to an end at Montreal.

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CHAPTER 31 ELECTRONIC COMMERCE E-COMMERCE AND THE LAW (Source p. 739) This chapter deals with one of the fastest growing sectors of business, and how it impacts the law. Electronic commerce raises many new situations that are examined in the light of existing legal doctrines.These doctrines can be applied, or adapted, to meet the problems that arise. This edition has an updated discussion of anti-span legislation, added content on internet defamation as a result of recent Supreme of Canada decisions, updated content on the new copyright legislation and related Supreme Court of Canada decisions, and the discussion of forum non conveniens as it relates to internet contracts has been expanded. E-commerce is not a separate branch of the law, like contracts, torts, property, or business organizations. It is a way of doing business. It consequently raises the same sort of issues that occur in other forms of business, and that is why this chapter is divided into segements that reflect content dealt with in the preceding chapters. The current cases will provide for in-depth discussions, particularly those involving jurisdiction- the choice of forum becomes very complex. In order to understand the legal problems posed by ecommerce, it is necessary to understand the basic principles of business law in particular, contract, tort, and intellectual property law. E-commerce knows no frontiers—which is why it is also necessary to understand something about international business law. Consequently, this chapter provides a suitable template for orgainizing a specialty course on e-commerce law. In the introduction to Chapter 4, in this Manual, we emphasized that it is often not possible to give a straightforward answer to legal questions. Nowhere is this more obvioius than in dealing with the sorts of issues raised by e-commerce. This is especially important to remember if students are asked to prepare answers to the Cases and Problems: we do not know the answers, so students should only be evaluated on their understanding of the issues and their approach to the problems. E-commerce issues can be viewed as an application of the law – it tests the student’s understanding of the many basic principles that have gone before and his or her ability to apply that understanding to new situations. The courts are only just beginning to be confronted with e-commerce questions, which is why this chapter has included more references than usual to U.S. decisions. We are not suggesting that Canadian courts will necessary reach the same conclusions as their U.S. counterparts; however, the U.S. cases provide an interesting illustration of the sorts of problems that have already arisen. INTELLECTUAL PROPERTY (Source p. 744) Copyright reform is dealt with in more detail in Chapter 20 and instructors should pay attention to its progress. Twice copyright reform bills have died on the table when governments have changed and so it could happen quickly if a majority government is

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formed. A useful site is that of Professor Geist, a law professor in the Faculty of Law at University of Ottawa and holds a Canada Research Chair in Internet and E-commerce Law, at www.michaelgeist.ca PRIVACY (Source p. 752) In 2010, Canada enacted anti-spam legislation prohibiting the sending of or permitting to be sent commercial electronic messages to an electronic address without the consent of the recipient. The proper name of the act is: An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, SC 2010, c 23, more easily referred to as Canada’s Anti-Spam Legislation (CASL). The CASL covers most forms of electronic communications and is regulated by the CRTC. The CASL imposes civil liability as well as fines for regulatory offences. Most interesting for prompting discussion in class, is the controversial decision to allow the disclosure by ISP’s of personal information for the purposes of investigation of compliance and violations. This information in turn must be preserved and can be shared with other parties (including foreign organizations) by the Privacy Commissioner or the Commissioner of Competition in pursuit of parties engaged in illegal activities. STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 759) As virtually all businesses today make use of technology in some way, it is vital that use of technology be made a part of a risk management plan. Even if a business does not use the internet to sell goods or services, but the internet is accessible to employees, concerns for vicarious liability and decreased productivitry through personal use, should be addressed. Where the business is engaged in internet transactions, it is vital that a proper plan be in place to deal with the possibility of contract disputes with persons located in other jurisdictions, as well as protection of intellectual property rights, avoidance of inadvertent intellectual property infringement, or defamation issues. ETHICAL ISSUE (Source p. 752) Employee Technology Use Students should consider what fairly balances the interests of both employees and employers: allowing some personal use of technology that is monitored to detect and discourage abuse.  Some personal use seems to be acceptable to most employers (72%) (Healy, M., and Iles, J.: 2004, ‘Quality management and e-commerce: the role of codes of conduct governing the use of technology’, The TQM Magazine 16(5): 354-358.) Also see the AMA findings sourced in the text.  Too much personal use justifies dismissal Telus v. TWU (2005) 143 L.A.C. (4th) 299

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Question 1 - First, when considering this question, do not assume that accessing a social networking site is automatically a personal use or (misuse) of employer’s technology. Remaining in close contact with clients, prospective clients, suppliers, co-workers, and competitors may be part of the job, especially in sales, marketing, or recruitment positions. In the modern business environment, social networking sites may be the best way to do this. That said, often social networking sites are used for personal reasons. Are there reasons why an employer should allow this? Is it different from (or even better than) making a personal telephone call? Allowing employees to take care of some personal business while at work may make them more productive in the long run. They may not have to leave quickly at the end of the day to do these things. They may be less stressed and more productive during the day if they can remain in touch with children at home. This is the rational that inspires Google to incorporate dry cleaners and hair salons into the workplace; make it easy for employees to meet their personal needs and they will have more time and be happier to work. It is also a show of respect for the obligations and integrity of employees and a demonstration of the trust the employer has in them (trustworthy). Question 2 - At some point, too much personal use becomes a distraction and a drain on productivity in the workplace. Illegal activity may expose the employer to civil, regulatory, or even criminal liability. Security and confidentiality may be at risk as unknown viruses may enter the system. Monitoring is an appropriate way to control misuse but it raises questions of privacy. Chapters 18 (Employment) and 33 (Privacy) consider these issues. Monitoring aggregate time spent rather than particular activities allows employers to discipline for loss of productivity or “theft” of time rather than evaluating particular conduct. Notice of monitoring is vital to the privacy issue so employees cannot reasonably expect privacy. Discuss how and where notice should be given. Question 3 – This question looks at employer “misuse” of social networking sites. Is this a lack of respect and an unfair invasion of personal privacy not relevant to the workplace? Or, does improper personal behaviour relevant to the workplace because it reflects back on the employer damaging its goodwill? What expectation of privacy exists for people posting information to these sites? Consider looking at the publicly available corporate codes of conduct; for example, Manulife available at Manulife Code of Business Conduct and Ethics <http://manulife.com/corporate>. Question 4 – This is an interesting question, as on the face of it, most people would immediately answer no, but as discussed earlier, what if an employee is linked to the reputation of a business? For example, if the employee was the “face” of the company; perhaps a senior lawyer in a law firm, or the CEO of a company, or even just the head of sales and marketing for a business – should it make a difference to the question of whether an employer should have a say in the personal social networking of one of these individuals, where what gets posted may have an impact on the reputation of the company? Likely, the anwer to this question is still, no. Employers have other means of dealing with these issues. For example, where an employee posted something detrimental to the reputation of the company, then the employer may have a cause for dismissal

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without notice (Chapter 18); or if the remarks were defamatory, then a civil cause for defamation (Chapter 3). Possible Video Resources (available in the archives of CBS News at http://cbsnew.com): CBS Sunday Morning News Video, August 31, 2008, “The “Google” Life” CBS Morning News Video, June 24, 2008, “Are You Hooked On Facebook?” CBS Morning News Video, June 20, 2006, “Too Much Information”

INTERNATIONAL ISSUE (Source p.753) What To Do About Spam? Question 1 – Now that Canada has enacted legislation to deal with SPAM, the question becomes what type of liability will be must effective in deterring the use of SPAM. Civil liability and fines set under criminal and regulatory offences, can do significant financial harm to companies, this is assuming that assets can be located and that enforcement of a judgment is possible. Criminal liability may be more effective as “incarceration is one cost that can’t be passed on to the consumer;” however, the issue of whether deterrence is effective or not is still an issue. Just because you put one offender in jail does not stop others from stepping up to fill his place. Perhaps the most effective system would be to make the enterprise unprofitable; increase the policing rather than the punishment. As a deterrent, the knowledge that a person is more likely to get caught is often a better deterrent than increased punishments. This then raises issues of invastion of privacy. Question 2 - What would be the effect of imposing a duty on ISPs to monitor their customers and to ‘ban’ spammers? Would it restrict freedom of expression? Would it make Internet use more expensive? The SOCAN decision reveals the Supreme Court’s view that ISP’s are not responsible for the content transimitted by users. However, the legislators could ignore this opinion and create strict or even absolute regulatory offences. The requisite intention would seem to be missing for a criminal mens rea offence. Question 3 - Is there a need for special anti-spam legislation at all or does it constitute too broad an infringement on free speech. Canadian courts have already held that certain types of speech should be monitored in spite of the constitutionally protected right. Hate literature, child pornography, and other forms of expression are deemed criminal and unacceptable by the Canadian public. While the majority of SPAM is certainly not that bad, should lines be drawn as to what is considered acceptable “speech” through this medium? Or is this level of censorship going too far?

QUESTIONS FOR REVIEW

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1. Contracts normally involved in establishing an online business include: a web site development agreement; a web site hosting agreement; and an Internet access agreement. (Source p. 737) 2. A “Web-wrap agreement” is a web site document setting out contractual terms, the acceptance of which is indicated by “clicking” on the appropriate icon. (Source p. 739) 3. Both federal and provincial legislation adapt traditional contract formality rules to the electronic age. The federal Personal Information Protection and Electronic Documents Act recognizes electronic contracts as a form of writing and electronic signatures as valid signatures. Provinces have adopted private sector legislation in the form of the Uniform Electronic Commerce Act that recognizes clicking an icon as communication of acceptance and confirms that electronic documents satisfy requirements of writing (among other things). Limitations on electronic contracting rules can be found in the consumer protection legislation. (Source pp. 740-741) 4. The law of the contract may determine such matters as: the capacity of the parties to contract; the legality of contract; the formal requirements governing the contract; any terms that are to be implied; the effects of, and remedies for, breach of contract; and the applicability of consumer protection legislation. (Source p. 740) 5. In the SOCAN case, the Supreme Court of Canada described ISPs as merely intermediaries who provided the means of communication and were not communicators; therefore, the ISPs were not exposed to Copyright infringement indirectly. There is propsed legislation that would impose obligations on ISPs to provide notice to subscribers of allegations of infringement. Likewise, under the CASL ISPs are not considered liable as long as their involvement is restricted to supply of telecommunication services. There is no obligation to give notice of violation or discontinuance of service, as has been recommended in copyright reform. (Source p. 743) 6. E-cash is a software payment system that facilitates the anonymous transfer of money over the Internet. (Source p. 737) 7. While a domain name does not of itself constitute a trademark, it is common for a domain name to consist in part of a trademark or trade name and as such may amount to the infringement of another person’s trademark by confusing the user or damaging the reputation of the trademark holder. (Source pp. 746-747) 8. Under the CASL the CRTC is responsible for the regulatory regime to enforce the prohibition of sending SPAM, complete with offences and civil liability. Fines of up to $1,000,000 per violation may be imposed. Directors and officers are personally liable for their companies’ infractions and employers are vicariously liable for infractions committed by employees. (Source p. 754)

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9. Under this test a court examines the features of a website to determine if it is actively connected to the jurisdiction or merely passive. In Zippo Manufacturing Co. v. Zippo Dot Com, Inc., the U.S. court ruled that three types of jurisdictional situations existed: (1) where the out-of-state defendant is carrying on substantial business within the jurisdiction; (2) where the defendant maintains an interactive site; and (3) where the defendant’s site provides purely passive advertising. The court held that it had jurisdiction in (1) where the business is being carried on; in case (3) there is no jurisdiction; and case (2) remains uncertain. This test has been referred to as the “level of interactivity” test. (Source pp. 757-757) 10. Traditionally, jurisdiction may be exercised where the defamatory statement is published (where it is made available to be seen, heard, downloaded, or read), but that may be inappropriate in the case of Internet libel. The most appropriate factors to establish jurisdiction would seem to be the place where the plaintiff lives, or where his or her reputation is injured as long as the location is foreseeable (Source p. 757) 11 The federal Personal Information Protection and Electronic Documents Act imposes restrictions on the collection, use and disclosure of personal information, in particular by the requirement to obtain an individual’s consent to use or disclose information collected and obliging the holder to secure and ultimately safely destroy the information; it applies to both public and private sector businesses (with some exceptions, notably where a province has passed substantially similar legislation). (Source p. 752) 12. Non-governmental organizations work to build international harmony between domestic laws in different jurisdictions. This is particularly valuable for e-commerce, because transactions regularly cross jurisdictional boundaries and all parties benefit from consistency and certainity in the law. (Source p. 758) 13. Illegal activities are made easier because the Internet facilitates the distribution of illegal material (such as hate literature and child pornography) and makes detection and prosecution difficult. The internet allows scams and fraudulent schemes to reach a much wider group of victims and often the offender is outside the jurisdictional reach of law enforcement. There are few intermediaries and no paper trail so gathering evidence can be difficult. (Source p. 755) 14. Copyright reform would bring Canada in line with WIPO (World Intellectual Property Organization) treaties that create legal remedies for TPM (technical protection measures) and DRMS (digital rights management systems) circumvention, impose responsibilities on internet service providers, and entrench a copyright holders’ exclusive right to make a work available on the internet. Unauthorized temporary or permanent storage on shared drives, as well as accessing such unathorized drives, would constitute infringement. (Source p. 749)

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CASES AND PROBLEMS 1. Ashley will have to prove that the statement was defamatory, which he may be able to do since she was not the hostess in question and yet was described as rude and unprofessional. Ashley will have to provide the right forum for the matter to proceed, It will be her home province, not Chicago. Only Jack will be liable, not the ISP. 2.. When was the contract made—if there was a contract—between Jane and SMART? When Jane clicked on “Buy Now,” she was making an offer to buy. When SMART confirmed the sale in an email at 10:04, it was communicating acceptance of Jane’s offer. Consideration was the price and the computer. Intention is presumed. Therefore, the contract was formed at 10:04. When SMART refused to supply the computer, Jane appropriately starts a breach of contract action. SMART will argue that there was no intention to contract at the price of $49.00 and so no contract was formed. Alternatively, SMART will argue that if a contract was formed it is void based on mistake as to terms (Chapter 8). If there is a contract SMART will also argue that the terms and conditions form part of the contract so Ontario has no jurisdiction and the availability term allows SMART to refuse to supply the computer. Focusing on the terms and conditions and the choice of forum clause, this contract may be considered a browse wrap rather than a click wrap agreement. The consumer was not forced (or required) to view the terms before accepting them as part of her offer. This case is based loosely on the facts of Dell Computers v. Union des consummateurs 2007 SCC 34 (Supreme Court of Canada) and Rudder v. Microsoft Corp. [1999] O.J. No. 3778 (Ontario Superior Court of Justice). In Rudder, the Court held that an internet contract with several pages was no different than a paper contract with many pages. Provided that the terms were brought to the attention of the consumer, they form part of the agreement. In that case the consumers were held to the choice of forum clause that designated Washinton state. In Dell the Supreme Court also held that the consumer was bound by the terms and conditions referred to on the order page. All consumers contracting on the internet are expected to have a certain level of computer literacy as per Kanitz v. Rogers (2002), 58 O.R. (3d) 299 (Ontario Superior Court of Justice), and Dell’s consumer, in particular, demonstrated superior computer skills so he was held to an arbitration clause in the terms. When Jane bypassed the block (and terms page) to order her computer she demonstrated superior computer skills and the court would likely find that had she wanted to review the terms and conditions prior to offering she would have been capable of doing so. (There may be specific consumer protection legislation that could assist Jane). 3. The issue will be determined based on whether the use of the domain name is likely to cause confusion (confusingly similar) or whether any initial misdirection of users is likely to damage the business of the trade name of the former employer (as discussed in Law Society of British Columbia v. Canada Domain Name Exchange Corp. (2004), 243 D.L.R. (4th) 746 (British Columbia Supreme Court) affirmed (2006), 259 D.L.R. (4th) 171 (British Columbia Court of Appeal)). This case is based on Peinet Inc. v. O'Brien, [1995] P.E.I.J. No. 68, a decision of the Prince Edward Island Supreme Court. In that case the court refused an application by the former employer for an injunction restraining

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the defendant from using his chosen name. The applicant had failed to demonstrate a likelihood of confusion and was unable to show that it had suffered any damage. [NOTE: The outcome of the case turned principally on the failure of the applicant to persuade the court of the likelihood of confusion; that is, it was decided on the basis of the evidence presented, rather than on any clear legal principle. In the present case there is the additional factor that the employer had declined the opportunity to develop the new technique. That would make it more difficult to show the likelihood of any damage.] 4. The first question to be decided is whether the British Columbia court (a) has jurisdiction to hear the defamation case, and (b) should do so. These are separate issues, since the court could decide that it does have jurisdiction, but that some other jurisdiction would be more appropriate (forum conveniens). In actions in tort, Canadian courts have traditionally taken the view that jurisdiction may be exercised in the state or province where the tort is committed, and libel is committed where the defamatory statement is published. Sleaze’s libel appears to have been written in New Zealand and to have first been published by the journal in Australia, but being broadcast on the internet it could be said to have been published worldwide. An alternative basis for jurisdiction is the place where the injury is suffered. In the present case, this appears to be principally in British Columbia, where both Midas and Goldfinger are resident. Canadian courts have exercised jurisdiction in defamation cases on that basis as long as the location is reasonably foreseeable; see the Bangoura v. Washington Post (2004), 235 D.L.R. (4th) 564 (Ontario Court of Appeal – leave to appeal to the Supreme Court of Canada refused) and Barrick Gold Corporation v. Lopehandia (2004), 71 O.R. (3d) 416 (Ontario Court of Appeal). There is nothing to suggest that some other jurisdiction (for example, Australia or New Zealand) would be more appropriate. Therefore it is proper for the British Columbia court to hear the action as long as it is reasonably foreseeable that Goldfinger and Midas would be located in British Columbia. As to the second question, there is no doubt regarding the validity of the claim against Sleaze (since he clearly cannot prove the truth of his allegations). But can Gargle be said to have ‘published’ the libel? Gargle is a search engine with a link to the libellous site. Hyperlinks to another website containing defamatory content do not create a presumption that the first site has republished the defamatory content. If however, there is direct evidence that readers are e ncouraged to follow the link, liability could attach. As Gargle is a search engine and not just another website, it likely that the no presumption regarding publication would be made.

CASE SUMMARIES Apple Canada Inc. v. Canadian Private Copying Collective, [2008] F.C.J. No. 5 (Federal Court of Appeal)

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In a six paragraph judgment, the court establishes simply that the Copyright Board has no legal authority to certify a tariff on digital audio recorders or on the memory permanently embedded in digital audio recorders

Bahlieda v. Santa (2003), 233 D.L.R. (4th) 382 (Ontario Court of Appeal) The plaintiff claimed that defamatory material had been placed on the plaintiff’s website. The court held that this constituted ‘broadcasting’ for the purposes of the Libel and Slander Act, R.S.O. 1990, c. L.12. (The trial judge dismissed the claim on a technicality relating to the pleadings, but that was reversed on appeal.)

Bangoura v. Washington Post (2004), 235 D.L.R. (4th) 564 (Ontario Court of Appeal) See Case 31.15 at p. 859 in the text. Barrick Gold Corporation v. Lopehandia (2004), 71 O.R. (3d) 416 (Ontario Court of Appeal) The defendant, who was resident in British Columbia, alleged that the plaintiff corporation had fraudulently obtained mining claims of which he was the beneficial owner and accused it of a number of acts of criminal misconduct. He posted messages on various Internet bulletin boards attacking the plaintiffs, who brought an action for damages for defamation. The defendant did not defend the action and the court awarded the plaintiff damages in the amount of $15,000, but dismissed the claim for punitive damages. On appeal, the Ontario Court of Appeal awarded a further $50,000 in punitive damages. Blair J.A. explained, “Defamation on the Internet has features which distinguish it, for purposes of damages, from defamation in other media. Communication via the Internet is instantaneous, seamless, interactive, blunt, borderless and far-reaching. It is also impersonal, and the anonymous nature of such communications may itself create a greater risk that the defamatory remarks are believed. The Internet has greater potential to damage the reputation of individuals and corporations as a result of these features than does its less pervasive cousins.” Bell Actimedia Inc. v. Puzo (1999), 166 F.T.R. 202 (Federal Court Trial Division) See Case 31.3 at p. 845 in the text. B MG Canada Inc. v. John Doe (2004), 239 D.L.R. (4th) 726 aff ’d (2005), 252 D.L.R. (4th) 342 (Feeral Court of Appeal) See Case 31.12 at p. 851 in the text.

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Braintech Inc. v. Kostiuk (1999), 171 D.L.R. (4th) 46 (British Columbia Court of Appeal) See Case 31.14 at p. 859 in the text Breedon v. Black [2012] SCC 19 Page 743 footnote 40 British Columbia Automobile Assn. v. Office and Professional Employees’ International Union, Local 378, [2001] B.C.J. No. 151 (British Columbia Supreme Court) During a labour dispute the defendant union created a website which used the plaintiff’s logo. The plaintiff sued for damages against the union and against the union’s president peronsally. The Court held there was passing off and awarded the plaintiff nominal damages against the union, but dismissed the action against the president personally. British Telecommunications, plc v. One in a Million Ltd., [1998] E.W.J. No 954 (England Court of Appeal) The defendant purchased the top level domain for several British companies who then sued for trade-mark infringement and cyberquatting. The Court held that it was an infringement of trade-mark and the Court of Appeal upheld that decision. Burke v. John Doe, 2013 BCSC 964 Page 743 footnote 43 Burke v. NYP Holdings Inc. (2005), 48 B.C.L.R. (4th) 363 (British Columbia Supreme Court) The defendant New York Post brought an application to strike the pleadings and a stay of proceedings as the B C. court did not have jurisdiction. The plaintiff was the general manager of the Vancouver hockey team at the time that Bertuzzi injured Moore; the New York Post published one of its column’s on a website; the article state that the plaintiff had personally challenged the player to injure the opposing player. The Court held that the proper forum was B.C. as his reputation was damaged in B.C. Candrug Health Solutions Inc. v. Thorkelson 2007 FC 411, (2007), 312 F.T.R. 13 (Federal Court of Canada – Trial Division) overturned on appeal 2008 FCA 100 (Federal Court of Appeal) Trademarks for Canada Drugs and CanadaDrugs.com were registered in favour of Thorkelson for use in association with drugstores, dispensaries and pharmacies.

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Pharmawest was sued for infringement when it opened “getcanadadrugs.com”. Pharmawest was initially successful in having the trademark registrations on the basis that they were merely descriptive and failed to distinguish the wares. The Court of Appeal overturned this finding. The evidence as to value focused on traffic site - in 2005 there were over 3,500,000 visitors to the CanadaDrugs.com website - and over $5,000,000 had been spent to promote the site. Canadian Association of Internet Providers v. SOCAN (2004), 240 D.L.R. (4th) 193 (Supreme Court of Canada) SOCAN, a collective society responsible for administering performing rights in musical works in Canada, sought to have a tariff imposed on Internet service providers (ISPs) in respect of performers’ royalties, on the basis that ISP facilities were used for the transmission of musical works. The court held that so long as an ISP confines itself to providing a conduit for information it is not “communicating” to the public. An ISP normally has no actual knowledge of any material transmitted that might infringe copyright and it would be impractical for it to monitor all the material moving through the Internet. A person does not authorize infringement by authorizing the use of equipment that could be used to infringe copyright. According to the court, “the Copyright Act provides a balance between the public interest in the encouragement and dissemination of works of the arts and intellect and obtaining a just reward for the creator. Use of the Internet to disseminate such works should be facilitated rather than discouraged, but this should not be done unfairly at the expense of creators.” Canadian Wireless Telecommunications Association, Bell Mobility Inc. and Telus Communications Company v. SOCAN, [2008] F.C.J. No. 21 See Case 32.11 at p. 851 in the text. Charron Estate v. Bel Air Travel Group Ltd., [2010] S.C.C.A. (Supreme Court of Canada) See Above decision Van Breda v. Village Resorts Ltd., [2010] O.J. No. 402 (Ontario Court of Appeal), leave granted [2010] S.C.C.A. 174 (Supreme Court of Canada). Crookes v. Wikimedia Foundation Inc., 2008 BCSC 1424, aff ’d [2009] B.C.J. No. 1832 at paras. 18–20, 41, 59 aff ’d Crookes v. Newton 2011 SCC 47 (Supreme Court of Canada) The plaintiff sued a variety of parties for publication of defamatory articles written about the plaintiff. The Supreme Court held that hyperlinks are references and not publications; they communicate that something exists, but not its’content. Crookes v. Yahoo, 2007 BCSC 1325, aff ’d [2008] B.C.J. No. 834 (British Columbia Court of Appeal) Copyright © 2016 Pearson Canada Inc.

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The plaintiff sued the defendant for publication of defamatory articles about the plaintiff posted on the internet. The Court of Appeal held that there was no jurisdiction to bring an action against the American defendant in B.C. The plaintiff did not show that the postings wee communicated to a third person; there was no evidence to suggest that anyone had read the material in B.C.; and there was no basis for the court to draw such an inference. The articles complained of were posted on a website with restricted access that was not available to the public. Under the circumstances the Court dismissed the action. Cybersell Inc. (Arizona) v. Cybersell Inc. (Florida), (1997) US App. Lexis 33871 (United States District Court of Arizona). This was an action for trademark violation. The plaintiff sued the Florida company in an Arizona court. The Court found the defendant had engaged in purely passive advertising in Arizona and was not subject to the jurisdiction of the court. There had been no “hits” in Arizona (except by the plaintiff company). Dell Computers v. Union des consummateurs 2007 SCC 34 (Supreme Court of Canada) Approximately three hundred consumers purchased Dell computers online at a time when the website displayed an erroneous low price. Dell refused to supply the computers and Union commenced a class action on behalf of the consumers. Dell brought a motion to stay the action under the Quebec arbitration legislation, because the online contract contained a mandatory arbitration clause. Both the motions judge and the Court of Appeal found the arbitration clause unenforceable against the consumer. Despite finding that determination of validity of the clause was first the responsibility of the arbitrator the Court assessed the validity of the clause and upheld it. The action was stayed. Desjean v. Intermix Media, Inc. (2006), 57 C.P.R. (4th) 314, aff’d [2007] F.C.J. No. 1523 (Federal Court of Appeal) The plaintiff brought an action against the defendant American company for breaches of the Competition Act. The motions’ judge concluded that it was not the correct forum to bring the action as there was no real or substantial connection to the jurisdiction; the American company had no commercial or financial links to Canada. The Court of Appeal upheld the decision, further noting that the American company was not bound by the Competition Act. Easthaven Ltd. v. Nutrisystem.com Inc. (2001), 202 D.L.R. (4th) 560 (Ontario Superior Court) A Barbados corporation (Easthaven) owned an Internet domain name of which an Ontario corporation was the registrar. A Delaware corporation (Nutrisystem.com) with the same trademark tried to acquire the domain name but the Barbados corporation demanded huge compensation. The Delaware corporation obtained an order from the Pennsylvania courts (where it had its principle place of business) that the Barbados corporation transfer the domain name to

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it. The Ontario registrar honoured the order and transferred the name to the Delaware corporation. The Barbados corporation responded by bringing an action in Ontario for damages from the Delaware company and an order that the Ontario registrar transfer the domain name back to it. The Ontario court declined jurisdiction because it was not the appropriate forum to hear the dispute; the Delaware corporation had not done any act or completed any transaction in Ontario. In addition, it would be unreasonable for an Ontario court to exercise jurisdiction over a Delaware corporation at the request of a Barbados corporation. Even if Ontario could exercise jurisdiction, it should not do so, since none of the factors to be considered in determining the issue of forum non conveniens established Ontario as the convenient forum. Entertainment Software Association v. SOCAN 2012 SCC 34 Page 749 footnote 72 IMAX Corp. v. Showmax Inc. (2000), 5 C.P.R. (4th) 81 (Federal Court Trial Division) See Case 31.5 at p. 846 in the text. itravel2000.com Inc. v. Fagan (2001), 197 D.L.R. (4th) 760 (Ontario Superior Court of Justice) See Case 31.8 at p. 848 in the text. ITV Technologies, Inc. v. WIC Television Ltd. (2003), 239 F.T.R. 203, aff ’d [2005] F.C.J. No. 438 (Federal Court of Appeal) See Case 31.6 at p. 847 in the text. Janssen-Ortho Inc. v. Amgen Canada Inc., [2005] O.J. No. 2265 (Ontario Court of Appeal) In March of 2003 CFTR Radio (680 AM Toronto) broadcast a report over the radio and similatenously over the internet that EPREX (a drug manufactured by Janssen) was associated with thirty-seven deaths. It also reported that “Canada was the only country that has not recommended EPREX be removed.” Another station made the same report four days later and questions about pulling the drug were raised in the House of Commons. In fact no country had recommended pulling EPREX. The source of the CFTR story was traced to the defendant competitor throught there public relations firm and a defamation action was commenced. The court held that the Libel and Slander Act applies to all those who have some responsibility for the defamation appearing in the newspaper

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or being broadcast. An internet broadcast was within the definition of the act as was an internet publication of a newspaper. Jaynes v. Commonwealth of Virginia, Supreme Court of Virginia, 276 Va. 443, 666 S.E. 2d 303 (2008), cert. denied, 129 S. Ct. 1670 (2009). First judgment was withdrawn after successful petition for rehearing: 657 S.E. 2d 478 (2008) See International Issue at p. 753 in the text. Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299 (Ontario Superior Court) The defendant provided cable TV and high speed Internet access to subscribers, who were required to execute a user agreement. That agreement provided that Rogers could change the terms of the agreement at any time by notifying subscribers on its website or by email. In 2000, Rogers amended the user agreement, adding a clause that all disputes must be referred to and determined by arbitration. The plaintiffs brought a class action against Rogers, claiming that service was frequently interrupted, yet Rogers continued to collect the full fees. Rogers brought an application to stay the proceedings on the ground that the agreement provided only for arbitration. The application was allowed. The user agreement expressly allowed Rogers to amend its terms. There was no reason to think that arbitration would lead to an unfair result. This outcome of this case is viewed as the motivating reason why the new Ontario’s Consumer Protection Act 2002 renders mandatory arbitration agreements unenforceable against a consumer. This judgment was cited with approval by the Supreme Court of Canada in Rogers Wireless Inc. v. Muroff [2007] 2 S.C.R. 921, 2007 SCC 35.

Law Society of British Columbia v. Canada Domain Name Exchange Corp. (2004), 243 D.L.R. (4th) 746 (British Columbia Supreme Court) affirmed (2006), 259 D.L.R. (4th) 171 (British Columbia Court of Appeal) In 2002, the Law Society of British Columbia was recognized by the Registrar of Trademarks as the official mark of the said law society. It had been operating under that name for one hundred and thirty years. The defendants bought the domain names <lawsocietyofbc.ca> and used it to direct people to AL4A (Adult Links for Adults) containing mature content. The Law Society brought a passing off action for damages and an injunction.The plaintiff was successful because of the possible damage to the reputation of the law society and the injunction was granted along with general damages. Punitive damages were refused. The Court of Appeal (2005 BCCA 535) dismissed the appeal saying the Court was in substantial agreement with the reasons of the Supreme Court judge. Molson Breweries v. Kuettner (1999), 94 A.C.W.S. (3d) 550 (Federal Court Trial Division)

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This was a “cybersquatting” case. The plaintiffs sought an injunction that the defendant be required to transfer to them ownership of the domain names <molsons.com> and <molsonbeer.com>, which had been registered by a corporation in Virginia. (The actual case turned on procedural issues.) Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 (Supreme Court of Canada) The respondents were mortgagees of properties in Alberta. The appellant was the mortgagor of the properties. The appellant moved to British Columbia. When the mortgages went into default, the mortgagees commenced foreclosure actions in Alberta. The mortgagor did not defend, nor appear in Alberta. The mortgagees then proceeded to claim on the shortfall of the mortgages after the sale of the properties. They again obtained their judgments in Alberta. The respondents then sought to have the Alberta judgments enforced in British Columbia. The Court held that there was a real and substantial connection to the Alberta jurisdiction and that the actions were properly brought there. The Court further held that Alberta judgments should be recognized and enforced in British Columbia. Muscutt v. Courcelles (2002), 60 O.R. (3d) 20 (Ontario Court of Appeal) Th plaintiff was injured in a motor vehicle accident in Alberta. All of the defendants resided in Alberta at the time of the accident. The plaintiff, who was seriously injured, returned to Ontario and underwent extensive medical care. Later one of the defndants also moved to Ontario. The plaintiff started this action in Ontario. The out of province defendants moved to have the action stayed in Ontario. Further they argued that the Rule 17.02 (h) was ultra vires the province. The Court held that there was a real and substantial connection in that the plaintiff’s pain and suffering arose in Ontario. The Court of Appeal, following the decision in Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 upheld the decision. Newman v. Halstead, 2006 BCSC 65 (British Columbia Supreme Court) Halstead, a community volunteer, defamed nine public school teachers and two school board administrators by accusing them of serious misconduct within the education system. A total of sixty defamatory statements about the eleven plaintiffs were circulated to a large number of receipients through chat room, bulletin board, and website postings as well as emails. The Court awarded a total of $675,000 in damages divided among the plaintiffs (largest single award was $150,000). The total included $50,000 of punitive damages. Olar v. Laurentian University (2007), Carswell Ont. 3595 (Superior Court of Ontario) aff’d 2008 ONCA 699 (Ontario Court of Appeal)

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The online (and hard copy) of the Laurentian calendar stated that a student enrolled in the two year engineering program could transfer to another Ontario university to obtain a degree. When Olar attempted this he discovered that although transfer was possible other Ontario universities would not give full credit for the courses taken at Laurentian. The trial judge found that the calendar contained a negligent misrepresentation. Olar was awarded $115,000 for the economic loss associated with lost income due to increased time in school. Total judgment was $120,620. Court of Appeal dismissed Laurentian’s appeal. 1267623 Ontario Inc. v. Nexx Online Inc. (1999), 45 O.R. (3d) 40 (Ontario Superior Court of Justice) A company brought an action against its internet service provider seeking an order to have its internet service restored. The defendant had cancelled service after a number of complaints revealed that the plaintiff had been sending out up to two hundred thousand unsolicited emails per day. The court held that this was in breach of the “netiquette” or internet’s unwritten rules of conduct and refused to order the service restored.

Panavision International Inc. v. Toeppen (1996), U.S. Dist. LEXIS 19698 (United States Court of Appeals – Ninth Circuit) The plaintiff brought a suit for trade-mark infringement for cyber-squatting and breach of the Federal and State Trademark Dilution Acts. The defendant used the name <Panavision.com> for a website that displayed photos of Pana, Illinois. The Court held that there was cybersquatting and dilution of the trademark. Peinet Inc. v. O’Brien (1995), 61 C.P.R. (3d) 334 (Prince Edward Island Supreme Court) The plaintiff brought this action against a former employee for passing off. The defendant had purchased the domain name <pei.net> which the plaintiff complained was confusingly similar to its own name <peinet.pe.ca>. The Court held that the plaintiff did not meet the elements for passing it off, further it could show no damages; the action was dismissed. Planned Parenthood v. Bucci (1997) 42 U.S.P.Q, 2d 1430 (U.S. District Court, S.D. New York) Planned Parenthood sought an injunction to prevent the defendant (an anti-abortionist and host on Catholic Radio) from using the domain name plannedparenhood.com alleging that his motive was to confuse users and deliberately divert them from the Planned Parenthood site, a www.ppfa.org. The court found that the defendant acted with full knowledge of the likely confusion and the injunction was granted.

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Pro-C Ltd. v. Computer City Inc. (2000), 7 C.P.R. (4th) 193, revs’d [2001] O.J. No. 3600 (Ontario Court of Appeal) The plaintiff produced a product called “Wingen.” The plaintiff alleged that the defendant appropriated this trademark and sold it in a non-competitive product; this caused so many searches to the plaintiff’s website, that it was so overwhelmed, that it could not service its own legitimate customers. The Court of Appeal overturned the trial judge’s decision and held that the plaintiff had not demonstrated a “use” of the trademark as based on s. 4 of the Trade-Marks Act and further, the plaintiff had not proven any damages. Re Broadcasting Act, [2010] F.C.J. No. 849 (Federal Court of Appeal) This case was a reference to the court to answer the question: do retail Internet service providers (ISPs) carry on, in whole or in part, "broadcasting undertakings" subject to the Broadcasting Act when, in their role as ISPs, they provide access through the Internet to "broadcasting" requested by end-users? The Court held that that the definition of broadcasting was directed at persons who ransmitted a program; the ISPs merely provided the mode of transmission and had no control over the content, were therefore not carry on “broadcast undertakings” as per the Act.

Robet v. Versus Brokerage Services Inc. (2001), 104 A.C.W.S. (3d) 988 (Ontario Superior Court) The plaintiff claimed damages against the defendant, an electronic trading broker, as a result of data entry errors in the defendant's system which caused the posting of multiple transactions to the plaintiff, and resulted in the plaintiff selling securities he did not own. The court held the defendant liable for the losses incurred. The mistakes were inexcusably gross negligence, indicating totally inadequate supervision on the part of the defendant. Rogers Wireless Inc. v. Muroff, [2007] 2 S.C.R. 921, 2007 SCC 35 (Supreme Court of Canada) Muroff tried to commence a class action against Rogers over roaming charges associated with the use of his mobile phone in the United States. Rogers sought an immediate stay of the action because the service contract contained a mandatory arbitration clause and a waiver of class actions. Muroff argued that the clause and waiver were abusive (within the meaning of Quebec consumer protection legislation). Relying on Dell Computers v. Union des consummateurs 2007 SCC 34, the Supreme Court referred the question of validity of the clause back to the arbitrator because it was one involving a question of fact and law. Citing Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299, the Court found that the clause was not automatically abusive as a matter of law alone but required an assessment of the particular facts.

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Ross v. Holley [2004] O.J.No.4643 (Ontario Superior Court) The defendant disseminated statements over the Internet accusing the plaintiff, an archeologist, of dishonest and reprehensible conduct and of “grave robbing”. The court found that the defendant had acted with malice. In assessing damages, Low J. was guided by the decision of the Ontario Court of Appeal in Barrick Gold (supra) and took into account the method of disseminating the libel. He awarded general damages of $75,000, plus punitive damages of $50,000. Rudder v. Microsoft Corp. [1999] O.J. No. 3778 (Ontario Superior Court of Justice) See Case 31.1 at p. 838 in the text. Saskatchewan Star Phoenix Group Inc. v. Noton, [2001] S.J. No. 275 (Saskatchewan Court of Queen’s Bench) See Case 31.7 at p. 847 in the text. Shaw Cablesystems G.P. v. SOCAN, [2010] F.C.J. No 1087 (Federal Court of Appeal) leave to appeal to Supreme Court of Canada granted. This was an appeal by various Internet service providers to a judgment by the Copyright Board that they were subject to the applicable tariff codes for communication of musical works by allowing users to download music. The Court of Appeal upheld this decision. SOCAN v. Bell Canada 2012 SCC 366 Page 751 footnote 83 Software Guy Brokers Ltd. v. Hardy, [2004] B.C.J. No. 95 (British Columbia Supreme Court) See Case 31.4 at p. 845 in the text. Sotramex Inc. v. Sorenviq Inc., [1998] A.Q. No. 2241 (Quebec Superior Court—Civil Division) See Case 31.10 at p. 850 in the text. Tele-Direct (Publications) Inc. v. Canadian Business Online Inc., [1998] F.C.J. No. 1306 (Federal Court, Trial Division) The plaintiff, Tele-Direct, is a Canadian corporation carrying on business as a compiler and publisher of business and telephone directories, as well as a provider of internet

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services. The plaintiff owns the trade-marks in Canada for "Yellow Pages", "Pages Jaunes" and "Walking Fingers." The individual defendant, Klimchuk, was the sole director of the Canadian corporate defendant, CBO, which maintained a web site entitled "Canadian Yellow Pages on the Internet", in association with a business directory service it operated at the domain name, www.cdnyellowpages.com. The Federal Court granted an injunction, restraining the defendants from infringing the plaintiff’s trademark. Warman v. Fromm, [2007] O.J. No. 4754, aff ’d [2008] O.J. No. 5043, leave to appeal denied [2009] S.C.C.A. No. 40 (Ontario Court of Appeal) See Case 31.2 at p. 842 in the text. Warman v. Grosvenor, [2008] O.J. No. 4462 (Ontario Superior Court of Justice) The plaintiff was a lawyer in Ontario who worked for the government with respect to human rights and hate propaganda on the internet. The defendant resided in Edmonton. The plaintiff alleged that he had received threatening emails from the defendant and that the defendants had made several defamatory postings about the plaintiff on the internet. The Court granted judgment in favour of the plaintiff; the plaintiff was entitled to an injunction, as well as $20,000 for defamation, $10,000 aggravated damages for defamation, $15,000 for assault, and $5,000 as aggravated damages for assault.

Wembley Marketing Ltd. v. ITEX Corp., [2008] O.J. No. 5194 (Ontario Superior Court of Justice) The plaintiff was a company in Ontario and the defendant a corporation incorporated in the State of Nevada. The plaintiff used the defendant’s accounting services to record barter trade transactions. The plaintiff alleged that the defendant failed to provide goods and services as agreed. The defendant brought a motion to have the action permanently stayed in Ontario as the contract between the parties stipulated that any actions must be brought in Sacramento, California. The Court held that the forum selection clause as set out in the Trading Rules available on the internet was valid and ordered the stay of proceedings in Ontario.

William H. Cosby, Jr. v. Sterling Davenport WIPO Decision No. D2005-076 See Case 31.9 at p. 849 in the text. Van Breda v. Village Resorts Ltd., [2010] O.J. No. 402 (Ontario Court of Appeal), leave granted [2010] S.C.C.A. 174 (Supreme Court of Canada) The plaintiffs were residents of Ontario. The defendants were located in Cuba. The plaintiffs had arranged for vacations in Cuba. One of the plaintiffs specifically requested scuba diving as an activity and subsequently died while scuba diving at the defendant’s resort. The other plaintiff was injured when equipment she was using to do chin-ups collapsed on her, leaving her a paraplegic. She and her husband had since moved to Copyright © 2016 Pearson Canada Inc.

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British Columbia after the accident. In both of these cases, the motions judges held that Ontario was the proper jurisdiction to hear the matter, but not as against the personal defendants. The defendants appealed the decision. The Court of Appeal reviewed the decision in Muscutt v. Courcelles (2002), 60 O.R. (3d) 20 (Ontario Court of Appeal) and the Uniform Law Conference model Court Jurisdiction and Proceedings Transfer Act and held that Ontario was the proper forum. Wiebe v. Bouchard, [2005] B.C.J. No. 73 (British Columbia Supreme Court) The plaintiff brought an action for defamation against the defendant for a report authored by the defendant and posted on the Government of Canada’s website. The plaintiff alleged that the report made defamatory comments about a website maintained by the plaintiff. The plaintiff brought the action in British Columbia. The defendant brought an application for forum non conveniens, claiming that the more convenient forum was Quebec; the plaintiff was located there, as were many of the witnesses, and the defendant would be disadvantaged in B. C. as the trial would be in English, not French. The Court held that B.C. was the proper forum as this is where the plaintiff contended that his reputation was damaged. Zippo Manufacturing Company v. Zippo Dot Com.Inc. (1997) 952 F. Supp. 1119 (United States District Court W.D. Pennsylvania) This was an action for trademark infringement. Zippo sued ZDC (a news-for-fee service) for misuse of its tradename Zippo—a name associated with cigarette lighters. The principal question was in which jurisdiction should Zippo sue? The Court held that there were three types of cases. The first was where there was substantial business being carried on within the jurisdiction; the second where the web site was an interactive site and the third where the advertising on the internet was purely passive in nature. The court decided that it has jurisdiction where there was substantial business being carried on in the jurisdiction, but would have no jurisdiction where the advertising was passive in nature. The court did not rule on the second type of case, where there was an interactive web site. In the actual case, the court found ZDC was doing substantial business in Pennsylvania, and it has jurisdiction. [NOTE: the Zippo test was considered in Braintech by the British Columbia Court of Appeal.]

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CHAPTER 32 PRIVACY This chapter covers rapidly changing areas of the law. The 14th edition includes a discussion of a tort now referred to as “intrusion on seclusion.” It also covers three recent Supreme Court of Canada cases on privacy. The organization of the privacy chapter reflects the circumstantial nature of privacy law. The law is different in the public and private sectors and legislation overshadows common law. When introducing the concept of privacy as a human right, instructors should connect the term to government and remind students that the role of the Charter is to control government behaviour. The right to privacy is set out in s. 8, and is also included in s.7, which covers liberty of person. The source of private sector privacy interests and obligations must be found elsewhere. Privacy and Technology (Source p.764) Technology has introduced many new ways to invade privacy. Instructors should discuss what it is that students are most concerned with respect to their own privacy. How much information should be displayed on social networks? Are they concerned with how much information an employer should or would discover about them when applying for a job? For example, should FaceBook be allowed as a source of information for employers? Are they concerned that their personal information may be accessed by others for purposes of fraud or other illegal purposes? Are students concerned about identity theft? GOVERNMENT REGULATION OF PRIVACY (Source 766) Regulation of Privacy in the Public Sector (Source p. 766) The Privacy Act regulates the collection, use and disclosure of personal information by federal government institutions. When information can be collected and used should be discussed with students, as set out in the text. (Source pp. 779-778). Provincial legislation, which varies between provinces, is discussed on p. 770. Regulation of Privacy in the Private Sector (Source p. 772) The application of PIPEDA is an area that can be confusing to students. It may be of assistance to trace the introduction of PIPEDA. When the Act was first introduced in January 1, 2001 it applied only to personal information held by federally regulated private sector organizations or interprovincial organizations. On January 1, 2004, the application of PIPEDA was extended to cover all private sector organizations involved in commercial activity whether federally or provincially regulated. It may also be helpful for instructors to refer directly to the language of section 4: 4. (1) This Part applies to every organization in respect of personal information that (a) the organization collects, uses or discloses in the course of commercial activities; or

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(b) is about an employee of the organization and that the organization collects, uses or discloses in connection with the operation of a federal work, undertaking or business .

The chapter notes two key exceptions to PIPEDA’s general application. The specific reference to “federally connected” employees in 4(1)(b) has led to the exclusion of all other employees from the application of s. 4(1)(a) (Source p. 880). The passage of substantially similar provincial legislation also operates to exempt organizations in that province from the general application of PIPEDA. The chapter’s description of the substance of PIPEDA is organized around the ten principles contained in the 1996 Model Code for the Protection of Personal Information created by the National Standards Council of Canada. This Code is incorporated into the Act as Schedule 1 and section 5 of the Act requires every organization to “comply with Schedule 1.” Schedule 1 is divided into clauses relating to the ten basic principles. Therefore, the chapter refers to principles, clauses and sections. Finally, the reasonableness of the purpose of collection, use or disclosure is central to satisfying the requirements of PIPEDA. Students should be reminded of their first introduction to this concept to assess duty and standard of care in Chapter 4. A Summary of Key Privacy Legislation (Source p. 781) can be used to examine any areas where legislation does not exist or is inadequate – and further, if legislation doesn’t exist, are the rights to privacy covered by civil liability (Source p. 781) or criminal liability (Source p. 783). STRATEGIES TO MANAGE THE LEGAL RISKS (Source p. 784) Privacy Law is a complex area that needs to form part of any business risk management plan. If the business entails the use of computers or other technology, particularly when storing customer information, then it is very important and the plan should include a compliance officer whose responsibility it is to ensure that legislation is followed. A business risk management plan also needs to address employee concerns with respect to privacy and use of technology for personal reasons. INTERNATIONAL ISSUE (Source p. 765) Outsourcing, Cloud Computing, and Transborder Data Flow Question 1 - Outsourcing of data illustrates the jurisdictional limits of domestic law and students are reminded that data custodians located in the United States are subject to American law just as Canadian citizens are subject to American law when they visit the United States. Therefore, the obvious solution is to prevent Canadian data from entering the United States. Students should focus on the impact a ban on outsourcing would have on international business and globalization. Canadian companies may not have the capacity to process all their own data. A ban may be seen as a protectionist move in violation of trade agreements and inviting retaliatory behaviour. In addition, it may be impossible to prevent data from being transferred to the United States when dealing with multinational corporations or Canadian subsidiaries of an American parent. In any event, Canadian data will be transmitted to the United States whenever a Canadian consumer

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contracts directly with an American company. Canadian law cannot reach beyond its jurisdictional limits to secure absolute privacy. Students should be asked to consider the value of the voluntary OECD standards in light of the U.S. Patriot Act’s clear conflict with Guideline 10? Question 2 – This question is designed to make students assess the degree of sensitivity of particular types of personal information and consider whether the level of protection should depend upon the degree of sensitivity. Sensitivity is a criteria used by the Privacy Commissioner and the courts to set the standard of behaviour required of information custodians. The B.C.G.E.U. and CIBC cases identify two highly sensitive types of information usually afforded the highest levels of protection: medical and financial (notes 13 and 15 respectively). Are there others? These two cases also invite a comparison between the public and private sectors. Do students believe there should be greater protection for information held by the government than for equally sensitive information in the private sector? Question 3 – When storing information on a cloud server, whether transnational or otherwise, encryption is the key to protecting privacy. The more complex the encryption the more unlikely that anyone would be able to access the information without the key. The difficulty again, is whether other jurisdictions would allow that level of privacy; that is, would servers be required to provide “back doors” for governments to be able to access the information if legislated to do so? Would proper encryption prevent this? Would an average user of the server even know if a government (foreign or domestic) had such a requirement?

ETHICAL ISSUE (Source p. 769) Government Transparency and Accountability Question 1 - This issue contrasts nicely with the international outsourcing issue. Arar’s information was knowingly and deliberately transferred to the United States. American access to this information was dependent on the application of Canadian not American law. Certainly, Arar was put through unnecessary harm. Students should focus not only on the degree of the security threat, or the sensitivity of the information, but also on the reliability of the information considering such factors as the source (opinion based or hearsay, etc). Achieving a fair balance is difficult. Question 2 - The values of responsibility (accountability for one’s actions) and fairness (an open process subject to public scrutiny) are central to evaluating the recommendations. These are principles students should be familiar with from the corporate governance chapters. Question 3 - This question allows students to apply the corporate governance template to government. Alternatively, the recommendations can be categorized as preventive, deterrent, or compensatory. In a democratic society, transparency in government is vital

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as is adhering to the rule of law. If governments can breach entrenched rights, what is there to prevent them from disregarding any rule or law? ETHICAL ISSUE (Source p. 771) Privacy Versus Security: The Virginia Tech Shooting Throughout this chapter, the value of privacy (respect for the rights of the individual) is stressed. By contrast, when considering the Shooting at Virginia Tech, students will no doubt prioritize security interests (respecting the rights of the public) over privacy, demonstrating the circumstantial nature of privacy protection. Questions 1 – This question requires students to identify the specific interests served by privacy and disclosure. Most people would believe that their own medical information is their personal property and no one else should have access to it. This issue demonstrates the difficulty in balancing the need for privacy and the need for security. How does any person draw the line of what is acceptable to disclose or not? Disclosing health information on the grounds of security runs the risk of discrimination based on fear. Instructors may wish to demonstrate the difficulty in assessing the degree of the threat by analogizing with the criminal lawyer who must decide if threats by an accused justify a breach of solicitor-client privilege. Question 2 – This question revises the non-discrimination argument to support disclosure rather than privacy; that is, in order to create a more accepting society should persons with an illness have to disclose that illness thereby making it more acceptable. Is it more likely that disclosure, particularly of mental illness will foster fear-based discrimination?

QUESTIONS FOR REVIEW 1. The three key components of modern privacy are personal privacy involving issues of bodily integrity, territorial privacy involving protection of one’s home and physical spaces, and privacy of personal information involving the security of sensitive information. (Source p. 763) 2. The constitutional authority for recognizing privacy as a human right is found in sections 7 and 8 of the Charter of Rights and Freedoms. Section 7 guarantees the right to life, liberty, and security of person and section 8 prohibits unreasonable search and seizure by government. The Supreme Court of Canada recognized the right to privacy as a fundamental human right in Hunter v. Southam Inc. [1984] 2 S.C.R. 145 (Source pp. 763-764) 3. No one is entitled to absolute privacy. The Charter (as interpreted by the Supreme Court in Hunter (supra)) only provides protection from government invasion of privacy when there is a reasonable expectation of privacy in the circumstances. Therefore, the level of protection varies depending upon the particular situation. (Source p. 763)

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4. The Privacy Act is the federal statute that regulates the conduct of the federal government, its agencies, and public institution; and the Privacy Commissioner monitors compliance with the requirements of the statute and investigates complaints. (Source pp. 766-767) 5. The Personal Information Protection and Electronic Documents Act (PIPEDA) regulates the use, retention, disclosure, accuracy, security, and destruction of personal information collected during commercial activities in the private sector. Businesses must obtain consent for the collection and use of personal information for an identified purpose from the identified individual. Thereafter, the business must only use the information for the approved purpose. The business must create, publicize, and implement privacy policies and procedures including a complaint process and identify a person to monitor the process. Individuals must be allowed access to their information for correction purposes. (Source p.772) 6. As discussed in Question 3, privacy protection is not absolute. Conduct will only be considered an invasion of privacy if there is a reasonable expectation of privacy in the circumstances. Determining reasonableness often involves balancing competing interests. Courts apply a four part test to determine reasonableness:  Is the measure demonstrably necessary to meet a specific need?  Is it likely to be effective in meeting the need?  Is the loss of privacy proportional to the benefit gained?  Is there a less privacy-invasive way of achieving the same end? (Source p. 774) 7. It is not yet clear whether a common law tort of invasion of privacy exists in Canada although courts have suggested that it might exist. Historically, privacy issues have been dealt with using existing torts such as trespass, nuisance, and defamation. England is moving closer to an invasion of privacy tort as discussed in Case 33.12. British Columbia, Manitoba, Saskatchewan, and Newfoundland have each created a statutory cause of action for wilful invasion of privacy. (Source p. 782) 8. PIPEDA imposes a duty on organizations to keep personal information safe. If security measures are inadequate and fall below the standard of security set by other similar businesses then civil liability for negligence may arise. Proposed criminal offences would expose those who are reckless about transfer or sale of data to criminal liability. (Source p. 783) 9. A business considering outsourcing data processing to an American company should:  undertake a security analysis of the American company before contracting;  inform affected data owners;  include specific confidentiality, security and reporting requirements in the outsourcing agreement;  seek prior regulatory approval of the agreement; and  regularly audit the privacy practices of the outsource company. (Source p. 765)

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10. In the public sector, consent is only required if the custodian intends to use the information for a purpose different from the one for which it was collected. (Source p. 869) In the private sector, the identified individual must consent to every collection, use, and disclosure of personal information subject to some limited exceptions set out in the legislation (s. 7 PIPEDA) and summarized in the Checklist at page 775 of the text. 11. Protection of employee personal information varies depending upon the nature of the employer. Public sector employees are protected by the Privacy Act or its provincial equivalent. PIPEDA covers private sector employees of businesses in federally regulated industries, or when the business crosses provincial boundaries. Only British Columbia and Quebec have legislation protecting the privacy of employees of businesses entirely within provincial jurisdiction. In other provinces, employment contracts (including collective agreements), or the common law must be used to find privacy protection. (Source p. 770) CASES AND PROBLEMS 1. The Charter does not apply to this situation, as it only applies to government issues. Is there protection under PIPEDA? PIPEDA covers disclosure of personal information during a commercial activity. This situation is similar to Case 32.9. While the information was gathered with consent, a breach occurred due to the lack of safeguarding of Erin’s credit information. (Source p.776) 2. This case involves the surveillance of private sector employees. A private sector employer involved in a business under federal jurisdiction or a business that crosses provincial boundaries is subject to the provisions of PIPEDA. This business is one of provincial jurisdiction operated within Vancouver so it is governed by the substantially similar provincial legislation in place in British Columbia (Personal Information Protection Act, S.B.C. 2003 c. 63). There are several issues to be addressed:  Is the data collected by GPS personal information? (discussed at p. 874)  If yes, did the employee expressly or impliedly consent to the collection and use of the data? (Clause 4.3 of the Canadian Standards Association Model Code)  Is the purpose, collection, and use reasonable? (Clause 4.2 of the Canadian Standards Association Model Code, Section 5(3) of PIPEDA) Electronic surveillance can be covert (secret), disclosed, or consensual. This case involves disclosed but not expressly consensual surveillance. Reasonableness of the purpose, use and collection can cure a lack of consent, but unreasonableness is not cured by consent (s. 5(3) PIPEDA). The reasonableness of any invasion of privacy is assessed considering the following four criteria:  Is the measure demonstrably necessary to meet a specific need?  Is it likely to be effective in meeting the need?  Is the loss of privacy proportional to the benefit gained?  Is there a less privacy-invasive way of achieving the same end? (Source p. 876)

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In addition, when the invasion involves surveillance it should only be undertaken as a last resort, after all other methods of collecting information have failed. Finally, it should be the least intrusive form of surveillance possible. This case is based on the Privacy Commissioners decision in PIPEDA Case Summary # 351 considering GPS surveillance (available on the Office of the Privacy Commissioner of Canada Website). The Privacy Commissioner found that:  The data collected through GPS (vehicle start/stop times, speed, location and mileage) is sufficiently linked to specific employees to be identifiable and therefore is personal information within PIPEDA  With respect to consent, there is an exception available for investigative purposes, where knowledge would compromise accuracy of information, but this is not applicable when all employees are being monitored (s. 7(1)). Therefore, employee consent was necessary.  It is appropriate to imply employee consent for purposes that a reasonable employee would expect (s. 5(3)).  Applying the above described four criteria, the Commissioner found that three of the employer’s purposes were appropriate and reasonable in the circumstances: safety (identifying disabled trucks), dispatch (sending closest truck), and asset management (locating missing trucks).  The Commissioner would only accept the purpose of workforce productivity and employee management if the specific uses and purposes were defined and communicated to the employee in advance. The Commissioner would not imply consent, because the loss of privacy outweighed the benefit gained.  The subject company’s “Policy on GPS Data Utilization for Performance Management” satisfied the Commissioner’s concerns. Unless KDP had a GPS policy that gave Jeff prior notice of the use of GPS for performance evaluation purposes, the use was not reasonable and consent could not be implied or waived. Therefore the company’s use of the data for that purpose violated Jeff’s privacy and breached KDP’s obligations under the legislation. Finally, it would make a difference if this business was carried on in Winnipeg because Manitoba does not have provincial legislation deemed to be substantially similar to PIPEDA. However, the employee may still be able to object to the collection and use of the person information. He may claim that covert GPS surveillance is a breach of his employment contract. As well, he may sue in tort because Manitoba has created a statutory tort for wilful invasion of privacy (Privacy Act, R.S.M. 1987, c. P125, s.2) 3. PIPEDA applies to this private sector commercial activity. There are two consent questions: i. Is the controversial practice of opt-out consent an acceptable means of obtaining consent for PIPEDA purposes? (Clause 4.3 of the Canadian Standards Association Model Code) Students should consider PIPEDA Case Summary # 42 which examined Air Canada’s practice of requiring Aeroplan Frequent Flyer Program members to opt-out of the

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Company’s practice of disclosing member’s personal information to non-Aeroplan partner companies (as discussed in Case 33.7 at p. 876). Opt out consent will only be acceptable for PIPEDA purposes if:  Information is non-sensitive in nature and context;  Nature of sharing of information is precisely described;  Purpose is precise and brought to the attention of the data owner;  An easy, inexpensive and convenient process of opting out is available and communicated to the data owner. (Source pp. 876-877, see PIPEDA Case Summary # 192, n. 36) In applying this test to the Primtel situation, the Commissioner will likely find that a telephone number is sensitive information and the flyer did not do enough to bring the opt-out process to the attention of the data owner. As well $2/month may be too expensive for opting out. ii. Is the website disclosure of the number sufficiently different from the previous “listing” of numbers to require new consent or does the prior consent cover this new form of disclosure? (Clauses 4.1, 4.3, and 4.5 of the Canadian Standards Association Model Code) Students should draw a distinction between a new use of the information, and a different manner of disclosure for the same purpose or use. Mary consented to the “listing” of her number when she originally contracted. Is it only number of people that now have access that has changed? Is this increased access sufficient to change the nature of the use? Was the previous use sufficiently defined? If the reasonable person in similar circumstances would expect the number to be available to all members of the public, then the earlier consent could cover this subsequent form of disclosure. 4. Students are entitled to make the assumption that Ticketmarketer is carrying on business in Canada and collecting information from customers across Canada. Therefore, it is subject to PIPEDA even if not a Canadian company. Case 33.1 Lawson v. Accusearch Inc., 2007 FC 125 (Federal Court) at pp. 866-867 demonstrates that the Privacy Commissioner has jurisdiction to investigate privacy violations in Canada even if the company is based elsewhere. The issue in this case focuses on use and identified purpose. The primary and reasonably expected purpose of collecting the personal information is to verify the identity of the purchaser at the time of claiming the tickets. Purchasers consent to this collection and use when they provide their information. Privacy concerns are raised because the company now uses this information for two entirely different purposes:  to create new personal information about the preferences of the purchaser; and  to target market specific products to particular purchasers. Unlike the preceding case, this is an entirely different use with a different purpose and new personal information is being generated without consent. The use of personal information for marketing purposes is considered in PIPEDA Case Summary # 42 (Case 33.7 at p. 876) and PIPEDA Case summary # 91.

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In Case # 91, a marketing company collected personal information (age, marital status, income) as well as consumer product opinions using a consumer survey mailed to households. It rewarded participants with coupons and discounts. The purpose of the survey was described as fact finding, opinion gathering, and product quality improvement. The survey solicited consent to further mailings and offers. The company was in the business of collating the collected information and selling it to other businesses. The Privacy Commissioner found that the disclosure of purpose was inadequate and failed to specifically identify the extent of the marketing purpose. The form of consent and the general privacy policy were also inadequate. Cases #42 and 91 involve disclosing the information collected to third parties for expanded marketing purposes. In both cases, the Privacy Commissioner found the disclosure of purpose was inadequate and the expanded purpose could not be reasonably expected by the data owner. Therefore, it seems that failure to disclose any form of marketing use would be a clear violation of Clause 4.2 of the Canadian Standards Association Model Code (re: Identified purpose) and Clause 4.5 ( re: Use and Disclosure). It would not be reasonable (s. 5(3)) to imply consent for a completely different collection and use (Clause 4.3 re: consent). Joan must revise the online purchase form to disclose the creation and collection of purchaser preference data. The purchaser should be asked to positively consent to the collection of the preference data and the use of the data for target marketing purposes. The form should have a link to the complete privacy policy as required by Clause 4.1 of the Canadian Standards Association Model Code (re: accountability). CASE SUMMARIES Alberta (Information and Privacy Commissioner) v. United Food and Commercial Workers, Local 401, 2013 SCC 62 Page 763 footnote 2

Bank of Montreal v. Cochrane, [2012] A.J. No. 1210 Page 782 footnote 65 B .C.G.E.U. v. British Columbia (Minister of Health Services), 2005 BCSC 446 (S.C.), aff ’d [2007] B.C.J. No. 650 (British Columbia Court of Appeal) The union brought a petition to have contract between the government and a private U.S. company to provide medical administration declared void as being ultra vires the powers of the province. The union argued that by entering into the agreement, the release of highly sensitive personal information to the private company was a violation of the s. 7 of the Charter. The Court held that it was not ultra vires the powers of the government and that there was no violation of s. 7 of the Charter as the contract contemplated reasonable security measures with respect to maintain privacy of information.

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Bernard v. Canada (Attorney General) 2014 SCC 13 Page 767 footnote 21 Bhamre Employment Insurance Claim Appeal, (September 23, 1998) CUB42012A (Ontario Labour Board of Referees) See Case 33.11 at p. 881 in the text. Briar et al. v. Treasury Board (2003), P.S.S.R.B. 3 (Public Service Labour Relations Board) An arbitrator rejected the grievances of four employees who were disciplined for sending and receiving pornographic material over the employer’s network in violation of the employer’s technology use policy. The system gave notice of the prohibitions and monitoring at log-in so there was no reasonable expectation of privacy. Camosun College v. CUPE, [1999] B.C.C.A.A.A. No. 490 (British Columbia Arbitration Board) An arbitrator upheld the dismissal of an employee based on the defamatory contents of an e-mail sent using the employer’s system. The email criticized the integrity and quality of the faculty at the College and the arbitrator found that there was no expectation of privacy when using the employer’s system. See Case 33.13 at p. 886 in the text. Canada (Information Commissioner) v. Canada (Transportation Accident Investigation & Safety Board), 2006 FCA 157 (Federal Court of Appeal) The Canadian Transportation Accident Investigation and Safety Board refused to release transcripts of air traffic control communications relating to four “in flight incidents” claiming that the statements of the pilots and controllers were personal information which could lead to their identification. The Court of Appeal disagreed finding that the contents of the communication were not about a person, but were about the operation of the aircraft during the incidents. Canada (Privacy Commissioner) v. Blood Tribe Department of Health, 2008 SCC 44 (Supreme Court of Canada) See Case 33.3 at p. 874 in the text. Condon v. Canada, 2014 FC 250 Page 782 footnote 63 Dyne Holdings Ltd. v. Royal Insurance Co. of Canada (1996), 135 D.L.R. (4th) 142 (Prince Edward Island Supreme Court – Appeal Division) The appellant Dyne holdings, was named as defendant in another lawsuit. The plaintiff in that suit claimed for the tort of conspiracy and the tort of interference with contractual relations. The appellant referred the matter to its insurance companies. The insurance companies declined to defend the action on the grounds that the claims of the plaintiff were not covered by the various insurance policies. The appellant sued and the trial judge

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held that the respondents were not required to defend the claim on behalf of the insured. The Court of Appeal overturned the decision with respect to two of the insurers. The Court held that the statement of claim held allegations which raise a claim that would apply to the right to privacy being violated, and as this was a claim covered within the policies, the insurers were obligated to defend the action on behalf of the appellant. Eastmond v. Canadian Pacific Railway, 2004 FC 852 at para. 127 (Federal Court) See Case 33.5 at p. 875 in the text.. General Motors of Canada Ltd., v. City National Leasing (1989), 58 D.L.R. (4th) 255 (Supreme Court of Canada) City National Leasing sued General Motors for damages under a statutory civil cause of action contained in the Combines Investigation Act. City claimed that General Motors was providing City’s competitors with preferential interest rate support to finance their leasing fleets. The Supreme Court of Canada found constitutional authority for creating the cause of action under the general trade and commerce power, setting five criteria for use of the power:  The legislation must be part of a general regulatory scheme;  The scheme must be monitored by a regulatory authority;  The legislation must address trade as whole not a particular industry;  The legislation must fall outside the constitutional authority of the provinces (jointly or severally);  The legislation must apply to the whole country, not just some regions. H.J. Heinz Co. of Canada Ltd., v. Canada (Attorney General), [2006] 1 S.C.R. 441 (Supreme Court of Canada) The Canadian Food Inspection Agency granted access to records of H. J. Heinz under the Access to Information Act. Heinz claimed that the documents contained personal information and should be exempt under s. 19 of the Act. In holding that s. 19 could be relied upon by a third party (not just the individual to whom the information relates) the Supreme Court made important declarations about privacy:  The Privacy Act and the Access of Information Act must be read together to balance privacy rights and access to information (para 31);  There is a presumption that personal information will not be disclosed (para 29);  Individual privacy is paramount over access rights (para 26). Hooper v. College of Nurses of Ontario, 2006 CanLII 22656 (Ontario Superior Court of Justice – Divisional Court) See Case 33.2 at p. 873 in the text. Hunter v. Southam Inc. [1984] 2 S.C.R. 145 (Supreme Court of Canada) The Director of Investigation and Research of the Combines Investigation Branch authorized a search of the Edmonton Journal offices of newspaper publisher Southam Inc. The Supreme Court held that s. 10(1)(3) of the Combines Investigation Act violated s. 8 of the Charter of Rights and Freedoms and were, therefore, of no force and effect. In order to be a justified and reasonable invasion of privacy, a search must receive prior

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authorization from a neutral and detached person not connected with the investigative or prosecutorial function. The minimum criteria for assessment of the reasonableness of the search are: reasonable and probable grounds to believe an offence has been committed, and that evidence is located at the site of the search. The subject search was not properly authorized nor did it meet the minimum criteria. In the course of the judgment, Mr. Justice Dickson described the purpose s. 8 of the Charter as protection of the right to privacy (paras 24, 25). International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers and its Local 736 v. E.S.Fox Ltd., 2006 CanLII 468 affirmed 2006 CanLII 6007 (Ontario Labour Relations Board) Relying on PIPEDA, the employer refused to supply the union with personal and medical information arising from a workplace accident as required by the collective agreement and the Occupational Health and Safety Act. The Ontario Labour Relations Board found PIPEDA inapplicable to the private sector employment relationship because the personal information was collected for employment related purposes (not commercial activity) and the employment was not connected to a federal work. Release of the information was ordered. Johnson v. Bell Canada, 2008 FC 1086 (Federal Court) A Bell employee requested disclosure (under PIPEDA) of all emails (from all sources) about the employee during the previous two years. Bell supplied all emails to which the employee’s supervisor had access (six hundred pages), but did not do a complete search of their data base for personal emails between co-workers. The Privacy Commissioner determined that this disclosure was sufficient and the Federal Court agreed. Personal emails were not subject to disclosure under PIPEDA, because they were not business related. Jones v. Tsige, 2011 ONSC 1475 (Ontario Superior Court of Justice) The defendant accessed the plaintiff’s banking records while working for the Bank of Montreal with no legitimate purpose. The defendant was involved in a relationship with the plaintiff’s former husband. The plaintiff claimed damages for the tort of invasion of privacy. In analysing the case law, the Court held that there was no common law tort for the invasion of privacy in Ontario; privacy issues are dealt with by statute. The Court further held that in this case there was no fiduciary duty present and so dismissed the motion for summary judgment. Lawson v. Accusearch Inc., 2007 FC 125 (Federal Court) See Case 33.1 at p. 867 in the text. Martin v. General Teamsters 2011 ABQB 412 Page 782 footnote 65 Milsom v. Corporate Computers Inc., [2003] W.W.R. 250 (Alberta – Court of Queen’s Bench)

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The plaintiff’s employment was terminated and severance was provided as per Alberta employment legislation. The employee was dissatisfied with the severance package and attempted to negotiate for more. When this negotiation was unsuccessful, the employer investigated the plaintiff’s e-mail communications and determined that it could terminate the plaintiff for cause due to the high volume of non-work related communications. The court discussed the expectation of privacy with respect to e-mails in the workplace at paras 40-41: [40] Even where an e-mail policy is published within a workplace, and even where the published policy outlines some privacy rights for an employee, an employee may not have a reasonable expectation of privacy when the contents of the employee’s e-mail is of an unprofessional nature, offensive, or where access by the employer is in furtherance of investigating illegal activity, in which case the employer’s interests would outweigh any claimed privacy right: McLaren. [41] Where there is no e-mail policy in place, an employee has no reasonable expectation of privacy in relation to e-mails received and sent in the workplace on the employer’s time and equipment. The court held that the plaintiff’s performance at work was decidedly poor, but this obligated the employer to give notice to the employee to improve his performance, not terminate his employee.

Mohl v. University of British Columbia 2009 BCCA 249 Page 782 footnote 65 Motherwell v. Motherwell (1976), 73 D.L.R. (3d) 62 (Alberta Court of Appeal) An injunction was sought to restrain a mentally ill daughter from making repeated offensive phone calls to her father, brother, and sister-in-law. The claim alleged invasion of privacy, nuisance, trespass, and intentional infliction of mental suffering. In considering the possibility of the existence of an invasion of privacy tort, the court examined the evolution of the common law in the areas of negligence and fiduciary duty. The Court of Appeal recognized that common law principles should be adapted to meet fresh circumstances and needs. In the end the court found that invasion of privacy (through use of telephone) was covered by the tort of private nuisance.. PIPEDA Case Summary # 183 (Office of the Privacy Commissioner) * A bank revised its policies and procedures relating to personal information after a bank employee committed identity theft. The Privacy Commissioner found that the bank was justified in refusing to disclose new anti-fraud measures even to a victim of the former employee’s identity theft. By disclosing general policies, the bank had found the correct balance between openness (Clause 4.8) and safeguards (Clause 4.7). PIPEDA Case Summary # 304 (Office of the Privacy Commissioner) * See Case 33.8 at p. 878 in the text.

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Incident summary #2: CIBC’s Privacy Practices Failed in Case of Misdirected Faxes, April 18, 2005 (Office of the Privacy Commissioner) PIPEDA Case Summary # 379 (Office of the Privacy Commissioner) * See Case 33.10 at p. 881 in the text. PIPEDA Case Summary #2003- 5 (Office of the Privacy Commissioner) * See Case 33.4 at p. 875 in the text. PIPEDA Case Summary #2002-42 (Office of the Privacy Commissioner) * See Case 33.7 at p. 876 in the text. PIPEDA Case Summary #2003-192 (Office of the Privacy Commissioner) * A customer complained when his bank sought opt-out consent for the use of personal information for secondary marketing purposes and for its disclosure to external organizations (rather than just bank affiliates as was previously the case). The Privacy Commissioner found the opt-out consent clause to be fundamentally flawed and set the criteria for use of opt-out consent. (Criteria described under Case 33.7 and at page 876 in the text.) PIPEDA Case Summary #2003-194 (Office of the Privacy Commissioner) * See Case 33.6 at p. 876 in the text. PIPEDA Case Summary #2005-313 (Office of the Privacy Commissioner) * CIBC sent notification to VISA customers amending the credit cardholder agreement; the notice made mention of a U.S. service provider and the possibility that the U.S. government could obtain access to VISA user information. Several complaints were made against CIBC as a result. The commissioner found that the complaints were not well-founded. As a company dealing with a U.S. service provider, the Office of the Commissioner required that CIBC notify its clients that information may be made available to the U.S. government under the U.S. Patriot Act. As the bank was acting in accordance with the rules as set out by the Office of the Privacy Commissioner, the complainants were dismissed. Poliquin v. Devon Canada Corporation, 2009 ABCA 216 (Alberta Court of Appeal) The defendant brought a motion for summary judgment to have the plaintiff’s claim for wrongful dismissal dismissed. The defendant claimed the plaintiff was dismissed for cause in that he accepted free services from the employer’s client contrary to the code of conduct and also used the corporate e-mail to disseminate pornographic and racist materials on the Internet. The Court of Appeal allowed the summary judgment and dismissed the plaintiff’s action. The court noted that it was important for the employer to act quickly with respect to using the company’s computers for such a purpose as it could

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affect the employer’s reputation within the community as well as a threat to the employer’s technology systems by way of a virus. At para 49, the Court held that, [A]n employee’s misuse of a workplace computer for pornographic or racist purposes negatively affects an employer’s professional, ethical and operational integrity. Employers are not required to tolerate the misuse of their computers and Internet access any more than they are required to put up with serious incidents of dishonesty by employees. R. v. Beare, [1988] 2 S.C.R. 387 (Supreme Court of Canada) The Supreme Court considered whether fingerprinting prior to conviction violated an accused’s privacy. The Court held that a person should expect a significant loss of privacy when charged with a criminal offence. This did not violate the principles of natural justice. R. v. Cole, 2012 SCC 53 Page 763 footnote 3

R. v. Dyment, [1988] 2 S.C.R. 417 (Supreme Court of Canada) An unauthorized blood sample was collected by an emergency room doctor and used to convict the patient of impaired driving. The Supreme Court held that this was a privacy violation (not collection of evidence at the scene), because the patient maintained a privacy interest in the use of his body and blood. The unauthorized taking of the sample violated all three types of privacy – personal, territorial, and informational and was unreasonable in the context of the Charter of Rights and Freedoms. R.v. Gamboc, [2010] S.C.J. No. 55 (Supreme Court of Canada) The accused was suspected of operating a marijuana grow-op. The police requested from the utility provider that a meter be attached to the house to determine electricity use. The electricity output was sufficient to grant a warrant and the police were then able to search the house and uncovered the grow-op. The Court of Appeal for Alberta held that the accused had a reasonable expectation of privacy and the evidence should therefore have been excluded. The Supreme Court allowed the appeal and restored the conviction. The method of collection of information was not intrusive; it did not supply intimate details of the lives of the occupants, it merely supplied information regarding electricity use. Therefore, s. 8 of the Charter was not triggered there was no invasion of privacy Re: McKesson Canada and Teamsters Chemical Energy and Allied Workers Union, Local 424, (2004), 136 L.A.C. (4th) 102 (Ontario Labour Arbitration) Grievances were filed by the union on behalf of senior employees who were denied overtime hours because the employer did not wish to violate provision of the Employment Standards Act. The arbitrator looked to the collective agreement as well as the Act to determine whether the grievances were well-founded. In this case, the arbitrator

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dismissed the grievances on the grounds that it would violate the ESA to allow the overtime hours as requested by the union. R. v. O’Connor, [1995] 4 S.C.R. 411 (Supreme Court of Canada) A defendant accused of sexual assault sought production of the alleged victim’s medical and counselling records. The Supreme Court drew a distinction between records already in the possession of the Crown and those still in the possession of the medical professionals. The former lost their private nature when they were provided to the Crown and were subject to standard production obligations. In the latter case, production is required only after a judge balances the competing interests of the accused’s right to make a full answer and defence against the reasonable expectation of privacy of the victim. R. v. Spencer 2104 SCC 43 Page 763 footnote 2

R. v. Tessling, [2004] 3 S.C.R. 432 (Supreme Court of Canada) The police used a camera with heat reading technology to determine that the defendant’s building was emanating extreme amounts of thermal energy. This information helped obtain a warrant and uncover a marijuana grow-operation. The Supreme Court held that the use of the heat reading camera did not infringe the defendant’s reasonable expectation of privacy in the context of section 8 of the Charter of Rights and Freedoms. Rodgers v. Calvert, (2004), 49 B.L.R. (3d) 53 (Ontario Superior Court of Justice) In the context of a civil action against an Ontario “not for profit” corporation devoted to the promotion of safe shooting, the plaintiff sought the defendant’s membership list. In determining that PIPEDA did not relieve the defendant of the obligation to provide the information, the Ontario Superior Court found that the activity was not a federal work (a work, undertaking, or business outside the exclusive legislative authority of the legislation of the Province). Nor was it a commercial activity because this involves more than a mere exchange of consideration or collection of membership dues. Trout Point Lodge Ltd. Handshoe, 2012 NSSC 245 Page 782 footnote 65 * All PIPEDA Case Summaries can be found under Commissioners Findings on the Office of the Privacy Commissioner’s website <http://www.privcom.gc.ca>.

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