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Canadian Business And The Law 5th Edition by Dorothy Duplessis – Solution Manual
CANADIAN BUSINESS AND THE LAW 5th Edition
Chapter 1: Knowledge of Law as a Business Asset …………………………………………………. 1
Questions for Review, page 19
- What is the function of law? Page 5
- How does the law protect members of society? Page 8
- How does the law facilitate business activity? Page 10
- In what ways does law facilitate certainty in the marketplace? Page 10
- Does the nature of the business relationship affect the enforcement of legal rights? Page 11
- How does the law resolve disputes? Page 12
- Does dispute resolution always involve going to court? Page 12
- In what way is knowledge of the law a business asset? Pages 3-12, 14-15
- How might a lack of knowledge of the law negatively impact a business? Pages 4, 13
- Why should a business put in place a legal risk management plan? Page 15
- What is the role of business ethics? Pages 15-16
- Why are business ethics important? Page 15
- What is spam? Page 3
- What is the purpose of regulating spam? Page 5
Questions for Critical Thinking, page 19
- What is the relationship between ethics and law? Are ethical responsibilities the same as legal responsibilities?
- When is a lawsuit the best response to a legal dispute? What is at risk?
- Knowledge of the law is a business asset. How can you acquire this asset short of becoming a lawyer? How is ignorance of the law a liability?
- There has been considerable concern about the safety of Tasers (electroshock
weapons) and their possible role in the death of approximately 300 people in North America. The danger associated with Tasers was most recently brought to light because of the death of Robert Dziekanski, a Polish immigrant who died at the Vancouver International Airport immediately after being tased by RCMP officers. According to the CEO of Taser International, however, there is “no other device with as much accountability” as a Taser and he maintains that Tasers actually save lives. What is the role of the law in regulating the products sold in the marketplace and ensuring their safety or relative safety? [footnotes deleted]
- Adam Guerbuez, the spammer described in this chapter, was made subject to a judgment of almost $1 billion dollars by an American court. Do you think this
judgment is unreasonably large? Should the defendant’s ability to pay be taken into consideration by the court? Why or why not?
- In 2010, the New Brunswick government implemented new voluntary guidelines
governing the indoor tanning industry, including that people under 18 should not be permitted to indoor tan. These guidelines would be voluntary to start with but that would change if indoor tanning operators ignored the guidelines, at which point legislation would be brought in. Is this a good approach to regulating business? Why or why not?
Situations for Discussion, pages 20-21
- Joe has recently opened a bar and adjoining restaurant, specializing in seafood. It is named “The Finny Friends” after a restaurant that Joe had visited in Toronto several years ago. In accordance with the law, Joe has a liquor licence from the provincial liquor-licensing authority that limits the seating capacity in the bar to 30. As Joe’s bar becomes increasing popular, he begins to regularly allow more than
60 patrons in at one time. Eventually he is caught, and—having already received two warnings—his operation is closed down for 30 days. Joe is flabbergasted at the severity of the penalty. Soon thereafter, Joe is contacted by a lawyer for The Finny Friends restaurant in Toronto. The lawyer says that Joe has 48 hours to take down his restaurant awning and destroy anything else with the name The Finny Friends on it (including menus, invoices, place mats, napkins, and even match covers) or he will bring an application for a court order to that effect. To make matters worse, a health inspector is on Joe’s doorstep saying that there have been several recent
reports of food poisoning originating from Joe’s restaurant. What has gone wrong in Joe’s business and why?
- The Privacy Commissioner’s Annual Report (2011) criticized Staples Business
Depot for not taking better steps to protect the privacy of customers who returned computers and USB hard drives. These returned items had undergone a “wipe and restore” process before resale, but the Privacy Commission’s audit found that sensitive data, such as social insurance numbers and tax records, had not been erased in all cases. What should Staples Business Depot do to ensure better compliance with privacy legislation? Would it be sufficient, for example, to ask customers to sign a form saying that they have wiped the returned electronic clean?
- Assume that you have a major dispute with a business on the property next to yours over acceptable use of its land. You find that although zoning allows for a small tool shop to operate on the property, the noise is too much for you. Your lawyer tells you that there may be a legal case for you to pursue, but it will be costly and the results are not guaranteed. What alternative approaches might address your problems more effectively?
- Several provinces across Canada, including Ontario, Manitoba, and Saskatchewan, have proposed or passed legislation that prevents children from buying or renting video games that are expressly violent or sexual, as determined by a ratings board. Businesses found selling these games to minors face penalties that range from fines to having their licence revoked. How effective do you think government regulation is in limiting children’s access to violent video games? Are there better ways of achieving these types of goals? Is it the role of governments to provide legal consequences for the underage renting or purchase of violent video games? [footnotes deleted]
- Olivia owns a convenience store and has invested a lot of money in gambling
machines for the store. Recently, the government passed a law banning the
machines from the store immediately, although pubs are allowed to continue
operating these machines. Is this law fair? Does it violate any of the common values associated with the law? Would it make a difference if the law applied only to new businesses? Would it make a difference if the government provided compensation to the convenience stores affected or phased in the law to allow for a period of adjustment?
- When her husband died of a heart attack in 2001 after taking the painkiller Vioxx, Carol Ernst sued the pharmaceutical manufacturer, Merck & Company. In 2005, a Texas jury awarded her $253.5 million after concluding that Vioxx had caused Mr. Ernst’s death. In 2008, a Texas appeals court reversed Mrs. Ernst’s victory. The court concluded that there was no evidence that Vioxx had, in fact, caused the death of Mr. Ernst and, as a result, Mrs. Ernst has been left with no compensation whatsoever for her husband’s death.
According to news reports, Merck has taken an aggressive stance on lawsuits against it and spent more than $1 billion on legal fees. Merck has observed that the plaintiffs are required to prove that Vioxx caused the heart attack in question.
Given that heart attacks are the most common cause of death in the United States, Merck would have faced “an essentially unlimited pool of plaintiffs” without taking such a hard line, according to an American law professor.
In 2007, a lawyer representing Mrs. Ernst stated to The New York Times
that Merck should be amenable to settling at least some of the cases brought against it. He claimed that “Merck’s goal is to manipulate the legal system to deprive justice to tens of thousands of people …….. Justice delayed is justice denied.”
Merck has taken steps to resolve some of the cases brought against it,
however. In 2007, it entered into a $4.85 billion agreement, the goal of which is to
bring to a conclusion a majority of the remaining Vioxx lawsuits. According to press accounts, more than 44 000 plaintiffs involved in the most serious claims have enrolled in the proposed settlement.
Do you agree with Merck’s approach to the lawsuits that have been brought against it? What happens to people who want to sue Merck but cannot afford a lawyer? [footnotes deleted]
Chapter 2: The Canadian Legal System…………………………………………………………………. 34
Questions for Review, page 46
- What is the key idea upon which the Canadian Constitution is based? Page 23
- What does “jurisdiction” mean? Page 26
- What is an example of a constitutional convention? Page 25
- Which document determines whether a government has the jurisdiction to pass a law or not?
- What is the doctrine of paramountcy? Page 28
- Which level of government does paramountcy seem to favour? Page 28
- How does the authority of a municipal government come into existence? Page 26
- What is the difference between a regulation and a bylaw (or ordinance)? Pages 29-30
- What is the executive branch of government? Pages 29-30
- How is the executive branch different from the legislative branch? Pages 25, 29
- What is precedent? Why is a system of courts essential to its creation? Pages 38-40
- What are the two types of trial courts? Page 31
- What is the common law? Who creates it? Page 38
- What is the Canadian Charter of Rights and Freedoms? Page 32
- What can a judge do if he or she determines that a piece of legislation is unconstitutional?
- If a law is found to violate a person’s freedom of expression pursuant to the
Charter, is it automatically struck down? Is there something in the Charter that might allow the government to justify violating that person’s freedom of expression? Pages 32-34
- What is the difference between public law and private law? Pages 40-41
- Which Canadian province operates under a civil law system? Page 41
- What is the role of equity? Page 39
- What is one important function of administrative law? Pages 42-44
Questions for Critical Thinking, page 47
- Canada has often been described as an over-governed state. What features of Canada’s system of government contribute to this opinion? Do you agree?
- There are several reasons traditionally offered for why commercial expression
should be protected under s. 2 of the Charter. For example, such speech is seen as contributing to the “marketplace of ideas” and, furthermore, it is hard to separate out commercial speech from other “higher” forms of speech, such as political and social. Do you agree with these rationales? [footnotes deleted]
- Under a common law system, judges follow precedent when making decisions or resolving disputes. What are the advantages of following precedent? Describe a situation where it might be inappropriate to follow precedent. A system of precedent (stare decisis) is intended to promote
- Review Figure 2.3 on page 36. In your opinion, how has the Charter affected business activity?
- Do you think that the Charter strikes a good balance between protecting the rights of individual citizens and allowing governments to legislate for the benefit of larger groups, or even all members of society? Is section 1 of the Charter necessary, or should an individual’s fundamental rights and freedoms be absolute?
- Dozens of administrative tribunals, such as the Labour Relations Board, the
Canadian Radio-television and Telecommunications Commission, various human rights tribunals, and the Occupational Health and Safety Commission, have been established by both the federal and provincial governments. Why do you think administrative tribunals are such a predominant feature in Canada? Why have they been established?
. Situations for Discussion, pages 47-48
- The government of Alberta has announced new regulations that include
requirements that home inspection businesses be provincially licensed and carry
$1 million in errors and omission insurance. Beyond this, the province has
mandated educational standards for home inspectors with the goal of improving the quality of work done by the home inspection industry. Opposition Liberal MLA Hugh MacDonald endorses the regulations as a means of clamping down on
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some of these midnight home inspectors ….. If I’m making an important decision to purchase a home based on information I’m getting from a home inspector, that person should be licensed and have minimum credentials.” [footnotes deleted]
Do you agree that government should regulate such an industry? What are the costs and benefits of such regulation to the consumer?
- A brawl at a popular Halifax nightclub called the Dome resulted in 38 arrests and
the suspension of the Dome’s liquor licence. Governmental officials believe that onedollar drinks offered by the Dome are one factor contributing to such violence.
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“This has blown into a cultural problem, and one of the issues we have identified is low-price, deep-discount drinks,” said Barry Barnet, Nova Scotia’s Minister of Health Promotion and Protection. The Nova Scotia government says it hopes to develop recommendations to address problems associated with excess alcohol consumption. From a risk management perspective, how should local bar owners approach governmental concern over bar violence? [footnotes deleted]
- Following legislative initiatives from California, the federal government of Canada announced its intentions to reduce greenhouse gas emissions from new vehicles, which would “harmonize with the mandatory national standards of the United States beginning with the 2011 model year” according to a 2010 press release. Part of the goal, as previously stated by the federal government, is to harmonize Canada’s climate change action with the U.S.’s regulatory environment so as to “protect the environment and ensure a level playing field for the automotive industry.” In the past, industry has lobbied government to reject California-style
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regulation, saying that such regulation could cause damage to both the auto
industry and the economy at large. Environmental research groups suggest that manufacturers are merely exaggerating their projected costs. What is the role of government in regulating industry and protecting the environment, particularly when doing so drives up the cost of the product? [footnotes deleted]
- The federal government recently proposed legislation that would establish a
national securities committee to replace the patchwork of provincially constituted securities commissions. Does the federal government have the jurisdiction to do so under s. 91, or does the jurisdiction fall to the provinces under s. 92? [footnotes deleted]
- An accounting student is researching the deductibility of business expenses. She has found an amendment to the federal Income Tax Act that states that certain expenses are not deductible. However, she has also found case law that states that the expenses are deductible. Which law prevails? What additional information do you require to answer this question?
- Several provinces have passed legislation that restricts the sale of violent video games to children. How could this legislation be challenged under the Charter?
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Explain. Are there any ethical considerations when contemplating such a challenge? [footnotes deleted]
Chapter 3: Managing Legal Risks…………………………………………………………………………. 65
Questions for Review, page 68
- What is meant by the preventive and reactive approaches to legal issues in a business? Page 50
- What is the primary goal of a legal risk management plan? Page 50
- How does a legal risk management plan relate to enterprise risk management? Page 50
- What is the value of a legal risk management plan? Page 50
- What steps are involved in the legal risk management model? Page 61
- How can a business identify its legal risks? Pages 51-52
- What legal risks are posed by technology? Page 53
- How is breach of privacy a legal risk? What are the costs associated with a privacy breach? Page 53
- How can a business evaluate its legal risks? What is the purpose of evaluating legal risks? Page 55
- What is the best strategy for managing legal risks? Pages 56-58
- What is an example of risk retention? When is this strategy most appropriate? Pages 57-58
- What is an example of risk Avoidance? When is this strategy most appropriate? Page 56
- What procedures are necessary to implement a risk management plan? Page 60
- How can a business keep its risk management plan current and relevant? Page 60
- What legal risks are involved in doing business internationally? How can these risks be managed? Pages 59-60
- How does the management of a legal crisis differ from managing legal risks? Page 63
- When should a business seek legal advice? Page 64
- What is the role of lawyers in legal risk management? Page 65
Questions for Critical Thinking, pages 68-69
- The active involvement and commitment of employees at all levels of an
organization is crucial for successful risk management. Who is ultimately
responsible for managing legal risks and legal services? What factors are relevant for assigning responsibility within an organization?
- Risk avoidance is an appropriate strategy when the potential losses seriously
outweigh the likely benefits. What factors should be considered on the cost and
benefit sides of the analysis? At what point should a business decide to discontinue an activity rather than try to manage the risk involved? What are some examples of risk avoidance?
. 3. The pharmaceutical industry involves inherent risks. The drugs developed by
corporations in the industry may not be as effective as research indicated and over time may produce unexpected, unintended, and serious side effects. How can pharmaceutical corporations use risk avoidance, risk reduction, risk transference, and risk retention in managing these risks?
- Risk management is a continuous process that requires commitment, time, and expense. However, the benefits are often difficult to identify because they arise largely from prevention. How can a business decide whether the benefits of a risk management plan compensate for the time and expense involved in its design and implementation?
- A common method of controlling the cost of legal services is to refrain from
consulting a lawyer until a serious legal problem absolutely requires it. Another
approach is to hire or retain lawyers on an ongoing basis to provide advice as
business decisions are made. Which approach is the most expensive? What should a business consider in making that choice?
- An article in The Lawyers Weekly, a leading legal publication, is entitled
“Corporate counsel key to risk management.” Do you agree with that statement? How can lawyers contribute to risk management? Do you see any problems with outside or in-house lawyer involvement in risk management?
Situations for Discussion, pages 69-70
- Johann is the comptroller of Super Tech Inc., a highly aggressive firm in the high- tech industry that specializes in software development. Sarah, the CEO, prides
herself on her ability to make fast decisions and doesn’t worry about documenting her actions. Her favourite sayings are, “We can’t spend all of our time writing things down” and “Why worry? That’s why we have insurance and lawyers.” This approach appears to have served her well, at least in the initial years of the business. Johann is concerned, however, because he is often faced with legal bills without having any knowledge of the issues involved. The firm’s legal costs are steadily increasing. How should Johann present a recommendation to Sarah that Super Tech should develop a legal risk management plan?
- If Sarah accepts Johann’s recommendation, whom should he recruit for the risk management team? Should he be the leader of the team? How should he go about identifying the legal risks in the firm’s business? Whom should he consult?
- Johann’s review has identified a particular problem with Super Tech’s software designers. When used by customers, their designs are failing at a higher rate than the industry norm. The designers are unwilling to go back and correct problems because they prefer to develop new products and are under pressure to do so. Super Tech is faced with legal claims and lost customers. How should Johann evaluate and address this problem in the context of his risk management plan, taking into consideration the software designers and the company’s profitability? Which of the four risk management strategies are appropriate?
- Pascal is the manager of software development for Super Tech. He discovers that Bill, the lead software designer, has announced that he is leaving the company next week. Pascal finds that Bill has accepted a job with Super Tech’s main competitor. Pascal fears that in his new job, Bill will use technology developed while at the company and will disclose the identities of key customers. How could Pascal and Super Tech have identified and addressed this risk? What should Pascal do now?
. 5. A routine review of Super Tech’s accounts receivable discloses a recurring problem with collections from one important customer. What factors should Super Tech consider in its review of this account? How could a risk management plan help
Super Tech in determining its course of action regarding this customer? Which steps of the process would be most important?
- Siena Foods Ltd., located in Toronto, Ontario, is a manufacturer and distributor of prepared meat products. In 2010, the Canadian Food Inspection Agency and Siena Foods issued a health hazard alert warning the public not to consume certain Siena brand ham as it may have been contaminated with Listeria monocytogenes. Food contamination is a major risk in the food processing business, with potentially disastrous consequences for the company and its customers. How should Siena manage this risk? What preventive and reactive action plans should be in place? To what extent can Siena rely on the Canadian Food Inspection Agency to manage the risk?
- Anna, a customer in a Wendy’s Restaurant, claimed that she bit into a piece of a
human finger while eating a bowl of chili. Anna filed a claim for damages. The event attracted wide media attention. Anna gave several interviews in which she graphically described the trauma that she experienced. The volume of business at all Wendy’s outlets in the region plummeted. After several weeks, Wendy’s accused the customer of deliberately placing the finger fragment in the chili. When the finger was examined, it proved to be uncooked. Anna and her husband were eventually charged and convicted of several criminal offences. The finger came from a co- worker of Anna’s husband, who lost it in a workplace accident. Apparently, Anna and her husband have a history of filing false injury claims. Apply the legal risk management model to this situation. What plan should organizations such as Wendy’s have in place to deal with this risk?
- JetBlue is an American low-fare airline. In 2007, its operations collapsed after an ice storm hit the East Coast of the United States. The storm led to the cancellation of over 1000 flights in five days. Other airlines were affected by the storm but were able to rebound within a day or two. JetBlue’s problems dragged on for days. The main problem was JetBlue’s communication system. A large portion of its pilots and flight attendants were not where they were needed, and JetBlue lacked the means to locate them and direct them to where they were needed. How could a risk management plan have addressed JetBlue’s problems? How should JetBlue’s crisis
have been handled? Are there opportunities for an organization in responding to a crisis?
Chapter 4: Dispute Resolution ……………………………………………………………………………… 97
Questions for Review, page 94
- What are some potential business law disputes arising from the operation of a fast- food restaurant? Page 71
- What is the goal of negotiation in resolving legal problems? Page 76
- What happens when negotiations fail? Page 77
- What is the process for attempting to resolve disputes informally? Page 74
- What issues should a business consider before deciding to proceed with a legal dispute rather than abandon it? Page 78
- What is mediation? What are the advantages of mediation as a method of resolving a dispute? Page 78
- What are the differences between mediation and arbitration? Page 81
- Why is arbitration particularly attractive in international disputes? Page 81
- What are the advantages of arbitration in comparison to litigation? Page 82
- What are the major steps in the litigation process? Pages 84-89
- What happens during the “discovery” stage of litigation? Page 85
- Why is settlement out of court more common and preferable than going to trial? Page 82
- How does a class action differ from a normal lawsuit? Page 85
- What is a limitation period? Page 82
- To what extent does the winner of a lawsuit recover the expenses of the litigation? Page 87
- How does the winner of a lawsuit enforce the judgment? Page 89
- What factors should be considered before appealing a court decision? Page 89
- What is a contingency fee? Page 90
Questions for Critical Thinking, page 94
- How could management use the various options for dispute resolution to deal with the disputes you identified in Question for Review 1? Which might be suitable for negotiation? mediation? arbitration? litigation?
- The Canadian system of litigation partially compensates the winning party for its legal expenses through an award of “costs,” to be paid by the loser in addition to any damages awarded by the court. In the United States, it is usual for the parties to bear their own costs. Which rule is fairer? Does the awarding of costs encourage or discourage litigation?
- Class actions are growing in popularity as a way for a large number of small
consumer claims that might otherwise have been ignored to be brought against a corporation. For example, Canadian purchasers of iPods brought a class action against Apple Inc. for the lack of staying power in their batteries. Apple settled and
the purchasers were credited $44.75 each. Who benefits from a successful class action lawsuit? Who loses from a successful class action lawsuit?
- Most jurisdictions in Canada now have an element of mandatory ADR in their
systems of litigation. For example, in British Columbia all civil litigation with a few exceptions is subject to mandatory mediation. What is the purpose of requiring
ADR prior to litigation? Is it logical to make ADR mandatory rather than consensual? Are weaker litigants at the mercy of stronger parties?
- Alternative dispute resolution has many positive features. It can be faster and
cheaper than litigation. And unlike litigation, the process can be confidential and the parties can control the process, the timing, and the selection of the facilitator. Are there any downsides to the avoidance of litigation in favour of ADR in the
resolution of disputes? When is litigation the most appropriate method of resolving a dispute?
- Consumers are buying many items, such as books, food, and clothing, on the
Internet. They are not always satisfied with every aspect of their purchases.
Complaints concern delivery of the wrong items, failure of items to meet statements and descriptions made on business websites, late delivery, refusal of returns, and problems with warranties. Consumers sometimes have difficulty contacting sellers and getting them to deal effectively with complaints. How appropriate are established methods of dispute resolution to deal effectively with these complaints? Are new rules needed? Is a specialized process needed?
Situations for Discussion, page 95
- Diane Blanchard is in charge of purchasing for Best Produce Ltd. (BP), a wholesale dealer in fruit and vegetables. She is informed by the receiving department that BP has just received a large shipment of tropical fruit from a supplier, Tropical Delights Ltd. (TD), who has been reliable in the past. Not only is the shipment significantly short, but the quality is poor and about 20 percent cannot be used. Identify the informal steps Diane could take to address this problem.
- Tropical Delights has a new sales manager, Brad Carpenter, who is unwilling to concede anything. TD insists on full payment of $50 000 for the shipment in
situation 1 above. Diane thinks a reduction in price of $15 000 would be fair for BP. Diane consults the legal department of BP and is advised to consider mediation as a means of resolving this dispute. Diane is not optimistic about the prospect of successful mediation in view of her recent dealings with Brad, but she knows that BP needs TD as a supplier of exotic fruit and suspects that TD values her company as a customer. Suggest how Diane might use mediation in this situation. What critical factors should Diane consider in deciding whether to pursue this dispute further?
- Mediation failed and TD was unwilling to consider arbitration. Diane was unable to find another reliable supplier of exotic fruit. Meanwhile, TD sued BP for $50 000. Diane’s CEO is puzzled and upset about TD’s attitude. He is about to refuse to buy anything ever again from TD and to fight the lawsuit. Sarah Rickard, the CEO of Tropical Delights, was not consulted about the decision to sue Best Produce. When she became aware of the litigation, Sarah was upset about the prospect of losing BP as a customer. When she investigated further, she discovered that several TD customers were unhappy with the service provided by TD in recent months and were seeking other suppliers. What should Sarah do about the BP lawsuit and her other dissatisfied customers? What arguments could Diane use to persuade her CEO to contact Sarah? Can Diane use her experience with TD to improve her relationship with suppliers in future?
- The Loewen Group, based in Burnaby, B.C., was one of the largest owners of
funeral homes in North America. Throughout the 1980s and 1990s, the company pursued a strategy of growth through the aggressive acquisition of U.S. funeral homes. In 1990, Loewen purchased Wright & Ferguson, the largest funeral operation in Jackson, Mississippi. Shortly after the purchase, a dispute arose concerning an earlier contract involving Gulf Insurance. Gulf alleged that Loewen had breached this earlier contract and sued Loewen for damages of $107 million. In 1995, a Jackson jury awarded the plaintiff $100 million in compensation and $400 million in punitive damages. The award equalled almost half the value of Loewen’s assets and almost 13 times its 1994 profit of $38.5 million. Loewen vowed to appeal. However, under Mississippi law, Loewen was required to post a bond of 125 percent of the award—$625 million—while appeals were pending. Rather than face several years of uncertainty, the company agreed to a settlement worth about $175 million. Despite the settlement, the litigation seriously undermined Loewen’s equity value and credit rating. The company eventually went bankrupt. Shareholders who lost their equity filed claims under NAFTA but were unsuccessful. What does this case illustrate about the risks of doing business internationally and the uncertainties of litigation? How could Loewen have tried to avoid these uncertainties? [footnote deleted]
- A woman from British Columbia, Saliha Alnoor, recently sued Colgate-Palmolive, alleging that she was injured by a defective toothbrush. She stated that the toothbrush snapped as she was brushing her teeth, which injured her gums and caused them to bleed profusely. Alnoor claimed that she had endured permanent injury and sought damages, including $94 000 in anticipated treatments. Colgate denied any wrongdoing. Soon after the trial began, the judge made several rulings against Alnoor, who was self-represented. Alnoor later agreed to drop her claim in response to Colgate’s offer to waive legal costs against her (estimated at about $30 000) if she did so. According to the National Post, Alnoor’s brother stated as follows: “We spent $21 000 on lawyers and experts, but we have no regrets. Now we know how justice works. Now we are much wiser.” Do you agree with Colgate’s
approach to Alnoor’s litigation? What are the risks Colgate faced from the litigation? What are Alnoor’s risks? [footnote deleted]
- In 1959, the Canadian-born Lord Beaverbrook, a newspaper baron and member of Sir Winston Churchill’s World War II war cabinet, established an art gallery in Fredericton, New Brunswick. Situated on the banks of the St. John River, the Beaverbrook Art Gallery houses an impressive collection of over 3000 pieces of Canadian and British art as well as unique sample of works from international artists.
In 2004, two charitable foundations founded by Lord Beaverbrook claimed ownership of over 200 paintings and sculptures, arguing that the paintings had not
been gifts to the gallery but were merely on loan. More specifically, the United
Kingdom Beaverbrook Foundation (Foundation “A”) claimed ownership of
133 paintings valued at more than $200 million, including JMW Turner’s Fountain of Indolence valued at $25 million and Lucien Freud’s Hotel Bedroom valued at $5 million. The Canada Beaverbrook Foundation (Foundation “B”) claimed ownership of another 83 pieces of art. Both Foundations launched lawsuits against the Gallery and its board of directors in Great Britain, while the Gallery sued the Foundations in N.B. In 2006, the Gallery and Foundation A agreed to arbitration. Lawsuits by Foundation B were set aside pending the outcome of the arbitration with Foundation A. The parties chose retired Supreme Court Justice Peter Cory as arbitrator, and hearings were held in public in Fredericton and Toronto. In March 2007, Cory ruled that of the 133 works, 85—including the core of the collection— belonged to the Gallery, and the other 48 belonged to the Foundation A. Cory also ordered Foundation A to pay $2.4 million in compensation for several paintings it removed from the gallery over the years and costs of $4.8 million. Foundation A appealed, as under the terms of the arbitration a disputant could appeal if it felt that the arbitrator’s ruling contained legal errors or disregarded important rules of evidence. In September 2009, a three-person appeal panel composed of retired judges upheld Cory’s ruling in its entirety. In July 2010, Foundation A filed an application in the Court of Queen’s Bench of New Brunswick to appeal the panel’s results on a point of law. Before a hearing on the application was held, the parties reached a confidential settlement. Each side is estimated to have spent more than $10 million in legal fees. The dispute between the Foundation B and the Gallery is
still on-going. It has been reported that the parties are meeting with a mediator to resolve their dispute. Why do you think the Foundation A (the UK Foundation) and the Gallery chose arbitration for their dispute? What were the advantages of arbitration for the parties? How well did the dispute resolution methods work for the Gallery and the Foundations. [footnotes deleted]
- In 1997, the Flynns hired Applewood Construction to build them an
environmentally friendly home. The house was erected on a concrete slab. The Flynns moved into their new home and discovered within the first year that the concrete slab had cracked, causing considerable damage to the structure. The Flynns successfully sued Applewood for damages, but before they could collect, Applewood went out of business. In 2005, the Flynns sued Superior Foundation, who had been hired by Applewood to pour the concrete slab. What defence might Superior have against the Flynns’ claim?
- In 2008, several hundred people became ill and a number of them died as the result of an outbreak of the listeria bacteria. The illnesses were traced to the consumption of deli meats that were produced from a single processing plant operated by MegaMeats Inc. Those most affected by the bacteria were the elderly, the very young, and those who were already ill. Is this an appropriate situation for a class
action lawsuit? What do the victims have in common? How are their claims
different? What process must be followed? How should MegaMeats deal with these claims?
Chapter 5: An Introduction to Contracts ………………………………………………………………. 132
Questions for Review, page 111
- What is a contract? Page 101
- What are the elements of a contract, according to the common law? Pages 101-102
- Must all contracts be in writing in order for them to be legally binding? Page 102
- What are the purposes of contract law? Pages 102
- Is the matter of whether a contract exists judged according to a subjective standard or an objective one? Explain. Page 106
- Contract law assumes that parties have equal bargaining power. What is the effect of this assumption? Page 107
- How does the presence of a written contract assist in dispute resolution? Pages 102-103
- What is the role of public relations in contracts? Pages 109
- What is an economic breach? Page 108
- Why might a business elect to not perform on a contract, and what are some of the consequences that may arise from this decision? Pages 108-109
Questions for Critical Thinking, page 111
- Is there a better way to resolve disputes about contracts than by applying common law rules in litigation?
- Should the law insist that there be actual equal bargaining power between the
parties before a contract can be formed? What would the dangers of such a rule be?
- Why are the non-legal factors in a contractual relationship so important? Why is it important to place contract law in a business context?
- Should negotiators follow a course of strict and absolute honesty in contractual negotiations? Why or why not?
- How important is it to be aware of the law when negotiating a contract? Does it depend on what you negotiate with? Does it depend on the size and complexity of the contract in question?
- How could relying on the notion of economic breach prove disastrous to a business?
Situations for Discussion, page 111
- Trackers is a manufacturer of steel tracking, which is used by customers in a
variety of applications. Trackers’ business is booming, and its scheduling is tight for meeting delivery commitments. Trackers is contacted by a representative of Coasters, who inquires whether Trackers is capable of providing track for a special roller coaster in Florida, and if so, what price Trackers could offer and when it could deliver. Trackers knows that Coasters is a leader in the industry and would be a valuable customer. What factors should Trackers consider before responding to the Coasters inquiry? What are the risks and benefits of agreeing to fill Coasters’ order?
- Jason, the owner of a furniture store, is thinking about hiring an independent
contractor to do deliveries for him. If the individual contractor proves unreliable, Jason is, of course, entitled to sue to recover his losses. How does inadequate
performance by the independent contractor put Jason at risk and how can that risk be reduced? [footnotes deleted]
- Melissa, an accounting student, interviews for a job with two firms. She really wants to work for Firm X but gets an offer of employment from Firm Y first and accepts it. A week later she receives offer from Firm X, which she also accepts. She does so
because she believes she is economically better off with firm X and will be able to “cancel” her acceptance with Firm Y.
- What is Melissa’s legal situation now?
Melissa appears to be in two contracts.
- Even assuming that she is better off economically by joining firm X, what other costs does she face?
- Samantha Jones entered into a contract with Jason Black to act as a contractor for a new house she is having built. She was anxious to have the house built as soon as possible, and upon receiving Jason’s estimate that the work, including labour and materials, will cost $250 000, she immediately paid a $50 000 deposit. However, since receiving Samantha’s deposit, Jason has been contacted by a developer who is willing to pay him a significant amount more to work on a new housing development, provided that he begin immediately. Jason does some calculations based on the current market. He decides that the amount the developer is offering is enough that he can afford to return the deposit, compensate Samantha for breaching the original contract, and still come out ahead on the development contract. He lets Samantha know that she will have to find a new contractor and begins work on the housing development. When he calls Samantha a few months later to offer her compensation, she informs him that she has finally been able to hire a new contractor, but that the estimate for the work has now doubled. In the intervening months, the costs of labour and materials have skyrocketed. The house
that originally would have cost $250 000 will now cost her $500 000. Do you think that Jason should be responsible for the additional costs of building Samantha’s house, even though they very much exceed his original estimates?
- Mr. Leopold applied to his provincial government for a student loan and was
advanced $13 500. The loan agreement obligated the government to advance further funds midway through the school year. Mr. Leopold stopped attending classes in September for medical reasons but did not advise his university’s Student Services Office of this, contrary to a term in his loan agreement. He also used the funds for living expenses instead of for tuition, contrary to the loan agreement. The university determined that Mr. Leopold was not eligible for the second installment of his loan, and the government therefore refused to advance it. Mr. Leopold sued the government for breach of contract and sought damages in the amount of
$1.5 million. Do you think Mr. Leopold’s action should be successful? Why or why not? [footnote deleted]
- A 22-year-old Grande Prairie man was shocked to receive an $85 000 cellphone bill from Bell Canada. The reason for the high cost was that the customer had been using his cellphone as a modem for almost two months. In one month alone, he downloaded what amounted to 10 high-resolution movies, according to Bell. The customer contended that he did not realize what the cost would be to use the modem system and that Bell should have alerted him as his cellphone bill began to climb precipitously. Bell acknowledged that accessing the modem services is costly but also emphasized that to do so, customers are required to register online and must agree to contractual terms that show the higher fees. It also admitted that its newly implemented data-usage monitoring system failed to pick up the customer’s high usage. In the meantime, Bell has offered to reduce the bill to approximately $4000,
but the customer is refusing to pay even that sum. Who is right in this dispute and why? What additional information do you require to answer this question? [footnote deleted]
Chapter 6: Forming Contractual Relationships……………………………………………………… 154
Questions for Review, page 138
- What must an offer contain? Page 114
- Is an advertisement an offer or an invitation to treat? Why? Page 115
- Are oral contracts enforceable? Page 126
- What is a standard form contract? Page 116
- Explain why it might be a good idea to get a contract in writing. Page 126
- Does the acceptance of an offer have to mirror it exactly, or are slight variations permissible? Page 122
- What is the “postal rule”? Page 126
- How is the postal rule different from the “ordinary rule” for acceptance? Page 126
- When must an offeree communicate acceptance to the offeror in a specific form? Page 123
- Why is a counteroffer a form of rejecting an offer? Page 122
- When can an offeror revoke or withdraw an offer? Page 118
- What is consideration? Page 128
- What is an option agreement? How is the concept of consideration related to the enforceability of such an agreement? Page 120
- What is a pre-existing legal duty? Pages 129-130
- Is a promise to pay more for performance of a pre-existing legal duty generally enforceable? Pages 130-131
- What is a gratuitous promise? Give an example. Pages 128-129
- Are the rules governing the formation of electronic contracts any different from those for written or oral contracts? Page 127
- How does the relationship between the parties affect presumptions concerning their contractual intent? Page 135
- What does Contract A refer to in a tendering context? Page 121
- What does Contract B refer to in a tendering context? Page 121
Questions for Critical Thinking, page 138
- The Ontario Court of Appeal in Gilbert Steel and the New Brunswick Court of
Appeal in Greater Fredericton Airport Authority take opposite views on the
enforceability of contractual variations unsupported by consideration. Which view do you prefer and why?
- Based on information contained in the box Business Application of the
Law: Spamming, what risk management steps should a business take in order to
help ensure that any commercial email it sends out is compliant with Canada’s new anti-spamming legislation?
- Family members are presumed not to intend legal relations, while businesspeople are subject to the opposite presumption, namely, that an intention to create legal relations is present. Why should the relationship between the parties affect the enforceability of their promises?
- When the common law rules of contract were being formed by the judiciary, paper correspondence was the only form of distance communication. Are the traditional rules of contract formation appropriate for modern methods of communication?
- What risks do negotiators face if they lack knowledge of the rules of contract?
- Do you think that the doctrine of promissory estoppel serves a useful purpose? Would it not be easier if the law simply insisted that all contractual variations be supported by consideration?
Situations for Discussion, page 139
- Mr. Gaff made the following written offer to Ms. Paulo: MEMO FROM: J. Gaff
TO: R. Paulo
DATE: June 7, 2000
I hereby agree to sell to R. Paulo my entire fleet of Rolls-Royce automobiles for the sum of $1 million. This offer is open until Friday, June 9, 2000, at 9:00 a.m.
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On Thursday, June 8, Gaff decided to sell the cars to his well-to-do neighbour instead. Paulo heard about the alleged sale later that same day and rushed over to Gaff’s house, stating that she wished to accept Gaff’s offer. Gaff smiled and said, “Sorry, you’re too late. I’ve sold to someone else.” Is Gaff obligated to keep the offer open until the specified time? What could Paulo have done to better protect her position?
- Jack and his sister Lisa inherited their parent’s cottage. Jack suggested to Lisa that he would be willing to buy her out for $50 000. Lisa thought about it for a minute and then quickly agreed. “A deal is a deal,” said Lisa and shook hands with her brother. “There is no need for us to go to a lawyer and get a big fancy contract written up.” If Lisa ever has to prove this contract in a court of law, what are the problems she faces?
- On October 30, Casgrain offered to purchase some farmland from Butler for
$14 500 with possession in January. On November 15, Butler made a counteroffer, by telegram, at $15 000. The telegram was delivered to Casgrain’s home on November 20 but Casgrain was absent on a hunting trip. Casgrain’s wife opened the letter and wrote back to Butler saying that her husband was away for 10 days and asked that he hold the deal open until Casgrain could consider the matter. Butler did not respond. On December 10, Casgrain returned home and immediately wired Butler, purporting to accept Butler’s offer of $15 000. The wire was received on December 12. By this time, Butler had already sold the land to someone else. Has Casgrain accepted the offer in time or has it lapsed?
- Mr. and Mrs. Smith were regular participants in a lottery pool with their friends. Each Friday, the group would meet at the local pub and contribute to a pool of cash that would then be used to purchase lottery tickets. The group agreed that if a winning ticket were purchased, the amount would be shared among the participants. There was also discussion that if someone in the group did not come to the pub on the day in question, another person present would contribute on the missing person’s behalf and get paid back later. On one Friday, the Smiths did not attend the pub nor, therefore, contribute to the pool of lottery cash but they trusted
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that their friends would contribute on their behalf. This did not happen. One of the tickets purchased turned out to be a winner. Mr. and Mrs. Smith say they are entitled to a share. The others in the group say that only those who actually paid into the pool for that winning ticket are entitled to a share of the prize. Which view do you think is correct and why? [footnote deleted]
- ABC Ltd. is owed $10 000 from Mr. Smith for home repair. Mr. Abbott, a senior officer with ABC Ltd., went to the Smith’s home to secure payment and spoke with Smith. Abbott explained that without payment, ABC faced bankruptcy. In response, Smith began complaining about the poor quality of the work done (even though he knew the work was perfectly fine) and that he would only pay $4000. “Take it or leave, buster,” he said. Abbott took his cheque and cashed it, feeling that he had no choice in the matter. He would now like to go after Mr. Smith for the balance. Can he do so? [footnote deleted]
- April manufactures leather chairs and sofas, and she is happy because she has just negotiated a contract with Bob’s Fine Furnishings, Ltd., to supply them with her handmade furniture. The terms of the contract are that on the first Monday of every month, April is to send over 10 chairs and two sofas, and Bob’s Fine Furnishings will pay her $7000. She is excited to learn that her furniture is so popular that Bob’s Fine Furnishings has a waiting list of customers who have pre-
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paid for their chairs, as her last shipment sold out in only a week. April is a little worried, however, as she has just received a phone call saying that her leather supplier will not be able to send her any leather for the next three months, because of a local shortage. Without the leather, she knows she cannot fill her order for Bob’s Fine Furnishings by the first Monday of next month, much less for the two months after that. What could April have done when negotiating the contract with Bob’s Fine Furnishings to help manage the risk of a situation like this? What should she do now that the contract is already in place?
- Mr. M, living in British Columbia, and Ms. A, living in England, met online and
struck up a relationship. Mr. M promised Ms. A that if she would come to live with him in Canada, with a view to marriage, he would pay off the balance on her mortgage on her home in England. Relying on this promise, Ms. A gave up her job and moved to Vancouver. The relationship proved to be an unhappy one,
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particularly because Mr. M did not pay off Ms. A’s mortgage, though he did lend her $100 000. She applied that money to her mortgage but was soon thereafter evicted from M’s home. Can Ms. A enforce Mr. M’s promise to pay off her
mortgage by relying on the doctrine of promissory estoppel? Is Ms. A’s reliance on Mr. M’s promise enough to make that promise enforceable? [footnote deleted]
Chapter 7: The Terms of a Contract ……………………………………………………………………. 196
Questions for Review, page 161
- What is the difference between an express and an implied term? Pages 142-144
- What are two major rules of construction used by the courts in interpreting a contract? Page 143
- Who decides the content of a contract and on what basis? Pages 143-144
- What are four sources that the court can rely on to imply terms? Pages 145-147
- Why are express terms preferable to implied terms? Pages 142-143
- How does the doctrine of business efficacy affect the interpretation of implied terms? Page 145
- How do the courts deal with ambiguities in the contract? Page 142
- What is the expression used to describe an implied legal promise to pay a reasonable price for goods or services? Page 148
- What are three ways that a party can control its exposure to liability for breach of contract? Pages 151-158
- What is a limitation of liability clause? Page 155
- How is a limitation of liability clause different from an exemption clause? Page 155
- Why are conditional agreements important? Pages 152
- What is the parol evidence rule? Pages 148-149
- What is a separate or collateral agreement? Page 149
- What is an entire contract clause? Page 153
- What assumptions do the courts make about how contract terms relate to changing circumstances? Page 151
- What is the difference between a click-wrap agreement and a browse-wrap agreement? Pages 156-158
- What is a liquidated damages clause? Page 158
Questions for Critical Thinking, page 161
- Entering a contract can create a great deal of risk for the parties. What are examples of these risks, and how can they be managed?
- Do you think conditional contracts contribute to uncertainty in the marketplace since parties will not know their obligations pending the outcome of an event?
- Courts are increasingly willing to imply into contracts a term requiring the parties to act in good faith. Is this a welcome development? Why or why not?
- Why does contract law refuse to enforce a penalty clause? Why are penalty clauses inherently objectionable?
- Do you agree that contracts should be interpreted based on an objective assessment of the parties’ intentions? What would be the advantages and disadvantages of interpreting contracts based on evidence of what the parties subjectively intended?
- Do you think the law is unreasonable to require business owners to point out to
consumers any unexpected clauses in a standard form contract if it appears that the consumer has not assented? Should customers simply be required to take care of themselves and read the contract before signing it?
Situations for Discussion, page 161
- Former U.S. administrative law judge Roy Pearson famously sued a local dry
cleaner over a lost pair of pants. Among other things, he sought $2 million for
mental distress and discomfort, as well as $15 000 for a rental car he said he would need in order to drive to another dry cleaner outside his neighbourhood. Pearson claimed, for example, that the dry cleaner owners committed fraud by not living up to the sign in their window that stated “Satisfaction guaranteed.” According to Pearson, this guarantee was unconditional, he was by no means satisfied, and the defendants had thereby committed an unfair trade practice. How should a judge interpret the “satisfaction guaranteed” sign? [footnotes deleted]
- Louise purchased a shrink-wrapped piece of software from a local software
developer. She used the software properly but, much to her dismay, the product contained a virus that destroyed the hard drive of her computer. When Louise looked in the software packaging, she found a card that contained a number of terms of conditions, including a limitation of liability clause. Is this term a part of the contract or can Louise argue that she is not bound by it? Explain.
- Ms. Weir was engaged by Canada Post to deliver advertising flyers for a five-year term. She was entitled to payment on a per-piece basis. The contract provided that Canada Post could terminate the agreement on 60 days’ notice if it changed its ad flyer distribution system and “alternatively, Canada Post may in its sole discretion terminate this agreement immediately on giving written notice to the Contractor.” Payment per piece became costly for Canada Post, and two years later it instituted a new payment system based on packages (containing several pieces). Is Canada Post entitled to terminate the contract with Ms. Weir? What evidence is the relevant? Is it a contract at all when one party has so much discretion? [footnotes deleted] This
- Kristin signed a user agreement with Hagel’s Cable, Inc. upon installation of high- speed Internet service in her home. Included in the agreement was a provision that the agreement could be amended at any time and that customers would be notified of changes on Hagel’s website, by email, or through regular mail. Hagel’s later added a clause to the agreement that any right to commence or participate in a class action suit was waived. The agreement, including the new clause, was posted on its customer support website, and a notice was posted on the main website that the agreement had been amended. Kristin has continued using the service since this
time. However, she now wants to join a class action suit that is alleging a number of breaches of the agreement. Will the clause in the amended user’s agreement prevent her from bringing such an action? Did she receive adequate notice of the amended term? Does the fact that the user agreement relates to Internet services make a difference in whether the notice was adequate? How is this situation similar to the Rudder v Microsoft Corp case discussed in this chapter? [footnote deleted]
- Jason and Floë booked a two-week vacation in the Caribbean with The Nation’s Vacations Inc. (“Nation”), having reviewed Nation’s brochure regarding destinations there. The brochure also contained an exclusion of liability clause, which stated:
Please review with care the terms and conditions below as they govern your purchase of travel services from Nation. Your booking with Nation constitutes acceptance of these Terms & Conditions.
Liability for suppliers: Nation makes arrangements with third-party
suppliers who provide travel services such as flights, accommodation, and car rentals. Nation endeavours to choose the most reputable suppliers but is not responsible for their acts and omissions. Disappointed customers must sue those third party suppliers directly for any loss or damages.
Nation assumes no responsibility for any claim, loss, damage, cost or expense arising out of personal injury, accident or death, loss, damage, inconvenience, loss of enjoyment or upset caused by Nation’s third party suppliers.
The brochure itself was designed to open to the page quoted above when flipping through the brochure from back to front. It was in easy-to-read font and with the emphasis indicated above. Though Jason and Floë had spent about
90 minutes reading over the brochure before booking their vacation package, they say that they did not know about the exclusion clause. Moreover, Jason, a construction firm manager, says that he does not know even what an exclusion clause is so reading it would have been pointless in any event.
When Jason and Floë arrived at the Caribbean resort, they were
immediately disappointed. Though the resort was a 4-star resort as advertised by Nation, Jason and Floë say that when they went to eat dinner in the resort buffet restaurant, they found the conditions to be unhygienic because, among other
matters, several small tropical birds were walking around on the floor of the
restaurant, having gained access through open doors. At a later point, a cat strolled into the restaurant and, they say, defecated in the corner though the resort disputes this. Jason and Floë also claim that the bathroom in their suite was unhygienic and
the staff were uniformly unfriendly, even hostile. Jason and Floë hotly refused
management’s offer of a free room upgrade and demanded to be flown home
immediately. The resort made those arrangements. Jason and Floë left the next day. Jason and Floë have now sued Nation for breach of contract, seeking, among other matters, reimbursement for their flight to and from the resort, as well as ground
transportation and accommodation costs. Nation says it delivered the requested travel services contracted for and in any event has successfully limited its liability through the exclusion clause. What do you think a judge will say? [footnote deleted]
- Lunar Inc. had developed a mechanism that harnessed heat from the sun. What the company lacked, however, was a method for storing the heat until it was needed.
Trays-R-Us had developed a unique tray that appeared to solve this problem, so the parties entered into negotiations. It was agreed that Trays would sell the trays to Lunar at a set unit price per tray for a term of one year. No particular sales volume for the year was agreed upon or guaranteed. After the trays were produced, however, Trays discovered that they leaked and were unable to hold any solar heat, owing to a design flaw that could not be fixed. As a result, Trays refused to fill any orders for the trays placed by Lunar. Lunar sued for breach of contract, alleging that there was an implied term in the contract that Trays would make trays available to Lunar as required. Does the business efficacy rule require that such a term be implied in the contract between Trays and Lunar? Do you think that such a term might have been left out on purpose? How can a business avoid having terms implied into a contract? [footnote deleted]
- The decision of Wiebe v Bobsien, discussed earlier in this chapter, went on to appeal and at that level, the dissenting judge would have found for the vendor. According to the dissent, the conditional agreement was unenforceable because its scope was too uncertain. The dissent stated:
I think this case falls in that category of incurable uncertainty. What
term should be implied? A term requiring the purchaser to make all
reasonable efforts to sell his house sounds alright … [but] it leaves
unresolved the question of whether he must sell at the price he can get, on the market, in the time allotted, or whether he is entitled to insist that the sale can only take place at a price he considers reasonable and is willing to accept.
I think that what the parties usually intend by this type of clause is the second alternative. That is, that the purchaser is only committed to sell his own house if he gets the price he has in mind. The reason is that in the residential housing market the purchaser is likely to be unfamiliar with the market, but he is almost sure to know how much cash he has and what size of mortgage he can count on being able to service. … The way to deal with this problem in the real estate market is for the form of subject clause to state the price and the essential terms upon which the purchaser must sell his own house. Then a court would have no
trouble in implying a term that the purchaser must make all reasonable efforts to sell at that price and on those terms. And the court could assess whether the purchaser had made reasonable efforts to do so.
Do you think that the dissent is asking for too much precision and detail in a subject to clause. Why or why not?
- Trackers is three days late in delivering the tracking to Coasters. Amritha now wants to rely on the clause in the contract that Trackers will pay $5000 for each day that the tracking is late, and she is claiming that Trackers owes Coasters $15 000. However, Trackers points out that Amritha has not been inconvenienced by the late delivery, because construction on the roller coaster had already been delayed by two weeks. It has been a week and a half since Trackers was able to deliver the tracking, and Coasters has still been unable to use it. Is Amritha entitled to rely on the clause and collect the $15 000? Do you need any additional information to make your decision?
Chapter 8: Non-Enforcement of Contracts …………………………………………………………… 234
Questions for Review, page 190
- Explain the difference between a void contract and a voidable contract. Page 167
- Who has the legal capacity to form contracts? Page 167
- What must be proven by someone seeking to avoid a contract based on mental impairment? Page 169
- Describe the doctrine of undue influence. Page 170
- What is duress? How does it relate to the idea of consent? Page 169
- Given an example of economic duress. Pages 169-170
- What is a misrepresentation? Page 175
- How does the concept of legal mistake differ from its ordinary meaning? Pages 177-178
- Name one statute that makes certain kinds of contracts illegal. Page 180
- What is the role of public policy in contract enforcement? Page 181
- How are non-competition covenants used in employment contracts? Page 182
- How does the Statute of Frauds affect contracts? Page 184
- What four types of contracts relevant to business law are required to be in writing? Pages 184-186
- How might the fact that a contract is electronic affect its enforceability? Page 185
- Is an electronic contract subject to the same basic principles as a traditional contract? Page 185
- Who is a minor? Page 167
- Are contracts with minors binding? Pages 167-168
Questions for Critical Thinking, page 190
- Though contracts are generally enforceable, there are important doctrines that
provide exceptions to this general rule. Do these exceptions undermine the notion of sanctity of contracts—the principle that once a contract is made, it should be enforced? Do these doctrines give the courts too much discretion to set aside a contract?
- What factors should a business consider in developing a policy on documentation of commercial relationships? Should it insist that all contracts be in writing or is more flexibility in order?
- Which doctrines discussed in this chapter would be unlikely to arise in an online transaction? Why?
- How can a business use a risk management plan in order to reduce the chances that it will enter into an unenforceable contract?
- The law of mistake will rarely provide a defence for someone seeking to avoid a contract. Is the law of mistake too strict and inflexible? Why or why not?
- Courts have shown flexibility in what they would accept as a traditional signature (including mere initials) or an e-signature (which can include someone simply typing his or her name). Do you think this flexibility opens the door to fraud? Why or why not?
Situations for Discussion, page 190
- Through her lawyer, Ms. Tanya, a commercial landlord, sent a letter to her tenant, Ms. Desie, who ran a bridal shop out of the premises. Tanya’s lawyer demanded all back rent and stated that if the rent owed was not received by the deadline specified, Tanya would lock her tenant out of the business premises. Desie had no money to pay the back rent and therefore did not make the specified deadline. In fact, Desie sent in no money at all. The landlord changed the locks. Soon thereafter, the parties
later came together in settlement whereby Desie agreed to provide a promissory
note in the amount owed in addition to Tanya’s legal fees in relation to this matter. Subsequently, Desie alleged that Tanya’s lawyer had forced her to settle and sign the promissory note in question. Desie said that she felt that she had no choice but to sign because otherwise, she would not have been allowed back onto the rental premises. Desie says that the agreement should be unenforceable because of the lawyer’s duress. Did the conduct of the lawyer amount to duress? What constitutes duress? [footnote deleted]
- Tim Donut Ltd. was founded by Tim Horton, a professional hockey player, in 1964. Ron Joyce, the company’s first franchisee, became an equal partner with Horton in 1966. Tim Horton died in 1974, and his wife inherited his share of the business. In 1975 she sold that share to Joyce for $1 million. Mrs. Horton later claimed that, after the death of her husband, she became addicted to drugs and did not know what she was doing when she sold her share. She said she was unaware for days that she had sold her interest and remembered little from the day of the sale, other than sitting in an office and signing some papers. She subsequently sought to have the contract cancelled.
What doctrines in this chapter are relevant to the situation? What further information is needed to apply those doctrines? What major challenges to succeeding on her claim did Mrs. Horton face?
- Ms. Stewart bought a business operating in rented space in a shopping mall. Shortly after she took over the business, the landlord pressured her to sign a lease that made her responsible for the arrears in rent of the previous tenant. The landlord secured Stewart’s agreement by exerting tremendous pressure on her. For example, he called in the sheriff to execute a distress for rent when, at that time, Stewart was in arrears only for the month of January. The landlord told Stewart that if she did not pay the former tenant’s arrears, “she would be the one to suffer.” The landlord knew that Stewart was unsophisticated in business dealings and signed the lease without seeking advice. Is she obligated to the lease? [footnote deleted]
- Leona was interested in purchasing property that she intended to use for her
family’s expanding brickyard business. She spoke with the owner, who had recently inherited the property from his elderly aunt. Leona asked if there were any restrictions on the land preventing it from being used as a brickyard. The owner replied, “Not that I am aware of.” Though this was literally true, the owner failed to explain that he had never checked whether the land was subject to any restrictions. Leona purchased the land and has found out that it cannot be used as a brickyard. Can she have the contract rescinded based on misrepresentation? Why or why not? This
- As part of her contract to work as a branch manager for ABC Ltd. (a foreign currency exchange company), Suzie was asked to agree to the following non- competition clause:
That for a period of eighteen (18) months from the termination date of the Employee’s employment with ABC Ltd., for whatever reason, he/she will not, for any reason, directly or indirectly as principal, agent, owner, partner, employee, consultant, advisor, shareholder, director or officer or otherwise howsoever, own, operate, be engaged in or connected with or interested in, or associated with, or advise, or anyway guarantee the debts or obligations of, or have any financial interest in or advance, lend money to, or permit his/her name or any part thereof to be used or employed in any activity, operation or business whether a proprietorship, partnership, joint venture, corporation, or other entity or otherwise carry on, engage in, in any manner whatsoever, any activity, business or operation which is the same as or in any manner competes with the Business of ABC Ltd. within the Country of Canada in any City or municipality in which ABC Ltd. operates or conducts business, in any manner. [emphasis added]
Is this clause enforceable when measured again the factors identified by the SCC in Elsley (discussed earlier in this chapter)? [footnote deleted]
- Symphony & Rose was a developer and builder of high-rise condominium projects. A Symphony & Rose sales rep told Wendy and Sam that a penthouse apartment was still available in their current project. Wendy and Sam provided Symphony & Rose’s real estate agent with information relevant to the purchase and delivered cheques for the various deposits. The agent told them that in a few days they would be required to sign an offer on Symphony & Rose’s standard form. They thought they had a deal. A few days later, a senior representative of Symphony & Rose contacted Wendy and Sam to tell them that the penthouse had already been sold but
40 other units were currently still available. Do Wendy and Sam have an
enforceable agreement? Should they have done anything differently? [footnote deleted]
- John Tonelli was an exceptionally talented young hockey player who, in 1973 at the age of 16, entered into a two-year contract with the Toronto Marlboros Major Junior A hockey club, a team in the Ontario Major Junior A Hockey League. The league had an agreement with the National Hockey League (NHL) that prevented the drafting of underage players and that called for the payment of certain fees once
a player was drafted at the end of his junior career. However, a similar agreement could not be reached with the World Hockey Association (WHA). John—like all other junior hockey players of his time—was forced to sign a new contract as a condition of continuing to play in the junior league. This new contract essentially bound him to play three years longer than his earlier contract with the Toronto Marlboros; in addition, it imposed monetary penalties if he signed with a professional team within that time frame or within a period of three years after he ceased to be eligible to play in the junior league. As soon as he turned 18 (the age of majority), John abandoned the contract with the Toronto Marlboros and signed with the Houston Aeros, a professional team. The Marlboros sued him for breach of contract. Is John’s contract enforceable against him? If yes, does this seem fair, and from whose point of view? If no, is it fair that John can sign a contract and then ignore his obligations under it? [footnote deleted]
- Sam Moore, an alert and intelligent 52-year-old businessman, tried without success to purchase a piece of farmland from Louis Wells. When he heard that Louis’s brother, James, was willing to sell his nearby farm, he went to see him at his nursing home to make an offer to purchase it. James was 62 years old and, unbeknownst to Sam, was suffering from brain damage. Sam offered to purchase the land for $7000. James signed an acceptance to the offer and received a deposit of $100, without receiving any independent advice on the transaction. The land in question was worth quite a bit more than $7000—in fact, the farmer who was leasing James’s land at the time had offered to pay $14 000 to $15 000 for it just the year before. Since then, a trust company had been appointed under the Mentally Incapacitated Persons Act and had taken over the management of James’s affairs. The trust company refused to transfer the farm to Sam, who decided to sue in order to enforce the contract he entered into with James. Is the contract for the sale of the farm enforceable? If yes, does that seem like a just result? If not, what legal doctrine would likely be used to rescind it? If the contract is not enforceable, do you think that it is fair to Sam, who did not know about James’s mental state? Or is it reasonable to expect him to make sure that the person he is contracting with is mentally capable of entering into a contract? What factors ought Sam have taken into account? [footnote deleted]
Chapter 9: Termination and Enforcement of Contracts ……………………………………….. 282
Questions for Review, page 216
- What are the four major ways that a contract can be terminated? Page 195
- What is an assignment? What risks does the assignee of a contractual right assume? Pages 197-198
- What is privity of contract? Page 201
- How is vicarious performance used by business? Page 196
- How is a new contract created through novation? Page 196
- When is a contract frustrated? Page 198
- What is a force majeure clause? Page 200
- What elements need to be established in a successful action for breach of contract? Page 201
- How is the severity of a breach of contract evaluated? Page 203
- What is the difference between a warranty and a condition? Page 203
- What is the purpose of awarding damages for breach of contract? Page 206
- When will a court award punitive damages for breach of contract? Page 206
- When is a plaintiff entitled to damages for mental distress? Page 208
- What is unjust enrichment? Page 212
- What is restitutionary quantum meruit? Page 212
- What is specific performance? Page 210
- When will a court grant an injunction? Page 211
- What is the remedy of rescission? Page 211
- When can the innocent party treat the contract as at an end? Page 203
- How can a plaintiff avoid the application of an exclusion of liability clause? Page 204
Questions for Critical Thinking, page 216
- A contract is considered frustrated only in very unusual situations. Should the doctrine of frustration be applied more often? Would a broader application produce fairer results? What is the downside of such a change in commercial contracts?
- Breach of a condition can signify the end of the contract, while breach of warranty does not. Should courts be allowed to exercise discretionary power in determining whether an innominate term should have this same result? What should parties do if they want to reduce the uncertainty as to how a given term will be classified?
- The privity rule is one of the basic elements of contract law. Is it too restrictive? On the other hand, is there a danger in creating too many exceptions to the rule?
- Contract law is intended to facilitate commercial activities and enable businesses to conduct their affairs so that their legal obligations are certain. Do you think, after considering the material in the last five chapters, that contract law achieves its goals? Can you think of ways to improve the effectiveness of contract law?
- The Supreme Court of Canada stated that mental distress damages for breach of contract can be awarded when an object of the contract was to secure a psychological benefit. What kinds of contracts can you think of that promise a psychological benefit?
- Everyone who suffers a breach of contract still has a duty to mitigate his damages. Do you think it is fair to impose a positive duty on someone when a contract is breached through no fault of his own? How strict do you think courts should be in analyzing whether someone has fulfilled his duty to mitigate?
Situations for Discussion, page 217
- Leonard purchased an unconstructed condominium in a large development. The contract stated that delivery of the completed condo was to be on a date set by the developer before February 1, 2010. Construction proceeded on schedule except on April 25, 2009, the whole development burned to the ground. After spending some time looking for the cause of the fire, the developer started the process of rebuilding in October 2009. It looks like the condo will be delivered about a year later than originally anticipated. Is Leonard bound by the contract under these circumstances? Does it matter if the fire was caused by the developer’s negligence? [footnote deleted]
- John chartered a large ship from Rent-a-Boat Ltd. The duration of the charter was
24 months, and it was a term of the contract that Rent-a-Boat would provide a
seaworthy ship and supply John with competent engine-room staff. Immediately, there were problems. For example, because of the ship’s engine being old and its engine-room staff being inexperienced, the ship was in repair for the first 20 weeks of the charter. In week 18, John advised Rent-a-Boat that its breaches of contract permitted him to end the contract and sue for damages. Is John correct? What remedy is John entitled to and why?
- Susan, a law professor, was in Israel when her cellphone was stolen from her home in Toronto. Upon her return, Rogers, the cellphone service provider, advised that $12 000 in calls had been made from that phone and she was responsible for payment. Susan replied that she would not pay, since those calls were unauthorized and had been made from her phone after it had been stolen. In response, Rogers, among other actions, cut off her young son’s cellphone service. The son’s phone had been acquired by Susan for safety reasons since he would be taking the subway, alone, to school for the first time starting in September. Susan was responsible for bills associated with her son’s cellphone, but the cellphone was held under a separate contract.
A judge ultimately determined that Rogers was in breach of contract when it cut off her son’s phone service, since it had no legal reason to do so. Among other heads of damage, the judge awarded Susan $612 in damages for “lost wages”
because she had to drive her son to school while his cellphone was blocked. Do you think Susan’s mitigation was reasonable? What else could she have done? Do you think that Rogers should appeal this decision? Why or why not? [footnote deleted] This case is based on
- Atlantic Fertilizer (AF) operates a fertilizer plant in New Brunswick. AF made a
major sale to the government of Togo in Africa and engaged Pearl Shipping (PS) to transport the fertilizer to Togo for a fee of $60 000. The contract between AF and PS specified that AF would deliver the cargo to PS for loading on its ship between
25 and 31 March and that AF would pay $1000 (in addition to the shipping charges) for each day after 31 March that the cargo was delayed. AF had difficulty in filling the large order in its plant and notified PS that delivery would be sometime after 31 March.
PS is contemplating AF’s message and deciding how it should react. Options under consideration are to wait for AF to deliver and add the $1000 daily charge to the bill, give AF a firm date by which it must deliver, or terminate the contract with AF and seek another cargo for its ship. Which options are legally available to PS? Which should PS choose? [footnote deleted]
- ABC Ltd. was in a contract to supply 1000 widgets at $1 each to XYZ Ltd. by a
specified date. Because of a mechanical failure at its factory, ABC Ltd. cannot fill the order on time and has advised XYZ Ltd. to expect delivery to be two months late. XYZ Ltd. planned to use the widgets as components in a machine that it had already contracted to sell for an anticipated profit of $30 000. It cannot wait the two months without jeopardizing that sale. What is XYZ Ltd. obligated to do now?
What if the only other source for replacement widgets is from a manufacturer who is proposing to sell at an exorbitant sum? What other costs can XYZ Ltd. seek to recover?
- XYZ Ltd. entered into a contract with ABC Ltd. for the supply of resin, which XYZ Ltd. needed to produce pipe necessary for a large pipeline. ABC Ltd. made the business decision to supply defective resin to XYZ Ltd. and drafted the contract
between the parties to protect itself from liability in relation to that defect as follows:
XYZ Ltd. assumes all responsibility and liability for loss or damage arising from the use of the resin supplied under this contract herein and acknowledges that ABC Ltd.’s liability is limited to the selling price of the resin.
Another clause stated,
XYZ Ltd. to notify ABC Ltd. of any objection to the resin supplied within 30 days. Failure to provide such notice constitutes unqualified acceptance and waiver of all claims.
ABC Ltd. knew that the resin was dangerous and would allow natural gas to escape. In fact, this is exactly what happened. There was an explosion in the pipeline for which XYZ Ltd. supplied pipe and that XYZ Ltd. fixed at great cost. When it
asked ABC Ltd. for help, ABC Ltd. refused to take any responsibility, pointing to the exclusion clauses. Because of negative publicity surrounding the gas pipe leaks, XYZ Ltd. lost both its reputation and its financial viability. Assuming that the
supply of defective was a breach of contract, do you think ABC Ltd. will be able to rely on the exclusion clauses above? On what basis? [footnote removed]
- Imperial Brass Ltd. wanted to computerize all of its systems. Jacob Electric Systems Ltd. presented Imperial with a proposal that met Imperial’s needs. In August, Imperial accepted the proposal, along with Jacob’s “tentative” schedule for implementation, which led Imperial to expect a total computerized operation by mid-January, with the possibility of a 30-day extension. In October, it became clear that there were problems with the software being developed, and Imperial asked for corrections to be made. At the end of October, the hardware and two software programs were delivered to Imperial, and Imperial’s employees attempted to begin to use the programs. Very little training was provided, however, and there were major problems with the computer screens freezing and data being lost. More programs were delivered in January, along with some operating instructions, but Imperial’s employees were still unable to make any use of the programs they had. The programmer whom Jacob assigned to Imperial’s contract, Mr. Sharma, continued to work on the remaining programs. In May, however, Jacob informed Imperial that Sharma would be leaving the company, and Imperial informed Jacob
that if that were to happen, given the problems and delays the company had already experienced, Imperial would be forced to end the contract with Jacob’s company. Is the breach by Jacob serious enough to permit the innocent party, Imperial, to treat the contract as at an end? [footnote deleted]
- Canadian Pacific Airlines (CP) agreed to safely transport the Newells’ two pet dogs on a flight from Toronto to Mexico City. The Newells were concerned about the safety and welfare of their dogs, but CP’s employees reassured them that the dogs would be safe in the cargo compartment of the aircraft, and reported to them before they boarded that their dogs had been safely placed in the cargo area. When the
flight arrived in Mexico City, one dog was dead and the other was comatose. The
Newells sued CP for general damages to compensate them for “anguish, loss of
enjoyment of life and sadness” that they allege resulted from the breach of contract. Are the Newells entitled to anything other than compensation for their direct financial loss (i.e., the value of the dogs)? If so, what would be an adequate amount to compensate for the mental distress suffered by the Newells? [footnote deleted]
Chapter 10: Introduction to Tort Law ………………………………………………………………….. 316
Questions for Review, page 235
- What does the term “tort” mean? Page 221
- Give an example of a tort. Pages 221-222
- What are the two main categories into which torts are organized? Page 224
- What is the difference between the tort of assault and the tort of battery? Page 224
- The goals of tort and criminal law are quite distinct, even when they stem from the same event. Explain the differences. Pages 224-225
- What is a joint tort-feasor? Page 227
- What does burden of proof mean? Page 225
- How does the burden of proof differ between a criminal case and a tort action? Page 225
- What is the difference in the way tort and criminal actions are initiated? Page 225
- What is the purpose of damages in tort? Page 225
- Under what circumstances might an injunction be awarded in tort? Page 228
- Vicarious liability is an essential feature of modern tort law. What is it? Page 226
- What might be a defence to a claim for vicarious liability? Page 227
- How does contributory negligence affect the amount of damages a plaintiff may receive? Page 228
- Explain the difference between pecuniary and non-pecuniary damages. Pages 229-230
- How are pecuniary damages typically calculated? Pages 229-230
- What are punitive damages? How are they different from aggravated damages? Pages 230-232
- When is overlapping liability in tort and contract common? Page 232
Questions for Critical Thinking, page 235
- What are the justifications for the basic legal principle that the standard of proof is higher in a criminal matter than in a civil one?
- Punitive damages are somewhat controversial even in jurisdictions where they are relatively common. At the same time, there are circumstances in which a person’s tortious actions have been particularly callous and calculating, yet the actual loss suffered by the plaintiff is not extensive in monetary terms. In these latter cases, what are the compelling reasons for allowing the plaintiff additional compensation over and above her actual loss? Should the compensation principle of tort law be compromised in this way?
Proportionality: Setting the quantum
- The concept of vicarious liability developed in the business world, where the
company is out to make a profit and its activities are for the most part directed to generating profit. Is it appropriate to apply a test developed in this context to a
charitable organization? What are the pros and cons for holding organizations liable for the conduct of their employees?
- Does the idea of contributory negligence reflect the major aims and purposes of tort law? Does it make sense to reduce the amount of damages available to a plaintiff, when he may not have suffered the loss to the same extent, or at all, but for the negligence of someone else?
- Without permission, Angela borrows Jacob’s car. Has Angela committed a crime? Do you think that her conduct might be tortious as well?
- Aggravated damages compensate the plaintiff for distress and humiliation. Do you think this opens tort law to abuse by plaintiffs who may misrepresent or exaggerate how the defendant’s conduct made them feel?
Situations for Discussion, page 236
- It was Susan’s turn to drive her three classmates to university, this time for the final exam in the business law course. Unfortunately she had left home late, and by the time she had picked up everyone else, they were in serious danger of arriving at least 10 minutes after the exam began. The weather was not good and the roads were obviously slippery—there were cars off to the side of the road in a number of locations. Susan’s friends urged her to speed up, which she did, although as a
relatively inexperienced driver she was uncomfortable handling the car under these conditions. As she approached a major intersection, the light turned amber, and Susan braked. When the car began to slide, Susan instinctively braked harder, causing the car to go out of control and enter the intersection, where it slid straight into the path of a car proceeding on a green light from the cross street. In the subsequent collision, one of the passengers in Susan’s car, Jean-Guy, was seriously injured.
The police arrived and, after investigating the case, charged Susan with
dangerous driving under the Criminal Code. In time it became clear that Jean-
Guy’s injuries had resulted not only in short-term harm—for example, because he could not sit his exam, he fell behind one term in his program—but also in permanent damage. In particular, his right arm and wrist were shattered and, being right-handed, he has and will continue to have limited manual dexterity. He was planning a career in IT and finds that these injuries severely affect his ability to perform basic tasks. For what categories of damages will Jean-Guy seek compensation?
- Discuss the relationship between criminal and civil law in relation to Situation 1. How will each case be proven and by whom?
- Reginald Smith, an employee of UR Safe Ltd., a security company, broke into a
branch of a bank that was a customer of UR Safe Ltd. Smith did so when he was not on shift with UR Safe Ltd., and by using keys he had stolen from his employer. Using these keys, Smith gained access to the ATM room in the bank but could not figure out how to open the ATM combination lock. He was close to giving up when he noticed that the bank kept an ATM instruction manual on a shelf right beside the ATM in the ATM room. Smith read the manual and on that basis was able to open
the safe. Is UR Safe Ltd. vicariously liable for Smith’s tortious conduct? [footnote deleted]
- Albert was walking home from his nightshift at 3:30 a.m. The road was very dark, and Albert was wearing a red jacket, blue pants, black shoes, and a green cap. Albert walked along the edge of the road but on the wrong side, such that his back was to oncoming traffic. Albert heard a vehicle approaching behind him but decided not to look or even move. Unfortunately, Albert was hit by the vehicle, a delivery van; the driver was taking newspapers to a local drop-off point so that carriers could then deliver them to homes on their routes. Albert was seriously injured.
Albert has two witnesses. The first is a police officer who arrived on the scene and administered a breathalyzer test to the van driver. The van driver was not impaired. Albert’s second witness is an individual who lives in a house directly across the road from the accident scene. This witness heard the impact of the
accident and ran outside to help. This witness’s evidence only related to the position of the plaintiff’s body and the location of the defendant’s delivery van. Will Albert be able to establish negligence as against the driver of the van? Why or why not? [footnote deleted]
- The plaintiff hired the defendant to renovate the wooden wharf that the plaintiff
owned in British Columbia. The wharf was part of the plaintiff’s grain-loading
facility in Vancouver Harbour. During this renovation process, the wharf was
seriously damaged by fire. The fire was started by molten slag from an oxyacetylene torch operated by the defendant’s employee. The defendant’s employee did not
minimize the fire hazard created by the torch. Among other deficiencies, the
defendant’s employees failed to wet the combustible surfaces before using the torch and failed to keep a proper fire watch during cutting operations so that any slag that landed could then be doused with water. When it came time to fight the fire, the defendant’s employee ran into difficulties because the plaintiff had not provided a fire protection system anywhere near the wharf in question, not even a fire extinguisher. The plaintiff claims damages in the amount of $1 million. Assuming that the defendant’s employee has been negligent in how he used the torch, what would a possible defence of the defendant be? Should the plaintiff recover all its damages or only a portion thereof? Is the defendant responsible for the tort of its employee? Why or why not? [footnote deleted]
- Louise arrived for a two-week vacation at a Mexican resort. She spent the day at the beach and, on returning to her room, found a bottle in the fridge containing a
clear liquid. Louise assumed the liquid was water and started to drink from the
bottle. It turns out that a member of the cleaning staff had inadvertently left a bottle of caustic cleaning solution in the fridge in Louise’s room and this is what Louise had drunk. Louise suffered extensive injury and required emergency surgery to remove some of her esophagus. Louise wants to sue the cleaning staff member who had left cleaning solution in Louise’s fridge. Will this action be successful? Does the cleaning staff member have any defences? [footnote deleted]
Chapter 11: The Tort of Negligence ……………………………………………………………………. 346
Questions for Review, page 257
- What competing interests must a court balance in deciding a negligence action? Page 239
- What are the four steps in a negligence action? Page 240
- Before Donoghue v Stevenson, what defence could most manufacturers of goods raise when faced with a claim for negligence brought by an injured user of those goods? Page 240
- How does the foreseeability test help in defining the neighbour principle in negligence? Pages 240-241
- What is the standard of care in negligence? Page 242
- How is causation usually determined in negligence? Page 242
- Does the normal standard of care vary in any specific circumstances? Explain. Page 242
- Does tort law generally allow recovery for pure economic loss? Page 245
- What does contributory negligence mean and what are the consequences of it being found to exist? Page 247
- Give an example of when the defence of volenti non fit injuria might be applied. Pages 247-248
- What kinds of plaintiffs will be likely to succeed in an action for negligent misstatement against a professional? Pages 248-249
- Why was there no duty of care owed in Hercules Managements v Ernst & Young? Pages 249-250
- What area of law other than tort law do product liability actions often involve? Why are actions in that area often more straightforward than in tort law? Page 250
- What is the thin skull rule? Give an example of when it would apply. How does the thin skull rule protect the plaintiff? Page 244
- Is the commercial host liable if one of its patrons is injured because of the patron’s own impaired driving? Explain. Pages 251-253
- Why is strict liability rare in Canada’s tort regime? Page 253
- Name two areas where strict liability is common. Page 253
Questions for Critical Thinking, page 257
- The principles of volenti non fit injuria have been restricted to allow the defence to apply only in limited circumstances. Are these circumstances too limited? For example, should the person getting into the car with an impaired driver still be allowed to
recover in negligence? Is there not sufficient public knowledge of the dangers of
impaired driving for people to understand the risk they assume? What about those who deliberately choose not to wear a seatbelt? Why should they potentially recover? Volenti applies
- From time to time, it has been proposed that the principles of strict liability be applied to product liability in Canada as they are in certain other jurisdictions. What are the pros and cons of applying this concept in Canada? What changes would result for producers of goods and services, as well as for consumers? Are there inherent risks that might arise for society as a whole if strict liability were imposed in certain industries?
- One of the areas in which liability for negligence is expanding is in the case of those serving alcohol both as a business and at office parties. Think of the contexts in which businesses might be exposed to these risks either because they make their money from selling alcohol or because they are conducting a social event. To what extent should the business be held liable for negative outcomes of the excessive consumption of liquor? How should the business protect itself?
- It is relatively new for courts to allow recovery for pure economic loss in negligence, that is, loss unrelated to any physical loss. Some would argue that extending negligence in this regard potentially places an unfair burden on some occupations and service providers. In our society, people should accept that there are some losses for which recovery cannot be obtained. What are the pros and cons of allowing recovery for purely economic loss?
- The application of the “thin skull rule’ often places a considerable burden on a
defendant who is found liable in negligence, above and beyond what would normally be “reasonably foreseeable.” Is it fair that the negligent party should assume the burden of these extra costs? Does the thin skull rule make sense when considered alongside the rule about remoteness of damage?
- In the Mustapha case described in this chapter, the plaintiff could not recover for his mental shock at seeing a dead fly in an unopened bottle of water because such a mental injury would not occur in a person of ordinary mental fortitude. Do you think such an approach unfairly favours the water supplier over the customer?
Situations for Discussion, page 258
- Sue regularly hosts social events for her employees at which alcohol is served. Sue’s lawyer says that she faces liability should a drunken employee get behind the wheel and become injured in a car accident. This is because the employer maintains a duty to provide the employee with a safe working environment even in such circumstances. What steps can Sue take to manage the risk of alcohol related liability when hosting a social event? [footnote deleted]
- Kurt, an avid skier, wanted to clear some wet snow and ice from his chair on the chairlift as it moved toward him from the boarding ramp. He was unable to sit down in time and simply grabbed onto the chair, which began to ascend the mountain. Kurt realized that the longer he held on, the higher the fall would be, so he quickly let go and fell about three metres into an embankment, injuring his right leg. Kurt sued the owner of the ski hill and its employee, the ski-lift operator who failed to stop the chair as soon as she could see that Kurt had not loaded properly. On what basis is the ski-lift operator liable? Do you think any judgment Kurt might receive should be reduced? Why? [footnote deleted]
- Klutz won a contest sponsored by a radio station, entitling him to play in a twilight golf tournament. He went to the radio station and signed a form releasing the station from any liability connected with the tournament. The event was held at the Dark Side Country Club, beginning at 11 p.m. Klutz attended a pre-tournament instructional meeting and was told that his team was to tee off on the second hole. While the team headed for that spot, Klutz hurried to his car to get his clubs and golf shoes. As he sprinted down the path to the parking lot, he ran into one of a series of black iron posts embedded in the asphalt path at the point where the walkway and parking lot met. Klutz somersaulted several times, ending up on the driveway with banged knees and a badly bruised elbow. He played seven holes of golf, but could not carry on. Prior to the accident, he was a self-employed upholsterer. Following the accident, he was unable to work for three months. After that his production was down 20 percent. His ability to participate in household and leisure activities was also reduced.
Apply the principles of tort law to this situation. Suggest a result. What further information would be useful? [footnote deleted]
- Burger Heaven (BH) is a large chain of restaurants specializing in burgers and fries. In response to customer demand, BH added coffee to its menu. The temperature of the coffee and the style of containers and lids were part of BH operating standards to be followed by all restaurant operators and staff. BH restaurants provide counter and drive-through service. Sandra bought coffee in the drive-through for herself and her husband, Morley. Sandra passed both cups of coffee to Morley. The car hit a big bump and the coffee spilled in Morley’s lap, burning him severely.
What should BH do about this particular incident? Is Morley likely to be
successful in any claim for negligence? What defences might BH raise? How can BH manage the risk of a similar incident occurring in the future? Can any preventive steps be taken?
- Mr. Worton purchased a slide for the family’s four-foot-deep aboveground
backyard pool from Jacuzzi Canada Inc. A Jacuzzi Canada employee told Mr. Worton that installing this kind of slide with his pool would be “ok” and “not a problem.” He was not advised that there was any risk at all in doing so. Worton installed the slide according to the instructions. Unfortunately, Carla, his 15-year- old, was seriously injured when she went down the slide headfirst and as a result is now paralyzed. Carla had been instructed by her parents only to go down the slide feet first, but on this occasion, she failed to follow this rule. Carla’s parents have sued Jacuzzi on her behalf. Is there negligence? Did this negligence cause Carla’s accident? [footnote deleted]
- Ellen attended the Skin Care Clinic Inc. to receive laser removal of unwanted hair. The technician performed the entire treatment without first conducting a full patch test and failed to stop the treatment when Ellen complained of pain. As a result, Ellen sustained facial and neck scarring. She was left with permanently lighter skin
below the lasered skin and was very concerned that others would think she had
leprosy. She was very traumatized and unable to work for at least a month. She also requires ongoing psychological care. What steps must Ellen establish in order to demonstrate a negligence claim? What kind of damages should she seek and on what basis? [footnote deleted]
- Big Pizza, a province-wide pizza chain, has a new promotional campaign. The chain guarantees that all pizzas will be delivered within 30 minutes or they will be free. While this promise is readily kept in small cities and towns, it places considerable stress on franchises in large urban areas. Franchisees are required by their franchise agreement to pass on this stress to drivers by fining them half of the cost of any pizza not delivered within the requisite time. To overcome this threat, drivers often are forced to drive well above the speed limit. One driver, attempting to meet the deadline, fails to notice another vehicle in its path and collides with it, seriously injuring the passengers in that vehicle.
Assuming that the issue of negligence by the driver is clear-cut and that the driver is an employee, can the injured persons claim damages from the franchisee for the actions of the employee? Why or why not? Is there any argument that Big Pizza has itself been negligent? Present arguments for both sides of the case, and determine whether liability will be upheld. [footnote deleted]
- The Bridge Engineering Company contracted to build a bridge between a suburb and the downtown of a medium-sized town. For years the two communities were joined by a one-lane bridge, and this new four-lane bridge was a major
improvement. Indeed, as a result of the new bridge, a local contractor began
building a new housing project of 30 homes. Just before the first home sales were
made, a major defect was discovered in the bridge design that meant that the bridge would be unusable for at least two years. Residents would be forced to use a lengthy detour that added approximately 30 minutes to the average drive between the suburb and downtown, where the majority of the residents worked. The market for the new housing project immediately collapsed, and the contractor was unable to sell any houses. The contractor is considering litigation but realizes that he has no claim in contract against the engineering company. Are there any alternatives? Explain.
Chapter 12: Other Torts …………………………………………………………………………………….. 393
Questions for Review, page 281
- How does the law define the occupier of property? Page 272
- Who is an occupier? Page 262
- What are the four different classes of visitors in the law of occupiers’ liability? Pages 262-263
- What is the standard of care owed to each of the four classes of visitors? Pages 262-263
- What is the major change made by legislation in many provinces of Canada to the common law of occupiers’ liability? Pages 263-264
- What is a nuisance in tort law? Page 266
- The courts have developed pragmatic rules for resolving inherent conflicts that arise in applying the tort of nuisance. Give two examples of these rules. Pages 267
- Under what conditions can trespass arise? Page 267
- What are the limitations to the ability of a store detective to detain a customer who is suspected of shoplifting? Page 269
- Describe how a false imprisonment claim might arise, other than by a person being physically restrained. Page 269
- How can a business manage the risk of retail theft and fraud? Pages 279-280
- Identify what must be established to prove deceit. Page 271
- What is “passing off” and what practices was this tort created to prevent? Page 271
- Describe a situation that might amount to the tort of interference with contractual relations. Page 273
- When is a court entitled to award punitive damages for the tort of defamation? Page 275
- What is injurious falsehood? Page 276
- What is the tort of invasion of privacy? Pages 276-277
Questions for Critical Thinking, page 281
- One of the controversial aspects of the tort of occupiers’ liability and its more recent statutory form arises out of the rights afforded trespassers. One possible change to the law would be to eliminate all rights. What would be the consequences of this approach? Are there some trespassers and some circumstances that you would feel uncomfortable leaving without protection?
- What can businesses do to manage the risk of slip-and-fall incidents?
- The tort of false imprisonment places serious limitations on any action the retailer can take to detain suspected shoplifters. What are the pros and cons of these limitations? Are they fair? What are the countervailing interests at stake? How can retailers reduce the risks associated with apprehending suspected shoplifters?
- The common law states that someone is liable for defamation just for repeating or passing on defamatory words he or she heard from someone else. This is called publication. Do you think that publication should be actionable? Why or why not?
- The tort of interference with contractual relations has its origins in the ancient
master/servant relationship. Today, however, there is greater recognition of
mobility rights, and those in business are generally used to competing in an
aggressive marketplace. Given that the aggrieved party has the right to sue for
breach of contract, should this tort be retained? What rights might not be protected if it were to be abolished? Are these important?
- A major aim of the tort of defamation is to seek to “protect the reputation of
individuals against unfounded and unjustified attacks.” However, it is relatively easy for a plaintiff to make out the tort, as it basically encompasses any statement that presents another in an uncomplimentary light. The major burden of the action then shifts to the person who made or published the statement to provide a defence. Do you think that the tort of defamation is too easily proven? Is it unfair to place such a heavy burden on someone to defend the statements she makes, especially given that freedom of speech is such an important principle in Canada?
- A convenience store owner has suffered several burglaries in the past few months. He is very concerned, as he believes this trend means he will likely lose his livelihood. He elects to arm himself with a shotgun for self-protection: the most recent break-in was by armed thieves. One evening, three thieves enter the
premises. He shouts at them to leave as they approach the till, and he brings out his shotgun. The thieves immediately start running out of the store. The store owner shoots one of them as he is leaving. Has the injured thief any right to compensation? How could the owner have better managed the risk of theft and burglary?
- Mr. Favo slipped and fell on a small patch of ice outside a popular car wash. Mr.
Favo was late for an appointment and was walking somewhat faster than usual just prior to taking the tumble. Ms. Daby, owner of the car wash, was proud of the 10-
year safety record she had established up until this point. She attributes this safety record to being acutely aware of the problems ice causes in winter when wet vehicles exit the car wash, leaving puddles in their wake On a related front, Daby also held frequent staff meetings in order to emphasize how important it was to prevent ice formation and to salt the sidewalk according to a very strict schedule. The supervisor on shift when Favo fell was adamant that the area had been salted prior to the incident. He also conducted an inspection of the area immediately after the fall and found only a very small patch of ice had been missed Is Daby liable? Is Favo contributorily negligent? [footnote deleted]
- Great Food Restaurant serves a very popular buffet style menu in central
Saskatchewan. During one dinner service, a patron became ill and vomited on one of the buffet tables. A supervisor and employee tended to the situation by removing most of the food from the buffet itself, wiping up with a cloth soaked in a weak
bleach solution and mopping the floor. They then replaced the food in the buffet and carried on business. Several people who subsequently ate at the restaurant became ill with the Norwalk virus, a highly contagious pathogen that is easily spread if not
deactivated with a sufficiently strong disinfecting solution. A small local newspaper ran a story about the incident, with the headline “Vomit serves up virus at buffet.” The article suggested that the illnesses were caused by “eating from a buffet that a
customer had vomited on.” It also quoted a health officer who said the virus was
likely spread by contact with contaminated surfaces and “may not have involved the buffet food at all.” There was no time to speak to Great Food Restaurant before the story had to go to press. Had the newspaper done so, it would have learned from the
manager his view that the illnesses were not caused by the restaurant food. Great Food Restaurant has since suffered a large drop in business and wants to sue the newspaper for defamation. Will its action be successful? [footnote deleted]
- The Kumar family are long-time residents of an older neighbourhood of a major
city. They inherited their home from Ms. Kumar’s parents. Their own family is now grown up and gone, and Mr. and Ms. Kumar enjoy the pleasures of the quiet and beautifully maintained back garden—that is, until the past few months. The neighbours on one side of the Kumars sold their property about a year ago, and the
new owners have shown the Kumars their plans for the property. The plans involve demolishing the home and building a much larger house, very close to the boundaries of the property. Because the building will be three storeys high and because of its size and location, all afternoon sun will effectively be blocked from the Kumar’s garden. Moreover, they will lose their privacy. The Kumars are distraught. They are also very concerned about the noise and disruption from the demolition and construction. Lastly, they have noticed that the large and noisy air- conditioning and heating units will be placed adjacent to their property, right beside their bedroom wall. Assuming that all these changes are within the local planning rules, what are the Kumars’ rights? What factors should the Kumars consider before launching a legal action?
- The Happy Bar operates in Fergus, Ontario. The bar routinely attracts large
numbers of students from the local universities. Because of its location, students
have to drive at least 20 kilometres. The owners of the bar are acutely aware of their responsibilities both to ensure no underage students drink and that all patrons leave the bar in a vehicle driven by a designated driver. On peak nights the bar brings in additional staff to ensure compliance with its policies. On one Saturday night, a regular staff member calls in sick but recommends his friend, who is a law and security student at the local community college. He assures the manager that this friend is very familiar with the appropriate practices and guidelines and is fully responsible. The friend is hired for the night and appears to the manager to be capable. Around 11:30 p.m., a group of young people become particularly rowdy, and one moves toward the door, car keys in hand and shouting to her friends to get into the car quickly so they can find a “really good party.” The new staff member is
the only employee nearby and able to intervene. He rushes to the young woman,
pins her arms behind her with one hand, and puts a choke hold around her neck. He demands she throw down her keys. Unfortunately, the woman suffers from epilepsy. This action precipitates a seizure, and, in the course of the seizure, perhaps in part because of the amount of alcohol consumed, the woman chokes. She is unconscious for 10 minutes and suffers serious brain damage. Discuss the tort principles that arise in this case. Who will be sued and for what? What are the merits of the case?
- Mandrake Ltd. owns and occupies an office building. Mandrake complains about the noise and vibration coming from the nearby subway system of the Toronto Transit Commission. Will Mandrake be successful in an action for nuisance? In particular, would the ordinary and reasonable resident of that locality view the disturbance as a substantial interference with the enjoyment of land? What factors will a court consider in determining whether there is nuisance or not? At what point should legitimate activities be curtailed because of the unavoidable consequences to other nearby businesses? [footnote deleted]
- Beginning in 1955, Disney started opening outdoor amusement parks around the world, and now owns a number of parks, including those in California, Florida, Europe, and Japan. Each amusement park contains various theme parks, one of which is called Fantasyland. In 1981, Triple Five opened an indoor amusement park in the West Edmonton Mall, also called Fantasyland. Has Triple Five committed the tort of passing off? What would a court take into account in determining whether the tort has occurred? If the tort is made out, do you think it is legitimate to give Disney a monopoly over the word “Fantasyland” in association with all amusement parks? [footnote deleted]
- Mr. Bahner was hosting a dinner for friends at a restaurant in the Bayshore Inn, Vancouver. The group ordered one bottle of wine and, at 11:30 p.m., the waiter asked if they would like another, to which they agreed. There was still wine in the first bottle however. At 11:50 p.m., Bahner was told by the waiter that, due to a law in force in British Columbia at the time, all the wine on the table had to be consumed before midnight. The plaintiff considered this to be impossible without resulting in drunkenness and therefore asked if they could simply take the second bottle away with them at the end of the evening. Bahner was advised by the waiter
that this, too, was against the law. The plaintiff paid for the dinner itself and the
first bottle of wine but refused to pay for the second, saying he would just leave it on the table. The second bottle was open but had been otherwise left untouched. In response, the hotel manager called a security guard. Bahner and his guests stood up and tried to leave. The security guard blocked the main restaurant exit, saying, “You cannot leave.” When Bahner again refused to pay, the security guard called the police. Since Bahner was not being permitted to leave the restaurant, he sat down at a table nearer the door and waited with his guests. He was then arrested and spent the night in jail before he was released. Does Mr. Bahner have a successful action for false imprisonment against the restaurant owner? Why or why not? How could such an unfortunate situation have been avoided to begin with? [footnote deleted]
Chapter 13: The Agency Relationship …………………………………………………………………. 434
Questions for Review, page 308
- What is agency? Give an example. Page 287
- Why would a business use an agent to act on its behalf? Pages 287-288.
. 3. How is an agency relationship entered into? Page 289
- What is the difference between the actual and the apparent authority of an agent? Pages 290-292
- When will an agent have implied authority? Pages 290-291
- What is a power of attorney? What is the risk involved with using a power of attorney? Page 292
- What is meant by agency by estoppel? How does agency by estoppel arise? Pages 293-294
- How is an agency by ratification created? Page 295
- Is a principal permitted to ratify any contract entered into by an “agent?” Explain. Page 296
- Is a real estate agent a typical agent? Explain. Pages 295-296
- What are the duties of the agent? Pages 297-298
- What are the duties of the principal? Page 300
- Do all business advisors owe fiduciary duties? Explain. Pages 298-299
- When can an agent be personally liable on a contract entered into on behalf of a principal? Pages 312-313
- Describe how an agent can be liable to the principal. Pages 301-302
- When is a principal liable for torts committed by an agent? How can a principal reduce his liability for torts committed by an agent? Page 305
- What is an undisclosed principal? Pages 301-302
- How may an agency relationship be terminated? Page 305
Questions for Critical Thinking, page 308
- In the insurance industry, the agent acts primarily for the insurance company,
which is the principal. Typically, the insurance agent also advises the client on the needed coverage and the meaning of the insurance policy. Do you see any potential problems with this situation?
- Is it reasonable to hold principals responsible for contracts formed with only apparent authority? What are the tradeoffs?
- The rise in electronic transactions has resulted in more homes being bought and sold without the use of a real estate agent. As in the travel industry, increasing Internet access and user savvy has empowered property buyers to do their own research and make their own deals. How does foregoing the services of a real estate agent affect recourse if things go bad for the purchaser?
- In the Ethical Considerations box (pages 300-301), it was noted that life insurance brokers may receive a variety of compensation from insurance companies for the business that they direct to them. In the standard disclosure letter given to consumers at the time of purchasing a life insurance policy, there is usually a line stating that some companies may provide compensation to the insurance broker, such as travel incentives or educational opportunities, in addition to commissions. Does disclosure in this manner address the criticism that such travel incentives and educational opportunities amount to a conflict of interest?
- The application of fiduciary duty to those who are brought within its scope is to impose a high standard of morality. Is this to be applauded? Are there any concerns?
- The agency relationship creates considerable risks for the principal. What is the nature of these risks in both contract and tort? How can these risks be managed? Does the agency relationship create risks for the agent? Explain.
Situations for Discussion, page 309
- Kerry is interested in selling her convenience store for approximately $250 000 to $300 000. As Kerry is unfamiliar with the commercial real estate market in Red Deer, she engages a real estate agent, Patrick. The engagement is a standard form listing agreement. Patrick shows the building to a young couple, Paul and Rick, who seem to be quite interested. In fact, they make an offer in writing to purchase the building for $250 000. They also indicate that they need a reply immediately. Patrick calls Kerry but is unable to reach her. Patrick is in a quandary, but
knowing that Paul and Rick’s offer is in Kerry’s range, albeit at the bottom, Patrick accepts the offer on Kerry’s behalf (he signs the written offer). Upon learning of Patrick’s actions, Kerry is quite upset and wonders whether she must sell the building to Paul and Rick. Advise Kerry.
- RCD Ltd. sells household appliances, including washers, dryers, dishwashers,
stoves, and refrigerators. Most of RCD’s customers are developers of apartment buildings and condominium complexes. RCD’s sales representative is Alastair Du. He is authorized to make contracts with buyers, provided the value of each contract does not exceed $100 000. Alastair ignored the restriction on his authority and concluded a contract to sell 50 sets of washers and dryers to BES Developers at a price of $500 000. BES placed its order on RCD’s application form, which states that contracts over $100 000 require written approval of RCD’s vice president of sales, and Alastair on behalf of RCD accepted the order. RCD delivered the 50 sets of washer and dryers, and received payment from BES. Within a month of delivery of the washers and dryers, BES complained that the washers vibrate excessively and
the dryers overheat, and they have caused damage to the apartments in which they were installed. RCD claimed to be protected from any liability for the faulty machines because Alastair had no authority to bind RCD to this contract. Does RCD’s argument constitute a valid legal defence to a claim against RCD by BES? Explain.
- Atlantic Life Ltd. is a life insurance company. The corporation hired Toby Ryan as its representative in Newfoundland. Toby was provided with Atlantic Life business cards and brochures and a company car with the Atlantic Life logo on it. A clause in the contract between the parties provided
The representative will not without the prior approval of the Company incur any liability or debt on behalf of the Company, accept insurance or other risks, revive polices, waive forfeitures, extend the time of payment of any premium or waive premium payment in cash, or make, alter or
discharge any contract and will not make any expenditure on behalf of the Company.
Toby negotiated on behalf of Atlantic Life the sale of a life insurance policy to Sadie Clements, insuring her life for $500 000. Shortly thereafter, Sadie died and her beneficiaries claim benefits under the policy. Atlantic Life refuses to pay on the basis that Toby did not obtain approval of Atlantic for the sale of the insurance policy. Does Atlantic Life have to pay the benefits? Assuming that it does, how could they have prevented this situation? [footnote deleted]
- Imam Daud Malik, a community organizer, had connections and influence with Sudanese politicians and government officials. He was interested in using these connections to promote relations between Islamic states and American Muslims. Through mutual acquaintances, Malik met Khan, the president of State Petroleum Corp. Khan, along with other investors, had incorporated State Petroleum to pursue the acquisition of oil concessions in Sudan. At the request of Khan, Malik assisted State in its efforts. There was no contract in place regarding Malik’s services. A short time later, State entered into an agreement with the government of Sudan for the acquisitions of oil concessions valued at $18 million. Malik claimed compensation from State for his services, but State refused to pay. Is Malik entitled to compensation from State? Explain. If he is entitled, what factors are important in determining the amount of compensation? [footnote deleted]
- Mollie Morrow was a real estate agent working for Commercial Properties. She was approached by Shane Jacobs to find a commercial building in downtown Halifax. She did some investigating and found a suitable property owned by Haldane Properties (HP). She approached the owners about selling and they agreed to pay a commission of 2 percent if she acted as their agent in the sale of the building. After considerable negotiations, the sale was concluded for $6 million. Unknown to HP, Mollie had agreed to pay half of her commission to Shane. When HP learned about this they refused to pay the commission. Mollie argued that HP had received what they wanted out of the deal; she had made a sacrifice by giving up part of her commission; and her sacrifice ensured that the deal went through. In short, her
actions helped, not harmed, HP. Is Mollie entitled to the commission? [footnote deleted]
- Hamilton Utility Inc. appointed Juan Abrams as one of its corporate officers.
Abrams rented cars from Quality Cars Ltd., a car rental business. The rental
agreements named Abrams as renter, and he signed the agreements describing
himself as company secretary of Hamilton Utility. Abrams, however, used the cars for personal purposes and not for company business. Hamilton refused to pay the charges as Abrams had not been given any authority enter contracts on its behalf. Is
Hamilton liable to pay the car rental charges? Explain. What would be the result if Hamilton appointed Abrams to a secretarial position? [footnote deleted]
- Paul, an 88-year-old widower, rented out a house he owned in Toronto to Aaron.
Using a forged power of attorney and posing as Paul’s non-existent grandson, Aaron had the property listed for sale on the Multiple Listing Service. A short time later, Peggy entered into an Agreement of Purchase and Sale for the property. The purchase price was $450 000. The Agreement stated that the seller was Paul and that Aaron was acting pursuant to a power of attorney. Aaron’s lawyer, Carter, who was unaware that the power of attorney was a forgery, sent a copy of it to Peggy’s lawyer. Peggy financed most of the purchase price through a mortgage with HSBC
that was title insured by Stewart Title Guaranty Company. On closing, HSBC
advanced the mortgage money to Sally, the lawyer acting on behalf of both Peggy and HSBC. She deposited the cheque into her trust account and drew a cheque in favour of Paul for $429 861.06, the balance of the purchase price. Aaron forged Paul’s signature, deposited the cheque into an account at the Korean Exchange Bank of Canada, and then disappeared with the money. The fraud in this real estate transaction was made possible by a bogus power of attorney. Who should bear the loss in this case—Paul, Peggy, Carter, Sally, HSBC, Stewart Title, or the Korean Exchange Bank of Canada? How could this fraud have been prevented? [footnote deleted]
- Ty Sharim has been employed as an agent for Farley’s Game and Fishing Lodge Inc. for the past 10 years. Farley’s runs an exclusive hunting and fishing camp in northern Ontario. Ty’s contractual duties include advertising the camp and soliciting customers at fish and gun shows and conventions in North America and elsewhere. One weekend, while on a fishing trip with his family, Ty came across a small fishing camp that was for sale. As Ty has always dreamed of owning and operating his own business, he is thinking of putting in an offer on the camp. Is Ty entitled to put in an offer to purchase the camp or must he inform Farley’s of the camp? Would you answer differ if Ty terminated his relationship with Farley’s before offering to buy the camp?
Chapter 14: Business Forms and Arrangements ……………………………………………………. 472
Questions for Review, Page 339
- Define sole proprietorship, partnership, and corporation. Pages 312, 315, 327
- What are the advantages and disadvantages of a sole proprietorship? Page 315
- How is a sole proprietorship created? Page 314
- What are the advantages and disadvantages of a partnership? Page 324
- How can a partnership come into existence? Pages 318-319
- Does the sharing of profits result in the creation of a partnership? Explain. Pages 316-317
- How can a partnership come to an end? Page 323
- How can the risks of the partnership form be managed? Pages 324-325
- What is the difference between a general and limited partner? Page 325
- Explain the difference between a limited partnership and limited liability partnership. Pages 325-326
- What are the advantages and disadvantages of the corporate form? Page 330
- How is a corporation created? Pages 329-330
- What is the difference between a business form and a business arrangement? Page 331
- What is the basis of a franchise? What is the relationship between parties to a franchise agreement? Pages 331-332
- How does franchise legislation change the relationship between a franchiser and a franchisee? Pages 332-333
- Is a joint venture a partnership? Explain. Page 334
- What is the difference between a joint venture and a strategic alliance? Page 335
- Is a distributor an agent? Explain. Pages 335-336
Questions for Critical Thinking, Page 339
- Many people think of franchising as a quick and easy way to start their own
businesses. Indeed, some buyers have experienced almost instant success, but far more have experienced dismal failure. It is estimated that about 20 percent of all franchises fail within the first three to five years. The key to success is often the choice of franchise and the franchise package or contractual arrangement. What should the franchise contract contain? What issues should it address?
- Many of Canada’s high profile franchise operations—Midas, Shoppers Drug Mart, General Motors, Tim Hortons, and Quiznos, for example—have been involved in litigation. Why are franchising companies a magnet for litigation, particularly class action litigation? Do you think that franchise legislation tends to facilitate or hinder lawsuits by franchisees against franchisors? [footnote deleted]
- The limited liability partnership is a response to concerns about professionals’
exposure to liability for their partners’ malpractice. What is the nature of the
liability created by the partnership form? How does the creation of a LLP address this liability concern? Is it appropriate that accountants and lawyers, for example, enjoy limited liability? Is there a downside for a law or accounting firm to converting to an LLP?
- What are the circumstances in which a partnership may be found to exist? What steps can be taken to avoid a finding of partnership? How can the consequences of being found a partner be minimized?
- In Shelanu Inc v Print Three, the Ontario Court of Appeal held that franchisors owe a duty of good faith to franchisees. What factors led the court to this conclusion? In what other contractual relationships might one party owe the other party a duty of good faith? What does “good faith” mean? How can franchisors comply with good faith obligations?
- The three basic business forms are sole proprietorship, partnership, and
corporation. How is each of these formed? How is each owned? How does each form allocate the risk associated with doing business?
Situations for Discussion, Page 340
- Michael Wright, Kyle Wright, and William Wright are farmers. Michael and Kyle are brothers, and William is their father. All three farmers have cattle ranches, and William has a grain operation. Each farmer keeps his own books of account, prepares his own income tax return, and maintains his own bank account. With regard to the cattle operations, each farmer has his own herd of cattle, which he individually markets. The cattle are fed and pastured together without regard to the source of the feed and the farmers share machinery and labour. Some of the land is registered to them individually and some is registered in the names of all three farmers. With regard to the grain operations, William is responsible for all aspects,
including crop rotation, seed selection, and fertilizer purchases. Michael and Kyle are not involved in the grain cultivation and do not receive any gross or net profit from the grain operation. They are, however, allowed to share in the crops by way of cattle feed. Are Michael, Kyle, and William partners? What factors do the courts consider in determining whether a partnership exists? What are the consequences of a finding that there is a partnership relationship? [footnote deleted]
- Edie, Alma, and Tim established a restaurant called EATs. Edie, a retired teacher, invested $20 000 in the venture, and Alma and Tim each invested $10 000. Edie, Alma, and Tim do not have a formal agreement concerning the allocation of responsibilities, but they each take turns doing the cooking. The serving and cleanup tasks are done by staff. One day, while Edie was doing the cooking, Juan got food poisoning from the food. Juan intends to sue EATs, Edie, Alma, and Tim for damages of $100 000. If Juan is successful, how will the damages be allocated among the parties? If the restaurant were incorporated under Eats Inc. and Edie owned 50 percent of the shares, Alma owned 25 percent, and Tim owned 25 percent, how would the damages be allocated? What do these two situations illustrate about risk?
- Anson is a partner in the accounting firm Morris, Benton. According to the
partnership agreement, Anson is entitled to 25 percent of the profits of the firm.
Anson’s partners recently contracted for the supply of a computer system at a cost of $50 000 for use in the firm’s business. Anson strongly objected to the purchase of the system and voted against acquiring it, but the contract was approved by a majority vote of the partners, and his objections were ignored. Anson is so upset, he is thinking about resigning from the firm. Could the computer supplier hold Anson personally liable for any of the debt? If so, is there anything that Anson could do to avoid liability?
- Review Strother v 3464920 Canada Inc on pages 322-323. At the time of the dispute between Monarch, Strother, and Davis & Company, Davis operated as a general partnership. It only became possible for a British Columbia law firm to become a limited liability partnership (LLP) in 2005. At that time Davis, along with many other B.C. firms, became a LLP. Assume that Davis was an LLP at the time of the dispute with Monarch. How would being a member of an LLP affect Strother’s personal liability to Monarch? How would Davis being an LLP affect the liability of the other partners? How do you think the LLP structure affects the relationship between a law firm and its clients? How do you think the LLP structure affects the relationship between lawyers within a law firm?
- Jody Ingalls is a recent university graduate with a BSc in kinesiology. As she was having difficulty finding a job, Jody decided that she could create her own job by opening a fitness club. As luck would have it, she saw an advertisement in a Halifax newspaper featuring franchise opportunities in the fitness industry. Jody responded to the ad and the franchise owner showed her the financial statements for a “Fit for Life” fitness franchise in a Halifax suburb. The income statements indicated that the franchise had made $100 000 per year for the past several years. Jody was extremely excited and agreed to lease it for $50 000 per year for a five-year period. She signed the contract and started carrying on the business. Jody worked 12-hour days for a year but was not able to make a profit, and now she wants out of her
contract. Can Jody get out of the agreement? Explain. Would your answer be different if the franchise was located in New Brunswick? Explain. What are the legal risks associated with “purchasing” a franchise? How can the risks be managed?
- Ragini and Rajiv were co-owners of a number of properties located in the suburbs of Surrey. They had acquired the properties for resale and planned to subdivide and sell them for a profit over the next few years. One property, known as “the Corner” was too small to meet the legal requirements for subdivision. Ragini and Rajiv hoped that they would be able to acquire adjacent property so that their subdivision plans could proceed. Rajiv did all of the work in the investigation of the surrounding properties while Ragini stayed in the background. She had recently been downsized out of her job and spent most of her time looking for alternative employment. Rajiv, through his investigative skills, learned that Ming, the owner of an adjacent property, would be willing to sell his property for the right price. Rajiv, also knew that Ragini, because of her job loss, would not be able to raise her share of the purchase price. He, therefore, purchased Ming’s property on his own behalf. Shortly thereafter, he offered to buy out Ragini’s interest in “the Corner” for $15 000 more than the fair market value. Ragini accepted the offer. Rajiv consolidated “the Corner” and Ming’s former property, subdivided them, and sold them for a $250 000 profit. When Ragini learned of Rajiv’s purchase of Ming’s property and the sale of the subdivided lots, she was very upset. Rajiv simply pointed out that she did not have the money or the means to share in the purchase of
Ming’s property, and he had paid a premium price for her interest in “the Corner.” Besides, he argued, it was his investigative skills and hard work, not hers, that led to the profit on the subdivision sale. What is the nature of the relationship between Ragini and Rajiv? Does Ragini have any legal liability in these circumstances? Explain.
- Thomas, a young entrepreneur, started a construction business. Ari, who owned and operated an ethnic radio station, agreed to run some advertisements for him. Unfortunately, Thomas was unable to pay Ari for the services. In the hopes of making the business profitable so that he could get payment under the broadcasting contract, Ari, without remuneration, assisted Thomas in his business. In fact, Ari
signed a contract with Lopez on behalf of Thomas for plumbing and heating supplies. When payment for the supplies was not forthcoming, Lopez sued Ari claiming that Ari was a partner of Thomas and was therefore responsible for the debt. Ari claimed that when he signed he was acting as Thomas’ agent. What difference does it make whether Ari is considered to be Thomas’ agent or his partner? What factors are important in determining the nature of a relationship between individuals? [footnote deleted]
- In 2038724 Ontario Ltd v Quizno’s Canada Restaurant Corp, the franchisees
brought a national class action against Quiznos and its designated supplier, Gordon Food Services, over alleged overcharging on supplies. The defendants opposed certification primarily on the grounds that damages were not common among franchisees and would have to be established individually. Despite the defendants’ arguments and a “class action waiver” clause in the franchise agreement purporting to prevent the franchisees from initiating or being part of any action, the Ontario Court of Appeal affirmed the certification of the class action. In certifying the class action lawsuit against the franchisor, the court strongly endorsed class actions as a
means of resolving franchise disputes. What is it about franchising disputes that makes them suitable for resolution by class action? Why do you think the “class action waiver” failed to protect the franchisors from class action litigation?
Chapter 15: The Corporate Form: Organizational Matters …………………………………. 523
Questions for Review, page 362
- Who are the corporation’s internal stakeholders? Who are the corporation’s external stakeholders? Page 344
- When should a business incorporate federally, and when should it incorporate provincially? Pages 345-346
- What basic rights must attach to at least one class of shares? Page 346
- A class of shares may include a combination of various rights and privileges. Name three examples of typical rights that may attach to a class of shares. Pages 346-347
- What is the difference between a widely held and a closely held corporation? Page 347
- How can a corporation qualify as a private corporation in Ontario? What are the advantages of a corporation qualifying as a private corporation? Page 347
- Are shares freely transferable? Explain. Page 350
- What are the basic requirements for a corporate name? Page 350
- What is a NUANS Report, and what is its purpose? Page 351
- What is a shelf company, and what is its purpose? Page 352
- Describe the process for incorporating a company. Page 352
- Compare shares with bonds. Which is the more advantageous method of raising money? Page 355
- What are the objectives of securities legislation? How are the objectives achieved? Page 356
- All securities acts have been amended to provide a new statutory right of action for misrepresentations contained in secondary market disclosures. What is the difference between the primary market and the secondary market for securities? What is the new statutory right of action for purchasers in the secondary market? Explain. Pages 357-358
- What is meant by insider trading? Insider? Tippee? Page 358
- Is all insider trading prohibited? Explain. Page 358
- What is a prospectus? What is its purpose? Page 357
Questions for Critical Thinking, page 362
- Salomon v Salomon stands for the proposition that the corporation has a separate existence from its shareholders. This means that creditors of a corporation do not have recourse against the shareholders’ assets. Is this fair? Is it fair that creditors of a sole proprietorship can go after the sole proprietor’s personal assets? What is the justification for the difference in treatment?
- As noted on pages 357-358, all provinces have adopted legislation that provides a right of action for investors in the secondary market who suffer damages from misleading disclosures. It is expected that these provisions will greatly facilitate class actions. There are, however, some significant differences in the various regimes with respect to class actions. For example, Ontario’s legislation provides that the winning party, including the winning party in a class action, is entitled to costs. There is no equivalent provision in the B.C. legislation and, under the B.C. Class Proceedings Act, RSBC 1996, c 50 costs generally cannot be awarded against the losing party in a class action. Which rule do you prefer—loser pays costs or loser does not pay costs in class actions? What is the likely effect on litigation of having a costs distinction?
- Dual-class share structures are prevalent in Canada. There are roughly 80
companies listed on the Toronto Stock Exchange that use some form of dual-class, multiple-voting share structure. Included in this group are Bombardier Inc., Canadian Tire Corp., Power Corp., Rogers Communications Inc., Shaw Communications Inc., Tech Resources Ltd., and Telus Corp. Why do you think dual-class structures have emerged in Canada? [footnote deleted]
- The Internet has had a tremendous impact on the securities industry—it has
spawned online brokerages, has emerged as the primary source of information for investors, and is the means by which businesses can distribute prospectuses, financial statements, news releases, and the like. It also poses considerable challenges as its global, invisible nature increases the likelihood of fraud. Because scam artists can anonymously and cheaply communicate with a vast number of people, they can readily spread rumours that result in the manipulation of market prices, trade in securities without being registered to do so, and distribute securities in nonexistent entities. What is the rationale for regulating trade in securities? Do you think the rationale changes when the commercial activity is conducted over the Internet?
- The Supreme Court of Canada ruled that the federal government’s draft legislation for the creation of a single national securities regulatory body was unconstitutional. One of the strongest arguments for the establishment of a single national securities regulatory is the need for effective enforcement of securities market conduct. How does a single national body, as opposed to 13 provincial and territorial bodies, improve enforcement? [footnote deleted]
- The acquittal of John Felderhof, the former chief geologist for Bre-X Minerals, and the settlement with Andrew Rankin, the former RBC Dominion Securities managing director (see page 359), represent serious setbacks for Canada’s largest securities regulator and raise important questions about securities regulation in Canada. Based on the Felderhof and Rankin cases, what are some of the difficulties with securities regulation in Canada?
Situations for Discussion, page 363
- In Silver v IMAX Corp, shareholders in a proposed class action against IMAX
Corporation and certain directors and officers are seeking $500 million in damages and an additional $100 million in punitives. The shareholders allege that IMAX misrepresented its 2005 earnings revenue in press releases and other disclosures for the period 9 March 2006 to 9 August 2006. It is alleged that 2005 revenues were overstated because IMAX recognized revenues from theatres that had yet to open and that this overstatement artificially inflated the trading price of IMAX securities. On 9 March, IMAX shares traded on the Toronto Stock Exchange (TSX) at $11.94. On 9 August, IMAX issued a press release stating that the U.S. Securities and Exchange Commission had made an informal inquiry about the company’s timing of revenue recognition. On 10 August, the price of IMAX shares dropped to $6.44 on the TSX. What will the plaintiffs have to prove to be successful in the proposed class action lawsuit? How do the secondary market liability amendments in
securities legislation assist the plaintiffs? If the plaintiffs are successful, how will damages be calculated? [footnotes deleted]
- Steering Clear Ltd. is a manufacturer of an expensive automatic helmsman, which is used to navigate ocean cruisers. Perry Jones ordered such a helmsman on behalf of a company called Cruisin’ Ltd. The helmsman was supplied, but Cruisin’ Ltd. did not pay its account. Because of this delinquency, Steering Clear Ltd. decided to investigate the background of Cruisin’ Ltd. and discovered that it has a grand total
of two issued shares—one held by Perry and the other by his wife. Perry has advised Steering Clear Ltd. that the debtor company has only $5 in the bank and may have to go out of business soon. Steering Clear wants to sue Perry personally for the debt.
Will Steering Clear be successful? On what basis? What is the largest obstacle
facing Steering Clear’s potential action against Perry? What should Steering Clear have done differently from a business perspective? [footnotes deleted]s
- Sophie Smith has an opportunity to open a designer shoe store in a new mall. She believes that the shoe store will be quite lucrative because of the mall’s location adjacent to a condominium development catering to young professionals. To take advantage of favourable tax laws, Sophie has decided to incorporate a company, and to save money she is going to do it herself. She knows that she will need a name for her corporation. Some of names that she is considering are Shoe Store Inc., Princess Sophie’s Shoes Ltd., DownTown Shoes Inc, Sophie Smith Ltd., Nu Shuz Inc., Sophie Smith Clothing and Apparel Inc., and simply, Sophie’s Shoes. Are there any problems with the names that Sophie is considering for her corporation? Explain. Assume that Sophie has XZONIC Shoes Inc. approved as the corporation’s name. What rights does registration of a corporate name give Sophie?
- Dr. Jody Rice set up a veterinary hospital in Annapolis Royal, Nova Scotia. She
registered the name Annapolis Royal Veterinary Hospital and received a certificate of registration, verifying approval of the name. Several months later, Dr. Rice received a letter from the registry office directing her to change her business’s name because of a complaint from Dr. Mike McGowan of Annapolis Animal Hospital Inc. Is Dr. Rice required to change the name of her business? Explain. [footnote deleted]
- Globex Foreign Exchange Corporation (Globex) is an Edmonton-based currency
trader. It entered into a contract with 3077860 Nova Scotia Limited (Numberco) for the purchase by Numberco of nearly 1.2 million British pounds. Carl Launt is the sole director and shareholder of Numberco. He funded Numberco with a deposit of $124 676. Canadian dollars to effect the trade with Globex. Numberco failed to pay for the rest of the funds purchased and Globex incurred a loss of nearly $90 000
when it resold the currency. Globex commenced an action for breach of contract
against Globex and discovered that it was a defunct company with no assets. Is there any legal basis for holding Launt responsible for the unpaid debt of Numberco owed to Globex? Could Globex successfully argue that Numberco was Launt’s agent?
How could Globex have better protected itself in this situation? [footnote deleted]
- In 2010, Frank Stronach relinquished control of auto parts giant Magna
International. Since 1978 Magna has had a dual-class, multiple-vote share structure. Through this structure, Stronach was able to control the company despite owning just 0.6 percent of its 113 million shares because his 720 000 Class B share each carried 300 votes, while the remaining 112 million Class A shares had one vote each. In return for cancelling the Class B shares, the Stronach family trust received US$300 million in cash and 9 million new Class A shares. In addition, Stronach received a four-year consulting contract and a 27 percent stake in Magna’s electric car business. It is estimated that the deal was worth $1 billion—an 1800 percent premium on the value of Stronach’s shares. Seventy-five percent of the Class A shareholders voted for the deal, and, subsequently, the Ontario Superior Court approved the deal. Market reaction to the deal was also favourable—on the day following the announcement of the deal, Magna shares closed up 14 percent on the Toronto Stock Exchange. What are the problems with dual-class share structures? What are the advantages? Do you think the deal to eliminate the dual-class structure at Magna was fair? [footnote deleted]
- In June 2003, Sam Waksal, the co-founder and former CEO of ImClone was sentenced to seven years in prison and fined $4 million on charges of insider trading. He was found guilty of leaking confidential information to family and friends in the days leading up the release of a federal ruling that rejected the company’s Erbitux cancer drug. Among the friends said to have been tipped was Martha Stewart. She sold nearly 4000 shares on ImClone on the day before the
regulator’s announcement. The sale saved her about US$51 000. Stewart pleaded not guilty to charges of insider trading, conspiracy, obstruction of justice, and making false statements to investigators. She argued that she had an agreement with her stockbroker to sell the shares if the price went below $60. The prosecution said Stewart had misled investigators by saying she did not recall if her stockbroker called on the day she sold her shares. The presiding judge dropped the insider trading charge and a jury convicted her of conspiracy, obstruction of justice, and making false statements to investigators. Stewart was sentenced to five months in prison, five months home arrest, and two years’ probation and fined $30 000. In January 2006, a federal appeals court in New York upheld her conviction. Was Martha Stewart an insider in relation to ImClone? What are the problems with insider trading? Should insiders be prohibited from trading in shares? Why is difficult to prove improper insider trading?
- Alimentation Couche-Tard Inc. is the Canadian leader in the convenience store
industry. At 8:30 a.m. on 6 October 2003, Couche-Tard publicly announced a deal to purchase the 2013-store Circle K chain. Completion of the deal would make Couche-Tard the fourth-largest convenience store operators in North America. When trading opened on the Toronto Stock Exchange at 9:30 a.m., the company’s class B stock was up 40 cents at $17.50. The price steadily gained all day to close at $21, for a gain of $3.90. Within five minutes of the opening, Roger Longré, a Couche-Tard director bought 1500 shares and by 10:30 he bought a further 2500. At the end of the day, he had a one-day gain, on paper, of $11 372. Did Longré breach any legal requirements? Did he breach any ethical requirements? Should insiders be prohibited from trading before earning announcements and after major announcements? Should insiders be required to clear all proposed trades in the company’s securities with a designated in-house trading monitor? [footnote deleted]
Chapter 16: The Corporate Form: Operational Matters ……………………………………….. 565
Questions for Review, page 395
- How can a corporation be liable in tort law? Explain. Pages 367-368
- How does a corporation enter a contract? Explain. Page 368
- How is the criminal liability of a corporation determined? Page 369
- When is a director personally liable for committing a tort? Pages 367-368
- To whom do directors owe duties? Pages 374-378
- What is a self-dealing contract? Page 374
- What are the duties of directors and officers? Pages 374-378
- Do directors owe duties to the corporation’s creditors? Explain. Pages 390-392
- Is a director liable for a corporation’s contracts? Explain. Page 380
- How may a director avoid personal liability when carrying out her corporate duties? Page 382
- What is meant by the term “lifting the corporate veil”? When will courts “lift the corporate veil”? Page 383
- What three main rights do shareholders have? Pages 384
- What rights to dividends do shareholders have? Page 386
- When is the dissent and appraisal remedy appropriate? Page 387
- What is the difference between a derivative action and an oppression action? Pages 387-388
- When is a shareholders’ agreement appropriate? What issues should a shareholders’ agreement address? Page 390
- What protection do creditors have from shareholders stripping the corporation of its assets? Page 391
- How is a corporation terminated? Page 392
Questions for Critical Thinking, page 395
- What are the arguments for prosecuting, convicting, and punishing corporations? Does holding corporations criminally responsible serve any social purpose? What are the arguments against prosecuting, convicting, and punishing corporations?
- The Canadian Democracy and Corporate Accountability Commission, an
independent body designed to investigate corporate influence has recommended that corporation laws should be amended to allow directors, at their discretion, to take into consideration the effect of their actions on the corporation’s employees, customers, suppliers, and creditors, as well as the effects of their actions on the community in which the corporation resides. How does the Supreme Court of Canada’s decision in BCE account for stakeholders’ interests? What is the problem with directors owing duties to all stakeholders? [footnote deleted]
- There are literally dozens of statutes that impose personal liability on directors and, in many cases, officers. Directors and officers face liability, for example, under securities, environmental, employment, tax and bankruptcy, and insolvency legislation. Why do you think this has occurred? What are the problems associated with holding directors to higher standards? How can directors protect themselves in an increasingly litigious environment?
- In BCE, the Supreme Court of Canada made it clear that the decisions of directors are to be given great weight. Provided directors follow the proper process and have regard for the interests of all stakeholders affected by their decisions, their balancing of conflicting stakeholder interests in determining the best interests of the corporation will be treated as a matter of business judgment not to be overturned
by the courts unless it falls outside the range of reasonableness. What is meant by business judgment? The Supreme Court of Canada confirms the importance of process in directors’ decision making. What are the key elements of that process? In other words, what steps can directors take to lessen the chances of a court secondguessing their decisions?
- Although not required by securities or corporate law, a number of Canadian
companies have held shareholder advisory votes on executive compensation (a say
on pay). Do you think shareholders should have a say on pay? What are the issues with shareholders deciding executive pay?
- In 2010, Syncrude Canada Ltd. received the largest fine in Alberta history for the violation of environmental legislation that resulted in the death of 1606 birds (see page 371). Prosecutors hailed the $3-million fine as precedent-setting and sending a clear message that the province will react to protect the environment. Critics of the fine, however, complained that the fine was a mere “drop in the barrel” for Syncrude and would not solve the problem of toxic tailings ponds and dead birds. They pointed out that the fine represents about a half a day’s profit for the oil sands company. Do you agree with the position of the prosecutors or the critics? Is fining corporations the best way to deal with environmental transgressions? Why or why not? [footnote deleted]
Situations for Discussion, page 396
- Jerome Neeson is a shareholder in Gourmet Chefs Inc., a company that owns and operates a test kitchen in a large metropolitan area. The company is involved in a number of businesses, including catering at high-end business functions, giving cooking lessons, and developing new recipes. Gourmet Chefs recently added to its staff a top chef who was trained at Le Cordon Bleu cooking school in France.
Jerome anticipated that the company’s profits would increase in the future, and he was very happy with the direction that the company was moving. He was therefore very surprised to receive notice of a shareholders’ meeting, where the directors proposed to sell the company’s test kitchen. Jerome is opposed to the sale and does not want to be involved with Gourmet Chefs if the sale is completed. Advise Jerome.
- Alicia, the president and CEO of a computer software company, broke into the
offices of a competitor late one night to see what kinds of products they were in the process of designing. She is caught in the act by the police, who brought to her attention the following provision from the Criminal Code:
s 348 (1) Every one who
breaks and enters a place with intent to commit an indictable offence therein … is guilty of an offence
Has Alicia’s computer software company committed the crime of break and enter?
- Lennie purchased a quantity of pressure-treated lumber from GoodWood Building Ltd. (GoodWood) last April. Lennie used the wood to build a deck around the front of his house. By the fall, however, he found that the wood was starting to rot, and it appeared that the stain used to treat the wood was peeling away. When Lennie tried to contact GoodWood, he discovered that their store had closed and the company was insolvent. Lennie managed to locate the salesman who sold him the wood, and he agreed that the wood appeared to be defective. He also told Lennie that the wood had been imported from Thailand so a lawsuit against the manufacturer would probably be long and expensive. He suggested that Lennie bring an action against the directors and shareholders of GoodWood. The shareholders and directors are Jim, Tim, and Tom. What are Lennie’s chances of success against the shareholders and directors? Does your answer change if GoodWood is an unincorporated business in which Tim, Jim, and Tom are the owners and managers? What are Lennie’s chances of success against them in this circumstance?
- The board of directors of Gismos & Widgets Inc., a manufacturer of computer components, has embraced the “green shift.” It takes great pride in its decisions that have benefited both the corporation and the environment. Examples of their environmentally friendly decisions include replacing all light bulbs with lower wattage bulbs, replacing old delivery vehicles with low-emission vehicles, installing solar panels on the rooftop, and instituting a recycling program for obsolete computers. Recently, a member of the board suggested that Gismos & Widgets purchase a large tract of land and have it preserved as a sanctuary for migrating birds. Other members of the board are in agreement, but a group of shareholder activists have gotten wind of the idea and have threatened to sue the directors. If the board approves the purchase, on what potential basis could the shareholders sue? Are they likely to be successful? Explain.
- Ryan and Sean are shareholders and directors of Springfield Meadows Ltd.
(Springfield), a company that has developed land for a large trailer park.
Springfield has 20 other shareholders. Ryan and Sean are approached by Louise, who wants to create a company whose business it will be to lease trailers. Ryan and Sean are interested in participating as directors and shareholders in this new company, since this would be a good way to fill up some of the vacant sites at Springfield’s trailer park. The new company is a big success, and Sean and Ryan
receive impressively high dividends on a regular basis. Eventually, the other
shareholders in Springfield learn about Sean and Ryan’s new company and sue them for breach of their fiduciary duty. The shareholders contend that Sean and Ryan should have developed the opportunity to get into the trailer-leasing business for the benefit of Springfield and should not have taken that opportunity for themselves. Are Sean and Ryan in breach of their duty to act in the best interest of Springfield?
- Peter sold his barbershop business to Andy for $25 000. As part of the agreement of purchase and sale, Peter agreed to a restrictive covenant that prohibited him from providing barbering services in an area within a 10-mile radius of his former shop for a period of one year. Within a month of the sale, Peter had incorporated a company and commenced cutting hair in violation of the restrictive covenant. Is there anything that Andy can do about this situation? Should he do anything? [footnote deleted]
- In Allen v Aspen Group Resources Corporation, a class action lawsuit was certified against a Yukon oil-and-gas firm for alleged misrepresentations and omissions in a takeover circular. Included among the defendants are WeirFoulds LLP, a prominent Toronto-based law firm that acted on behalf of Aspen and advised it in connection with the takeover bid, and one of the firm’s partners, Wayne Egan. Egan acted as legal counsel for Aspen and had been a member of its board of directors. The plaintiffs argue that Egan’s liability for both for his work as a lawyer and in his capacity as a director extends to WeirFoulds. What are the problems with professionals, such as lawyers and accountants, serving as directors for corporate clients? What are the advantages for the professional? What are the advantages for the corporation?
- Liquor Barn Income Fund, owner of Liquor Depot, is suing its former chief
executive officer (CEO) and chief operating officer (COO) for allegedly buying
liquor stores through intermediary companies and reselling them to Liquor Barn. It is alleged that the defendants, between late 2006 and May 2007, bought nine liquor stores on Vancouver Island and one in Alberta and sold them to Liquor Barn at inflated prices. For example, court records show that the Days Inn liquor store in Victoria was bought for $720 000 and resold to Liquor Barn for $2.4 million, and the Grove Liquor Shoppe in Spruce Grove was bought for $948 617 and resold for $1.6 million. Assume the allegations are proved to be true. What duties have the CEO and COO violated? What should they have done differently? [footnote deleted]
Chapter 17: Personal Property ……………………………………………………………………………. 614
Questions for Review, page 420
- How is personal property different from real property? Page 401
- What are some examples of personal property? Page 401
- How is tangible property different from intangible property? Page 401
- Who bears the risk of loss to personal property? Page 403
- How is ownership of personal property acquired? Page 401
- What can the owner of personal property do with it? Page 403
- When is the owner of personal property not in possession of it? Page 405
- What is a bailment? Page 405
- What are some examples of bailments? Pages 405
- How do commercial bailments and consumer bailments differ? Page 405
- How can a bailee for value collect fees? Page 407
- What is the liability of a bailee for damage to the goods? Page 408
- How can a bailee limit the liability for damage to the goods? Page 408
- When are contractual limits on damages not enforced? Page 411
- What are the major differences among the types of bailment for reward? Page 417
- What is the difference between an operating lease and a financing lease? Page 412
- What role does insurance play in bailment? Page 417
- What risks relate to personal property? Page 417
Questions for Critical Thinking, page 420
- Personal property in the form of chattels is portable. Proving and tracking
ownership and possession are challenging. Should we establish a comprehensive system of registering all chattels as we do for motor vehicles? How would such a system help in verifying and tracking? Would the benefits justify the expense?
- Intangible personal property includes legal rights, which may be contained in legal documents, such as a lease or a loan agreement. Are these rights as difficult to control as chattels? Should those documents be available for examination in a public registry?
- Legislation governing innkeepers’ liability for their guests’ property was developed to deal with an environment when guests were to a large extent at the mercy of innkeepers with regard to the safety of their property. Is this the case today where most hotels are professionally owned and managed? Are guests still at risk?
- The standard of care in a bailment depends on the type of bailment and the
particular circumstances of the transaction. Therefore, the obligations of the bailor and bailee may be difficult to define in a contract in advance of a dispute. Would legislation be an easier way to set the standard?
- The self-storage industry is growing rapidly as business and individuals need extra space to store their excess property. Does the rental of a storage locker fit the definition of bailment? Are there specific issues in this type of transaction that require a different set of rules from those in place for other bailment-type situations?
- Commercial bailees generally try to minimize their liability in a standard form contract. They justify these low limits as a means of controlling risk and keeping their prices competitive. Is there a market opportunity for more generous liability terms? For example, could a storage business increase market share by accepting a greater risk of liability than its competitors and charging a higher price?
Situations for Discussion, page 421
- Clancy Cars Ltd. engaged Railco Ltd. to transport several motor vehicles from
Montreal to Halifax. The vehicles were to be delivered to Clancy’s on Wednesday, but they were delayed. On Saturday, an employee of Railco informed Clancy’s that the vehicles had arrived at Railco’s facilities in Halifax and would be delivered to Clancy’s on Monday. Over the weekend, a violent wind and rain storm hit Halifax. Although the vehicles were parked in an area for safekeeping, they were severely damaged in the storm. When Clancy’s claimed damages, Railco argued that the
storm was so severe it was an “act of God.” Who is responsible for the damage to the vehicles? [footnote deleted]
- Black was looking to buy a quality used luxury vehicle. He found a 2010 Audi at
Dexter’s Audi that met his needs. He examined the car on several occasions and
took it for a couple of test drives. Discussions with Dexter’s salesperson White were productive and Black and White were close to making a deal. Black wanted to have the car inspected by an expert mechanic before finally agreeing to buy it, so he asked to have the car over a long weekend so he could drive it further and complete the inspection. White agreed, but required Black to sign a draft agreement and pay a deposit on the purchase price. Black signed the document “subject to satisfactory inspection.” Black took the car, but before the inspection could be done, he encountered a deer on the highway. He swerved to avoid the deer, lost control, went off the road, and hit a tree at high speed. Black was not injured but the car was demolished. Was this a bailment situation? Who is responsible for the vehicle? [footnote deleted]
- Ying leased a machine to haul large logs in her lumbering business. The lease
required Ying to keep the machine in good repair and fully insured, and to return it at the end of the lease in its original condition, subject to “normal wear and tear.” The machine never worked very well. Ying ran up large repair bills and began to suspect the machine was not heavy enough for the needs of her business. When she contacted the leasing company, she was reminded that the lessor had made no promises about performance of the equipment. Ying is thinking about stopping her lease payments and insurance premiums and leasing a heavier machine from another dealer. She needs that heavier machine to maintain profitable levels of production. What factors should she consider? What would you advise her to do? Would your opinion be different if Ying had instead leased a truck for her personal use?
- Ying took her logging machine in for repairs. A week later she got a call from the shop to tell her that the machine was fixed and the bill was $4500. Ying had left strict instructions with the shop that she must approve all work before it was done. What rules of contract determine whether Ying is obligated to pay the bill? If she refuses, what are the shop’s remedies? What safeguards and risks are involved in those remedies for Ying? Would the result be different for a consumer contract? [footnote deleted]
- Roach owned a truck with a large crane attached. Roach took the truck to Vern’s
Auto to have the crane removed with the intention of mounting it on another vehicle in the future. Vern’s allowed Roach to leave the crane in its yard, assuring him it would be safe. A few months later, Roach decided to sell the crane. When he went to get the crane, it was gone. Vern’s had no idea what had happened to it, and because they had charged nothing for storing the crane, it was not interested in finding out. Is Vern’s responsible for the missing crane? What are the determining factors? What information is missing? What steps should Roach and Vern’s have taken to safeguard the crane? [footnote deleted]
- Ace Towing leased a truck from City Motors. TGI was anxious to sell Ace a new
truck and offered to buy out the lease from City Motors if Ace would buy a new
truck from TGI. The deal was completed and the leased truck was delivered to TGI
without any examination of its condition. TGI discovered that the truck’s engine required significant repairs. Who is responsible to pay for the engine repairs? [footnote deleted]
- Horst is a collector of hockey memorabilia. He is particularly interested in hockey sticks that have been autographed by well-known players in the National Hockey League. When Horst checked on eBay, he found many autographed hockey sticks for sale, including several signed by his favourite players. He is prepared to pay the going rate, but wants to be sure that the autographs are authentic and that the current owners acquired the sticks legitimately. Horst has heard of organizations that purport to authenticate autographs, but has also heard of many “fake”
autographs that were authenticated. What legal issues should Horst consider? How should he manage the risks facing him?
- Canfor hired B.C. Rail to transport wood pulp from the interior of British
Columbia to a shipping terminal for eventual delivery to a customer in Scotland. The contract between Canfor and B.C. Rail specified that the railcars would be clean and the pulp delivered free from contamination. Canfor insisted on wood- lined boxcars and also routinely inspected and swept out the cars before loading bales of pulp. When the pulp arrived in Scotland, it was contaminated with wood splinters and rejected by the customer. Canfor had to compensate its customer and pay for transporting the pulp back to B.C. Can Canfor recover its losses from B.C. Rail? Explain. [footnote deleted]
Chapter 18: Intellectual Property ………………………………………………………………………… 641
Questions for Review, page 454
- What is intellectual property? Page 424
- What are the major forms of intellectual property rights? Page 425
- What is a patent? Give an example. Pages 425-426
- Are life forms patentable in Canada? Explain. Pages 426-427
- Are computer programs patentable in Canada? Explain. Page 427
- What are the three requirements for patentability? Pages 428-429
- What is the difference between specifications and claims in a patent application? Page 430
- How long does patent protection last? Page 430
- What is an industrial design? What are the requirements for industrial design registration? How long does an industrial registration last? Pages 432-433
- What is the advantage of marking an industrial design to indicate that the design is registered? Page 433
- What is the purpose of a trademark? Page 433
- What is the relationship between trademarks and trade names? Page 434
- Must trademarks be registered to receive legal protection? Explain. Pages 434-435
- What is meant by “cyber-squatting?” Page 435
- Who owns the copyright in a book? How long does copyright last? Page 441
. 16. What are the moral rights of an author? Give an example. Page 443
- One of the exemptions under the Copyright Act is fair dealing. What is fair dealing? Page 444
- What are the requirements for the protection of confidential business information? Pages 445-446
- What is the difference between an intellectual property assignment and a licence? Page 448
- Give an example of how intellectual property rights may be lost if they are not properly used. Page 449
- How is injunctive relief used in intellectual property disputes? Pages 450-451
- What are the penalties for copyright infringement? Page 450
Questions for Critical Thinking, page 454
- In Monsanto v Schmeiser (page 426), the Supreme Court of Canada ruled that the building blocks of life are patentable. Schmeiser was found guilty of patent infringement for saving and planting canola seeds containing Monsanto’s engineered gene. In Hoffman v Monsanto, 2005 SKQB 225, 264 Sask R 1 aff’d 2007 SKCA 47, 293 Sask R 89, a group of organic farmers in Saskatchewan launched a class action against Monsanto and Bayer Crop Science for contaminating their crops with genetically modified organisms. The Saskatchewan courts refused to certify the action, and the Supreme Court of Canada refused leave to appeal. The Supreme Court’s denial of leave leaves open the question of whether biotech companies are liable for damages caused by their transgenic products. The farmers were seeking damages in tort against the biotech companies for failing to control the dispersal of their products and for failing to prevent them from doing economic and environmental damage. If the case had been heard by the Supreme Court of Canada, it would have provided an answer to the question of what is the proper balance between the property rights granted to Monsanto and Bayer and the obligation to mitigate the negative effects of the exercise of those rights. Who should bear the social, economic, and environmental risks of biotechnological innovation?
Who should have the responsibility of allocating the economic and environmental risks of biotechnological innovation? [footnotes deleted]
- When a major sporting event—the Grey Cup game, the Stanley Cup playoffs, the Olympics—occurs in a city, local businesses like to show their support of the home
players. Often they decorate their businesses with the team logo, put signs of
support in their display windows, or develop products named after their heroes. The official sponsors of an event who have paid for the right to be a sponsor are often not happy. They do not like to see other businesses capitalizing on the goodwill associated with the event without paying. For example, during the 2011 Stanley Cup playoffs, a Vancouver Honda dealership received a cease and desist letter from the National Hockey League after it displayed “Go Canucks Go!” above the words “honk if you’re a fan” and the Canucks stick-and-rink logo. Do the actions of the dealership amount to trademark infringement? What intellectual property issues are raised when businesses try to benefit from the popularity and excitement of sporting events without paying for the right to be a sponsor? What is the risk to an organization in protecting its trademarks and sponsorship arrangements from violations? [footnote deleted]
- Websites on the Internet offer powerful marketing opportunities for businesses.
However, the websites, and the domain names that identify them, also present
opportunities for others to take unfair advantage of the goodwill that a business has worked hard to establish. “Cyber-squatters” do this by registering domain names that include a business’s trademark. How can a business, short of litigation, protect its portfolio of trademarks from cyber-squatters?
- Beginning in 1998, the United States Patent Office has allowed patents for all
manner of business methods, including, for example, Amazon’s one-click method for purchasing goods on the Internet, Priceline’s name-your-own price reverse- auction process, and Mattel’s system that allows its customers to order personalized toys. Patents have even been granted for reserving office bathrooms, for enticing customers to order more food at fast-service restaurants, and for the process of obtaining a patent. The Federal Court of Appeal’s decision in Canada (Attorney General) v Amazon.com Inc (see page 428) opens the door to similar patents being granted in Canada. Are business-method patents good for Canadian business? Some business- method patents have been criticized because they have covered subject matter that is old or obvious. What are other criticisms of allowing patents for business methods?
- A “patent troll” is a person or company that holds patents for the sole purpose of extracting licence revenue or suing infringers. The troll does not make, use, or sell new products or technologies but waits until a company has invested in, developed, and commercialized an idea and then it pounces—offering a licence in return for cash. The target company is often left with only two options: pay up or litigate. How can companies manage the risk posed by patent trolls? [footnote deleted]
- On June 29, 2012, An Act to Amend the Copyright Act received Royal Assent.
Dominating the debate over the amendments has been the use of digital locks or
technological protection measures (TPMs). These are basically electronic locks
embedded into devices, such as DVDs, computer software, and video games, to
prevent copying. The Act introduces provisions against tampering with or removing TPMs and provides penalties for circumvention. What is the purpose of TPMs? Does the use of TPMs coupled with penalties for circumventing strike the right balance between the rights of creators and the rights of users?
Situations for Discussion, page 456
- Meredith opened a restaurant called Checkers in St. John’s, Newfoundland and Labrador. After about six months, she received a phone call informing her that “Checkers” is the name of a restaurant in Vancouver, British Columbia, and she must immediately cease using the same name. Must she comply? Why or why not? How can Meredith obtain rights to the name?
- Duncan, a small town on Vancouver Island, is known as the “City of Totems.”
Almost 80 totem poles can be found spread throughout the city, both in its
downtown core and on the Trans-Canada Highway. In 2007, the city council created a copyright policy to govern the use of images of the totem poles. The policy states that the city holds the copyright policy on the totem collection, that the use of the
totem images requires approval from the city, and that the city reserves the right to levy a copyright charge. On what basis could Duncan claim to own copyright in the various totem poles located in the town? If Duncan owns copyright in the totem poles, could people be prevented from taking pictures of the totem poles? Is existing copyright law suitable for the protection of Aboriginal cultural property, such as traditional legends, stories, songs, and knowledge? [footnote deleted]
- Anne recently returned from a holiday in Ottawa. While there, she visited the
National Gallery and was most impressed by a landscape painting by one of the
Group of Seven artists. Anne believes that the scene depicted in the painting would provide a wonderful design for her house wares business. She would like to use it for wallpaper, dishes, and other bric-a-brac. Does her plan have any implications in terms of intellectual property? Explain.
- Tabatha Pelkey had worked at Physical Fitness Equipment Sales Ltd. as its
manager for six years; she left following a pay dispute with the owner. A few weeks later, she opened her own store just 18 blocks from Physical’s site. She sold the same exercise equipment to the same market and featured an almost identical sign. Her business was instantly successful and had a serious negative impact on Physical’s operations. Could Physical successfully sue Pelkey for breach of confidence? What would Physical need to prove to be successful? How could Physical have protected itself from competition from Pelkey? [footnote deleted]
- Mechanical engineer Vadislav Ircha was hired by Seanix Technology Inc. in March 1995 to design chassis and cases for computers. For the first few months, Ircha spent most of his time meeting with a subcontractor who was developing a case for Seanix’s newest motherboard. Ircha soon realized, however, that the subcontractor’s design was flawed, so he began working on a design of his own. Lacking proper design facilities at Seanix’s office, he did most of the work at home,
and was able to produce a completed mock-up of a new “swing-out” case in early 1996. Ircha’s design was so impressive that the president of Seanix offered him a
30 percent salary increase and a bonus for a European vacation. Ircha, however, refused the president’s offer, left the company, and claimed rights in the case. Seanix brought action for rights in the case. What legal issue(s) must be resolved? Outline the law that governs them. How could Seanix have prevented this dispute? [footnote deleted]
- Coco Sharpe is a software developer specializing in online games and puzzles. He has developed a revolutionary new poker game aimed at enhancing the skills of would-be poker players. Coco believes that he can make a lot of money selling the game online. Coco calls his game Coco Cardsharp, and he has received a registered trademark for the name. However, when Coco applies to register the domain name, he discovers that www.cococardsharp.com is registered to Janet Rollins. When contacted by Coca, Janet claims that she knows nothing about Coco’s game but that she is willing to sell the rights in the domain name to Coca for $50 000. What are Coco’s options? How should Coco attempt to settle the dispute with Janet? What are the advantages and disadvantages of pursuing online dispute resolution? What are the advantages and disadvantages of pursuing litigation?
- In 1969, Cynthia and Frederick Brick opened a high-end furniture store in
Winnipeg. They operated the store under the name Brick’s Fine Furniture. In 1988, Brick Warehouse Corp., a national chain of lower-priced furniture sent the Bricks a letter demanding that they stop using “Brick” as part of their business name. In 1977, Brick Warehouse had filed a number of trademark applications that included
the word “Brick.” The Bricks had not registered the word “Brick” as a trademark. As they had used the same name for more than 20 years, they refused to comply with Brick Warehouse’s demand. The furniture chain sued and after a protracted legal battle that cost the Bricks $178 000 in legal fees, the case settled. The parties agreed to co-exist in Winnipeg. What legal arguments were available to the Bricks? How could the Bricks have prevented this dispute? [footnote deleted]
- For the past 15 years, Chuck Morrow has owned and operated Chuck’s Grill House in Burnaby, British Columbia. His restaurant offers a selection of beef dishes, including prime rib, steaks, burgers, and ribs. The most popular dish on the menu is Chuck’s BBQ Ribs. The ribs are cured and smoked (using a secret method invented by Chuck), slow-roasted, and then finished on a grill. Chuck has recently developed
a new and improved method of curing and smoking ribs by using flavoured wood chips, and he wants to protect it so that others cannot use it. Chuck may be able to protect his new and improved method of curing and smoking ribs from being used by others through a patent or by keeping his recipe a trade secret. What are the requirements for patent protection? What are the advantages and disadvantages of patents versus trade secrets? What factors should be considered in making a choice between secrecy and patenting?
Chapter 19: Real Property ………………………………………………………………………………….. 689
Questions for Review, page 483
- What are the unique features of land as a form of property? Page 459
- What is a fee simple? Page 459
- What are the limits on an owner’s use of his land? Page 460
- How does a joint tenancy operate? Page 460
- How can ownership of land be divided by time? Page 460
- What is the purpose of registering title to land? Page 461
- What is a restrictive covenant relating to land? Pages 461
- What are the benefits of an electronic registration system? Page 463
- What are the three stages in a transaction for the purchase and sale of land? Page 466
- What should a buyer of land investigate? Pages 467-468
- What is clear title? Page 467
- What happens at the closing of a property transaction? Pages 469
- What are the key features of a mortgage? Page 471
- What are a lender’s remedies if the borrower fails to make mortgage payments? Page 475
- What are the essential terms in a lease? Page 477
- What is the remedy of distress? Page 479
- What is a periodic tenancy? Page 480
- How can the owner of land dispose of his interest? Pages 480-481
Questions for Critical Thinking, page 483
- Land registration determines property rights strictly according to the order of
registration, unless there has been fraudulent activity. Should the system allow for late registration in exceptional circumstances, such as when a buyer fails to consult a lawyer or the lawyer neglects to register the documents? Can you think of other exceptional circumstances?
- Identity theft and mortgage fraud are occurring more frequently. Property owners discover mortgages registered against their property about which they know nothing. The perpetrator of the fraud has fled with the money, leaving the property owner and the lender to absorb the loss. How can this problem be effectively prevented? Is it up to property owners, the banks, or the lawyers who facilitate the transactions?
- Real property law originated as a means of protecting rights or resolving disputes between conflicting individual rights to property. Increasingly, broader uses of land in the public interest are coming into conflict with individual owners’ rights. Some examples are wind turbines that produce noise; cellphone towers that are unsightly and may emit radiation; and oil or natural gas pipelines that entail environmental risks. What factors may help to resolve this friction between the public interest and individual ownership rights?
- In most cases, a lender has more expertise and experience in credit transactions than the borrower. Do the rules of contracts and mortgages allow the mortgagee (lender) too much protection at the expense of the mortgagor (borrower)? Should the lender bear some responsibility for a decision to lend that turns out to be a bad one? Does it matter that the mortgage is subprime and the borrower has been enticed and persuaded by the lender to borrow the money?
- The format and content of residential leases is largely dictated by legislation, while commercial leases are entirely negotiated by the parties, resulting in lengthy and complex documents. The difference is largely based on the assumption that commercial tenants can take care of themselves, while residential tenants are vulnerable to exploitation by landlords. Is this a valid assumption? Should there be more similarity in the processes that create the two types of leases?
- Covenants in commercial leases generally limit the landlord’s ability to rent space to tenants whose businesses compete with those of existing tenants. In shopping malls, the anchor tenants have more bargaining power than smaller stores and so can better protect their business. In times of real estate downturn, small stores may fail at a higher rate. The covenants may limit the landlord’s ability to fill the vacant space. What are the implications of this situation? Are there remedies to better promote the full use of mall space?
Situations for Discussion, page 484
- The Mellicks owned a farm that the Haywards were interested in buying. During negotiations, the Mellicks told the Haywards that the farm contained a total of
94 acres, with 65 acres under cultivation. The offer to buy described the farm as
containing 94 acres but made no mention of acres under cultivation. The agreement contained a clause indicating that there were no conditions, representations, or agreements other than those expressly contained in the offer. The deal closed, and several months later, the Haywards discovered that there were only 51.7 acres of land under cultivation. Were the Haywards entitled to 65 acres under cultivation? [footnote deleted]
- Campbell’s business is in financial difficulty. Technology is advancing quicker than Campbell can move. She is faced with a gradual reduction in business operations and a related need for less space. She has 20 years left in the lease of her business premises but cannot afford to pay the monthly rent. How should Campbell approach her landlord? What are her legal options? Is the situation different if
Campbell owns her business premises subject to a mortgage on which she cannot make the payments? How should she approach her banker? What are her legal options?
- Bayshore Trust granted a loan to Assam based on a mortgage for $210 000 with
interest at 14 percent for a one-year term. The monthly payment was $2540. At the end of the term, Bayshore renewed the mortgage for another year at 14.5 percent. During that year, Assam defaulted and Bayshore sued Assam, who argued that Bayshore induced him into a state of financial disaster by granting a mortgage with monthly payments he could not possibly make. Assam alleged that Bayshore should never have lent him such a large sum of money. At the time of the mortgage, Assam’s annual income was $28 000. Who should decide whether a lender such as Assam can make payments on a loan? Should Bayshore be required to do anything more than protect its own interest in the mortgage? Would the outcome be different in today’s subprime mortgage environment than when this case came to court in 1992? [footnote deleted]
- Jeanette bought a small office building with a 25 percent cash payment and a
75 percent mortgage. The total price was $400 000, and her monthly mortgage
payment was $3000. The location of the building was not convenient for tenants and their customers. Jeanette’s major tenant defaulted on its lease and left. Jeanette sued for unpaid rent, but the lawsuit is dragging on. She was unable to keep up her payments on the mortgage, and the bank foreclosed. The building was eventually sold for $200 000. Because the outstanding balance on the mortgage was $280 000, the bank is now suing Jeanette for the $80 000 shortfall plus its legal expenses. Jeanette believes that the property was worth much more than $200 000 and she wants to attack the bank’s conduct of the sale and avoid the claim against her. Has the bank acted properly? Could Jeanette have decreased her risk? [footnote deleted]
- Shoker engaged a real estate agent to find a property suitable for use as a trucking terminal. The agent found a property that was zoned “highway commercial.” Its permitted uses included a retail store, car and truck sales agency, commercial
garage, parking lot, and restaurant. Shoker signed an agreement to buy the
property, which contained two conditions—the buyer would confirm the zoning
with the municipality, and the buyer would exercise due diligence to ensure that the property was suitable for his intended use. The agreement did not specify a trucking terminal as the intended use. Shoker discovered that the zoning would not permit the operation of a trucking terminal. He gave notice to terminate the agreement. The seller alleged breach of contract and kept the deposit of $50 000. Is the agreement enforceable by the seller? How could the agreement have been more clearly written? [footnote deleted]
- Bresson bought a piece of land for commercial development for $3 million. He was assured that it contained an unlimited supply of water from an existing well. When construction began, it was discovered that the water was unusable because of contamination in the soil caused by leakage of gasoline from underground tanks located on the adjacent property. What investigation should Bresson have done before the deal closed? Was the seller obligated to disclose the state of the land? Is the owner of the adjacent property responsible? [footnote deleted]
- Perkins leased space for two stores from Plazacorp. A few years ago, an awning
across the front of the stores was removed, causing rainwater to seep into one of the stores and damage carpets and inventory. Plazacorp fixed the leak after repeated complaints by Perkins over a period of time. The second store was affected by sewage backups that originated in the common area of the property. In an attempt to prompt Plazacorp to remedy these situations, Perkins ceased paying rent. When Plazacorp sued for the rent arrears, Perkins counterclaimed for the cost of damage and repairs to the two stores. Was Perkins entitled to stop paying rent? Is Perkins’ counterclaim valid? On what does the answer depend? [footnote deleted]
- Greenwood rented office space to Evergreen for five years, with an option for
renewal of three or five years. In the second year of the lease, Greenwood informed Evergreen that it could not comply with its obligations under the lease beyond the end of the current year. Greenwood planned to demolish the building and erect a 21-storey office tower. Greenwood offered Evergreen preferential treatment in the new building when it was completed. Evergreen refused to move, claiming that the current building had architectural value and should be preserved. The lease did not include clauses dealing with demolition or the landlord’s right to resume possession during the term of the lease. How does this situation illustrate rights of ownership and landlord-tenant relations? How could the dispute be resolved? [footnote
Chapter 20: The Employment Relationship ……………………………………………………… 723
Questions for Review, page 516
- Which level of government has jurisdiction to make laws in the area of employment? Page 489
- What are the tests for determining the difference between an employee and an
independent contractor? Why is it important to distinguish between an employee and an independent contract? Pages 490-491
- Define vicarious liability and negligent hiring. How do they differ? Pages 492-493
- The human rights Acts attempt to prohibit discrimination in employment. What is meant by “discrimination”? Page 495
- What is the difference between systemic and adverse effects discrimination? Page 495
- What is a bona fide occupational requirement? Give an example. Page 495
- What is the “duty to accommodate”? Pages 496-497
- What is the purpose of the federal Employment Equity Act, SC 1995, c 44? Page 498 The 9. Do employees have fiduciary obligations? Explain. Page 500
- Do employment contracts need to be in writing to be enforceable? What are the
advantages of a written employment contract? Can you think of any disadvantages? Page 501
- What is the purpose of employment standards legislation? Give an example of an employment standard. Page 503
- Explain how the freedom to contract in employment has been affected by legislation, and give examples. Pages 503-505
- What is the purpose of workers’ compensation legislation? Page 506
- Would displaying a nude picture be an example of sexual harassment in the workplace? Explain. Page 507
- What is the purpose of pay equity? Pages 508-509
- Is alcohol and drug testing in the workplace permissible? Explain. Pages 509-510
- Do employees have a right to privacy? Explain. Pages 510-513
- Describe how unionized employees enter into employment contracts. Pages 513-514
Questions for Critical Thinking, page 516
- A recent article in The Globe and Mail reports that headhunters are having
difficulty getting references for ex-employees from employers. Mark Reidl, the
president of Acchuman, a Toronto-based executive search firm states, “I’ve been in the business for 16 years, doing background checks, and companies just aren’t
giving references anymore. They don’t say anything and, if they do, they certainly aren’t looking to give me the goods.” Why do you think employers are reluctant to give references? Are there any legal reasons for not providing reference information? Are there any legal concerns with an employer not providing a reference for a former employee? Are there any legal concerns with a prospective employer asking the former employer for reference information? [footnote deleted]
- An advertisement that reads: “Wanted: Vietnamese Waiters for a Vietnamese
Restaurant” is discriminatory. On what basis does the advertisement discriminate? Could or should ethnicity qualify as a bona fide occupational requirement? Would it make any difference where the restaurant was located?
- The distinction between an independent contractor and an employee is not always clear. What steps can be taken by an employer who wishes to engage independent contractors to ensure that its workers will be classified as independent contractors? What are the risks associated with having “independent contractors” classified as employees?
- Mandatory retirement has been abolished in the federal sectors and all the
provinces with the exception of New Brunswick. It is discriminatory under human rights legislation although exceptions are generally permitted for bona fide occupational requirements and bona fide retirement or pension plans. Is ending mandatory retirement good for business? What are the advantages and disadvantages of mandatory retirement policies? How might employers require their employees to retire at age 65 without breaching applicable human rights laws?
- An employer has a duty to accommodate the special needs of a physically or
mentally disabled employee unless the accommodation causes undue hardship. What is the duty to accommodate? What are some examples of accommodation? What is undue hardship? What are some factors to consider in determining undue hardship? What are some factors not to consider in determining undue hardship? Is accommodation “special treatment”? Is it fair that one person gets “special treatment” over another?
- In the wake of evolving methods of communication (emailing, text messaging, and blogging) and methods of surveillance (closed-circuit cameras and software for monitoring Internet and email use) privacy in the workplace is an area of growing contention. On one side is the employer’s right to monitor its workforce and on the other is the employee’s right of privacy with respect to technology use. One of the ways to strike an appropriate balance between these competing interests is a computer-use policy. What are the benefits of such a policy? What should such a policy contain?
Situations for Discussion, page 517
- In 2001, Cindy Choung became British Columbia’s first accredited Chinese-
language court interpreter. Interpreters are called by court services (a branch of the government) when needed and are selected from a list in rotation. They are paid an hourly rate, plus expenses. All travel arrangements are made by and paid for by court services. There is no guarantee of a minimum amount of work, and there is no prohibition against working for other agencies. Court services makes no deductions for income tax, employment insurance, or pension plans. A code of professional
conduct implemented by court services governs how interpreters are to translate
and to dress in court. It also sets out rules of confidentiality and prohibits
interpreters from assigning their work to another interpreter.
In 2004 the court services’ executive director received complaints about
Cindy’s work and decided to remove her name from the list of interpreters. Cindy is considering bringing an action for wrongful dismissal. Is she entitled to bring such an action? What does she need to prove? Explain. [footnote deleted]
- Silvia Cabrera is an account executive at a major bank. Over the past six months she has noticed that the performance of one of her loans officer, Jorge Rodriquez, has been declining. Jorge had always been an excellent employee who maintained great relationships with colleagues, performed his work on time, and rarely missed a day of work. However, in the past six months, he has had frequent absences from work, has had difficulty meeting deadlines, and is moody and distracted. When asked if he was having any problems, Jorge simply replied, “It’s personal.”
Last week, Silvia happened to be delivering some important bank documents to Jorge’s office when she thought she saw some pornographic images on Jorge’s computer before he switched screens to some graphs and tables. Silvia was not 100 percent sure of what she saw, so she did not say anything to Jorge. She decided to speak to the branch manager about her concerns.
The branch manager was quite taken aback and would like to search Jorge’s computer, his email account, and his Internet usage. Can the branch manager
legally perform such a search? Discuss. Would it be appropriate and legal for the
bank to install computer-surveillance technologies that target the use of information sources on all employees’ computers? [footnote deleted]
- Tom Mason was hired as a technical salesperson for Chem-Trend Limited
Partnership, a chemical manufacturer that sold industrial chemicals worldwide. At the time of hiring, he signed a standard form contract that contained a confidentiality clause prohibiting him from using or disclosing any trade secrets or confidential information after the termination of his employment, and a non- competition clause that prohibited him from engaging in any business or activity that could be deemed in competition with Chem-Trend for a period of one year following termination of his employment, regardless of whether he had been fired or quit on his own. This prohibition included providing services or products to any business entity that was a client of Chem-Trend during the course of his employment.
Seventeen years later, Chem-Trend terminated Mason’s employment. At the time of his termination, his sales territory spanned all of Canada and several U.S. states. As a result, he was familiar with some of Chem-Trend’s clients that operated
worldwide, and he had acquired extensive knowledge of Chem-Trend’s products, operations, customers, and pricing. Given this situation, are the confidentiality and non-competition clauses enforceable against Mason? What factors are relevant in
determining the enforceability of the non-competition clause? How could Mason and Chem-Trend have better protected their interests? [footnote deleted] This situation is based on Mason v
- a. Bill Reyno owns and operates a bottle-recycling plant. He has recently
experienced a rash of thefts and break-ins and wants to hire a night watchman or security guard. Bill wants someone large and feisty in case there are any problems. What steps should Bill take in hiring someone to fill the job position?
- Jon Blondin applied for the position. When he showed up for the interview, he
seemed to be a little “unstable.” In fact, Bill thought he might have been drinking but he wasn’t sure. Other than this concern, Jon seemed to be perfect for the job. Bill would like Jon to take a drug and alcohol test. Is it permissible for Bill to make this request?
- In January 2005, the Canadian Imperial Bank of Commerce (CIBC) launched a lawsuit against a number of its former employees and Genuity Capital Markets. CIBC is seeking damages in excess of $10 million. CIBC alleges a variety of transgressions, including the theft of client information and the solicitation of its employees. CIBC alleges that the former CEO of CIBC World Markets (CIBC terminated the CEO’s employment in February 2004) and others set up a competitor, Genuity Capital, while still employed with CIBC. In less than a year, a total of over 20 senior employees of CIBC left to join Genuity. The allegations are supported by copies of numerous BlackBerry messages exchanged by the defendants in the summer of 2004. Since CIBC filed its suit, the defendants have counterclaimed for $14 million, alleging that the bank breached the privacy of the defendants by going through their email. Further, the former CEO has stated that he was not restricted by any agreement from competing with CIBC. Assuming that the former CEO was not restricted by any agreement from competing with CIBC, does that exonerate him from liability? What can companies like CIBC do to avoid similar situations? What steps can an employer take to minimize the risks associated with the loss of employees and intellectual assets such as client lists, business strategies, and the like? [footnote deleted]
- Melissa Antidormi was a successful 41-year-old working as a sales manager with BEA Systems Inc., a California-based software firm, when she left to join Blue Pumpkin Software Inc. At the time of her departure, her base salary was $90 000, and she was on target to earn approximately $300 000 in sales commissions. For
19 months, Blue Pumpkin had pursued her to lead its expansion into Canada and Latin America. She initially declined the offer as she had no interest in leaving her job at BEA Systems. However, Blue Pumpkin was persistent in selling their vision of a “New Canadian Team.” Blue Pumpkin flew Antidormi to California, where the CEO indicated that Melissa’s new position would provide a long-term opportunity. With promises of better pay, greater responsibilities, and job security, she joined
Blue Pumpkin. Six months later, Melissa was terminated when the company
changed its business plans to concentrate on the U.S. market. The company offered her two weeks of severance; she sued for wrongful dismissal. After a two-year legal battle, the Ontario Superior Court awarded her $320 000—the equivalent of one year’s salary, commission, and bonuses—plus her legal costs. The court ruled that Melissa deserved 10 months’ notice because Blue Pumpkin had misrepresented certain facts—in particular, the job security that she would enjoy as long as she performed well. How can employees protect against false promises and misrepresentations? How can employers protect against false promises and inflated expectations? [footnote deleted]
- Jordan Wimmer, a blonde, 29-year-old financier employed by Nomos Capital
Partners Ltd., is suing her supervisor because he allegedly sent her emails calling
her a “dumb blonde” and “decorative.” She is also claiming that he sent the
following joke to her and her colleagues: “A blonde asks her boyfriend for help assembling a jigsaw puzzle. She struggles to match the pieces to the picture of a rooster on the box. Eventually the boyfriend calms her down and says, ‘Let’s just put all the cornflakes back in the box.’” What is the legal basis for Wimmer’s lawsuit? What does she have to prove to be successful? Assuming the allegations are true, is she likely to be successful? Is Nomos Capital responsible for the supervisor’s actions? How should companies deal with issues of “jokes” in the workplace? [footnote deleted]
- In May 2006, WestJet Airlines apologized to rival Air Canada and agreed to pay it $5.5 million for investigation and legal fees plus donate $10 million to children’s charities to settle a lawsuit. In 2004, Air Canada had sued WestJet and several of its executives, in Ontario Superior Court, for $220 million. It was alleged that a former Air Canada employee, now employed by WestJet, passed on confidential, proprietary information to WestJet.
Apparently, the former Air Canada employee, who continued to have access to an Air Canada website for the limited purpose of booking personal travel, gave his password to a WestJet executive. WestJet accessed Air Canada’s website approximately a quarter of a million times and created automated technology to download and analyze passenger load and booking information. Air Canada claimed that, by obtaining this confidential information, WestJet was able to compile computer-generated reports for its own strategic planning, routing, and pricing decisions. WestJet countered with accusations that Air Canada hired private investigators to sift through an executive’s garbage and then had a U.S. firm digitally reconstruct shredded documents.
What obligations did WestJet have to Air Canada as a result of the decision to hire one of its former employees? Were WestJet’s actions wrong, or was it just taking advantage of lax security? [footnote deleted]
Chapter 21: Terminating the Employment Relationship ………………………………… 778
Questions for Review, page 543
- In what circumstances may an employee be terminated? Page 521
- What is meant by “just cause?” Page 521
- What is a progressive discipline policy? How does a progressive discipline policy affect the termination of employees? Page 522
- When does incompetence amount to just cause for dismissal? Pages 523-524
- An employer may dismiss an employee for cause when the employee’s conduct is prejudicial to the employer’s business. Give an example of conduct that is prejudicial to the employer’s business. Page 524
- In the absence of just cause, how much notice of termination must an employee be given? Pages 527-528
- In the absence of just cause, how much notice of termination must a superior- performing employee be given? Page 528
- How is reasonable notice calculated? Page 528
- In the calculation of reasonable notice, which factor is the most important? Explain. Page 530
- In general, a longer-term employee is entitled to more notice than a shorter-term employee. What is the rationale for this distinction? Page 529
- What is constructive dismissal? Give an example. Page 530
- How can a wrongful dismissal suit arise? Name three ways. Page 532
- Why is the manner of termination important? Page 533
- When is a successful litigant entitled to punitive damages? Explain. Pages 535-536
- What is the duty to mitigate? When does it arise? Page 537
- What should a termination settlement contain? Pages 538-539
- How does the process for termination differ between the union and nonunion sectors? Page
. 18. What is the grievance process? When is it used? Pages 539-540
Questions for Critical Thinking, page 543
- On occasion, employers and employees have argued for a rule of thumb in
calculating reasonable notice. Most frequently, they have argued for a “month-per- year-of-service” rule. Courts have generally rejected such an approach. What are the advantages of such a rule? How is such a rule defective?
- Mandatory retirement has been abolished in almost all Canadian jurisdictions. This will result in more people working past the traditional retirement ages of 60 to 65. When there was mandatory retirement, employers often ignored performance issues with older employees because they would soon retire. With the abolition of mandatory retirement, employers will have to deal with aging workers who may not be able to keep up with the evolving demands of their occupations or companies.
How should employers manage this challenge? What is the risk for employers who require older employees to acquire new skills?
- The introduction of technologies such as fax machines, email, and the Internet into the workplace has greatly increased the possibility of employees using company property for personal use. It is a new spin on the old nuisance of employees making personal phone calls at work—but with greatly magnified consequences. Use of technologies by employees ranges from occasional online shopping ventures to hours spent surfing the Internet to the use of a company computer to run a personal business. Should excessive Internet use be grounds for dismissal? Under what circumstances? Other than to prevent lost productivity, why would an employer want to control an employee’s Internet use?
- The Supreme Court of Canada has indicated that in some circumstances, it is
necessary for a dismissed employee to mitigate her damages by returning to work for the same employer. In what circumstances do you think a terminated employee should be required to return to work for her ex-employer? Do you see any problems for the terminated employee and the employer with the employee returning to work? [footnote deleted]
- In Honda Canada Inc v Keays, the Supreme Court of Canada stated that if an
employee can prove the manner of dismissal caused mental stress that was in the contemplation of the parties (mental distress over and above the normal impact of termination), the damages should be awarded through an award that reflects the actual damages, not through an arbitrary extension of the notice period. Is this approach beneficial to employees? Explain.
- Employees have been disciplined and, in some cases, terminated for just cause for their use of social media when its use has adversely affected the employer’s legitimate interest. A social media policy may reduce the risk of harm to the employer’s business interests and the risk of penalties to the employee for her social media conduct. How can an employee’s use of social media harm the employer’s business interest? How should a social media policy be developed within an organization? What should a social media policy contain?
Situations for Discussion, page 544
- Rhianne Dolman was an insurance adjuster who had worked for Dillman Adjusters for eight years. Her annual salary with Dillman was $60 000. Groger Adjusters persuaded Rhianne to work for it at a salary of $75 000 per year. Rhianne agreed and signed an employment contract. Several days later, Groger asked her to sign a non-solicitation agreement. Rhianne agreed.
Three months later, Rhianne was having lunch with some colleagues when
Rhianne asked one of them if he would be interested in opening an adjusting
business to compete with Groger. She also asked another employee if,
hypothetically, he would like to work for her someday in the adjusting business. The conversation was overheard by another employee of Groger, who informed senior management. Rhianne’s employment was terminated immediately. Did Groger have just cause to terminate Rhianne? What is the effect of the non-solicitation clause? If Groger does not have just cause to terminate Rhianne, to how much notice is she entitled? [footnote deleted]
- In 2007, Paul Wolfowitz, president of the World Bank, was forced to resign in wake of revelations that he had secured a new pay package for bank employee Shaha Riza, who happened to be his girlfriend. When Wolfowitz took over as president in 2005, he arranged to have Riza transferred to the U.S. State Department from her position as a Middle East expert. The move was a promotion, and her salary rose to $193 590 from $133 000.
Love in the workplace is an exceedingly common occurrence, with half of
Americans regularly reporting in surveys that they have been involved in an office romance. What are the risks of office romances for employees? What are the risks for employers? Should companies have policies regarding workplace romances? If so, what should such a policy contain? [footnote deleted]
- Margaret Brien, aged 51 was terminated from her job as office manager at Niagara Motors Limited, a car dealership after 23 years. Her termination came as a complete surprise to her as she had never been disciplined and had not received any warnings about her performance. At the time of her termination, the dealership told Brien that she was being terminated because her position was being eliminated. This was not correct. The dealership had secretly advertised her position and required Brien to train her replacement after her dismissal. She was offered eight weeks of pay in lieu of notice and 23 weeks of severance if she signed a release. Brien sued for wrongful dismissal. In response, the dealership alleged that Brien performed her duties incompetently and unprofessionally and that it had just cause for her termination. The dealership also refused to provide Brien with a letter of reference or to assist her in any way with her job search. Brien successfully sued Niagara Motors for wrongful dismissal. What would be reasonable notice in this situation? What factors will the court consider in an award for damages? How would the award of damages differ pre-Honda v Keays versus post-Honda v Keays? [footnote deleted]
- Randal Martin joined International Maple Leaf Springs Water Corp. of Vancouver, B.C., in July 1994. He was hired to assist with the construction of a bottling plant at a spring near Chilliwack, B.C., and to develop markets in North America and Asia. He had been running a similar operation in Saskatchewan but left on the assurance that the B.C. company was viable and would be able to finance the new plant and fund the marketing initiatives. By March 1995, Martin had settled contracts with six companies and was close to three more, including a major deal with an American brewery that wanted to use its own brand name on Maple Leaf’s products.
In April 1995, the company fired Martin accusing him of dishonesty and coming to work drunk. Maple Leaf alleged that Martin was dishonest in registering trade names belonging to the company. Martin had registered trade names personally, as Maple Leaf did not have the funds to do it itself. The president of Maple Leaf knew about Martin’s action and knew that the trade names would be transferred to the company as soon as Martin was repaid. There was no evidence of Martin coming to work drunk. Martin successfully sued for wrongful dismissal. What would be
reasonable notice in this situation? What factors would the courts consider in awarding a period of notice? [footnote deleted]
- Clyde Peters has worked as a senior systems analyst for 17 years at NJ Industries. He has a good work record and a positive image throughout the company. Recently, he came under the supervision of the new controller, John Baxter, who has quickly found himself dissatisfied with Peters’ performance. Baxter believes that Peters has failed to properly implement the company’s new computerized financial system. As well, he has failed to design a strategic plan for his department.
These two matters have caused considerable problems between the two. Baxter is considering recommending Peters’ termination. How should the problem be resolved? Do grounds for termination exist? [footnote deleted]
- Sandra Sigouin had worked at a Montreal branch of the National Bank for 20 years before being promoted to the position of special loans administrative officer. She was given the post even though she lacked the proper qualifications and training. The new job went badly. Sigouin made many mistakes, and the bank warned her in writing that if she did not improve, she would be terminated. She asked to take courses and promised to improve, but no further training was provided. A few months later, she was fired for incompetence after failing to renew a letter of credit. The mistake cost the bank $850 000. What should Sigouin do? Do you think the bank had grounds to terminate Sigouin for just cause? Do you think the bank acted fairly? Should an employer be permitted to promote an employee to her level of incompetence and then fire her for incompetence? What are the risks for an employer that uses such a tactic? [footnote deleted]
- Philip Kelly was a materials manager for Linamar Corporation. He supervised
approximately 10 to 12 employees, some reporting to him directly and some
indirectly. He was required to instruct his staff on a regular basis and had
disciplinary authority over them. In addition, he was a member of the plant
operating committee, which was a management committee. As such, he was
regularly involved with management issues with his peers and other divisions of the
company. In addition to his responsibilities within the company, Kelly was also responsible for contact with suppliers and customers of the company. He had worked at five different divisions of the company and was well known throughout the organization.
On 21 January 2003, Kelly was charged with possession of child pornography as a result of an investigation into a Texas child porn ring. By that time, he had been an employee with the company for 14 years, had a good employment record, and was earning $64 000 per year. Two days later, Linamar dismissed Kelly for cause. Does Linamar have just cause for dismissal? Who has the onus to prove just cause? What is the standard of proof? What factors will the court consider in determining whether just cause exists? [footnote deleted]
- Terry Schimp, 25, worked as a bartender for RCR Catering and Pubs. Although he was occasionally tardy, sometimes missed a staff meeting, and a few times was short on his cash, he was considered a productive employee. At the end of a private function that RCR was catering, one of Schimp’s supervisors noticed an open water bottle on his bar. He took a drink and discovered that it was vodka, not water. Suspecting that Schimp had stolen the vodka, the supervisor immediately fired Schimp. He was escorted off the premises in front of about 50 other staff members, and he was banned for six months from returning to the hotel premises where RCR’s offices were located. Schimp was extremely upset, but within a month he was able to get a new job with the same hourly rate of pay, only without tips. He sued for wrongful dismissal. At trial he was awarded $30 000 in damages. On appeal the damages were reduced to $10 000, of which approximately $7000 was compensation
for the humiliation and degradation he suffered. Aside from the damage award,
what costs did RCR incur as a result of this situation? How should RCR have acted differently? [footnote deleted]
Chapter 22: Professional Services ………………………………………………………………………. 825
Questions for Review, page 562
- Who is a professional? Page 548
- What is the meaning of “fiduciary” in the context of professional-client relationships? Page 556
- How may professionals be in a conflict of interest? Page 556
- What should a professional services contract contain? Page 550
- What are the options for setting professional fees? Page 550
- What is a retainer? Page 550
- What is the basis for determining the cost of professional services if there is no formal contractual term addressing the issue? Page 550
- What are the three types of professional responsibility? Page 549
- Why were accountants traditionally protected from third-party claims? Page 552
- How did the Supreme Court of Canada limit the duty of care for negligent misstatements in the Hercules decision? Page 553
- What is the meaning of “self-regulating profession”? Page 559
- What is the key role of the bodies created to oversee the professions? Page 559
- During a disciplinary process, why is it important to protect the rights of the professional against whom a complaint has been made? Page 561
- What are LLPs? Page 558
- What rules establish who can be a member of a particular profession? Page 559
- If a conflict between a professional’s ethical obligations to the profession and those to the client cannot be resolved, what must the professional do? Page 549
- What is a professional’s duty of confidentiality? Page 557
- Why did the accounting firm Arthur Anderson disappear after the Enron collapse and KPMG survive its tax-shelter prosecution? Page 555
Questions for Critical Thinking, page 564
- The following is an excerpt from an auditor’s report:
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
Is this description of an audit adequate for clients? Could it be written in
such a way as to make the extent of their responsibilities clearer to users? [footnote deleted]
- If you are the manager in an organization responsible for finalizing contracts with professional service providers, what factors would you consider in deciding between fees based on an hourly basis versus a per-job basis? What protections might you try to build into the contracts?
- The Hercules decision was heavily criticized by some members of the business press as too lenient on auditors but was received with great relief by auditors. Did the Supreme Court of Canada define the purpose of the audit too narrowly? What is the appropriate balance between fairly compensating those who suffer loss and discouraging professionals from providing needed services?
- In an economic downturn, investors often look to their investment advisors to
explain their losses. Investors may claim that their advisors were more interested in
their own fees and commissions than their clients’ portfolios or that their advisors failed to fully explain the degree of risk in their investments. Are investment advisors “professionals”? Do they owe their clients fiduciary duties? What standards should advisors be required to meet?
- Most professionals are required to maintain a minimum level of liability insurance in the event that claims are brought against them by those who rely on their advice. However, the cost of this insurance is passed on to clients through the fees they pay
for services received. Does this system encourage professional responsibility? Is there a more effective method?
- Professional organizations are authorized by legislation to regulate their own members in terms of controlling permission to practise, setting standards, and imposing discipline. Can the public expect to receive fair treatment from professional organizations that have a vested interest in protecting their own members?
Situations for Discussion, page 565
- Over the years of running a small business, Lan had acquired sizable savings. She wanted to get the best return on this money and discussed this with her lawyer, Harvey. He advised her that this was an excellent time to get into real estate; he had many clients who required financing. Lan could provide either first or second mortgages, depending on her desired level of risk and return. Harvey said he had
some clients involved in a large townhouse development. Lan trusted him implicitly, as he had been her lawyer since she had first started her business. Thus, she lent the bulk of her savings—$200 000—as a second mortgage, which would earn interest at
19 percent per annum over five years.
Within eight months the real estate market collapsed. The mortgagees defaulted on payment, and once the holders of the first mortgage had foreclosed, there was nothing left for Lan. When she complained to Harvey, he said that investments of any sort carry inherent risk. His personal investment company, for example, had been one of the partners in the townhouse development, and he too had lost his entire investment.
Lan seeks advice about what she can do to recoup her losses. Identify Lan’s options.
- Good Property engaged the services of a professional real estate appraisal firm,
McGee and McGee, prior to purchasing a large tract of property on the outskirts of town. When Dan, the CFO of Good Property, first discussed the appraisal with Andy McGee, he said the appraisal was required by 10 January. Andy said this was impossible owing to other commitments and proposed 26 January. It was agreed that Andy would be the appraiser. Dan said he would get back to Andy about the date.
The project was more complex than either Good Property or the appraisers expected. The local water conservation authority was about to issue a report that seriously affected the land, so Andy waited for it. The appraisal was not handed to Good Property until 29 January. By this time, another purchaser had acquired the property. When Dan was handed the sizable invoice for the work, he claimed that Andy had breached the contract by finishing the work late and had caused Dan to lose out on being able to buy the land. Furthermore, the invoice was far more than
he expected to pay. How are these matters likely to be resolved? What arguments
can Good Property and McGee raise? What would happen if McGee had not waited for the water report and Good Property had bought the land, which was later devalued by the report?
- Midor was a lawyer with a busy real estate practice focused on mortgages. For a
time, Midor’s practice prospered. He became wealthy and invested in several highly speculative ventures that failed. Midor found himself in serious financial difficulty and under severe stress. He devised a scheme where he would purchase pieces of real estate by using straw buyers. They would allow their names to appear on transfer and mortgage documents in return for a fee. The straw buyers were never the real owners or borrowers. Through successive transfers of these properties,
Midor was able to inflate their apparent value and give fraudulent mortgages to a variety of banks at values well in excess of the properties’ actual value. When the fraudulent scheme was eventually discovered, the banks were left with largely worthless mortgages and the straw buyers appeared to owe large sums to the banks based on properties they never owned. Since Midor has lost all of the ill-gotten funds, who is responsible for compensating the banks and the buyers? What consequences does Midor face? [footnote deleted]
- Sino-Forest Corp. is an international forestry company. Between 2007 and 2011, the company raised $2.7 billion in the capital markets. In June 2011, allegations were
made that Sino-Forest’s forest holdings in China and other countries were grossly and fraudulently overstated. The share price plummeted from $26 to $1 before stabilizing at $5. Two pension funds have filed a class action suit against the company, its executives and directors, auditors Ernst & Young, and a number of investment banks. The allegations against Ernst & Young consist of negligence in the audits, which should have detected the overstatement of holdings and objections to the presence on the Sino-Forest board of directors of former Ernst & Young partners.
What must the claimants prove in order to establish Ernst & Young’s liability? If the forest holdings were overstated as alleged, should the audits have revealed the problem? [footnote deleted]
- Big Cleanups was a public company that had developed products used to address environmental cleanups. Its market performance attracted considerable investor attention. One investor, Max Find, acquired a significant holding in Big Cleanups over a five-year period. He tracked all performance announcements closely and increased his holdings with each favourable announcement.
Late in 2011 there were rumours of some underlying problems with Big
Cleanups’s technology. Max therefore paid particularly close attention to the 2011 annual report. Surprisingly, the report indicated further strong performance, and Max, on the basis of the report, increased his holdings in Big Cleanups.
In the fall of 2012 the results for the second quarter of 2012 were released. They showed unexpected losses, and the share price precipitously declined. The auditor withdrew the 2011 audited statements and later issued new statements, which showed a large loss. Max claims that his losses are due to the allegedly misleading
audit report. If he had known the true state of affairs, he would have reduced, not increased, his holdings in the company. The auditor claims that the audit was prepared according to generally accepted accounting principles and that the firm was not responsible for this turn of events.
Outline the primary arguments for Max and the auditors.
- Yul is a CGA working as comptroller for Jones Manufacturing. He is concerned about the cash flow position of the company. Customers have placed large orders, but Andrew (the CEO) has insisted on an aggressive pricing policy, and prices charged do not cover costs.
Yul approaches Andrew with his concerns, but Andrew will not listen. Andrew is a high-profile member of the local community; the success of the company means that it can hire a large number of people in this economically depressed area, and it
is inconceivable to him that booming sales could translate into losses. Yul explains that the auditors will be coming soon and, if he doesn’t expose the current position, they will uncover it anyway. Andrew tells him that he understands, but that he wants Yul to do whatever it takes to get through this audit. Afterward, prices can be raised, since by then the company will be in a strong position in the marketplace and this temporary hurdle will have been overcome.
Yul is trying to devise a strategy to reconcile his professional responsibilities and the survival of this company. It would be devastating to see the company close if he is unable to find a way of presenting the information to satisfy the auditors.
Discuss the pressures Yul faces. What should he do now?
- Environmental Consultants Ltd. (ECL) was hired by Crass Developments Ltd. (CD) to evaluate a prospective development site for signs of pollution. The site had previously been used for a variety of industrial purposes but was then vacant. CD was considering a number of possible sites and wanted to choose the one with the lowest environmental risk. At the time, ECL had plenty of work and wanted to complete the evaluation for CD as quickly as possible. The senior partner at ECL assigned two junior employees to the CD job, one with two years’ experience and the other just recently hired. They did a site inspection and conducted a few soil
tests that were appropriate for a “clean” site but not for one that had been used
previously. They produced a positive report. The senior partner was out of the office for a few days, so the report was sent to CD without his approval. CD bought the land; a year later, signs of pollution began to emerge and CD was responsible for an expensive cleanup effort. To what degree are ECL and the three employees responsible for CD’s cleanup costs?
- The B.C. government (BC) embarked on an ambitious building program to replace
50 aging schools. In an attempt to lower construction costs, the government decided to build a few variations of the same model. BC hired ABC architects to design the basic model and variations, DEF Engineering to oversee the construction, and GHI Construction to actually do the building. The project took three years to complete.
Five years later, serious problems began to emerge in the schools. Cracks appeared in the walls, many of the windows leaked, and mould was found in the walls. What responsibility do the architects, engineers, and builders have for these problems? What forms of risk management are relevant?
Chapter 23: Sales and Marketing: The Contract, Product, and Promotion ……………….. 858
Questions for Review, page 596
- What is the relationship between voluntary standards, such as those created by the Canadian Standards Association, and common law obligations in tort and contract? Page 584
- What are the key provisions of the Consumer Products Safety Act? Page 588
- How did sale of goods legislation originate? Page 572
- What is the difference between an implied condition and a warranty in the Sale of Goods Act? Page 573
- What is an example of a condition implied by the Sale of Goods Act into a contract of sale? Page 573
- What is an example of a way in which Sale of Goods Act provisions have been adapted to consumer contracts of sale? Page 581
- What are “specific” goods? Page 576
- What rules decide when title to goods passes from the seller to the buyer? Pages 576-578
- What is a bill of lading? Page 574
- What is the purpose of the Consumer Packaging and Labelling Act? Page 586
- How does the Competition Act classify the marketing practices that it regulates? Page 682
- How does the law ensure the safety of consumer products? Page 584
- What is misleading advertising? Page 589
- How can a business defend itself from an accusation of misleading advertising? Page 591
- What is the due diligence defence? Page 593
- How can a corporation use the misleading advertising provisions of the Competition Act against a competitor? Page 592
- If a business is investigated for an improper performance claim about its products, what is its best defence? Page 592
- What is the selling practice known as “bait and switch”? Page 593
Questions for Critical Thinking, page 596
- If consumer protection legislation equates to good marketing practices, why do we have so much legislation? Would market forces not sort these issues out without state intervention?
- Why do businesses need to be familiar with the law relating to competition and consumer protection? How does this law relate to marketing practices?
- The standards relating to children’s playground equipment are controversial. Some see them as being too cautious and as imposing undue burdens on service providers, such as parks and schools, that might have to replace all equipment. Why has this controversy arisen? What interests need to be balanced?
- The new Consumer Products Safety Act is a major federal legislative initiative to force sellers to provide safe products and increase consumer confidence. Such legislation is normally reviewed every five years. When the CPSA is revisited in 2016, what criteria should be used to measure its effectiveness?
- Why does the Competition Act focus on regulating the behaviour of business rather than on providing remedies directly to consumers? Does provincial legislation serve consumers more effectively?
- Compare the criminal and civil procedures relating to deceptive marketing
practices in the Competition Act. Which are the advantages of the civil process?
Situations for Discussion, page 597
- Senior management of Superior Chemicals Ltd. has decided to revamp the
marketing program for the company’s line of household products, which includes kitchen, bathroom, furniture, flooring, and all-purpose cleaners. They wish to promote these products as more environmentally friendly than those of their competitors. The marketing department has developed a large number of possible messages, such as “natural,” “nature clean,” “renewable ingredients,” “biodegradable,” “the environmental choice,” “the responsible choice,” and “We care about the earth.” Management is aware of the rules regarding misleading advertising and the new guide for environmental claims. What should management consider in developing the advertising campaign for their cleaning products? Which claims are appropriate? How must Superior be able to support its claims? [footnote deleted]
- Hammer and Nails Hardware, a nationwide chain, has devised a new product line. It has discerned a growing niche in the market among older “empty nesters” who are moving from houses into apartments or condominiums. It has devised a “We meet all your basic needs” campaign that prepackages tools, home repair products, and decorating products. It intends to introduce a series of 10 different lines over a six-month period. They will be boxed in an attractive, uniform style of packaging that includes “how-to” books. The packages will include the basic items needed for particular household tasks.
What must Hammer and Nails consider in terms of its choice of package
contents, packaging, labelling, instructions, and promotion in order to comply with legal requirements and avoid creating inflated expectations from consumers? The Consumer
- Outdoor World sells new and used snowmobiles. It makes most of its money from new products, and it attempts to move secondhand ones quickly, particularly since the season is short and it does not want to be caught with extensive storage costs throughout the summer. Each January it has a major “blowout” sale that is heavily promoted and provides genuine savings.
Morley is in the market for a used snowmobile. He tells the salesperson he wants a basic machine, “no hassles,” and as good a deal as he can get. The salesperson shows him three; he starts each one and says that they are roughly equivalent. Morley takes a quick look and picks one basically on colour, since he knows little about snowmobiles. The listed price was $3500, but because Outdoors is anxious to clear the line and Morley is extremely price-sensitive, he is able to bargain down the price to $2000.
Two days later there is a good snowfall and Morley takes the machine out for a run. Five kilometres from home, the snowmobile splutters to a stop. Morley cannot get the machine started. In the end, a friend rescues him, and Morley gets the machine towed straight back to Outdoor World.
What are Morley’s rights under the common law? Do the Sale of Goods Act
warranties and conditions help? Do Morley’s rights vary according to the province in which the sale occurred?
- McAsphalt Industries Ltd. is a supplier of asphalt and cement for use in road
paving work. Chapman Bros. Ltd. is a road paving company. Chapman ordered some modified asphalt cement from McAsphalt who assured Chapman that the material could be used with its conventional equipment. When Chapman used the material, it broke into chunks, requiring the removal of a filter and the alteration of its equipment. Much of the paving had to be redone. Chapman refused to pay McAsphalt for the material and claimed compensation for the cost of repaving and profit lost on other jobs. Who is responsible for the quality of the material and its
suitability for Chapman’s equipment? How will the conflicting claims be resolved? [footnote deleted]
- Softest Diapers is one of two leading producers of diapers for infants. It has spent several years researching and testing a new brand of super-absorbent diaper. It is now devising an advertising campaign that will make direct comparison with its
competitor’s products. The marketing team has spent months comparing the two lines of products and genuinely believes that the new Softest diapers absorb significantly more moisture than do the equivalently priced products of the competitor. The team has asked the scientists to confirm their results, and after several months of testing, the scientists report that there is, on average, a 10 percent increase in absorbency.
The campaign is an immediate success. The competitor, recognizing the threat, immediately seeks an injunction to stop this campaign under the provisions of section 36 of the Competition Act. What provisions of the Act and what arguments will the competitor rely upon? What will Softest use in its defence? What are the possible outcomes?
- Shopic Inc. imports a wide range of consumer goods, largely from China. One of its products is compact fluorescent bulbs. In recent discussions with its Chinese supplier, Shopic has discovered that one shipment of bulbs was inadvertently shipped to Canada before quality inspection and therefore may not be compliant with CSA standards. Shopic has already sold the bulbs to its customers and no complaints have been received. However, there is a potential safety hazard. What are the relevant rules for the import and sale of the bulbs? What is Shopic’s potential legal liability? What should Shopic do about these bulbs? [footnote deleted]
- In 1996, Shawna and Jim bought a new Dodge truck from Dodge City Auto. The truck was manufactured by Chrysler Canada. When the truck was a year old and had traveled 30 000 kilometres, it burst into flames and was destroyed. When Shawna approached the dealer and the manufacturer, they refused to assist her in any way and referred her to her insurance company as her only remedy. Shawna later learned that two other 1996 Dodge trucks self-incinerated in her province. She also learned that the cause of the fires was a defective daytime running light module, of which Chrysler was aware. Comment on Shawna’s remedies arising from her purchase of the truck. How would you evaluate Chrysler’s marketing strategy relating to its product? [footnote deleted]
- Loyalist Foods Ltd. processes and sells a wide variety of canned food. It follows industry practice in its use of bisphenol A (known as BPA), a chemical used in plastic bottles and the epoxy resin lining the inside of cans. BPA prevents contamination and lengthens the shelf life of products, but it also mimics estrogen and disrupts biological processes. Since small amounts can seep from the lining into the contents of the containers, the use of BPA has become controversial. Health Canada has banned BPA from plastic baby bottles and has added BPA to its list of toxic substances. Consumers have reacted to the publicity surrounding BPA by essentially abandoning plastic water bottles.
Loyalist is concerned about the future use of BPA. A recent study has suggested there may be danger from consuming a lot of canned food. Loyalist fears that consumers may start avoiding cans containing BPA and wonders what Health Canada may do next. What legal risks does Loyalist face regarding BPA? What changes to its marketing program should Loyalist consider? [footnote deleted]
Chapter 24: Sales and Marketing: Price, Distribution, and Risk Management ………….. 889
Questions for Review, page 618
- Who decides the price in a commercial sale? Page 600
- What are two examples of anticompetitive behaviour? Page 602
- What is a conspiracy to fix prices? Page 601
- What is abuse of dominant position? Page 602
- Under what conditions is it acceptable to state “recommended retail price” on a product? Page 603
- What are two situations where it is legitimate for a seller to refuse to supply to a retailer? Page 604
- What is bid rigging? Page 602
- What is the meaning of “ordinary price” in evaluating the promotion of goods? Page 604
- How did Sears’ tire advertising break the law? Page 605
- What is double ticketing? Page 606
- What is the difference between legal multi-level selling and pyramid selling? Page 608
- What must be disclosed to potential participants in a multi-level marketing plan? Page 608
- How are door-to-door sellers regulated? Page 609
- What are two primary concerns of consumers buying online? Page 610
- What are key features of legislation governing online contracts? Page 611
- What is a corporate compliance program in relation to marketing regulations? Page 615
- How is privacy law relevant to marketing? Pages 610, 611, and 612
- How does a do not call list limit marketing strategy? Page 612
Questions for Critical Thinking, page 618
- The prohibition of various unfair pricing practices by the Competition Act is
intended to promote a level playing field and prevent pricing policies that limit
competition. Why are market forces not able to eliminate unfair competitors? Why are customers not able to distinguish the fair competitors from the unscrupulous?
- A manufacturer that wishes to market a product at a premium price cannot attempt to influence the resale price of its product by distributors without fear of review. How then can manufacturers protect the premium image of their products and discourage discount prices?
- It has been said that Canada’s anti-spam law is long overdue and will finally cure Canada’s reputation as a haven for spammers. Will the new law deter spammers? How will we know if it is working?
- Internet shopping opens up a broad range of risks to consumers. What
recommendations would you have for federal and provincial governments moving to improve regulation to enhance consumer confidence?
- Canadian car drivers are often disgruntled when gasoline prices change. It seems
that whether the price goes up or down, every gas station in town adjusts its price at the same time. Is this an indication of a price conspiracy by the oil companies? What does the recent
- As a relatively new marketing manager in a fast-moving consumer products
business, you are concerned because the firm encourages managers to operate
quickly, independently, and aggressively. You are aware of the advisability of a risk management plan and a corporate compliance program under the Competition Act. How could you persuade management to adopt this approach given the existing corporate culture?
Situations for Discussion, page 619
- Mega Goods Inc. is a major discount retailer operating throughout Canada. The
Home Co-op is also a nationwide chain, but it is a cooperative buying group of
smaller retailers that band together in order to achieve buying power. Both retailers buy large volumes of plastic food containers from the major manufacturer (PFC Inc.) in the market. The product line is an important customer draw and is often used in special promotions.
Mega Goods is eager to increase its market share, particularly with the entry of a multinational, U.S.-based discounter into the Canadian market. It decides to attempt to eliminate the direct competition from Home Co-op in smaller centres.
Mega Goods approaches PFC and requests changed conditions of purchase.
Specifically, it asks for a significant drop in price in return for a reduced payment period. This change will place it at a distinct advantage over Home Co-op, as Home Co-op cannot pay quickly because of its membership structure. Mega Goods intends to approach all other major suppliers if this proposal works.
PFC management is quite concerned, as Home Co-op is a long-standing
customer. Would supplying on Mega Goods’ terms be legal? Is it a wise business practice?
- There are three major suppliers of highly specialized industrial chemicals in
Canada. They have all operated for many years, and they respect each other and the quality of their products. They recognize that the market, while profitable, is finite, and that for each to survive, none can assume a greater market portion than currently held. For many years, it has been accepted that when calls for supplies are made by various industries, Company A will respond for Western Canada, Company B for Ontario, and Company C for Quebec and the Maritimes. Recently, purchasers from these suppliers have been questioning why, of all supplies purchased, these chemicals are subject to the least price fluctuation. They have learned from employees of A, B, and C of the arrangement. What are the implications for A, B, and C, their employees, and their customers?
- Miguel and Marta are the owners of Universal Suppliers Ltd. They have been
reasonably successful in selling printer cartridges and paper to a variety of local customers, but they wish to expand their business. They have decided to begin selling their products by telephone in order to reach potential customers across Canada and in the United States. They hired a number of phone sellers and have
given them a free hand in communicating with customers. Some of these sellers have gone to considerable lengths to get orders, including suggestions that potential customers have purchased from Universal in the past and can continue to pay deep discount prices. Does this sales campaign raise any legal issues? What is the potential liability of Universal, Miguel, Marta, and the phone sellers? Should those contacted by telephone be expected to protect themselves? Is contact by telephone more problematic than contact in person, by mail, or by email?
- Textiles Inc. is a major chain of fabric sellers. In this market, there are a few high- end sellers of fashion designer fabrics, some small independents, and three chains, with Textiles being the largest and most profitable. Textiles thrives on its ability to attract customers, often through discount pricing.
Every few weeks Textiles has a major promotion, with certain materials being sold at a reduced cost. The business sells both regular fabrics and fashion fabrics. Textiles tends to discount the regular fabrics while the prices of fashion fabrics retain their high markup. After a while, even though advertisements state that fabric prices are reduced by 30 percent and even 50 percent, regular customers have become so accustomed to these reductions that they seldom expect to pay the full price.
These practices are attracting the attention of competitors, who have notified the Competition Bureau. Why is the bureau likely to be interested in Textiles’ pricing practices?
- Air Canada controls 70 percent of the domestic passenger market in Canada and
20 percent of international air travel through Canadian airports. The airline has been in bankruptcy protection several times and is slowly regaining profitability, although costs for employees, fuel, and airports are rising. It is a challenge to maintain a full Canadian network along with international routes. Canadian competitors have begun to erode Air Canada’s market share, particularly on its more profitable routes. Senior management is considering several options to combat the competitive threats, including lowering fares below the competition, boosting loyalty rewards for customers, taking over the smaller airlines, starting their own smaller airlines to compete on certain routes, abandoning less profitable routes, forming an alliance with several of their largest competitors, or using their bargaining power to negotiate favourable deals with suppliers. Management is concerned about the legal ramifications of the various options. Are any of the possibilities illegal? What are the relevant factors?
- Two companies (WSI and CA) dominated the commercial waste collection service industry on Vancouver Island. Their customers were restaurants, schools, office complexes, and condominium developments. They jointly engaged in certain business practices to preserve their dominant position and discourage other small and medium-sized waste collection companies. These practices included the use of long-term contracts that locked in customers and contained highly restrictive terms, such as automatic renewal clauses and significant penalties for early contract termination. One small competitor (UP) was frustrated by its difficulty in finding customers because it provided prices and services that were competitive with the two major players. UP eventually discovered the terms of the contracts used by WSI
and CA. UP considered filing a complaint with the Competition Bureau. How would such a complaint be dealt with? [footnote deleted]
- The Rolling Stones produced a new four-disc DVD called Four Flicks. TGA
Entertainment, the band’s management company, made an agreement with Future Shop (FS) granting FS the exclusive right to sell the DVD set to consumers. In return, the Stones received a larger portion of profits from the DVD than they would have through normal distribution. Music retailer HMV Canada anticipates huge demand for the DVD and wants to be able to sell it through its outlets. TGA refuses to sell to HMV because of the agreement with FS. Is this agreement valid under marketing law? Explain. [footnote deleted]
. 8. Merck & Co. is the fourth largest pharmaceutical company in the world. It
developed and tested an effective painkiller called Vioxx that was particularly
helpful to those suffering from arthritis. The drug was approved by the regulatory
authorities and put on the market in 1999. Over the next five years, it was taken by
20 million patients, generating $2.5 billion in sales and 11 percent of Merck’s revenue each year. In 2004, a report was released indicating an elevated risk of heart attack and stroke among those who took Vioxx for 18 months or longer. Merck decided to withdraw Vioxx from the market. Subsequently Merck was named as defendant in over 27 000 lawsuits involving Vioxx. Twenty of the cases went to trial, most of which were won by Merck, but Merck’s legal costs exceeded $1 billion. In 2007, Merck negotiated a settlement of all lawsuits totalling $4.85 billion. The total represented less than Merck’s annual profit and provided claimants an average of $100 000. Meanwhile, Merck’s competitors continue to sell similar drugs with severe warnings on the packages regarding possible health risks. In 2011, Merck agreed to pay $950 million to settle criminal charges related to the marketing of Vioxx. Should Merck have put Vioxx on the market? Should it have been withdrawn from the market in 2004? Why did Merck fight every case for three years and then decide to settle? Why did the criminal process take seven years? What broader marketing law and consumer protection issues does this situation raise? [footnote deleted]
Chapter 25: Business and Banking ……………………………………………………………………… 918
Questions for Review, page 641
- What is the basic nature of the bank-customer relationship? Page 624
- How are banks regulated? Page 624
- What are the key issues addressed in a banking contract? Page 627
- What are the key duties of the customer and the bank? Pages 625 and 626
- What are the requirements for an instrument to be negotiable? Page 631
- What is a cheque? Page 629
- Why is the volume of cheques declining? Page 637
- Why are electronic transfers not subject to the same regulations as paper transactions? Page 627
- When a business issues a cheque to a supplier, who is the drawer, who is the drawee, and who is the payee of the cheque? Page 631
- What is an electronic financial services agreement? Page 627
- What are the key risks for a business in creating cheques for suppliers and accepting cheques from customers? Pages 632 and 634
- Why is the holder in due course in a stronger position to collect on a negotiable instrument than the assignee is to collect a debt? Page 633
- What are the banks’ obligations regarding suspected money laundering? Page 625
- What is identity theft? Page 628
- What are the benefits of electronic banking? Page 627
- What are the legal uncertainties in electronic banking? Pages 627
- How can cellphones be used for banking? Page 629
- What is “phishing”? Page 628
Questions for Critical Thinking, page 641
- In banking relationships, customers are expected to take care of themselves and to negotiate and be aware of their rights and obligations. In practice, the terms of banking contracts are dictated by the banks and found in standard form agreements that are not open to negotiation. Should banking contracts be regulated to ensure a basic level of fairness for customers?
- Retail merchants are caught between their customers and the credit card
companies. Customers want their cards to be accepted, especially those offering
attractive rewards to card users. Meanwhile the card companies require merchants to accept all cards and pay whatever fees the companies choose to impose. How can merchants deal with this dilemma?
- Electronic banking presents a regulatory challenge in that paper-based rules do not apply and the nature of electronic transactions produces a new set of potential
problems. What are some of those problems? Are the regulations likely to be outpaced by developments in technology?
- The regulatory divisions among the four types of financial services (banks, trust companies, insurance companies, and investment brokerages) have disappeared. Now, banks are able to provide all financial services in some form. Who benefits most from this relaxation—clients or banks? Can this relaxation contribute to a financial crisis and lead to demand for stricter national and international regulation?
- Considering the number of negotiable instruments and electronic transfers, there are relatively few legal disputes arising from them. Does that mean that the system is working well? What criteria might be used to measure the effectiveness of the system?
- Electronic transactions can result in the creation and combination of databases containing sensitive business and personal information. Those who provide this information are naturally concerned about its security and their privacy. One way to deal with such concerns is to enable anonymous transactions through such means as encryption, which in turn creates concern for illicit activities, such as money laundering. Which is more important—providing security or preventing fraud or crime?
Situations for Discussion, page 642
- Grenville agreed to facilitate transfers of funds from a Taiwanese businessman who he did not know. Grenville was to deposit cheques in his account and forward the funds to Asian accounts in exchange for a 5 percent commission. Without Grenville’s knowledge, the first cheque (in the amount of $10 000) that he deposited
in his credit union account had been altered and forged. Several months after the cheque cleared, the defects in the cheque were discovered. Grenville’s credit union took the full balance in Grenville’s account ($6000) and sued him for the remaining $4000. Is the credit union entitled to recover the $10 000 from Grenville? What are the relevant rules? [footnote deleted]
- Ken needed $100 000 to start his restaurant. He sought advice from W Bank.
Pamela, the loans officer at the bank, suggested a working capital loan on certain specified terms. She assured Ken that he should have no problem being approved if
he decided to apply for a loan. The approval process took longer than usual, but Ken went ahead and signed a lease for space for his restaurant and a contract for renovation of the space. Eventually, W Bank rejected Ken’s application. Based on recent experience, the bank decided that restaurants are too risky since most do not last beyond six months. Ken was unable to arrange alternative financing in time and suffered a large loss in his business. Is this a typical banking relationship where Ken must look out for himself, or does the bank have some responsibility for his plight? What should Ken and the bank have done differently? [footnote deleted]
- Ratty Publications wrote a cheque payable to LePage on its account at CIBC in
payment for the first month’s rent on an office lease. Ratty changed its mind about the lease and instructed CIBC to stop payment on the cheque. The following day, LePage got the cheque certified at another branch of CIBC and deposited the cheque in its account at TD Bank. When TD presented the cheque to CIBC for payment, CIBC refused to honour it. Which prevails—the stop payment or the certification? Does the validity of the cheque depend on the lease agreement between
Ratty and LePage? Which of the four parties should bear the loss? [footnote deleted]
- Harvey’s Car Lot bought a used car from Luke. When Luke delivered the car,
Harvey gave him a cheque for $5000. Luke cashed the cheque immediately. When Harvey put the car in the garage, he discovered that the bottom was severely rusted and the engine was shot. What can Harvey do about the cheque? How should Harvey change his purchasing practices? How would the outcome be different if instead of giving Luke a cheque, Harvey had promised to pay Luke when Harvey resold the car? [footnote deleted]
- Ravanello is a computer hacker. He is motivated primarily by the challenge of
breaching systems, but he figures he might as well make some money at the same time. After many months of dedicated effort, he penetrated the electronic customer files of EZ Bank. Not wanting to appear greedy or be caught, Ravanello devised a system to skim $10 from random accounts every month. He began to accumulate
money in his account faster than he could spend it. It was nine months before a
customer of EZ convinced the bank that his account was short by three $10
withdrawals and the bank was able to trace the reason. What does this scenario
reveal about the perils of electronic banking? Do you think this scenario could really happen? Is such a risk likely to be prevented by banking practices, contracts, or the law? Who is responsible for the losses?
- Rubin and Russell were partners in RRP Associates. They did their personal and business banking with Colossal Bank, where they arranged their accounts so that transfers from one to the other could be made by either partner online, by phone, or in person. Although the business prospered, Rubin and Russell had difficulty
working together. Following a serious disagreement, Russell went online and
transferred $50 000 from the RRP account to his personal account. When Rubin discovered this transaction, he complained to the bank and was told that the transfer was done in accordance with the agreement between RRP and the bank. How can partners best balance the risks arising from banking arrangements with the need for convenient banking? What action can Rubin take now?
- Bob was the sole officer, director, and shareholder of 545012 Ltd. Bank of Montreal issued a bank card to Bob for the company’s account. Bob entrusted an employee, Paul, with the corporate card and its PIN. Paul forged cheques payable to the company, deposited them in the corporate account, and then used the corporate card to withdraw cash and make point-of-sale purchases, creating an overdraft of $60 000 on the corporate account. The bank sued 545012 Ltd. and Bob for the amount of the overdraft. Who is responsible for the overdraft? On what will the answer depend? [footnote deleted]
- BMP Global Inc. (BMP) was a distributor of nonstick bake ware in British
Columbia. BMP was a customer of the Bank of Nova Scotia (BNS) in Vancouver. Hashka and Backman were the two owners of BMP and had personal accounts in the same branch of BNS. BMP received a cheque for $902 563 drawn by First National Financial Corp. on the Royal Bank of Canada (RBC) in Toronto. Hashka deposited the cheque in the BMP account and informed the manager, Richards, that the cheque was a down payment on a distributorship contract with an American company. Richards placed a hold on the cheque for seven days. The cheque cleared and was paid by RBC to BNS and released to BMP. Hashka and Backman paid several creditors and transferred funds to their personal accounts. Ten days later RBC notified Richards that the signatures on the $902 563 cheque were forged. Richards froze the three accounts in his branch and returned the combined balance of $776 000 to RBC. Was Richards justified in freezing and seizing the accounts of BMP, Hashka, and Backman? Can they take action against Richards and BNS? Is RBC responsible for accepting the cheque with the forged signatures?
Chapter 26: The Legal Aspects of Credit …………………………………………………………….. 948
Questions for Review, page 664
- What are some examples of credit transactions? Page 645
- What are some of the methods that creditors use to reduce risk in credit transactions? Page
- What are the rights of an unsecured creditor on default by the debtor? Page 645
- What are the key aspects of personal property security legislation? Page 651
- What are the disclosure requirements for a consumer loan? Page 660
- What is a criminal rate of interest? Page 661
- What are some problems with payday loans? Page 661
- What is a general security agreement? Page 649
- What is the role of a financing statement? Page 651
- How are lenders’ remedies limited by law? Page 655
- What is a purchase-money security interest? Page 652
- What is the difference between a perfected and an unperfected security interest? Page 645
- What is the role of a receiver or receiver-manager? Page 655
- What is a deficiency? Page 655
- Who are the parties in a guarantee contract? Page 656
- What are the issues with standard form guarantee contracts? Page 659
- How does a guarantee affect the limited liability of a shareholder? Page 656
Questions for Critical Thinking, page 664
- When a business fails, most of the assets may be claimed by secured creditors.
Unsecured creditors may receive very little, if anything, and shareholders may be left with nothing. Is the protection accorded to secured creditors justified?
- There is a complex web of rules governing consumer credit. Should commercial credit be regulated the way consumer credit is now or left to the lender and borrower to negotiate?
- What factors affect the ability of a borrower to finance a business using debt? How does an economic downturn or credit freeze affect the ability of a business to borrow? How do these developments affect existing credit agreements?
- Creditors holding general security agreements are required to give the borrower
reasonable notice before appointing a receiver to take possession of the assets of the business. How should a secured creditor decide how much time to give a debtor?
- The Canadian Constitution gives the provinces control over property and civil rights, which includes the regulation of credit and registration of property as security for credit. Do the benefits to the provinces of autonomy outweigh the burden on business of dealing with so many sets of rules?
- In light of this chapter, what factors would you advise Bill and Martha to consider in financing Hometown’s expansion? Did they make the right decision in issuing shares? When Hometown borrows, how should they try to structure the terms of the loan to minimize the risk to Hometown and to themselves?
Situations for Discussion, page 665
- Douglas Pools Inc. operates a pool company in Toronto. In order to finance the business, Douglas Pools negotiated a line of credit with the Bank of Montreal to a maximum indebtedness of $300 000. The line of credit was secured by a general security agreement in favour of the Bank, in which the collateral is described as “all assets of Douglas Pools, all after-acquired property and proceeds thereof.” The Bank registered its security interest under the PPSA on 10 January 2011. On 30 March 2011, Douglas Pools bought a 2009 Dodge Ram pick-up truck from London Dodge for $15 000. London Dodge agreed to accept payment for the truck over three years, with interest at 6 percent per year, and took a security interest in the truck in order to secure payment of the purchase price. London Dodge registered its security interest under the PPSA on 4 April 2011. On 11 November 2011, Douglas Pools sold the truck to Fisher & Co. (a company owned by the same person that owns Douglas Pools) for $1.00. Douglas Pools defaulted on its obligations to both the Bank and London Dodge and, on 28 November 2011, declared bankruptcy. At the time of the bankruptcy, Douglas Pools owed the Bank $240 000 and London Dodge
$12 000. Now, the Bank, London Dodge, the Trustee in Bankruptcy, and Fisher &
Co. all claim the truck. Whose claim to the truck has first priority? Whose claim has second priority?
- The Weiss Brothers operated a successful business in Montreal for 30 years. They bought a bankrupt hardware business in Ottawa, even though they had no experience selling hardware. Their bank, TD, got nervous about their financial stability and suggested they seek financing elsewhere. The brothers contacted a former employee of TD who was with Aetna Financial Services and negotiated a new line of credit for up to $1 million. Security for the line was a general security agreement, pledge of accounts receivable, mortgage on land, and guarantees by the brothers. Six months later, the brothers defaulted on the line. Aetna demanded payment in full and appointed a receiver, who seized all the assets three hours later. What can the Weiss Brothers do to save the business and their personal assets? What could they have done to prevent this disaster? Why did Aetna grant credit after TD had become reluctant to continue? [footnote deleted]
- The bank agreed to lend money to Wilder Enterprises Ltd. and, in order to secure repayment of the loan, the company granted the bank a security interest in all of its assets. The loan was also personally guaranteed by members of the Wilder family, who owned the company. Periodically, the bank increased the company’s credit limit as the company expanded its business. When the company experienced financial difficulty, however, the bank dishonoured two of the company’s cheques. That prompted a meeting between the bank and the Wilders, the result of which was that the bank agreed to loan additional funds to the company, and refrain from demanding payment on its loan, in exchange for additional guarantees from members of the Wilders family. Despite the agreement, and without warning, the bank stopped honouring the company’s cheques and demanded payment of the loan in full. When the company was unable to pay, the bank appointed a receiver- manager and took control of the company. The receiver-manager refused the company’s request to complete the projects that the company then had underway and, as a result, the company went bankrupt. The bank sued the Wilders for payment pursuant to the guarantees that the bank had, all of which permitted the bank to “deal with the customer as the bank may see fit.” Will the Wilders be obligated on their guarantees? How sympathetic are the courts likely to be? Could the Wilders have structured their affairs differently to avoid high personal risk for the escalating debts of their failing business? [footnote deleted]
- Kyle owned and operated a retail sporting goods shop. A new ski resort was built in the area and, to take advantage of increased activity, Kyle decided to expand his
shop. He borrowed money from his bank, which took a security interest in his
present inventory and any after-acquired inventory. One year later, an avalanche
destroyed the ski lodge. Kyle’s business suffered, and he was left with twice as much inventory as he had when he first obtained the loan. When he defaulted on the loan payments, the bank seized all his inventory. Kyle claims the bank is entitled only to the value of the inventory at the time of the loan. How much inventory can the bank claim? Could Kyle have negotiated better terms at the outset?
- Nicola applied for a personal loan from ABC Bank. She provided all of the personal and financial information requested by the bank. When she inquired about her
application, the bank’s credit officer told her that her application had been denied. When Nicola sought an explanation for the refusal, she was told that her “credit score” was not high enough. The bank refused to provide any information concerning her score or the formula used to calculate the score, claiming this was confidential commercial information. What can Nicola do now?
- King Tire Shop agreed to buy a vacant building supply outlet to expand its tire business. To finance the purchase, King negotiated a loan from its bank, with the land and building as security. As part of the loan documentation, the bank required a report stating that the property was not environmentally contaminated in any way. King engaged a local environmental consulting firm to investigate and prepare the report for the bank. The firm gave the property a clean bill of health, and the
loan was granted. Two years later, it was discovered that the adjacent property,
which was formerly a gas station, had seriously contaminated the soil, and pollution was leaching into the soil of King’s property. The cleanup cost is significant, and King cannot afford it. As a result, King’s property is seriously devalued and the bank is concerned about the value of its security, especially since King’s business is not doing well. Who is responsible for this environmental damage? What are the bank’s options? What are King’s options?
- New Solutions Financial loaned Transport Express, a transport trucking company, $500 000 under a commercial lending agreement. The interest rate was 4 percent per month, calculated daily and payable monthly. This arrangement produced an effective annual rate of 60.1 percent. Other clauses in the agreement specified other charges, including legal fees, monitoring fee, a standby fee, royalty payments, and a commitment fee totalling 30.8 percent for a total effective annual rate of
90.9 percent. Transport Express found the terms of the agreement too onerous and refused to make the agreed payments. Is this agreement enforceable? Why or why not? Should a commercial arrangement like this be treated differently from a payday loan? [footnote deleted]
- RST Ltd. is an independent printing company in a medium-sized town in
Saskatchewan. It was established 15 years ago by Ron, Sandra, and Tara, who each own one-third of the shares in the company. Last year, RST revenues were $4 million, mainly from local contracts for such items as customized office
stationery, business cards, advertising posters, calendars, and entertainment
programs. Because the business is prospering, the owners are planning to expand their printing and sales space. They know that significant financing is required for the expanded facilities and the increased business. The current capital structure of RST is 60 percent owners’ equity and 40 percent debt. Rather than issue shares to other investors, the owners are prepared to put more equity into the business by purchasing additional shares in order to maintain their debt/equity ratio. The
expansion project will cost $1 million, so they need to borrow $400 000. Do you agree with the owners’ financing decisions? What are the risks? How can the owners plan for uncertainty in their industry and the economy in general?
Chapter 27: Bankruptcy and Insolvency ………………………………………………………………. 978
Questions for Review, page 686
- How can negotiated settlements be used when a business is in financial difficulty? Page 668
- What is the difference between insolvency and bankruptcy? Page 670
- What are the purposes of bankruptcy legislation? Page 675
- What is the difference between an assignment in bankruptcy and a bankruptcy order? Pages 675
- What are two examples of an act of bankruptcy? Page 675
- What is a preference? Page 678
- Who investigates preferences and transfers at undervalue? Page 676
- Who are preferred creditors? Page 680
- How are preferred creditors treated differently from secured and unsecured creditors? Page 680
- How are employees protected in the bankruptcy of their employer? Page 681
- Under what circumstances will a bankrupt likely not be discharged automatically from bankruptcy? Page 683
- What are the duties of the trustee in bankruptcy? Pages 669
- What debts are not released in a discharge? Page 683
- What is the purpose of a proposal? Page 670
- What is the difference between a Division I proposal and a consumer proposal? Page 671
- Why might a large company prefer reorganizing under the CCAA rather than making a proposal under the BIA? Page 672
- What happens if unsecured creditors do not vote to approve a proposal? Page 672
- What are the differences between an individual being bankrupt and a corporation being bankrupt? Pages 682 and 683
Questions for Critical Thinking, page 686
- Business decisions made prior to bankruptcy can be challenged by the trustee if they are found to be preferences or transfers at undervalue. What is the rationale for giving the trustee this authority? How does it relate to the purposes of bankruptcy legislation?
- Current bankruptcy law bars graduates from being discharged from their
outstanding student loans for seven years after the completion of their studies or five years in cases of hardship. Why does the law deal with student loans in this way? Is it fair to treat student loans differently from other debts?
- In late 2008, the North American auto industry was in serious financial difficulty. General Motors and Chrysler sought large bailout packages from both the American and Canadian governments. It was speculated that the ripple effects on the economy would be far reaching if these companies failed. Other commentators
suggested that bankruptcy protection would be a positive step for the companies.
They would be able to sharply reduce their excessive costs by negotiating deals with creditors, dealers, and the unions, and emerge in a stronger position to compete with automakers from other countries. In 2009, both companies went through an expedited process supported by government. Is bankruptcy protection an appropriate process in a potential industry failure of this magnitude?
- Proposals are an important part of the bankruptcy and insolvency legislation.
However, despite the controls that exist, they can have the effect of delaying legal
actions by creditors to protect their interests. Does the potential benefit of proposals in salvaging troubled businesses outweigh the potential losses to creditors?
- The category of preferred creditors is not found in the bankruptcy legislation of many countries. What is the rationale for the protection afforded preferred creditors in Canadian law? Is this special treatment appropriate considering the interests of all creditors?
- Why does the bankruptcy legislation treat individuals differently from corporations regarding a discharge from bankruptcy? Is this treatment appropriate?
Situations for Discussion, page 687
- Before creditors can petition a debtor into bankruptcy, they must be able to show that at least one act of bankruptcy has been committed by the debtor. Review the events in the Hometown situation and identify any possible acts of bankruptcy. Do the various acts of bankruptcy have a common theme? Should it be obvious to a debtor such as Hometown that such conduct is inadvisable? When the debtor has committed an act of bankruptcy, at what point should the creditors act upon it?
- Ontario Realty (OR) is a major property developer based in Toronto. It is in the
business of building office towers and other commercial premises. In the past year,
the Ontario economy has been weak and commercial properties are difficult to sell. OR now finds itself with several significant properties for which there is little chance of development until the economy recovers. OR’s debts are $150 million, and its assets at today’s values are worth $80 million. Two banks hold security for
90 percent of the debt. The balance of the debt is unsecured. The company is unable to make regular payments on its loans.
John, the CEO of the company, has weathered this kind of crisis before. He
believes an economic recovery will begin within a year. His discussions with the two major creditors suggest that only one would be prepared to negotiate a more favourable payment scheme until the market recovers. John seeks advice from an insolvency practitioner about the pros and cons of making a proposal. What advice is John likely to receive? What factors will the creditors consider in responding to OR’s situation? What are John’s options?
- Designer Shirts is a supplier to Classic Stores (Classic), a major national retail
outlet. There are rumours that Classic is in trouble, but the company has been in trouble before and has managed to recover. Industry experts say that there is too much at stake to allow the company to fail.
Classic has recently announced an infusion of cash from a major investor. On the basis of this news, Designer Shirts agrees to make deliveries, although it insists on a shorter payment period than normal. Designer makes the first delivery of summer stock at the end of March. It receives its payment within the specified
20 days. It then makes a second delivery, but this time payment is not forthcoming in 20 days. Based on further promises that the payment will be made within two days, Designer makes a third shipment. Within 10 days there is an announcement
that Classic has made an assignment in bankruptcy. Designer has received payment for neither the second nor the third shipment and is owed $1.5 million. What are Designer’s options? Could Designer have better managed its risk in this situation?
- Falcon Gypsum Ltd. is in the business of manufacturing wallboard, largely for the U.S. housing market, which has been growing for many years. In recent months, several developments have caused Falcon management to become concerned. The U.S. housing industry has slowed considerably. This has caused wallboard prices to fall sharply. In addition, the Canadian dollar has risen in relation to the U.S. dollar, making Canadian manufacturers such as Falcon less competitive in export sales.
Falcon currently employs 40 workers. The company owes $32 million to 90 different creditors. The major creditors are the bank and the provincial government, who hold secured loans. Management’s strategy is to attempt to wait out the current adverse conditions and hopefully return to prosperity. In order to do that, Falcon needs some breathing room from creditors and some additional bridge financing. What are Falcon’s options? What should Falcon do? If Falcon makes a proposal, are creditors likely to approve the proposal? [footnote deleted]
- Kim owns a family business that is experiencing serious difficulties because of
changing economic circumstances. It operates as a sole proprietorship and has
borrowed from a number of sources (originally commercial, but lately from friends and family) over the last three years to keep the business afloat. There are three employees, without whose services Kim could no longer run the business. He is beginning to feel overwhelmed and needs some basic advice as to what he can and
cannot do. For example, should he create a corporation and sell the business assets to that corporation? Should he consolidate his loans and pay off as many as he can now by extending his borrowing with the bank? If he repays his friends and family, is there any risk in doing so? What should Kim do?
- The Great Big Bank has recently conducted a review of its small-business loan
failure rates and is concerned about the results. There is strong evidence that
failures are increasing disproportionately to loans made and that amounts
recovered are decreasing. Interviews of local loans managers suggest a good deal of confusion about how to assess risk, when the bank should call a loan, and what mechanism best meets the bank’s needs after the loan has been called. In addition, the credit market is tight and the bank’s senior management has ordered that lending requirements be strengthened. Based on all this information, the bank is redesigning its basic training manual. The primary focus now is on the section entitled “The loan has gone bad. Now what do you do?” Develop guidelines that would offer practical advice and basic information for loans officers. Identify the options and the circumstances under which each might be appropriate.
- Gaklis was the sole director, officer, and shareholder of Christy Crops Ltd. He
controlled the company and made all major decisions. The company had financial
difficulty and was placed in receivership. Gaklis had guaranteed substantial debts of the company and was unable to respond to demands for payment. He was forced into bankruptcy and eventually applied for discharge. The trustee and the creditors opposed his application based on his conduct. Gaklis had disposed of land belonging to the company. He had given a security interest for $60 000 on an airplane and transferred ownership to his father. He had failed to cooperate with the trustee by refusing to disclose particulars of bank accounts and insurance policies.
Should Gaklis be discharged from bankruptcy and released from his unpaid debts? If so, on what terms? [footnote deleted]
- Gregor Grant was the president and sole shareholder of Grant’s Contracting Ltd. On application by a major creditor, an order of bankruptcy was issued against the company. In the course of investigating the company’s affairs prior to bankruptcy, the trustee discovered that a cheque received in payment from a supplier had not been deposited in the company’s account but had been diverted to another company owned by Gregor’s brother, Harper. Harper had kept some of the money for himself and returned the remainder in smaller amounts to Gregor. What, if anything, can the trustee do about this transaction? What could be the impact on the two companies, the two brothers, and the customer who sent the cheque? [footnote deleted]
Chapter 28: Insurance ……………………………………………………………………………………… 1009
Questions for Review, page 710
- What is the purpose of an insurance contract? Page 691
- What is a premium? Page 691
- Every province has enacted insurance legislation. What are the purposes of insurance legislation? Page 691
- What are the three main types of insurance? Page 692
- What is a deductible? What effect does it have on insurance premiums? Page 692
- What does it mean to say that an insured has a duty to disclose? What happens if the insured fails in this duty? Pages 692-693
- What is an insurable interest? Why is it important? Page 694
- Why are contracts of insurance known as contracts of indemnity? Pages 694-695
- What is a coinsurance clause? What is its purpose? Pages 694-695
- What is the right of subrogation? When does the right of subrogation arise? Page 695
- What is the difference between a rider and an endorsement in an insurance policy? Pages 695-696
- How do “no-fault” liability systems differ from tort-based liability systems? Pages 699-700
- Describe comprehensive general liability insurance. How does it differ from warranty insurance? Pages 700-701
- What is the purpose of errors and omissions insurance? Page 701
- When should a business consider buying key-person life insurance? Page 705
- What does an insurance broker do? Page 706
- What is the purpose of an insurance adjuster? Page 707
- Does the insurer have a duty of good faith? Explain. Page 707
Questions for Critical Thinking, page 710
- A manufacturing business is in the process of applying for property insurance. What kind of information must the business disclose to the insurance company? Why can insurance companies deny coverage on the basis of nondisclosure or misrepresentation of information?
- What does it take to establish an insurable interest? For example, does an employer have an insurable interest in an employee’s life? A retired executive’s life? Does a creditor have an insurable interest in a debtor’s life? The owner of property has an insurable interest in the property. Do mortgagees and lien holders have an insurable interest in property? Does a tenant have an insurable interest in the landlord’s property? Does a thief have an insurable interest in stolen property?
- In many regions of the world, kidnapping for ransom has become a thriving
business. The victims of this crime have included not only journalists, diplomats, and aid workers but also business executives. What role, if any, should insurance play in addressing the risk of being kidnapped in a foreign country? Do you think that the presence of insurance might exacerbate the risk? Aside from having money to pay a ransom demand, what are the other advantages of having kidnapping insurance?
- Fraudulent insurance claims are a problem faced by the insurance industry.
Common examples involve inflated property values, exaggerated personal injuries, arson and other deliberate acts of sabotage, and “insider theft.” Insurance companies are entitled to question the authenticity of all claims. How far should the insurance company be able to go to obtain evidence of fraud? On what basis should the insurance company be entitled to deny a claim? For example, should an unusual pattern of claims be a basis for denial?
- In Whiten v Pilot, the court upheld an award of punitive damages against an insurer for breach of the insurer’s duty of good faith. Should the courts award punitive damages against claimants who make fraudulent insurance claims? For example, there have been instances where a group of individuals have conspired to stage motor vehicle accidents and then submitted false property damage and personal
injury claims. What factors should the courts consider in awarding damages for insurance fraud?
- Between April 17 and April 19, 2011, hackers accessed Sony’s online gaming
service, PlayStation Network (see Technology and the Law: Business’s Liability in Contract and Tort for the Consequences of Online Hacking, textbook page 246). The names, birth dates, addresses, email addresses, phone numbers, and passwords of millions of people who entered contests promoted by Sony were stolen. Credit card information may also have been compromised. What are the potential costs to Sony as a result of this hacking incident? What are the insurance issues? [footnote deleted]
Situations for Discussion, page 711
- Athena Aristotel operates a retail clothing store in West Vancouver. The store is
located on the bottom floor of a building owned by Athena. One of Athena’s friends rents the top floor for a residence. Recently, Athena suffered major property damage when a three-alarm fire destroyed her building. The cause of the fire is not known, although faulty wiring is suspected. As a result of the fire, Athena was required to temporarily move her retail operations to a nearby location. Her friend had to find a new place to live. What type of insurance coverage will respond to Athena’s loss? Assume that Athena discovers that she is not covered for the full extent of her losses. Must Athena absorb the uninsured portion of the loss, or does Athena have any other options? Explain. What steps should Athena take to ensure that she has optimal insurance coverage? [footnote deleted]
- In an increasing number of residential communities, dwellings are being used for marijuana grow operations. In many instances, a rented house is converted to a hot house to cultivate the plants. The conversion causes extensive structural damage, a compromised electrical system, excessive condensation, and mould, and it is unlikely that the damage is covered under the homeowner’s insurance policy. This is because it is common practice in the insurance industry to include a clause that excludes damage that results from illegal activity, whether the homeowner is aware of the illegal activity or not, and a clause that specifically excludes damage that arises from
marijuana growing operations. How can a business that rents out real estate
manage the risk posed by marijuana grow operations? What steps should the
business take before renting out its property? What steps should the business take after the property has been rented out?
- Dorothy is a sole proprietor who recently incorporated her business in order to take the benefits of limited liability. As part of this change, she transferred all her business assets over to her corporation, Dorothy Ltd. Unfortunately, she forgot to change her insurance policies naming the company as the new insured. The property remains insured in Dorothy’s name. Soon after the transfer, there was a break-in at Dorothy Ltd.’s corporate offices and much of the company’s expensive computer equipment was stolen. Dorothy made a claim on her policy but the insurance company took the position that she did not have an insurable interest in the corporate property.
Explain why the insurance company refused Dorothy’s claim. What can she do now? What arguments can she make in support of her claim? What practical advice would Dorothy now give to other small-business owners? [footnote deleted]
- Twelve-year-old Aaliyah Braybrook was babysitting two boys, aged three and five, when a fire broke out in their home. Braybrook was able to get the boys and the family pet out but the fire destroyed the home and damaged two neighbouring homes. It is alleged the fire was started by the five-year-old playing with a lighter in the bathroom. TD Insurance, the insurance company for the owners of one of the damaged neighbouring homes, filed on their behalf a $350 000 lawsuit against Braybrook and the father of the boys, who was the owner of the destroyed home. After a public outcry, including a speech by the local Member of Parliament in the House of Commons, TD Insurance dropped the suit against Braybrook. What was the likely basis of the lawsuit by the neighbours against Braybrook? On what basis could TD Insurance sue Braybrook on behalf of the neighbours? What do you think was the reason for TD Insurance naming Braybrook in the lawsuit? What was the risk to TD Insurance in naming Braybrook in the lawsuit? [footnote deleted]
- Precision Machine Ltd. manufactures pistons and rings for draglines and
excavators that are used in oil sands exploration. Demand for these components is unpredictable but critical, as machines cannot operate without them. In an effort to ensure that customers are satisfied, Precision keeps about $100 000 worth of components in inventory at all times. The value of the inventory is covered by property insurance from SPADE Insurance Ltd. The policy contains a coinsurance clause that requires Precision to hold 80 percent coverage. Precision, however, only carries $60 000 worth of coverage. An electrical fire destroys some of Precision’s inventory, and Precision makes a claim of $30 000 on its policy. How much of the claim is Precision entitled to receive from SPADE? Why would Precision underinsure its inventory? How much is Precision entitled to receive from SPADE if its loss is $40 000?
- On 12 April 2001, portions of Toronto’s SkyDome’s retractable roof collided when it was being opened. Pieces of the roof fell onto the playing field, making the SkyDome unsafe for use. The regularly scheduled Major League Baseball game between the Toronto Blue Jays and the Kansas City Royals was postponed. The Blue Jays sued Sportsco, the owner/operator of the SkyDome, for damages in the amount of $1 million, alleging a loss of revenues from the loss of use of the building on 12 April 2001. Sportsco made a claim under its comprehensive general liability policy with ING Insurance for a defence to the Blue Jays’ claims. ING denied coverage and brought an application seeking a declaration that it did not owe Sportsco a defence (an insurer has a duty to defend the insured when allegations fall within the coverage of the policy). Who has the onus of proving whether a claim falls within an insurance policy? On what basis may an insurance company like ING Insurance deny coverage to an insured? [footnote deleted]
- Greenhouses Inc. owns and operates a greenhouse in rural Nova Scotia. On a busy Saturday in early spring, a customer, Xavier Donnelly, tripped over some bags of potting soil and fell onto a table used for repotting large plants and shrubs. Xavier suffered a severe gash to his right arm and a large bruise on his forehead. The way in which accidents and other incidents are handled can have a significant impact on the ultimate cost of a claim. How should the employees of Greenhouse handle Xavier’s accident? Outline the steps that they should take in this situation.
- In 1999, John Jacks signed a long-term car lease agreement, which was assigned by the dealership to GMAC Leaseco. On the same day, Jacks contacted a representative of the Wawanesa Mutual Insurance Company to insure the vehicle. The representative asked Jacks a few questions related to driving. In particular, the representative asked Jacks how many accidents he had had in the previous six years, whether he had ever been convicted of impaired driving, and whether his driver’s licence had ever been revoked or suspended.
In 2002, Jacks had an accident and his car was destroyed. In response to his
claim for compensation, Wawanesa conducted an investigation and discovered that the insured had been convicted of several crimes between 1980 and 1991, including break and enter, theft, possession of property obtained by crime, abetting in fraud, identity theft, fraud, and possession of drugs. Wawanesa refused to pay
compensation on the basis that Jacks had failed in his duty to inform. What is the purpose of the insured’s duty to disclose? What is the content of the duty to disclose? Who has the onus of proving whether the duty to disclose has been fulfilled? Did Jacks fulfill the duty to disclose? Discuss. [footnote deleted]