Chapter 1: Knowledge of Law as a Business Asset Law in the Business Environment The law impacts virtually every aspect of society, including the business environment. The law affects most business decisions – from development of the basic business idea through to its implementation, and all the attendant matters in between, including financing, hiring, production, marketing, and sales. Business law: a set of established rules governing commercial relationships, including the enforcement of rights Defines general rules of commerce Protects business ideas and more tangible forms of property Provides mechanisms that permit businesspeople to select their desired degree of participation and exposure to risk in business ventures Seeks to ensure that losses are borne by those who are responsible for them Facilitates planning by ensuring compliance with no commitments Rules and Principles Law: the set of rules and principles guiding conduct in society Protecting Persons and Their Property o Those who break the Criminal Code of Canada – such as breaking into another person’s house, assaulting someone, or committing a commercial fraud – are subject to criminal sanctions, such as fines or imprisonment o Businesses are legally required to adequately protect their customers’ personal information due to the regime established by the Personal Information Protection and Electronic Documents Act o Business is required by law to treat humanely any animals in its care. Failure to do leads to prosecution under animal welfare statuses and even then Criminal Code of Canada o The law protects the members of society in two ways: It sets rules with penalties in order to encourage compliance It seeks to make those who break the law accountable for their misconduct o Breach of Contract: failure to comply with a contractual promise Facilitating Interactions o The law facilitates personal interactions by providing rules concerning marriage, adoption, and the disposal of property upon the owner’s death for example o Age of majority: the age at which a person becomes an adult for legal purposes. In Canada, this ranges from 18-19 years of age, depending on the province o Contract law: rules that make agreements binding and therefore facilitate planning and the enforcement of expectations o The law functions to prevent disputes and to facilitate relationships o Litigation: the process involved when one person sues another Providing Mechanisms for Dispute Resolutions o Mediation: a process through which the parties to a dispute endeavor to reach a resolution with the assistance of a neutral person o Arbitration: a process through which a neutral party makes a decision (usually binding) that resolves a dispute o Liability: legal responsibility for the event or loss that has occurred How and Why the Law Works Legal risk management plan: a comprehensive action plan for dealing with the legal risk involved in operating a business Law and Business Ethics Business ethics: moral principles and values that seek to determine right and wrong in the business world Consider how ethics impacts on business decisions form a number of vantage points: o Business to consumer: how far should a company go in extolling the virtues of its product? When does sales talk become deception? o Business to society: to what lengths should a company go to enhance shareholder return? o Business to employee: should a business monitor employee emails and Internet use on company computers? o Business to business: short of lying or fraud, is it ethical to bluff during business negotiations? Chapter 2: The Canadian Legal System Introduction The Canadian legal system is the machinery that compromises and regulates the government. Government in turn is divided into three branches: The legislative branch creates law in the form of statues and regulations The executive branch formulates and implements government policy and law o Government policy: the central ideas or principles that guide government in its work, including the kind of law it passes The judicial branch adjudicates on disputes Constitutional law: the supreme law of Canada that constrains and controls how the branches of government exercise power Charged with upholding “the values of a nation” – tied to the political philosophy known as liberalism: a political philosophy that emphasizes individual freedom as its key organizing value The Canadian legal system: the machinery that comprises and governs the legislative, executive, and judicial branches of government The legislative branch of government passes laws that impact on business operations. The executive branch implements and generates policy that may be directed at business The judicial branch provides rulings that not only resolve existing legal conflicts but also impact on future disputes The Canadian Constitution Canadian constitution is not contained in one document – located in a variety of places, legislative and political, written and unwritten. Written elements of the Constitution include the Constitution Act, 1867 - part of which divides legislative power between the federal and provincial governments – and the Canadian Charter of Rights and Freedoms – which identifies the rights and freedoms that are guaranteed in Canada Constitutional Conventions: important rules that are not enforceable by a court of law but that practically determine how a given power is exercised by government The Legislative Branch of Government The legislative branch of government creates a form of law known as statute law: formal, written laws created or enacted by the legislative branch of government Familiar example of statute law is the Criminal Code of Canada, which prohibits a variety of offences, such as assaults, theft and fraud. Three levels of government – the federal, provincial, and municipal levels – make legislation in Canada Parliament, the federal legislative branch, is composed of the House of Commons and the Senate For legislation to become a law, it must first be passed by the house of commons, and then approved by the Senate Statute Law and Jurisdiction Each level of government has the jurisdiction to pass laws within its proper authority or sphere The Constitution Act, 1867 Federal Government - Parliament - House of commons - Senate Law-making jurisdiction provided by s.91 of the CA Provincial Government Legislature Law-making jurisdiction provided by s.92 of the CA Territorial Governments Limited self-government Subject Municipal Government Law-making jurisdiction provided by the provincial legislature Executive jurisdiction: jurisdiction that one level of government that holds entirely on its own and not on a shared basis with another level Concurrent jurisdiction: jurisdiction that is shared between levels of government Paramountcy: a doctrine that provides the federal laws prevail when there are conflicting or inconsistent federal and provincial laws Ratify: to authorize or approve Treaty: an agreement between two or more states that is governed by international law Bylaws: laws made by the municipal level of government The Executive Branch of Government The executive branch of government has a formal, ceremonial function, as well as a political one Formal executive: the branch of government responsible for the ceremonial features of government Political executive: the branch of government responsible for day-to-day operations, including formulating and executing government policy, as well as administering all departments of government The chief executive of the federal government is the prime minister, while the chief executive of the provincial government is the premier. Other members include cabinet members, civil servants, and the agencies, commissions, and tribunals that perform government functions Cabinet: a body composed of all ministers heading government departments, as well as the prime minister or premier Regulations: rules created by the political executive that have the force of law The Judicial Branch of Government Judiciary: a collective reference to judges It may seem surprising that the judiciary is a branch of government, given that the judiciary is supposed to be independent of government Judges: those appointed by federal and provincial governments to adjudicate on a variety of disputes, as well as to preside over criminal proceedings System of Courts Each provincial and territorial system of courts has three basic levels: trial, intermediate appeal, and final appeal Trial courts are two types: inferior and superior o Inferior court: a court with limited financial jurisdiction whose judges are appointed by the provincial government. Criminal, family, and civil cases Small claims court: a court that deals with claims up to a specified amount o Superior court: a court with unlimited financial jurisdiction whose judges are appointed by the federal government Supreme Court of Canada: the final court for appeals in the country Canadian Charter of Rights and Freedoms (1982): a guarantee of specific rights and freedoms enshrined in the Constitution and enforceable by the judiciary Everyone has the following fundamental freedoms: Freedom of conscience and religion Freedom of thought, belief, opinion and expression, including freedom of the press and other media of communication Freedom of peaceful assembly Freedom of association Sources of Law There are four sources of law in Canada: constitutional convention, statute law, the royal prerogative, and common law. Royal prerogative: historical rights and privileges of the Crown, including the right to conduct foreign affairs and to declare war Common law: rules that are formulated in judgments Precedent: an earlier case used to resolve a current case because of its similarity Equity: rules that focus on what would be fair given the specific circumstances of the case, as opposed to what the strict rules of common law might dictate Classifications of Law Domestic law: the internal law of a given country, which includes both statute and case law International law: law that governs relations between states and other entities with international legal status Substantive law: law that defines rights, duties, and liabilities Procedural law: the law governing the procedure to enforce rights, duties, and liabilities Public law: areas of the law that relate to or regulate the relationship between persons and government at all levels o Tax, constitutional, and administrative law Private law: areas of law that concern dealings between persons o Tort, property, and company law Administrative law: rules created and applied by those having governmental powers Chapter 5: An Introduction to Contracts Contract Law A contract is a deliberate and complete agreement between two or more competent persons, not necessarily in writing, supported by mutual consideration, to do some act voluntarily. A contract is enforceable in a court of law. There are certain elements of a contract, discussed below: An agreement is composed of an offer to enter into a contract and an acceptance of that offer. Items contained in an agreement are referred to as terms. Complete states that the agreement must be complete. The agreement must be deliberate; both parties must want to enter into a contractual relationship. Formally, this concept is known as intention to create legal relations. An agreement must also be voluntary, freely chosen and cannot involve coercion or other forms of serious unfairness. Be two or more competent parties. There must be at least two parties entering the contract. Supported by mutual consideration: a contract involves a bargain or exchange between the parties involved. Meaning each party must give something of value in exchange for receiving something from the other party. Therefore the contract must be supported by mutual consideration. Not necessarily in writing. An oral contract is enforceable, although written contracts are preferred. In most Canadian jurisdictions there are certain kinds of contracts – those involving an interest in land – that must be in writing in order to be enforceable. Once a contract is entered, both parties are able to rely on the terms that were negotiated, and use them to plan accordingly. Dispute resolutions: Taking the matter to court and suing for losses sustained Contract law is put in place to ensure that each party gets what they expected out of the deal. Most of the time, the rules governing a contract are based on common law. Creating the Contract Contractual relationships typically begin with communication, which could arise in countless forms. Contract law is governed by the objective standard test: the test based on how a “reasonable person” would view the matter. The kind of contract the ends up getting created is influenced by ones bargaining power. It is almost impossible for parties to have equal bargaining power because one party will typically have more experience, knowledge, market leverage, or other advantages. Contract law was constructed on the assumption that those who negotiate and enter into contracts have equal bargaining power: the legal assumption that parties to a contract are able to look out for their own interests. Performing or Enforcing the Contract Contract law is narrow in scope; its emphasis is often on a specific transaction and isn’t traditionally focused on retaining business relationships. This is why businesses regularly breach contracts. Although contracts are legally binding commitments, it is not always the best economic decision for a party to keep that commitment. Contract law has some flexibility, since it requires contractual obligations to be performed or compensation to be paid for non-performance. Chapter 6: Forming Contractual Relationships The Contract Before a contract can be put into place, there must be an agreement – takes the form of offer and acceptance o Offer: a promise to perform specified acts on certain terms o Only a complete offer can form the basis of a contract. An offer doesn’t have to meet the standard of perfect clarity and precision in how it is expressed. An offer can meet the requisite standard even if it leaves certain matters to be decided in the future. Invitation to treat: an expression of willingness to do business Standard form contract: a “take it or leave it” contract, where the customer agrees to a standard of set terms that favours the other side. There are two sides of a contract: o Offeror: the person who makes an offer. o Offeree: the person to whom an offer is made. Termination of offer: Revocation: the withdrawal of an offer. The Offeror can revoke an offer any time before acceptance simply by notifying the Offeree. Option agreement: an agreement where, in exchange for payment, an Offeror is obligated to keep an offer open for a specified time. If the Offeror withdraws the offer before the option agreement permits, they have committed a breach of contract, and the Offeree can sue for damages. o Lapse: the expiration of an offer after a specified or reasonable period. o Rejection: the refusal to accept an offer o Counteroffer: the rejection of one offer and proposal of a new one. o Death or Insanity: an offer generally dies if the Offeror or Offeree dies. However, there could be a term within the offer to specify otherwise. Acceptance Acceptance: an unqualified willingness to enter into a contract on the terms in the offer. Communication of Acceptance: o In order for the acceptance to be legal, the Offeree must communicate – by words or conduct – an unconditional assent to the offer in its entirety. This can be conveyed in a number of ways: in person, in writing, by mail, by fax, by email, by telephone, and by other actions. o Acceptance is effective only when communicated – once it reaches both parties. An exception to this rule is the “postbox rule” – if it is clear that the Offeror intends the postbox rule to apply to their offer, then acceptance is effective at the time of mailing the acceptance, rather than at the time of delivery. Consideration Consideration: the price paid for a promise. o Consideration is a key ingredient that distinguishes a legally enforceable promise from one that is not legally enforceable. Gratuitous promise: a promise for which no consideration is given. o Promissory Estoppel: a doctrine whereby someone who relies on a gratuitous promise may be able to enforce it. Promise Enforceable without Consideration Promise under seal: a practice used to authenticate written agreements by putting hot wax beside the signature on a document and placing an imprint in the wax that is unique to the person who signed it. The seal is taken as evidence of serious intent by the promisor. Intention to Contract Business Agreements o Most agreements in the commercial world are intended to be contractual; the common law recognizes this through a rule stating that in the marketplace, the intention to contract is presumed. Rebuttable Presumption: a legal presumption in favour of one party that the other side can seek to rebut or dislodge by leading evidence to the contrary. Family Agreements Common law presumes that promises between family members are non-contractual. Chapter 8: Non-Enforcement of Contracts The Importance of Enforcing Contracts There are a number of legal doctrines that are exceptions to the general rule that a contract, once formed, is enforceable. This is on the basis of there being: An unequal relationship between the two parties Misrepresentation or important mistakes concerning the contract A defect within the contract itself Voidable Contract: a contract that, in certain circumstances, an aggrieved party can choose to keep in force or bring to an end. Void Contract: a contract involving a defect so substantial that it is of no force or effect. Contracts Based on Unequal Relationships Legal capacity: the ability to make binding contracts o Age of majority: the age at which a person becomes an adult for legal purposes o Mental incapacity: in order for the contract to be formed freely and voluntarily by both parties, both must be able to understand the nature and consequences of their agreement. If members of the parties were to be mentally impaired through illness or intoxication, and the other party was aware of their state, they may be able to avoid the contract at their option. Duress: contracts that are made as a result of one of the parties being threatened with physical harm are not enforceable o Duress is now broader, and includes economic duress: the threat of economic harm that coerces the will of the other party and results in a contract Undue Influence: unfair manipulation that compromises someone’s free will o Undue influence operates in two circumstances: Actual pressure Presumed pressure Unconscionable Contract: an unfair contract formed when one party takes advantage of the weakness of another o Inequality between the Parties o An improvident bargain or proof of exploitation Misrepresentation and Important Mistakes Misrepresentation: a false statement of fact that causes someone to enter a contract Recession: the remedy that results in the parties being returned to their precontractual positions Ingredients of an actionable misrepresentation: a statement must be proven to be o False o Clear and unambiguous o Material to the contract o One that actually induces the aggrieved party to enter into the contract o Concerned with a fact and not an opinion, unless the speaker claims to have special knowledge or expertise in relation to an opinion Categories of Actionable Misrepresentation: o Fraudulent misrepresentation: the speaker has a deliberate intent to mislead or makes the statement recklessly without knowing or believing that it is true o Negligent misrepresentation: the speaker makes the statement carelessly or negligently o Innocent misrepresentation: the speaker has not been fraudulent or negligent, but has misrepresented a fact Mistake: an error made by one or both parties that seriously undermines the contract Common mistake: both parties to the agreement share the same fundamental mistake Contracts Based on Defects Illegality: o Illegal contract: a contract that cannot be enforced because it is contrary to legislation or public policy o Illegal by statute: The Criminal Code The Federal Competition Act Ontario’s Real Estate and Business Brokers Act o Contrary to Public Policy: at common law, contracts are contrary to public policy when they injure the public interest Public policy: the community’s common sense and common conscience Non-solicitation clause: a clause forbidding contract with the business’ customers Non-competition clause: a clause forbidding competition for a certain period of time Writing as a Requirement: as a general rule, contracts do not have to be in writing in order to be enforceable o Contracts of guarantee Guarantee: a promise to pay the debt of someone else, should that person default on the obligation A guarantee must generally be evidenced by writing o Contracts not to be performed within a year o Contracts for the sale of goods o Contracts dealing with land Contracts concerning land generally must be evidenced in writing in order to be enforceable. Chapter 9: Termination and Enforcement of Contracts Termination and Enforcement of Contracts Termination through: o Performance: when both parties have fulfilled their contractual obligations to each other, they have performed the contract Vicarious performance: performance of contractual obligations through others o Agreement: parties are always free to voluntarily bring their contract to an end. They may decide to: Enter into a whole new agreement – novation: the substitution of parties in a contract or the replacement of one contract with another. Vary certain terms of the contract End the contract Substitute a party Assignment: the transfer of a right by an assignor to an assignee o Frustration: when a contract is frustrated, it is brought to an end Termination of a contract by an unexpected event or change that makes performance functionally impossible or illegal o Breach Enforcement of Contracts Balance of probabilities: proof that there is better than 50% chance that the circumstances of the contract are as the plaintiff contends Privity of contracts: the plaintiff has to establish that there is a contract between the parties Breach of contract: the plaintiff must prove that the other party has failed to keep one or more promises or terms of the contract o Condition: an important term that, if breached, gives the innocent party the right to terminate the contract and claim damages o Warranty: a minor term that, if breached, gives the innocent party the right to claim damages only o Innominate term: a term that cannot be easily classified as either a condition or a warranty o Fundamental breach: a breach of contract that affects the foundation of the contract o Anticipatory breach: a breach that occurs before the date for performance Entitlement to a remedy: the plaintiff must demonstrate that it is entitled to the remedy claimed or is otherwise deserving of the court’s assistance o Damages: monetary compensation for breach of contract or other actionable wrong o Expectation damages: damages that provide the plaintiff with the monetary equivalent of contractual performance o Punitive damages: an award to the plaintiff to punish the defendant for malicious, oppressive, and high-handed conduct o Duty to mitigate: the obligation to take reasonable steps to minimize the losses resulting from a breach of contract or other wrong o Interlocutory injunction: an order to refrain from doing something for a limited period of time o Unjust enrichment: occurs when one party has undeservedly or unjustly secured a benefit at the other party’s expense Restitutionary quantum meruit: an amount that is reasonable given the benefit the plaintiff has conferred Chapter 10: Introduction to Tort Law Defining Tort Law Tort: A harm caused by one person to another, other than through breach of contract, and for which the law provides a remedy Trespass to land: wrongful interference with someone’s possession of land Deceit or fraud: a false representation intentionally or recklessly made by one person to another that causes damage Negligence: unreasonable conduct, including a careless act or omission, that causes harm to another One of the key objectives of tort law is to distinguish between a situation in which the loss suffered by an injured individual should remain uncompensated and one in which responsibility for the loss should be “shifted” to another party considered responsible for causing the loss, known as a tort-feasor Tort-feasor: person who commits a tort How Torts are categorized Intentional tort: a harmful act that is committed on purpose Assault: the threat of imminent physical harm Battery: intentional infliction of harmful or offensive physical contact Liability in Tort There are two kinds of liability in tort law: primary and vicarious Primary liability arises due to one’s own personal wrongdoing Vicarious liability: the liability that an employer has for the tortious acts of an employee committed in the ordinary course or scope of employment When a person is injured due to the tortious conduct of more than one person, those culpable are known as joint tort-feasors: two or more persons whom a court has held to be jointly responsible for the plaintiff’s loss or injuries Contributory negligence: a defence claiming that the plaintiff is at least partially responsible for the harm that has occurred Damages in Tort The purpose of damages The primary goal of a tort remedy is to compensate the victim for loss caused by the defendant - generally a monetary judgment Less common alternatives are equitable remedies, such as injunction – a court order requiring or prohibiting certain conduct Financial compensation means the defendant is ordered by the court to pay a sum of money to the successful plaintiff Worker’s compensation legislation: legislation that provides no-fault compensation for injured employees in lieu of their right to sue in tort Pecuniary and Non-Pecuniary Damages Under Canadian law, the losses for which damages are awarded are categorized as being pecuniary or non-pecuniary Non-pecuniary Damages: compensation for pain and suffering, loss of enjoyment of life, and loss of life expectancy Pecuniary Damages: compensation for out-of-pocket expenses, loss of future income, and cost of future care Punitive damages: an award to the plaintiff to punish the defendant for malicious, oppressive, and high-handed conduct Aggravated damages: compensation for intangible injuries such as distress and humiliation caused by the defendant’s reprehensible conduct Chapter 11: The Tort of Negligence The Law of Negligence Ch. 10 defined the tort of negligence as a carless act that causes harm to another Reasonable care: the care a reasonable person would exhibit in a similar situation Steps to a Negligence Action Step 1: does the defendant owe the plaintiff a duty of care? If yes, proceed to the next step o Duty of care: the responsibility owed to avoid carelessness that causes harm to others o A defendant owes a duty of care to anyone who might be reasonably affected by the defendant’s conduct, known as the neighbor principle o Stage 1: is there a prima facie duty of care? – At first sight or on first appearances o Stage 2: are there residual policy considerations outside the relationship of the parties that may negate the imposition of a duty of care? Step 2: did the defendant breach the standard of care? If yes, proceed to the next step o In general, the defendant’s conduct is judged according to the standards of behaviour that would be observed by the reasonable person in society o A reasonable person: the standard used to judge whether a person’s conduct in a particular situation is negligent Step 3: did the defendant’s careless act (or omission) cause the plaintiff’s injury? If yes, proceed to the next step o While the legal test for causation is sometimes debated, courts generally ask the following question: would the harm not have occurred but for the defendants actions? o Causation: the relationship that exists between the defendant’s conduct and the plaintiff’s loss or injury Step 4: was the injury suffered by the plaintiff too remote? If not, the plaintiff has proven negligence o At this point, the court asks: even if there is an obligation to take reasonable care and it was breached, how far will the legal liability of the defendant stretch? o Remoteness of damage: the absence of a sufficiently close relationship between the defendant’s action and the plaintiff’s injury o Thin skull rule: the principle that a defendant is liable for the full extent of a plaintiff’s injury even when a prior vulnerability makes the harm more serious that it otherwise might be o Pure economic loss: financial loss that results from a negligent act where there has been no accompanying property or personal injury damage to the person claiming the loss Defenses to a Negligence Action Contributory Negligence o Refers to unreasonable conduct by the plaintiff that contributed – or partially cause – the injuries that were suffered o This defence recognizes that both the defendant and the plaintiff may have been negligent Voluntary assumption of risk: the defence that no liability exists as the plaintiff agreed to accept the risk inherent in the activity o A complete defence to the lawsuit, and the plaintiff will be awarded nothing by a judge even though the defendant had been negligent Negligent Misstatement Negligent Misstatement or negligent misrepresentation: an incorrect statement made carelessly The plaintiff’s loss is due to the defendants physical actions but due to the defendant’s careless oral or written statements Professional: someone engaged in an occupation requiring the exercise of special knowledge, education and skill Negligence and Product Liability The law imposes a standard of care on manufacturers in relation to the design, manufacture, or the sale of their products Product liability: liability relating to the design, manufacture, or sale of the product Product liability cases often involve contract law as well The Negligence Standard vs. Strict Liability Strict liability in tort makes the defendant liable for the plaintiff’s loss even though the defendant was not negligent, and by definition, had exercised reasonable care Strict liability: the principle that liability will be imposed irrespective of proof of negligence Chapter 12: Other Torts Introduction Tort actions relevant to businesses can be conveniently divided between those that arise because a business occupies a property and those that arise because of the actual business operations Torts and Property Use Tort actions may arise in relation to property in a number of ways, most commonly when the occupier of the property harms others Occupier: someone who has some degree of control over land or buildings on that land Occupiers’ Liability Occupiers’ liability describes the liability that occupiers have to anyone who enters onto their land or property Liability at Common Law The liability of the occupier for mishaps on property is not determined by the ordinary principles of negligence, rather liability is determined by classifying the visitor as a trespasser, licensee, invitee, or contractual entrant Contractual entrant: any person who has paid (contracted) for the right to enter the premises Invitee: any person who comes onto the property to provide the occupier with a benefit Licensee: any person whose presence is not a benefit to the occupier but to which the occupier has no objection Trespasser: any person who is not invited onto the property and whose presence is either unknown to the occupier or is objected to by the occupier The Tort of Nuisance Nuisance: any activity on an occupier’s property that unreasonably and substantially interferes with the neighbor’s rights to enjoyment of the neighbor’s own property Trespass to land: wrongful interference with someone’s possession of land Torts from Business Operations Torts involving customers: Assault and battery o An assault is the threat of imminent physical harm by disturbing someone’s sense of security o Battery is the actual physical contact or violation of that bodily security False imprisonment: unlawful detention or physical restraint or coercion by psychological means o Legal authority: the authority by law to detain under section 494 of the Criminal Code Deceit: a false representation intentionally or recklessly made by one person to another that causes damage Business-to-business Torts Passing off: presenting another’s goods or services as one’s own Interference with contractual relations: incitement to break the contractual obligations of another Injurious or malicious falsehood: the utterance of a false statement about another’s goods or services that is harmful to the reputation of those goods or services Defamation: the public utterance of a false statement of fact or opinion that harms another’s reputation o Justification: a defence to defamation based on the defamatory statement being substantially true o Qualified privilege: a defence to defamation based on the defamatory statement being relevant, without malice, and communicated only to a party who has a legitimate interest in receiving it o Fair comment: a defence to defamation that is established when the plaintiff cannot show malice and the defendant can show that the comment concerned a matter of public interest, was factually based, and expressed a view that could honestly be held by anyone o Responsible communication on matters of public interest: defence that applies where some facts are incorrectly reported but (1) the publication is on a matter of “public interest” and (2) the publisher was diligent in trying to verify the allegation o Absolute privilege: a defence to defamation in relation to parliamentary or judicial proceedings Chapter 13: The Agency Relationship The Nature of Agency Agency is a relationship that exists when one party represents another party in the formation of legal relations Agent: a person who is authorized to act on behalf of another Principal: a person who has permitted another to act of her behalf These legal relationships are as binding on the principal as if that person had directly entered them herself Agency Defined Agency relationships, like contractual relationships in general, operate for the most part with a few difficulties – agents simply represent principals in transactions with others Two key relationships: The agent-principal relationship The outsider-principal relationship Outsider: the party with whom the agent does business on behalf of the principal The complications resulting from these relationships have necessitated rules of law to regulate and resolve them – the law of agency: the law governing relationships where one party, the agent, acts on behalf of another, the principal Chapter 14: Business Forms and Arrangements Forms of Business Organization Choosing how to own a business is a critical decisions because it determines in large part who: Is financially liable for the business Shares in business profits and other assets Makes and is accountable for management decisions The Sole Proprietorship The sole proprietorship: an unincorporated business organization that has only one owner Financial Liability Any obligation of the business becomes the sole proprietor’s personal obligation The breach of contract: the sole proprietor would be the one getting sued, and it would be their assets at risk Unlimited liability: unrestricted legal responsibility for obligations o Regardless of what the owner has invested in their business, their personal assets may be seized to pay the outstanding debts of the business Profit sharing The sole proprietor not only bears the risk of failure, but also enjoys the advantage: all the profits after taxes accrue to the sole proprietor alone Decision Making The sole proprietor, having no partners and no board of directors to report to, can make business decisions very quickly and independently Disadvantages: few people are good at everything, yet the sole proprietor is responsible for every aspect of the business, from buying and selling to financing and advertising Another consideration is what to do in the sole proprietor’s absence Sources of Capital Limited sources of capital Without business partners, limited to whatever assets are available Taxation Because the sole proprietorship is not a legal entity separate from the owner, there are no formal or specialized tax rules governing it – profits and losses are simply reported on the owner’s personal income tax Transferability A sole proprietorship cannot be transferred or sole to another because it has no legal status Assets associated with it though – such as inventory – are transferrable Regulations Minimal legal requirements for establishing and conducting this form of business organization – one simply commences business activity They are subject to the same general legislation as any other business form o The registration of licensing of the business o Requirements vary from province to province In addition to the regulations put in place by the federal and provincial governments, municipalities often impose their own registration or licensing requirements A sole proprietor who wishes to use a name other than their own for conducting the business must register the name at the local registry office or other government office designated by the province, where such records are kept and made available to the public Also subject to the laws of general application o Local zoning laws, provincial taxes, health legislation, those who hire employees must comply with all applicable legislation A sole proprietor (unlike a public corporation) is not required to publish the business’s financial statements The Partnership The partnership: a business carried on by two or more persons with the intention of making a profit The rules governing partnerships come from 3 sources: partnership legislation, contract law, and agency law Financial Liability Each partner is fully responsible for all the debts and obligations of the partnership and not just for some appropriate proportion Joint liability: liability shared by two or more parties where each is personally liable for the full amount of the obligation Each partner’s personal assets can be seized and sold through the judicial process if the partnership assets are insufficient to satisfy partnership obligations Profit sharing It is the partners themselves who decide how profits and other firm assets are to be divided, if they fail to agree on this point, partnership legislation requires them to share profits equally Decision Making Because a partnership comprises two or more persons pooling their resources, the management base is potentially strong If one person is sick or unable to devote sufficient attention to the business, the other partners are in place to carry on The downsides is that managing the business will require consultation among the partners, and they may not always achieve consensus A dispute or disagreement between the partners can be extremely disruptive Although the partners may have determined that they will have authority in different areas, instances are bound to arise in which responsibility overlaps Sources of Capital Partnerships provide more sources of capital compared to a sole proprietorship The partnership looks to each partner for a capital contribution and can rely on the creditworthiness of each one to secure financing from other sources, such as the bank Taxation The partnership is not a separate legal entity and therefore any income from the partnership is allocated to the partners and they must in turn include it on their individual tax returns Transferability The partnership does not provide for the ready transfer of interest from one owner to another Partners do not individually own or have a share in specific partnership property Each partner has an interest in all partnership property Agency and the Partnership Act Partnership law is based in large part on contract law, agency law, and provincial partnership legislation, known in every jurisdiction as the Partnership Act The legislation in place in the common law provinces provides mandatory rules with respect to: o When a partnership exists o What the relationship of partners is to outsiders These acts have optional rules with respect to o The relationship of partners to one another o How and why a partnership ends When a partnership exists According to the Partnership Act, a partnership exists when two or more people “carry on a business in common with a view towards profit” The statutory definition of partnership covers people who expressly intend to be partners as well as people who may not necessarily intend to be partners but act as if they were The partnership act also sets out a number of circumstances that point toward there being a partnership but not conclusively so The Relationship of Partners to One Another If people become partners, the Partnership Act provides that they also become one another’s agents as well as the agents of the firm in matters relating to the partnership’s business It also means that partners owe fiduciary duties to one another, which require a partner to put the interests of their partners above their own Persons who wish to be associated in partnership should have a partnership agreement, preferably one drafted by a lawyer o Provides the parties with significant freedom to define their relationship Relationships of Partners to Outsiders While partners are to enter into a partnership agreement in order to set out the rights and obligations between them, this will not modify the relationship between partners and outsiders, which is governed specifically by the Partnership Act and generally by partnership law, including agency law A partner is an agent of the firm – and there are therefore responsible for contracts entered into with actual or apparent authority The Partnership Act and agency law also make partners responsible for one another’s mistakes Joint and several liability: individual and collective liability for a debt. Each liable party is individually responsible for the entire debt as well as being collectively liable for the entire debt Each partner is individually as well as collectively responsible for the entire obligation How and why a partnership ends The Partnership Act provides for the termination of a partnership under certain circumstances: o If entered into for a fixed term, by the expiration of the term o If entered into for a single venture or undertaking, by the termination of that venture or undertaking o By any partner giving notice to the others of their intention to dissolve the partnership o Following the death, insanity, or bankruptcy of a partner Nevertheless, these provisions may be varied by agreement On dissolution of a partnership, partnership legislation provides a process for dealing with partnership property – it must be applied in payment of the debts and liabilities of the partnership first and then to payment of what is due to the partners. In the event that the partnership property is insufficient to satisfy all of the firm’s obligations, partners must individually contribute to the obligations in proportion to their entitlement to profits or in another agreed-upon proportion After all of the firm’s debts are satisfied, any excess is applied, in the following order to: o Repayment of loans made to the firm by partners o Repayment of capital contributed by the partners o Payment of any surplus to partners according to their respective rights to profits Regulations Partnerships are bound by all rules of general application, including the obligation to comply with laws concerning licensing, employment, tax collection, and public health Most provinces require the filing of a declaration of partnership that contains information on the partners, the partnership name, and the duration of the partnership o Failure to do so isn’t fatal but it can impede legal actions filed in the name of the partnership and can result in fines Partnership Variations There are two variations of the partnership: the limited partnership and the limited liability partnership Limited Partnership Limited partnership: a partnership in which the liability of some partners is limited to their capital contribution This vehicle has been used mostly as an investment device o Limited partners put money into a business in return for tax breaks and profits o The general partner manages the investment for a fee and carries the responsibility – assuming the limited partners have not made guarantees or commitments beyond their investment Cannot be created informally – limited partnership requires a written agreement that must be registered with the appropriate provincial body General partners have substantially the same rights and powers as partners in ordinary partnerships; limited partners have more narrowly defined rights o They have the right to share in profits and have the right to have their contribution returned on dissolution, but the cannot take place in the management of the partnership – they lose their status of limited partners and just become general partners Limited Liability Partnership Limited liability partnership (LLP): a partnership in which the partners have unlimited liability for their own malpractice but limited for other partners’ malpractice It is designed to address concerns of professionals who are not permitted to use incorporation as a means of achieving limited liability An LLP has the characteristics of a general partnership, with specific limitations on the liability of partners o The limitation on liability (the liability shield) varies depending on the jurisdiction o Alberta, Manitoba, Quebec, and Nova Scotia provide a partial shield that protects a partner from liabilities arising from the negligent or wrongful acts of her employees or partners, but continues to hold the partners liable for their own acts and omissions, and the partnership assets continue to be available with respect to the acts and omissions of all partners o In Saskatchewan, New Brunswick, BC, Ontario, Newfoundland and Labrador, and NWT the legislation provides a full shield that not only protects partners from the negligent or wrongful acts of her partners or employees, but also protects Chapter 22: Professional Services Businesses and Professional Services Professional: someone engaged in an occupation, usually governed by a professional body, requiring the exercise of specialized knowledge, education, and skill Relationships and obligations o The legal or ethical obligations that employed professionals owe the business vary according to the capacity in which they are hired o In principle, the legal obligations of employed professionals are the same as those who work in private practices outside the firm They are in a fiduciary relationship with their employer, where elements of trust, confidence, and reliance on the professionals’ skill, knowledge, and advice exists They can be liable for negligence, and their employers can be vicariously liable for their actions Ethical obligations o Professionals’ ethical obligations are especially important to employers o Professionals retaining membership in their profession continue to be bound by the rules of professional conduct and codes of ethics of their professional bodies o Ethical conflicts or dilemmas tend to arise when the business in under stress Hiring professionals in-house Responsibilities of Professionals to Clients and Others who rely on Their Work Responsibilities in Contract Professional responsibilities in any given engagement are defined, in part, by contract Retainers: an advance payment requested by a professional from a client to fund services to be provided to the client Responsibilities in Tort General Responsibility o Responsibility to Third Parties