Chapter 7 - Cases 5 and 8
Case 5
The Garden Book Company advertised in a local newspaper the publication of its latest book on flower growing. The
advertisement indicated that orders would be taken by mail at a price of $30 per copy, but the book would be available
at all book stores as well.
In response to the advertisement, Laurel Bush sent her cheque for $30 to the Garden Book Company, and
requested in her letter that the company send her a copy of the book by return mail. Laurel mailed her letter on
February 19th. On February 21st, Laurel noticed the same book on sale at a local book store at a price of $9.95. She
purchased a copy, then went home and immediately wrote a letter to the Garden Book Company revoking her offer to
purchase the book, and requested a return of her $30 cheque. Laurel mailed her letter at 4:20 p.m. on February 21st.
The Garden Book Company received Laurel’s letter of February 19th on February 22nd, and mailed her a letter
the same day that acknowledged her order and advised her that the book would be sent to her by courier within a few
days. The Garden Book Company received Laurel’s letter of February 21st on February 23rd. The company ignored
her second letter, and delivered the book to the courier on February 25th.
Discuss the rights of the parties in this case. Identify and explain the legal principles and rules applicable, and
indicate in your answer how the case would be decided if the matter came before the court.
Answer:
This case raises the issues related to acceptance of an offer, and the application of rules concerning acceptance and
revocation. Students should note that Laurel Bush made an offer by mail to purchase a book. The nature of this offer might
be examined by asking the question. Was this an offer that required acceptance by an act? Was the letter of acceptance
by the Company a valid acceptance of the offer? Was the acceptance complete when the letter was mailed? Laurel's letter
of revocation would only be effective when received by the Company, and was received by it on February 23rd. The
Company, aware of the revocation, completed its part of the 'contract' on February 25th. Students may be asked if the
revocation was effective on February 23rd. Under the terms of Laurel's offer, acceptance was to be made by sending her
the book by return mail. The offer did not require acknowledgement, but rather, the performance of an act. The Company's
letter of acceptance, therefore, would probably not be effective acceptance when mailed, but only effective when received.
The mailing of the book after receipt of the letter of revocation would probably not be effective acceptance of the offer.
Case 8
Tom was tired of running his business and was looking for a buyer so he could retire before the winter. Bill wanted to
buy the business, but needed another month to raise the necessary finances. Tom said to Bill: “Look, for $5,000, I will
give you an option to purchase in 30 days, but if you are not ready to buy at that time for fifty thousand, I am going to
1
sell it to Dan.” Bill paid Tom the $5,000. Thirty days later, Bill appeared at Tom’s door with $45,000. Tom said: “Sorry,
I am going to sell it to Dan. I said the price was $50,000.” Bill was confused, and sought legal advice.
What advice would the lawyer provide to Bill?
Answer:
The option to purchase in this case was a promise by Tom to hold open the promise to sell the business for a 30 day
period. Offer and acceptance in the option agreement was finalized when Bill paid over the $5,000. The issue here for
students to consider is whether the $5,000 was to be a part of the purchase price of the business. Was the option a
separate contract? No mention was made of the $5,000 being a part of the purchase price. Was the offer to sell the
business for $50,000 a separate contract offer? It could be argued that it was, in which case Bill did not properly accept the
offer when he met with Tom in 30 days and presented him with $45,000 instead of the $50,000 stated in the offer.
Chapter 8 - Cases 1 and 8
Case 1
Jane and Henry were married and Jane’s father, a farmer, told her and Henry that he had no use for the old pasture
north of the meadow. He suggested that they could build a house on the property, saying, “It will be all yours anyhow
when I’m gone.” Jane and Henry did so, and five years later, Jane and her father had a terrible falling out. Her father
changed his will to give all of his property to the Humane Society, and within the year he died. When the executor of
the will read its terms, he began proceedings to evict Jane and Henry from the property and to sell their house.
Discuss the legal issues raised in this scenario.
Answer:
2
The facts of this case raise the issue of promissory estoppel, since Jane and Henry clearly acted to their detriment by
building a house on the property in reliance on her father’s promise of the property on his death. One question may be the
extent of the property Jane and Henry may claim. Would this be only the “old pasture north of the meadow”or the father’s
entire estate? A court might decide that their claim would be limited to the property where the house was located, as their
reliance on the father’s promise (by building a house) was limited to ‘the old pasture’.
Case 8
Levine’s car stopped running on the highway, and a passing motorist called a service station for him on a mobile
phone. The service station called an independent tow truck operator, who soon towed the car to the service station,
some 5 km distant. A mechanic examined the car, and realized that a wire had come loose from the distributor cap.
He snapped the wire back into place, and wrote up a bill. Levine was charged $5 for the repair and $175 for the tow.
Levine was outraged and refused to pay.
What would be the nature of the claim, and what factors would the court consider in deciding the case?
Answer:
This case concerns quantum meruit. The passing motorist made the call to the service station at Levine’s request. The
request for service was probably broad enough to authorize the service station operator to tow Levine’s vehicle to the
service station – a reasonable expectation, but was it also reasonable for Levine to believe that the service station
operator might come to where Levine’s vehicle was located to make the repairs? Probably not. Under quantum meruit, the
service station operator would be entitled to charge a reasonable price for his services. The $5 was probably reasonable.
The tow truck operator charged $175 for a 10 km. round trip. Was this a reasonable charge? If this was the usual charge
by other operators in the area, then the charge would stand, and Levine would be obliged to pay both of the charges.
PART I
LEGAL FUNDAMENTALS
CHAPTER 1
3
LAW AND THE LEGAL SYSTEM
LEARNING GOALS
1. To provide an understanding what a law is, its sources, and how it is enforced.
2. To provide an outline of the legal system and its operation.
3. To outline alternative methods of resolving disputes between persons or businesses.
CHAPTER COMMENTARY
Chapter 1 is introductory in nature, and provides a general background concerning the nature
of law, how laws developed, the general need for some rules to govern the behaviour of
individuals, and the establishment of the various fundamental rights and duties of persons in
society. It also examines the legal system and how it is used to resolve disputes.
In class discussion, special emphasis should be placed upon the sources of law in order
that students may have a clear idea of what they are and where they may be found. Many
students fail to realize that the common law and equity represent a large body of law, and the
scope and application of these sources of law should be emphasized in class discussion of the
chapter. In the context of the courts and the law, the doctrine of precedent should be noted,
and its purpose and application discussed with emphasis on the need for "predictability" in the
application of the law to cases that come before the courts. It would be worthwhile to note as
well that some judges of the Supreme Court of Canada have expressed the view that they, as
judges of the highest court in the land, do not consider themselves bound by the doctrine, but
would only change a common law rule where it had become inappropriate in a modern social
setting. (This point is not set out in the text).
The role of the courts as the chief interpreter of the constitution is also noted, and
should be emphasized in any class discussion of the enforcement of rights under the Charter.
The Charter of Rights and Freedoms is set out in Appendix ‘A’ of the text for reference by
students. As an approach to teaching this part of the chapter, a systematic examination of the
fundamental rights and freedoms may be made with the class requested to provide a fact
situation related to a freedom or right, and then have the class speculate as to how the Charter
might be interpreted by the court as it relates to the matter. With each fundamental right or
freedom it is important to emphasize that the freedom or right must be viewed in the light of
s.1 which makes the right "subject only to such reasonable limits prescribed by law as can be
demonstrably justified in a free and democratic society," and not absolute. The
"notwithstanding" clause (s. 33) which permits legislatures or parliament to override the
Charter rights should be noted as well. Students should note that the province of Quebec used
(s. 33) to override this decision of the Supreme Court of Canada, and passed Bill 178 to require
"French only" signs on all Quebec businesses.
The organization of the Charter itself provides an orderly approach to discussion of the
nature of the rights and freedoms granted under it, as well as the method of enforcement.
With respect to the latter, it is readily apparent that most of the rights and freedoms are those
which the framers of the constitution felt should be enshrined to protect them from
encroachment or interference by governments.
A final point to note and to emphasize in class is that the constitution includes ore than
the Charter of Rights and Freedoms. It also includes the original British North America Act of
4
1867 (as amended over the years) which establishes the structure of our government, and the
legislative powers and jurisdiction of the provincial governments and Parliament. Consequently,
it is a lengthy and complex document which sets out not only the rights and freedoms of the
individual, but how Canada as a democratic society governs itself. On this point it should be
emphasized that legislative bodies may not exceed the powers granted to them under the
constitution, as the exercise of jurisdiction when none exists renders such an act ultra vires and
a nullity.
Statute law is defined on p. 7 of the text, and the process associated with this type of
law-making is described very briefly. Students should be informed that this process is
legislative as distinct from judicial. Discussion may then lead into the topic of Civil Codes, and
students may be asked to discuss the pros and cons of a civil code system vs. the Common
Law/equity system.
Chapter 1 also focuses upon the administration of the law. The text material includes the
structure of the courts in Canada, and as a class exercise, it might be useful to carry simple criminal
and civil actions (based upon easily understood incidents) through the various steps and appeals to
their final resolution at the highest appeal levels. In this fashion, the text material may be
re-enforced, and the various limitations on appeal, etc., noted in the process.
The distinction between criminal and civil proceedings should be emphasized, as experience
has indicated that students frequently fail to realize that an incident which gives rise to both civil
and criminal proceedings (such as a "criminal negligence" incident) would follow two separate legal
paths, one dealing with the criminal act, and the second, dealing with the civil aspect.
Some time should be given to the procedure by which judgments of lower courts may
be appealed. The conditions under which a judgment may be appealed should be stressed
(error of law, rejection of important evidence in reaching a decision, etc.) and the appeal routes
examined for both civil and criminal cases. These are depicted on the charts in the text, but it
should be noted that a number of provinces are in the process of revising their court system,
and the names of the courts and the appeal routes may change as well.
Since alternate dispute resolution (ADR) is considered by many business firms as a more
efficient system of resolving disputes, the topic should be opened for class discussion as an
alternative to the court system. Discussion should note the particular advantages of (ADR) over
the court system (speed of resolution, lower costs, etc.) but it should also be noted that certain
kinds of disputes still lend themselves to the courts for settlement.
Some time should be spent on the regulatory processes that governments use to control
business activities. It differs from what students may view as a legal process in the sense that
most of the ‘law’ or the rules are made by bureaucrats and enforced by them. Students should
be made aware that administrative agencies and commissions play a significant role on the
business scene as they represent the means by which the government seeks to protect the
public health and safety, ensure fair competition in the market place, and generally protect the
consumer from unfair business practices. The regulation of the professions also ensures that a
level of competence is established and maintained through a licensing process.
Discussion of administrative agencies or commissions should also emphasize the fact
that the usual methods of regulating business and the professions is through a registration or
licensing system. The registration or license is the means by which control is maintained, since
in most cases the failure of a business or professional person to comply with the rules or
5
requirements set down for the business or profession could mean the loss of the registration or
license to carry on the business or practice the profession. Students should also be made
aware that the termination of a registration or the lifting of a license to practice a profession or
carry on a business must be in accordance with the rules of natural justice, and a hearing
process, and perhaps an appeal process must be made available to the affected party to ensure
fairness in the decision.
Students should also be made aware that administrative tribunals set down rules and
procedures to carry out the policy objective of the government, and that these ‘rules’ are
usually set out in regulations made under the particular statute. These regulations have much
the same effect as statutes, but are subordinate legislation in the sense that they do not follow
the enactment process for ordinary legislation.
The Review Questions at the end of the chapter should provide a sufficient test of student
knowledge of the essential material, and are reproduced here with draft answers and the
appropriate page references for answer review.
REVIEW QUESTIONS
1. What is the purpose of the law?
Answer:
The law is a means of social control as well as a method of resolving disputes.
2. How are laws usually enforced?
Answer:
The courts are the principal means of enforcement of laws.
3. Explain the common law system and how it relates to the function of the courts.
Answer:
The Common Law system is a system where the laws are not codified, but may be found in the
recorded judgments of the courts. Courts maintain a degree of consistency in the law by following
the doctrine of precedent (Stare Decisis).
4. What is the role of the doctrine of precedent with respect to the common law?
Answer:
The doctrine of precedent is an important theory. Judges are expected to apply previous
decisions to similar cases which come before them in order to maintain a degree of consistency
in the law. By following this doctrine, the law is not only consistent, but others can predict how
the law may be applied in similar cases.
5. How is Statute law created?
6
Answer:
Statute law is created by a legislative process. It begins with the presentation of a bill (outlining
the proposed law) in the legislature. The Statute law is the end result of the process. See text pp.
8-10.
6. Distinguish Statute law from Common Law.
Answer:
Statute law is created by a legislative process. Common Law consists of the recorded judgments of
the courts.
7. Describe the difference between the Common Law and the Civil Code of Quebec, and the merits
of each system.
Answer:
Common Law consists of the recorded judgment of the courts.
Common Law merits: - flexible, as judges may change it through interpretation, or by
distinguishing the case at hand from the precedent. Adaptable to changing social attitudes.
The Civil Code is a written body of law.
Merits of Civil Code: - laws are written down and may be consulted to determine what the law is.
The law can be changed by statute amendment and kept up to date by the legislature if change is
warranted.
8. Why is the Charter of Rights and Freedoms important as law?
Answer:
The Charter is "supreme law" in the sense that it overrides all other federal and provincial laws,
and all such laws must not conflict with it, except as permitted. It is "entrenched" in the sense that
it is difficult to change.
9. On what basis may a legislature or the federal government override Charter rights?
Answer:
Fundamental rights and freedoms may be restricted under s. 1 if the restriction can be shown to
"be demonstrably justified in a free and democratic society." Rights and freedoms may be
"temporarily" overridden by the "notwithstanding" clause (s. 33) as well.
7
10. Why is an independent judiciary important?
Answer:
Important because:
(a)
not open to manipulation by political action.
(b)
free to resolve differences between individuals without fear of the consequences.
(c)
able to determine differences between governments without concern that the
powers of the court will be attacked.
(d)
permanent body to administer the law is vital in order to maintain continuity and
confidence in the system.
(e)
"independence" generally equated to "fairness".
11. Explain the difference between a trial court and a court of appeal.
Answer:
A court of original jurisdiction (sometimes referred to as a trial court or a court of first instance) is a
court where a case is heard for the first time. A court of appeal is a court which reviews the
decision of the court of original jurisdiction to make certain that the judgment was fairly and
properly made.
12. How does a criminal trial differ from a civil trial?
Answer:
Criminal:
-
Crown brings the charge against the accused. A two-step process in many cases:
(1) preliminary hearing, (2) full hearing.
Crown obliged to prove the particular offence was committed by the accused, and
that the offence is one which is set out in the criminal code.
Crown must prove act, identity, and intent to commit the offence (subject to
certain exceptions).
must prove its case beyond any reasonable doubt in order to obtain a conviction.
Civil:
the party who alleges a violation of his or her rights brings the action.
onus of proof of facts alleged rests on the plaintiff.
case is outlined through "pleadings".
plaintiff not subject to the higher standard of proof of criminal courts.
13. What are the differences in the testimony given at a trial between ordinary and expert
witnesses?
Answer:
"Direct" evidence is given by ordinary witnesses who testify as to what they heard, saw, or did.
"Opinion" evidence is evidence given by experts who have special knowledge about the subject
matter of the evidence, and who express an opinion about the matter based upon their
specialized knowledge or expertise.
8
14. What is “hearsay evidence”?
Answer:
Hearsay evidence is neither direct or expert evidence, but evidence given by a third party who
was informed by someone else (usually a person who would normally be an ordinary witness)
of the facts. Hearsay evidence is usually not admissible in a court of law.
15. Explain the purpose of pleadings in a civil case.
Answer:
The purpose of pleadings in a civil action is to set out the facts of the case and the issues in dispute
in sufficient detail to enable each party to know the matters in dispute and prepare their
respective cases for the trial. They avoid surprise at trial, and minimize the time required by the
courts to dispose of the case.
16. On what basis might an appeal be made from the judgment of a trial court?
Answer:
An appeal may be allowed where the judge improperly applied the law, (improperly instructed the
jury as to the law) or made an error in rendering a decision.
17. What possible remedies are available to a Court of Appeal in deciding a case brought before
it?
Answer:
A Court of Appeal may (1) reverse the decision, if the trial judge erred. (2) affirm the decision of
the trial judge, or (3) send the matter back to the lower court for a new trial.
18. Outline the importance of lawyers and their advice to business persons.
Answer:
Legal counsel are learned in the law, and advise others of their legal rights and duties. They also
carry out on behalf of their clients the job of processing an action through the courts, or
negotiating legal matters on their behalf.
19. Explain the arbitration process and how it differs from the court system.
Answer:
An arbitration is conducted much like a court action, but in a much less formal setting. While
the rules of evidence and procedure are usually followed, the process generally does not
require pleadings or discovery. The parties are usually responsible for the selection of the
arbitrator, and the arbitrator’s fees. The hearing does not involve ‘court costs’.
9
20. Why do many businesses prefer to use Alternative Dispute Resolution processes rather than
the courts to resolve their disputes?
Answer:
Alternative Dispute Resolution is a confidential process as well as a relatively low cost and
efficient process for resolving disputes. Often business people do not wish to destroy a
business relationship if a dispute arises, and arbitration will often allow them to obtain an
answer or solution to their problem that will allow them to continue to do business with each
other.
21. A province enacts a law compelling persons who are bankrupt to perform 100 hours of
community service in order to be eligible to receive a discharge from their bankruptcy. Why
might the federal government object to this law and how would it challenge it?
Answer:
The Federal Government would object to the Provincial law on the basis that bankruptcy falls
within the jurisdiction of the Federal Government under s. 91(21) of the British North America
Act 1967. It would challenge the Act in the courts – probably ask the Supreme Court to rule on
the Statute.
DISCUSSION QUESTIONS
1. A private club in a city permits an adjacent restaurant to use a patio on its grounds as a part of
the restaurant during the summer months. The municipality passed a by-law prohibiting smoking
in all restaurants including their outdoor facilities. The by-law enforcement officer advised the
private club that because a restaurant was operated on their property, the by-law would also
apply inside their club building. The club seeks the advice of its lawyer. What advice might the
lawyer give the club?
Comment:
Students should identify the nature of the non-smoking law and the type of business covered
by it. By leasing the grounds of the club to the restaurant it may have extended the nonsmoking area to the club grounds, but the question is: Does the by-law extend to nonrestaurant facilities? Since by-laws are likely to be strictly construed by the courts, the nonsmoking ban would probably not apply to the inside of the club building.
2. How does Alternate Dispute Resolution (ADR) differ from the court system? What are the
advantages and disadvantages of each, and why do businesses prefer to use Alternate Dispute
Resolution?
Comment:
In the discussion of this question students should mention the following points:
10
- ADR is an informal method of resolving differences
- ADR is a confidential dispute resolution process.
- ADR is less costly than the courts.
- Parties select the ADR decision-makers.
- Dispute is usually resolved in a shorter time than using the courts.
- The business relationship is often preserved by using ADR as it is a less
confrontational method.
- Advantage of the court may be that precedent may indicate the possible outcome if
the issue is of a legal nature.
- The high cost of using the courts may persuade the parties to settle the dispute ‘out
of court’.
3. The doctrine of precedent is a useful tool for judges. In what way is it used by
Judges?
Comment:
Students should recognize that precedent is a useful tool for judges as it provides them with
guidance as to how a case may be decided. It provides them with the decision of other judges and
their reasons for judgment. It is flexible as well, as each case is usually different on the facts, and if
the precedent cases do not appear to be fair in their application, the judge can simply distinguish
the case at hand from the precedent, and render a decision that is more appropriate in the
circumstances. Students should note that lower court judges cannot ignore precedent-setting
judgments of the Supreme Court of Canada/or Courts of Appeal of the province if the issue before
them has clearly been addressed in the precedent.
4. Ivan delivered a truckload of cement to Konrad’s jobsite, where Konrad was building a small
apartment building. Konrad showed Ivan where to pour the cement, but in doing so, Ivan’s
attention wandered and the cement ran and filled an underground drainage system that
Konrad had just completed. Describe the steps in any legal action that might result.
Comment:
The probable process would be a civil action that Konrad would institute against Ivan for the
damage caused by Ivan’s carelessness. The steps in the process would be those set out on pp.
18-20 of the text.
PART I
LEGAL FUNDAMENTALS
CHAPTER 1
LAW AND THE LEGAL SYSTEM
LEARNING GOALS
4. To provide an understanding what a law is, its sources, and how it is enforced.
11
5. To provide an outline of the legal system and its operation.
6. To outline alternative methods of resolving disputes between persons or businesses.
CHAPTER COMMENTARY
Chapter 1 is introductory in nature, and provides a general background concerning the nature
of law, how laws developed, the general need for some rules to govern the behaviour of
individuals, and the establishment of the various fundamental rights and duties of persons in
society. It also examines the legal system and how it is used to resolve disputes.
In class discussion, special emphasis should be placed upon the sources of law in order
that students may have a clear idea of what they are and where they may be found. Many
students fail to realize that the common law and equity represent a large body of law, and the
scope and application of these sources of law should be emphasized in class discussion of the
chapter. In the context of the courts and the law, the doctrine of precedent should be noted,
and its purpose and application discussed with emphasis on the need for "predictability" in the
application of the law to cases that come before the courts. It would be worthwhile to note as
well that some judges of the Supreme Court of Canada have expressed the view that they, as
judges of the highest court in the land, do not consider themselves bound by the doctrine, but
would only change a common law rule where it had become inappropriate in a modern social
setting. (This point is not set out in the text).
The role of the courts as the chief interpreter of the constitution is also noted, and
should be emphasized in any class discussion of the enforcement of rights under the Charter.
The Charter of Rights and Freedoms is set out in Appendix ‘A’ of the text for reference by
students. As an approach to teaching this part of the chapter, a systematic examination of the
fundamental rights and freedoms may be made with the class requested to provide a fact
situation related to a freedom or right, and then have the class speculate as to how the Charter
might be interpreted by the court as it relates to the matter. With each fundamental right or
freedom it is important to emphasize that the freedom or right must be viewed in the light of
s.1 which makes the right "subject only to such reasonable limits prescribed by law as can be
demonstrably justified in a free and democratic society," and not absolute. The
"notwithstanding" clause (s. 33) which permits legislatures or parliament to override the
Charter rights should be noted as well. Students should note that the province of Quebec used
(s. 33) to override this decision of the Supreme Court of Canada, and passed Bill 178 to require
"French only" signs on all Quebec businesses.
The organization of the Charter itself provides an orderly approach to discussion of the
nature of the rights and freedoms granted under it, as well as the method of enforcement.
With respect to the latter, it is readily apparent that most of the rights and freedoms are those
which the framers of the constitution felt should be enshrined to protect them from
encroachment or interference by governments.
A final point to note and to emphasize in class is that the constitution includes ore than
the Charter of Rights and Freedoms. It also includes the original British North America Act of
1867 (as amended over the years) which establishes the structure of our government, and the
legislative powers and jurisdiction of the provincial governments and Parliament. Consequently,
it is a lengthy and complex document which sets out not only the rights and freedoms of the
individual, but how Canada as a democratic society governs itself. On this point it should be
12
emphasized that legislative bodies may not exceed the powers granted to them under the
constitution, as the exercise of jurisdiction when none exists renders such an act ultra vires and
a nullity.
Statute law is defined on p. 7 of the text, and the process associated with this type of
law-making is described very briefly. Students should be informed that this process is
legislative as distinct from judicial. Discussion may then lead into the topic of Civil Codes, and
students may be asked to discuss the pros and cons of a civil code system vs. the Common
Law/equity system.
Chapter 1 also focuses upon the administration of the law. The text material includes the
structure of the courts in Canada, and as a class exercise, it might be useful to carry simple criminal
and civil actions (based upon easily understood incidents) through the various steps and appeals to
their final resolution at the highest appeal levels. In this fashion, the text material may be
re-enforced, and the various limitations on appeal, etc., noted in the process.
The distinction between criminal and civil proceedings should be emphasized, as experience
has indicated that students frequently fail to realize that an incident which gives rise to both civil
and criminal proceedings (such as a "criminal negligence" incident) would follow two separate legal
paths, one dealing with the criminal act, and the second, dealing with the civil aspect.
Some time should be given to the procedure by which judgments of lower courts may
be appealed. The conditions under which a judgment may be appealed should be stressed
(error of law, rejection of important evidence in reaching a decision, etc.) and the appeal routes
examined for both civil and criminal cases. These are depicted on the charts in the text, but it
should be noted that a number of provinces are in the process of revising their court system,
and the names of the courts and the appeal routes may change as well.
Since alternate dispute resolution (ADR) is considered by many business firms as a more
efficient system of resolving disputes, the topic should be opened for class discussion as an
alternative to the court system. Discussion should note the particular advantages of (ADR) over
the court system (speed of resolution, lower costs, etc.) but it should also be noted that certain
kinds of disputes still lend themselves to the courts for settlement.
Some time should be spent on the regulatory processes that governments use to control
business activities. It differs from what students may view as a legal process in the sense that
most of the ‘law’ or the rules are made by bureaucrats and enforced by them. Students should
be made aware that administrative agencies and commissions play a significant role on the
business scene as they represent the means by which the government seeks to protect the
public health and safety, ensure fair competition in the market place, and generally protect the
consumer from unfair business practices. The regulation of the professions also ensures that a
level of competence is established and maintained through a licensing process.
Discussion of administrative agencies or commissions should also emphasize the fact
that the usual methods of regulating business and the professions is through a registration or
licensing system. The registration or license is the means by which control is maintained, since
in most cases the failure of a business or professional person to comply with the rules or
requirements set down for the business or profession could mean the loss of the registration or
license to carry on the business or practice the profession. Students should also be made
aware that the termination of a registration or the lifting of a license to practice a profession or
carry on a business must be in accordance with the rules of natural justice, and a hearing
13
process, and perhaps an appeal process must be made available to the affected party to ensure
fairness in the decision.
Students should also be made aware that administrative tribunals set down rules and
procedures to carry out the policy objective of the government, and that these ‘rules’ are
usually set out in regulations made under the particular statute. These regulations have much
the same effect as statutes, but are subordinate legislation in the sense that they do not follow
the enactment process for ordinary legislation.
The Review Questions at the end of the chapter should provide a sufficient test of student
knowledge of the essential material, and are reproduced here with draft answers and the
appropriate page references for answer review.
REVIEW QUESTIONS
1. What is the purpose of the law?
Answer:
The law is a means of social control as well as a method of resolving disputes.
2. How are laws usually enforced?
Answer:
The courts are the principal means of enforcement of laws.
3. Explain the common law system and how it relates to the function of the courts.
Answer:
The Common Law system is a system where the laws are not codified, but may be found in the
recorded judgments of the courts. Courts maintain a degree of consistency in the law by following
the doctrine of precedent (Stare Decisis).
4. What is the role of the doctrine of precedent with respect to the common law?
Answer:
The doctrine of precedent is an important theory. Judges are expected to apply previous
decisions to similar cases which come before them in order to maintain a degree of consistency
in the law. By following this doctrine, the law is not only consistent, but others can predict how
the law may be applied in similar cases.
5. How is Statute law created?
Answer:
14
Statute law is created by a legislative process. It begins with the presentation of a bill (outlining
the proposed law) in the legislature. The Statute law is the end result of the process. See text pp.
8-10.
6. Distinguish Statute law from Common Law.
Answer:
Statute law is created by a legislative process. Common Law consists of the recorded judgments of
the courts.
7. Describe the difference between the Common Law and the Civil Code of Quebec, and the merits
of each system.
Answer:
Common Law consists of the recorded judgment of the courts.
Common Law merits: - flexible, as judges may change it through interpretation, or by
distinguishing the case at hand from the precedent. Adaptable to changing social attitudes.
The Civil Code is a written body of law.
Merits of Civil Code: - laws are written down and may be consulted to determine what the law is.
The law can be changed by statute amendment and kept up to date by the legislature if change is
warranted.
8. Why is the Charter of Rights and Freedoms important as law?
Answer:
The Charter is "supreme law" in the sense that it overrides all other federal and provincial laws,
and all such laws must not conflict with it, except as permitted. It is "entrenched" in the sense that
it is difficult to change.
9. On what basis may a legislature or the federal government override Charter rights?
Answer:
Fundamental rights and freedoms may be restricted under s. 1 if the restriction can be shown to
"be demonstrably justified in a free and democratic society." Rights and freedoms may be
"temporarily" overridden by the "notwithstanding" clause (s. 33) as well.
10. Why is an independent judiciary important?
15
Answer:
Important because:
(a)
not open to manipulation by political action.
(b)
free to resolve differences between individuals without fear of the consequences.
(c)
able to determine differences between governments without concern that the
powers of the court will be attacked.
(d)
permanent body to administer the law is vital in order to maintain continuity and
confidence in the system.
(f)
"independence" generally equated to "fairness".
11. Explain the difference between a trial court and a court of appeal.
Answer:
A court of original jurisdiction (sometimes referred to as a trial court or a court of first instance) is a
court where a case is heard for the first time. A court of appeal is a court which reviews the
decision of the court of original jurisdiction to make certain that the judgment was fairly and
properly made.
12. How does a criminal trial differ from a civil trial?
Answer:
Criminal:
-
Crown brings the charge against the accused. A two-step process in many cases:
(1) preliminary hearing, (2) full hearing.
Crown obliged to prove the particular offence was committed by the accused, and
that the offence is one which is set out in the criminal code.
Crown must prove act, identity, and intent to commit the offence (subject to
certain exceptions).
must prove its case beyond any reasonable doubt in order to obtain a conviction.
Civil:
the party who alleges a violation of his or her rights brings the action.
onus of proof of facts alleged rests on the plaintiff.
case is outlined through "pleadings".
plaintiff not subject to the higher standard of proof of criminal courts.
13. What are the differences in the testimony given at a trial between ordinary and expert
witnesses?
Answer:
"Direct" evidence is given by ordinary witnesses who testify as to what they heard, saw, or did.
"Opinion" evidence is evidence given by experts who have special knowledge about the subject
matter of the evidence, and who express an opinion about the matter based upon their
specialized knowledge or expertise.
16
14. What is “hearsay evidence”?
Answer:
Hearsay evidence is neither direct or expert evidence, but evidence given by a third party who
was informed by someone else (usually a person who would normally be an ordinary witness)
of the facts. Hearsay evidence is usually not admissible in a court of law.
15. Explain the purpose of pleadings in a civil case.
Answer:
The purpose of pleadings in a civil action is to set out the facts of the case and the issues in dispute
in sufficient detail to enable each party to know the matters in dispute and prepare their
respective cases for the trial. They avoid surprise at trial, and minimize the time required by the
courts to dispose of the case.
16. On what basis might an appeal be made from the judgment of a trial court?
Answer:
An appeal may be allowed where the judge improperly applied the law, (improperly instructed the
jury as to the law) or made an error in rendering a decision.
17. What possible remedies are available to a Court of Appeal in deciding a case brought before
it?
Answer:
A Court of Appeal may (1) reverse the decision, if the trial judge erred. (2) affirm the decision of
the trial judge, or (3) send the matter back to the lower court for a new trial.
18. Outline the importance of lawyers and their advice to business persons.
Answer:
Legal counsel are learned in the law, and advise others of their legal rights and duties. They also
carry out on behalf of their clients the job of processing an action through the courts, or
negotiating legal matters on their behalf.
19. Explain the arbitration process and how it differs from the court system.
Answer:
An arbitration is conducted much like a court action, but in a much less formal setting. While
the rules of evidence and procedure are usually followed, the process generally does not
require pleadings or discovery. The parties are usually responsible for the selection of the
arbitrator, and the arbitrator’s fees. The hearing does not involve ‘court costs’.
17
20. Why do many businesses prefer to use Alternative Dispute Resolution processes rather than
the courts to resolve their disputes?
Answer:
Alternative Dispute Resolution is a confidential process as well as a relatively low cost and
efficient process for resolving disputes. Often business people do not wish to destroy a
business relationship if a dispute arises, and arbitration will often allow them to obtain an
answer or solution to their problem that will allow them to continue to do business with each
other.
21. A province enacts a law compelling persons who are bankrupt to perform 100 hours of
community service in order to be eligible to receive a discharge from their bankruptcy. Why
might the federal government object to this law and how would it challenge it?
Answer:
The Federal Government would object to the Provincial law on the basis that bankruptcy falls
within the jurisdiction of the Federal Government under s. 91(21) of the British North America
Act 1967. It would challenge the Act in the courts – probably ask the Supreme Court to rule on
the Statute.
DISCUSSION QUESTIONS
1. A private club in a city permits an adjacent restaurant to use a patio on its grounds as a part of
the restaurant during the summer months. The municipality passed a by-law prohibiting smoking
in all restaurants including their outdoor facilities. The by-law enforcement officer advised the
private club that because a restaurant was operated on their property, the by-law would also
apply inside their club building. The club seeks the advice of its lawyer. What advice might the
lawyer give the club?
Comment:
Students should identify the nature of the non-smoking law and the type of business covered
by it. By leasing the grounds of the club to the restaurant it may have extended the nonsmoking area to the club grounds, but the question is: Does the by-law extend to nonrestaurant facilities? Since by-laws are likely to be strictly construed by the courts, the nonsmoking ban would probably not apply to the inside of the club building.
2. How does Alternate Dispute Resolution (ADR) differ from the court system? What are the
advantages and disadvantages of each, and why do businesses prefer to use Alternate Dispute
Resolution?
Comment:
In the discussion of this question students should mention the following points:
- ADR is an informal method of resolving differences
18
-
ADR is a confidential dispute resolution process.
ADR is less costly than the courts.
Parties select the ADR decision-makers.
Dispute is usually resolved in a shorter time than using the courts.
The business relationship is often preserved by using ADR as it is a less
confrontational method.
Advantage of the court may be that precedent may indicate the possible outcome if
the issue is of a legal nature.
The high cost of using the courts may persuade the parties to settle the dispute ‘out
of court’.
3. The doctrine of precedent is a useful tool for judges. In what way is it used by
Judges?
Comment:
Students should recognize that precedent is a useful tool for judges as it provides them with
guidance as to how a case may be decided. It provides them with the decision of other judges and
their reasons for judgment. It is flexible as well, as each case is usually different on the facts, and if
the precedent cases do not appear to be fair in their application, the judge can simply distinguish
the case at hand from the precedent, and render a decision that is more appropriate in the
circumstances. Students should note that lower court judges cannot ignore precedent-setting
judgments of the Supreme Court of Canada/or Courts of Appeal of the province if the issue before
them has clearly been addressed in the precedent.
4. Ivan delivered a truckload of cement to Konrad’s jobsite, where Konrad was building a small
apartment building. Konrad showed Ivan where to pour the cement, but in doing so, Ivan’s
attention wandered and the cement ran and filled an underground drainage system that
Konrad had just completed. Describe the steps in any legal action that might result.
Comment:
The probable process would be a civil action that Konrad would institute against Ivan for the
damage caused by Ivan’s carelessness. The steps in the process would be those set out on pp.
18-20 of the text.
CHAPTER 2
TORT LAW
LEARNING GOALS
1. To identify common intentional and unintentional torts.
2. To identify business situations where torts are most likely to occur.
3. To understand the principles of law, and the standard of care or conduct imposed by the
courts to determine tort liability.
19
4. To understand how the courts apportion liability where more than one person is
responsible for a tort.
5. To understand how damages or compensation is determined by a court.
CHAPTER COMMENTARY
Chapter 2 introduces the first area of the law and some of the more important (and common) acts
of intentional and unintentional interference with persons or property. Since tort law represents
one of the oldest areas of the law, its development is one of the best examples of laws that were
established in response to the needs of society. Most of these principles were formulated long ago,
and have been refined over the years as society changed. The basic intentional torts and the
principles associated with them are examined in the first part of this chapter, and the concepts
applied to business-related activities are found in the last part of the chapter. Note that the
business-related torts set out are those where the intention to injure competitors is an essential
component of the tort itself.
Chapter 2 also examines a number of the more common torts that involve intentional
and unintentional interference with the rights, property, or person of another. These various
torts rank among the oldest and, in some cases, constitute crimes under the Criminal Code. For
the purpose of re-enforcement, it might be a useful exercise to note once again that some
intentional torts (and in particular the intentional torts covered in this chapter) may be subject
to both civil and criminal proceedings if they constitute crimes as well as civil wrongs.
Many of the intentional torts described in this chapter in some instances have a
defence, which may constitute justification for the act, and may wholly or partially absolve the
actor from liability. These should be discussed, along with their limits. E.g: assault/battery and
the act of self-defence. Similarly, the tort of defamation, and the defence of privilege.
Most of the intentional torts described in the chapter are generally well-known to
students, and class discussion should perhaps be used to explore the various defences in detail,
and the issue of damages or compensation for the party injured by the wrongful act. Because
these torts tend to be deliberate acts, this aspect of the various torts should be emphasized.
Care should be taken, however, to note the exceptions such as battery situations, where the
'touching' is without consent, but where the intention is not to injure. For example, a medical
practitioner performs a surgical procedure without the patient's consent. The medical
practitioner may have had the best of intentions, and performed the
operation to improve the patient's health, but in doing so without consent would have
committed a battery.
The chapter also introduces a number of new legal terms that you will find described in
the text material. Definitions of these terms should be committed to memory or understood
thoroughly by the students. In addition to the text description, the Glossary at the back of the
text might be consulted for brief definitions of the various terms.
Business-related torts and crimes tend to be those torts designed to injure competitors
by slandering their goods or their business name. Students should be reminded that the
reputation of a business and the reputation of a product are important 'assets' of a business,
and entitled to protection under tort law. The protection of a reputation of business (or
product) is possible by way of an action for slander of goods or slander of title, but it should
20
also be noted that untrue statements about the reputation of a business person would be
actionable as defamation.
Certain business-related activities are 'crimes' as well, and these are discussed briefly in the
text. Note that some of these activities are covered in greater detail in other chapters of the text.
For example, conspiracies to fix prices, etc., are covered in Chapter 15 which deals with the
Competition Act. Instructors may wish to expand upon the material in Chapter 2 by reference to the
material in Chapter 15 if they do not intend to include the latter Chapter in their course material.
Torts associated with unintentional interference with persons or property are generally
associated with careless acts or a failure to act, and the concepts of duty not to injure, foreseeability,
and standard of care should be considered in their application to these types of torts.
It is important to note that the concept of strict liability has remained over the years as
an important determinant of liability in cases where persons keep in their possession
something capable of causing injury if it should escape. This must usually be something which
is not normally confined, or something which, if confined in a particular way, creates or has the
potential of causing injury if it escapes. Examples would be the confinement of a dangerous
wild animal, or the storage of a large quantity of water in a reservoir. The courts generally
consider both of these activities to be inherently dangerous, and if the animal or water should
escape, the likelihood of injury to a neighbour is very great. Judges generally assume that the
person who engages in this type of activity is aware of the dangers involved, and of the
potential for harm. As a consequence, they are usually held responsible for any damage caused
if escape occurs, regardless of the precautions taken to prevent the escape. Liability in these
instances would likely be determined on the basis of strict liability.
Apart from cases where strict liability might be imposed, tort liability is generally concerned
with the right of a person to live without interference or injury to their person or property by others.
Tort law, consequently, imposes a duty on persons not to injure others, or their property. This
concept of a duty not to injure forms the basis of a great many kinds of torts: negligence, nuisance,
defamation, etc., as well as most crimes of violence.
Students should be made aware that the duty is not absolute, otherwise it would represent
a strict liability situation. In most cases, the duty will be subject to a standard of care, or the concept
of foreseeability. On these points, as the text indicates, the standard of care is usually the standard
of the "reasonable person", and the conduct of the person is compared to that standard. In a similar
fashion, the question of foreseeability is usually
framed by the words "would a reasonable person under similar circumstances have foreseen the
possibility of injury?"
The doctrine of foreseeability, the standard of the "reasonable person," and their application
to the question of liability should be re-enforced by way of examples, such as the following incident:
"A" owns two large dogs and he frequently allows them to run loose on his grounds. The
grounds are fenced, and the type of fencing is such that the dogs could not slip between the fence
wires. One side of the property borders on a pathway regularly used on week-ends by riders on
horse back. "A" allows his dogs to run free on a week-end while a group of horses and their riders
are on the pathway. The dogs, by their sudden barking, frighten one of the horses, and it throws its
rider. The rider suffers an injury, and later institutes legal proceedings against the dog owner.
The questions which might be raised here include the following:
21
(1) Does the dog owner have a duty not to injure the rider?
(2) What is the nature of the duty, if any?
(3) Did the dog cause the injury? Was it the proximate cause?
(4) Was the injury which the rider suffered foreseeable by the dog owner?
By a "reasonable person"?
(5) What consideration should be given to the rider's actions? Should the rider have
foreseen the possibility of the horse bolting when near the dogs? Is the rider obligated
to take precautions under the circumstances?
(6) If the fence was such that the dogs could easily pass through it and enter on the
pathway, what effect might this have on your answers to the above questions?
A series of incidents similar to the above may be used to discuss and illustrate the various
concepts covered in the chapter.
Note that in some provinces (such as Ontario) virtual strict liability may be imposed by
statute upon dog owners for injuries caused by their dogs (subject to certain exceptions). The
common law standard is consequently replaced by a higher standard in these instances. See for
example, Dog Owner's Liability Act, R.S.O. 1990, c. D-16.
Another useful approach might be to describe an incident, then have the class examine the
incident by raising the questions: Does the defendant owe a duty to the plaintiff? What is the duty
owed? What standard or care must be maintained? Did the defendant breach the duty? Did the
plaintiff suffer an actionable loss as a result?
In any class discussion, the standard of care, foreseeability of injury, and the reasonableness
of the actions of the defendant should be underscored as the important determinants of liability in
order to avoid giving the impression that once a duty is owed, any injury which follows is actionable.
In this regard the comments concerning the duty of care of professionals might be used as an
example.
In the case of a professional person performing a service, (e.g. a lawyer or accountant)
the standard is normally that of an ordinary skilled member of the profession, and if the work is
done in accordance with that standard, there is usually no liability in the case of injury. The
important point to note here is that the duty is not absolute. If the professional exercises the
degree of skill of the average member of the profession, that is
all that can reasonably be required of the person, assuming that the profession has established
a reasonable standard. It is only when the performance is below the standard that liability
normally will arise.
Some class discussion time should also be devoted to professional negligence in the form of
negligent misstatements and negligent misrepresentation by accountants, lawyers, etc., and the
extent of their liability.
The owner or occupier of land is not subject to the ordinary rules of negligence, but instead,
at common law is subject to three different standards, depending upon the type of person that
enters upon the land. The landowner owes the lowest duty to the trespasser. In this case, the duty
is usually to avoid deliberately injuring such a person. The courts more recently, however, have
22
occasionally applied the test of "ordinary humanity".
The licensee is entitled to a warning of any unusual or hidden dangers, since he or she enters
on the lands with the consent of the landowner. The invitee, to whom the highest duty is owed,
must be warned or protected from any dangers of which the landowner is aware, or ought to be
aware as a reasonable person.
With regard to occupier's liability, a number of provinces have passed legislation to eliminate
the distinction between licensees and invitees, and to establish a statutory standard of care for
occupiers. British Columbia, Alberta, and Ontario are provinces that have taken this approach.
It might also be worth noting that the liability of occupiers of land, which in the past has been
subject to some codification in the form of petty trespass Acts and other similar legislation, has been
the subject of more extensive codification in some provinces in recent years. This has tended to
delineate the rights and duties of landowners and other occupiers of land. See for example, Ontario,
the Occupiers' Liability Act, R.S.O. 1990, c.0-2.
Product liability is a growing area of tort law as products become more complex. It is
essentially an ordinary negligence action, where the manufacturer may be held liable if the
consumer is injured by a product that was negligently made, or where the user was not warned of
the dangers associated with the use of the product. The case of McAlister (or Donoghue) v.
Stevenson which is described briefly in the text on page 49, and case law on
p. 50 outlines this liability, and the standard of care required of manufactures of products.
Classroom review of the chapter should also include a review of the defences which might
be raised to a claim in tort. Instructors should note, however, the limitations on waiver as a defence,
since the circumstances under which torts arise may have a significant impact on the concept as a
defence.
Tort remedies are outlined on pages 53-55 of the text as they apply to unintentional torts.
The topic of remedies is covered elsewhere in the text as well with respect to other legal
relationships. Some instructors advise students at this stage that other remedies (such as
injunctions) will be encountered later on in the text, and the remedies used in tort actions, such as
money damages will also be dealt with as they apply to other types of injuries.
REVIEW QUESTIONS
1. In law, what is a tort?
Answer:
A legal term used to describe activities that either intentionally or unintentionally cause injury
to others or their property, where the person causing the injury has no legal right to do so.
2. Why are some intentional torts also considered to be crimes?
Answer:
23
Because of the state’s obligation to protect the lives and property of its citizens, many
intentional torts are considered to be wrongs against society or crimes. The state consequently
makes these torts crimes, and enforces them as such.
3. What defence is available in cases of assault and battery? What limits are imposed by the
courts?
Answer:
Self-defence may be raised as a defence where a person had a genuine fear of injury to their
person as a result of a threat of violence (assault) and acted to prevent the battery. Note also that
others may have a legal right to use force against a person. E.g.: police officers restraining a
suspect of a crime.
4. Explain defamation.
Answer:
Defamation is a false statement made that is injurious to a person’s character or reputation.
Slander is spoken defamation. Libel would be written defamatory statements. Libel is the more
serious, as it is recorded, and others may read it over the years. Slander may soon be forgotten.
5. Explain duty of care.
Answer:
Duty of care is based upon the premise that a person should not do anything to injure his or her
neighbour - hence the duty not to injure becomes an essential factor in establishing tort liability.
Note that some individuals may have the right to injure or take the property of others. See text for
examples pp. 37-38.
6. Explain the reasonable person test.
Answer:
The reasonable person test is used to establish the standard of care attached to the duty of a
defendant not to injure. The plaintiff must satisfy the court that the defendant's conduct or
actions fell short of what a reasonable person would have done in the circumstances.
7. Why do the courts impose strict liability for damage in certain cases?
Answer:
24
Strict liability is generally imposed to-day where a person maintains an animal or thing which if not
confined is potentially dangerous. Since these things are known to be dangerous, the person
keeps them at his or her peril.
8. Define negligence.
Answer:
Negligence arises where a person unintentionally injures someone or causes injury to his or her
property where the person causing the injury has no lawful right to do so.
9. What defences may be available to a defendant in a negligence case?
Answer:
Defences are:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
lawful right.
voluntary assumption of risk.
Act of God.
defendant met the standard of care of a reasonable person.
waiver.
statute of limitations.
release.
10. On what basis do courts award damages in negligence cases?
Answer:
Courts normally attempt to put the injured party back in the same position as he or she was
before the injury in so far as money damages may do so.
11. What kinds of money damages might a court award in a case where a negligent
motorist causes an accident in which a pedestrian on a sidewalk is struck by the
vehicle?
Answer:
(1) money damages to compensate for specific losses: medical expenses, lost wages, etc.
that may be calculated.
(2) general damages to compensate for pain and suffering, and any permanent injury
resulting from the accident.
12. Explain a waiver and how it is used.
25
Answer
Waiver is the promise by a person not to sue another person in the event that injury or loss
should occur due to the other person’s actions.
13. What duty of care does an occupier of land have towards a trespasser? An invitee?
Answer
To a trespasser: no duty of care except to treat with ‘ordinary humanity’ (not to deliberately
injure).
To an invitee: to protect the invitee from any unusual dangers that exist on the property that
the occupier is aware of or should be aware of as a reasonable and careful person.
14. How might a trespasser become a licensee?
Answer
A trespasser may become a licensee if the occupier of land fails to take steps to stop a known
trespasser from continuously trespassing on the land.
15. What tests do the courts use to decide if a professional person has been negligent?
Answer
The test used to determine professional negligence is the standard of performance established
by the governing body of the profession. (The skill level of a reasonable person who was a fully
qualified member of the profession).
16. Explain how the courts might limit the liability of professionals who prepare financial
statements for clients.
Answer:
The extent of the liability is generally limited to the users that might reasonably be foreseen to be
relying on the statements in their decision-making.
17. How might manufacturers of hazardous products limit their liability if damage might result
from the improper use of the products?
Answer:
Careful testing to ensure safety, and where the product has some inherent danger, provide
adequate warning and instructions for its use.
26
DISCUSSION QUESTIONS
1. In the ASK A LAWYER scenario at the opening of the chapter, the case raises three
questions:
(a) should the company proceed with the marketing of the product?
(b) If so, what precautions should the company take in its marketing information?
(c) What step should the company take to minimize risk of liability?
How would you answer each of these questions?
Comment:
Students should consider or raise the following points in their discussion of ASK A LAWYER
scenario. Careful testing of the product should first be done to ensure that the product contains
no other inherent risks. It may then proceed with the marketing of the product. Because of the
known allergic reaction, the product should contain a very visible and clear warning that
protective gloves should be worn when using the product. A hazard warning might also be
included on the label and the label should be applied to the container in such a way that it can
be seen and read by a user. The company might also determine if a ‘child proof’ container
could be developed. Insurance coverage should be obtained to protect the company in the
event that a user should suffer injury and sue the manufacturer.
2. A tavern has decided to hire a person to control unruly patrons. What advice and instructions
should the management give to the new employee?
Comment:
Students should recognize the principal duty of the employee would be to have the unruly patron
leave the premises. The instruction could include:
(1) making the employee aware that the patron must first be asked to leave the
tavern immediately – the reason for this would be that it would represent notice to the
patron that his/her status has been changed from invitee to trespasser if he/she refuses
to leave.
(2) the employee may escort the patron from the premises if he/she refuses to
leave, but the employee can use no more force than necessary in the process.
(3) the employee should call the police if the patron threatens anyone with violence or
assaults other patrons.
3. Two municipal politicians have proposed a by-law for a city that would prohibit groups of
more than three persons from singing aloud on city streets without first obtaining a license to
do so from the municipality.
The local newspaper believes the proposal to be a foolish and an unnecessary by-law.
27
It wishes to ridicule the politician, and their by-law. What can they do in this regard?
What limits might the law impose?
Comment:
Newspapers are usually permitted to make ‘fair comment’ about local politicians, but their
statements must be honest opinion, based upon the information available to them. If they
have an honest belief that the proposed by-law is foolish, they may express this opinion in their
newspaper. Newspaper cartoonists may portray the local politicians in their cartoons as being
foolish in their proposal.
4. Asa agreed to sell her house and lot to Bailey. Asa had her lawyer prepare a deed for the
property, but the lawyer described the wrong parcel of land in the deed. Bailey’s lawyer failed
to notice the error, and registered the deed. A year later, Bailey discovered that his deed was
for the wrong property. Asa by then had moved out of the country, and could not be located.
What advice would you give Bailey?
Comment:
Bailey in this case would incur the cost of correcting the property deeds in order to obtain a
proper deed to the land purchased from Asa. This would likely be expensive, and since Bailey’s
lawyer was negligent in failing to ensure that the deed was for the correct property, Bailey may
take legal action against the lawyer for the costs of correcting the error, and obtaining good
title to the property.
COMMENTS RE: DISCUSSION CASES
CASE 1
The Happy Hour Sports Bar employed Bertha as a bartender. One evening, a young man
entered he bar in an obvious drunken state, and demanded a beer. Betha refused to serve him
a beer, and offered to call him a cab to drive him home. The young man refused the cab, and
demanded a beer in a loud voice. Bertha once again refused to serve him, and told him to leave
the bar at once. He then became angry and began pounding on the bar with his fist,
demanding a beer.
Without a further word, Berta walked around the bar to where the man stood. She
quickly put a head-lock and arm-lock on the man, then escorted him out of the bar and into the
street, where she released him.
A few moments later, the man returned to the bar and demanded a drink. Bertha again
walked around the bar and seized the man by the arm to escort him out of the building, but the
man refused to move, and attempted to strike her with the fist of his free arm. Bertha avoided
the swinging arm and seized it as well. She then pinned both arms behind the man’s back, and
pushed him in the direction of the exit. Once through the door, she gave him a heavy push into
the street, where he fell, striking his head against a parking meter. The man suffered a serious
28
head injury as a result of the fall, and brought a legal action for damages against the bar owner
and Bertha.
Discuss the type of case the man might take to the court, and the defences, if any, of
Bertha and her employer. Render a decision.
Comment:
The facts of the case may give rise to an action for damages on the basis of excessive force
causing injury. This may also include a claim of negligence on the part of Bertha, since she
threw the patron in the direction where the head injury would not likely have occurred. Apart
from the issue of use of force, the case deals with the rights of an occupier of property to eject
a person from property, and the application of force in the exercise of rights.
Questions that might be raised in connection with these issues are: What is the status
of the drunken patron once he was requested to leave the premises in the first instance? Did
Bertha commit a tort by taking the patron and ejecting him from the premises? Did the patron
commit a trespass by returning? Did Bertha’s actions on the second occasion constitute a tort?
Students should note that the drunken patron had entered on the premises lawfully.
The bartender was entitled to ask the patron to leave because he was drunk. When he refused
to leave, he became a trespasser, and the occupier (the bartender) was entitled to take
reasonable steps to remove him from the premises. However, when the patron refused to
leave, the police should perhaps have been called to deal with him, as any excess force on the
part of Bertha might be considered a battery. As a general rule, a person may eject a trespasser
from property if the trespasser refuses to leave after being told to do so, and the person in
possession (owner or tenant) may use whatever force is necessary to eject the trespasser.
On the question of the head injury, the patron’s claim concerning the push of the patron
in the direction of the parking meter raises the question of negligence, forseeability of the
injury by the parking meter, and the reasonable person test. On this point, the patron’s head
striking the parking meter would probably not be a foreseeable consequence of the push out
the door.
CASE 2
The Daily News was a small town newspaper that frequently reported the local Town Council
meetings in detail. At one of the Council meetings, one of the councillors raised a concern
about a housing project in the community that was being constructed by Ace Contractors.
During the discussion at the Council meeting, the councillor stated that the owner of Ace
Contractors, a John Smith, was a ‘crook’ and should be ‘kicked out of town’. The Daily News
reported the discussion in detail, including the comments of the councillor. Smith in fact was
an honest citizen, and not a ‘crook’.
When Smith discovered the newspaper report, he instructed his lawyer to immediately
begin a legal action against the newspaper and the councillor.
Describe the nature of the action, and the defences, if any, that the Daily News and the
councillor might raise in their defence. Explain, with reasons, how the case might be decided.
Comment:
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Students should recognize that the town councillor made a false statement about the owner of
the construction company. Does a town councillor at a meeting have absolute privilege to
make such statements? Would it make a difference if he honestly believed that statement to
be true?
Municipal corporations are creatures of statute, and unless provision is made to protect
councillors in the governing statute, they may not have the absolute privilege of Parliament, the
legislatures or the courts. If no protection, the councilor’s false statement may constitute
defamation. However, a Manitoba case [McKinnon v. Daphin (Rural Municipality [1996] M.J.
No. 24] suggests that a defamatory statement made by a Municipal Councillor at a council
meeting, if made without malice may have qualified privilege. The question here is: was the
statement malicious? If so, then the defence of qualified privilege would not stand.
The newspaper’s position should also be discussed by the class. What responsibility
would the newspaper have to Smith? If the newspaper was merely reporting the council
meeting and the statements of the councilors, it may be able to avoid liability.
CASE 3
Luxury Fur Farms for many years operated a mink ranch in a farming area near a municipal
airport. Due to the growth of the city, a new runway was constructed that would allow larger
aircraft to use the airport. The runway was constructed in a direction such that aircraft
approaching the runway would fly directly over the building that housed the mink if cloud or
fog conditions required the pilots to fly to the south of their normal approach path.
Because mink will devour their young if a loud noise occurs, Luxury Fur Farm had the
words ‘MINK RANCH’ painted on the roof of their barn in large, 20 foot letters that were clearly
visible to aircraft in the air. A warning of the existence of the ranch was also reported in the
pilot flight information manuals, advising pilots not to fly low over the buildings.
Shortly after the new runway was constructed, weather conditions required Ace Airlines
Flight 120 to approach the airport on a path directly over the mink ranch. The noise of the
aircraft caused a great many of the mink to kill and eat their young, and Luxury Fur Farms
suffered a substantial loss.
At the trial of the case, the pilot of the plane admitted that he was unaware of the
location of the mink ranch. He also stated that he had not examined the flight information
manual that identified the location of the mink ranch.
Discuss the nature of this case, the claim of Luxury Fur Farms, and the defence, if any,
that might be raised by the Airline. Render a decision.
Comment:
The facts of this case raise the issue of whether the airline was under a duty of care towards the
mink ranch owner not to injure the animals. Students should be asked to discuss this issue in
terms of the nature of the duty (if any), whether a reasonable person (pilot) should be aware of
the injury that might be caused by flying over the building at a low altitude, and if so the
conduct that should take place to avoid the injury.
Students should be asked to speculate about the duty of care (if any) in terms of how far
away from the mink ranch would be appropriate? Does the fact that the approach over the
mink ranch was not the normal or usually flight path to the runway for aircraft matter? Does
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the airport have any obligation to the farmer by constructing the new runway as it did? Was
the pilot negligent by not examining the information circular? Was the pilot expected to know
the significance of the words “Mink Ranch”?
The facts of the case are essentially those of Nova Mink Ltd. v. Trans-Canada Air Lines
[1951] 2 D.L.R. 241. The court in that case concluded that the pilot was under no duty to avoid
the mink ranch, as a reasonable person would have no way of knowing how far to stay away
from the mink ranch to avoid injury. The case against the pilot and the airline was dismissed.
CASE 4
A golf club constructed a driving range on its property that faced a number of residential
properties located next to the golf course. Golfers using the driving range frequently hit golf
balls into the backyards of the neighbouring residential properties, and on several occasions
broke windows in the houses located on the lots. On one occasion, a golf ball struck and killed
a cat that had been sleeping on a bench in one of the backyards.
The residential property owners complained to the club about the golf balls being driven
into their properties, but the club refused to change the location of the driving range. In
response to the complaints, the club stated that the individual golfers that caused the damage
should be responsible, since they hit the balls into the yards.
When the club refused to stop the use of the driving range, the property owners
decided to institute legal proceedings against the club.
Discuss the nature of the action, the arguments of the parties, and render a decision.
Comment:
Students should identify the facts of this case as raising issues of nuisance, trespass and
negligence. In this case, the club has some responsibility for the damage caused by the flying
golf balls, as it was responsible for the location of the driving range.
Note that the driving of golf balls onto the neighbouring properties constitutes a
trespass. It may also constitute nuisance causing injury or damage to the enjoyment of the
property owners. The negligence claim may be more difficult to establish, since this would
relate to carelessness of individual golfers. However, the club may be partially responsible due
to its location of the driving range in a place where it could as a ‘reasonable person’ expect golf
balls could be driven in a direction that would cause damage. Students should discuss the
requirements to establish each of these possible claims.
The property owners would likely be successful in a claim for an injunction to stop the
use of the driving range – forcing the club to relocate it.
CASE 5
A fast food restaurant operated a ‘drive-thru’ service that allowed motorists to purchase food
items and drinks without leaving their vehicles. The restaurant was well-know for the quality of
the coffee that it served, and much of its business reputation was based on this fact.
Restaurant advertising was designed to capitalize on its coffee reputation which it advertised as
“the best and hottest coffee in town”.
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One evening, a customer who frequently bought coffee at the restaurant purchased a
large coffee from the drive-thru part of the operation. When she received the coffee container,
she placed it between her knees on the car seat and attempted to drive away. Unfortunately,
when she moved her leg to press on the accelerator, the coffee spilled, causing serious burns to
both knees. She was unable to work for over a week while her injuries healed, and decided to
take legal action against the restaurant.
Outline the nature of her claim, and speculate as to the arguments that she and the
restaurant owner might make to support their respective sides of the case. Render a decision.
Comment:
This case concerns the duty of care of the restaurant to its customer. The customer’s claim
would be a claim of negligence and a breach of duty towards her. Did the restaurant have a
duty of care? Was the duty met by the notice that it served the “hottest coffee in town”?
Would a reasonable person expect a customer to hold the coffee cup as she did and
drive the vehicle? Was the customer partially or wholly responsible for her injury?
Students may conclude that a reasonable person would not expect a customer to hold
the coffee cup as she did, and that she would be entirely responsible for her injury.
The facts of the case are similar to those of a U.S. case where the jury concluded that
the restaurant was liable for the injury. A Canadian court may well have reached an opposite
conclusion.
CASE 6
“Ace Andy” was a stock car driver who experienced reasonable success in the non-professional
race circuits. He eventually decided to incorporate the business on the advice of his
accountant, and transferred his cars, trucks and trailers to the corporation. However, he
retained his shop building (which had an estimated value of $300,000) and leased it to the
corporation for an annual rental. The value of the stock cars, trucks and trailers as well as the
other race equipment had a value of approximately $250,000.
In order to acquire additional capital, Andy, who was the President of the corporation,
arranged for a bank loan in the amount of $250,000. The bank required the corporation’s
financial statements in order to process the loan, and Andy instructed his
accountant to prepare them. These were prepared in due course, but the accountant, in error,
included the shop building as a corporate asset when in fact it was not owned by the
corporation, but by Andy personally.
Before advancing the loan to the corporation, the bank discovered the accountant’s
error, and Andy was required to personally guarantee the loan to the bank.
Some time later, the corporation found that it needed additional capital for a
replacement vehicle, and Andy contacted a friend who was interested in investing in the
corporation. The friend offered to invest $60,000, but wished to examine the corporation’s
finances before doing so. Andy suggested that the investor contact the bank, as the bank had
loaned the corporation $250,000, and it could give the investor any information that he might
require about the corporation.
The investor contacted the bank for information, but the loans manager was on
vacation, and a clerk, who was unfamiliar with the bank loan and the errors in the financial
32
statements, provided the investor with copies of the corporation’s financial statements without
comment.
The investor examined the financial statements, and decided to purchase $60,000 worth
of shares in the corporation.
Over the next few months, Andy’s success on the race circuit turned into disaster. Both
of his cars were destroyed in track accidents, and in the last accident, Andy was seriously
injured. As a result, the flow of prize money ended, and the corporation was in financial
difficulty. At this point in time the investor discovered that the financial statements were in
error, and that land and shop building were not assets of the corporation.
Advise the investor, Andy, the bank, and the accountant of their position and rights (if
any) at law.
Comment:
This case deals with the responsibility of a professional and a banking institution to a third
party. The accountant was clearly negligent when he failed to notice that the building was not
acquired by the corporation when it bought the business from Andy. The error was discovered
when the bank advanced funds, and the bank acquired additional security to secure its loan to
the corporation. However, did the bank owe a duty to the investor to inform him of the error
on the financial statements before releasing them? Was the accountant liable to the investor
on the negligently prepared statements that result in a loss for third parties that they (the
accountants) could reasonably have foreseen would be using them to make investment
decisions. Should a “reasonable accountant” have foreseen the use of financial statements in
the instant case? The statements were prepared at Andy’s request for the bank, but the
accountant should have foreseen the possibility that they might be used by other investors as
well, and corrected the errors contained in them when discovered. By leaving the misleading
statements in the hands of the bank, he should have foreseen the possibility of others using
them when they contained a known error. The bank was also negligent in this instance by
providing the investor with misleading financial statements, although it is important to note
that the investor in the case requested financial information from the bank, and the financial
statements were given as a part of this opinion.
CASE 7
Candy Ltd. manufactures a variety of soft and hard candies that it packages in clear plastic bulk
packs for filling candy dispensing machines located in shops and malls. The dispensing
machines are owned and operated by Candy Dispensers Incorporated, and the corporation paid
the shop owners or mall a small rental fee for the space occupied by the dispensing machine.
The shop owner or mall assumed no responsibility for the operation of the machines, and
Candy Dispensers Incorporated employees handled the filling of the machines, and the removal
of the cash.
One day, a disgruntled employee at Candy Ltd. discovered a large, 2 cm long maggot on
the shipping dock, and in a fit of anger, took the maggot into the plant and threw it into the
packaging machine that was packaging bug and animal shaped candies. The package containing
the maggot was shipped to Candy Dispensers Incorporated along with other candies as a part of
a large order.
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In due course, the package containing the maggot (that by this time had died) was
emptied into a candy dispensing machine at Joe’s Variety and Snack Bar, a popular shop where
students bought snacks on their way to and from a nearby school.
Lisa and Andrea, two students who often bought candy at Joe’s Variety, put coins in the
vending machine, and obtained a quantity of the candy. Lisa noticed that one of the candies
that Andrea had received was an odd looking shape, and commented that it looked like a ‘dried
up caterpillar’. Andrea nevertheless decided to eat it, only to discover that it had a terrible
taste. She soon felt ill as a result of the toxins in the maggot, and required hospital treatment.
As a result, she missed a week of school, and was unable to work at her part-time job for a twoweek period while she recovered from the ‘food’ poisoning.
Advise Andrea.
Comment:
The issues in this case are similar to those in McAlister (Donoghue) v. Stevenson cited in the
text on p. 49, but differs in the sense that the candy dispensed from the machine was open to
inspection by the purchaser before it was eaten. Students might be asked if this absolved the
manufacturer from liability. Since the caterpillar was similar in shape to the candy, the
consumer might not be expected to examine each piece of candy, and the manufacturer may
be liable. The shop selling the candy may not be responsible, as it did not handle the candy in
any way.
CASE 8
For many years the 4CAB Company operated a taxi service in a major city of 1 million persons.
The firm uses an easily remembered telephone number, ending in the numeric equivalent of
“4CAB.”
An unidentified person placed a message on an internationally known subscriber online
service, advertising T-shirts for sale bearing highly offensive images and slogans, with a phone
number for placing orders. Accidentally or intentionally, this number led to the business
telephone of 4 CAB Company taxi service.
Almost immediately after the posting, hundreds of calls drowned 4 CAB’s phone lines,
complaining about the offensive T-shirts. New advertisements were repeated over a period of
seven days, during which time 4 CAB Company complained to the online service. 4 CAB
Company requested, then demanded, removal of the messages. In response, the online service
promised “an investigation.” On the tenth day, with its business brought to a standstill, the 4
CAB Company headed for court, seeking damages from the service provider for business
interruption, an order to remove the messages, and an order that its telephone number be
filtered out of future postings.
Discuss the issues arising here and how you would handle this, if the case came before
you as the judge.
Comment:
This case is based on Kenneth M. Zeran v. America Online, Inc., 129 F.3d 327 (1997), US Court
of Appeals, 4th Circuit. The case was originally in the context of a private residential individual
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and the bulletin board operator, where statutory law exculpated the operator from information
originating from third parties, upheld at both first instance and appeal. In the fact situation
given, there may be greater grounds for liability in the bulletin board operator, especially with
the increase in technological filtering capability that has arrived since 1997. Today, there may
be greater expectation that a telephone number could be filtered, after a reasoned request. It
is still unlikely that damages for business interruption could be visited on the bulletin board
operator, when the principal wrongdoer is acting through the operator. The probability for
damages against the operator increases if it exhibits gross negligence or delay in investigating
the claims of parties injured as a result of postings, where reasonable means exist to prevent
that harm from continuing.
CHAPTER 3
FORMATION OF A VALID CONTRACT
LEARNING GOALS
1. To examine the role of contracts in business.
2. To understand the elements of a valid contract.
3. To determine how contracts are formed.
4. To outline the rules relating to the creation of a valid contract.
5. To understand the legal obligation of privacy and data protection.
CHAPTER COMMENTARY
Chapter 3 introduces the law of contract, and represents the first of a series of chapters concerning
one of the most important areas of the common law from the standpoint of business persons. A
good grounding in the basic concepts related to the law of contract is therefore essential for all
students.
The chapter covers the rules for the formation of a valid contract. It begins with the first
of the essential elements of a binding agreement: the intention to create a legal relationship.
While this is a relatively simple element for the student to grasp, its importance should not be
ignored, and perhaps a few fact situations should be discussed to distinguish situations where
the intention is considered present (such as an agreement between strangers in a business
setting) from those where it is not (e.g.: a family agreement of a casual nature). The test applied
in these cases is generally that of the reasonable person, and whether such a person would
regard the agreement as binding.
The chapter also introduces the elements of offer and acceptance. Offers should be
distinguished from mere invitations to do business, and the distinction between an offer and an
advertisement to sell goods should perhaps be pointed out by way of example. A certain
amount of drill concerning the rules for both offer and acceptance is often useful to firmly fix
the requirements for each in the minds of the students.
CONTRACT CASE PROBLEMS: A SUGGESTED APPROACH
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Chapter 3 introduces the law of contract and the elements of a valid contract. The case problems
provide an opportunity to analyze the dealings between the parties in each situation, and to
determine if the parties have established an enforceable agreement.
An approach that may be suggested to students for these cases might be to examine the
facts of the case, first to determine if the parties intended to create a legal relationship, then to
identify the offer (or offers, as the case may be). Once the offer has been identified, the next
step should be to look for an unconditional acceptance of the offer. If an acceptance can be
found, check the conditions under which it was made to ensure that it was made in accordance
with the terms of the offer, and before lapse or revocation occurred. By following this
approach, students are less likely to overlook something in the case which would affect the
creation of the agreement, or allow one party to avoid it. In the chapters which follow,
additional essential elements will be added to the three elements examined in this chapter. The
advantage of this approach to case analysis is that the examination may be expanded in a
methodical way to cover each new element as it is added to the "list".
Consideration is sometimes difficult for students to fully understand. Because consideration
represents the "something" that the promisor receives for his or her promise, examples are often
useful methods of explaining the concept. For example, the following statements might be put
forward: "I will sell you my car for $3,000". What is the consideration that an offeror would receive
in return for such a promise? From whom would it come? Similar questions may be asked in
connection with an offer of this nature: "I will give you two dollars if you will deliver this parcel to
the post office for me."
Promises for which consideration is received, and gratuitous promises should be
distinguished, and in addition, the effect of a seal on the requirement of consideration should
be discussed. As well, the question of adequacy of consideration and the question of its legality
should be explored.
The importance of the seal as consideration as it relates to a tender is noted on
pages 79-80. The nature of a tender, and the effect of a tender made under seal should be discussed
in class. As to the former, the courts have held that a tender is an offer, and constitutes an
irrevocable promise to hold the offer open for a period of time if made under seal. If no seal is
present, a tender would probably be subject to revocation at any time before acceptance.
As the text indicates, whether a contract is under seal or not, the courts will not go into the
adequacy of the consideration in a contract, as long as it contains some valuable consideration in
the eyes of the law. Apart from situations where a party has made an obvious mistake in stating the
amount of consideration, the courts are not concerned about adequacy or whether proper value is
received for a promise. The important thing is whether consideration is present. In the analysis of
any contract case, the existence of consideration is essential, unless it falls within one of the
exceptions, or the agreement is made under seal.
An area where confusion sometimes arises is where a contract is not performed by a party
who has a duty to perform. In this instance, if the terms of the agreement should be altered, it is
necessary to ask the question: What consideration does the party receive in return for the promise
to compensate a party to carry out an obligation which the party has a duty to perform? If the
answer is "nothing", then the promise is merely gratuitous.
The application of the doctrine of consideration to the debtor-creditor relationship raises a
problem where a gratuitous promise is made to reduce a debt. The text however, provides a number
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of illustrations of the "exceptions" which the courts have established to limit the application of the
rule. The fact that many provinces have dealt with this situation through legislation should be
emphasized (e.g.: the Western provinces, Ontario) as students frequently overlook this change.
Included in the chapter is a discussion of promissory estoppel which may require class time
to review. The concept is frequently a source of difficulty for some students, although it normally
should not be difficult to understand. Students should be aware that where a person by words or
conduct has led another to believe that a certain state of affairs exists, and the person so informed
acts upon the representations to his or her detriment, the person making the statements cannot
later repudiate them, even though no consideration was given for the promise contained therein.
It should be noted, however, that as a general rule promissory estoppel does not constitute a
cause of action, but only a defence
Chapter 3 also introduces the elements of capacity and legality. As the text indicates,
not everyone who enters into an agreement may be bound by it, as the law attempts to protect
some individuals, such as minors, who lack experience in business matters, and whose
inexperience might therefore be taken advantage of by others. Care should be taken, however,
to emphasize that the protection granted to such persons is not absolute, but rather, balanced
by the need for those individuals to contract for necessaries such as food, clothing, and shelter.
To do otherwise would work a hardship on the very group that the law attempts to protect. The
balance of the common law is a key point to discuss in class.
To the elements of intention, offer and acceptance, capacity, and consideration, the
chapter also introduces the additional requirement of legality. The chapter deals first with the
question of enforceability, then examines the requirement of legality under both statute law
and common law. Students are occasionally surprised at the number of different types of
agreements that they believed were lawful, when in fact the law renders them unenforceable.
In particular, the unenforceability of an agreement between a dishonest employee and an
employer p. 86 that involves the employee's promise to return the stolen goods in exchange for
the employer's promise not to press criminal charges, appears to be difficult for many to
comprehend. So too, are contracts where an unreasonable restriction on the employee is
contained in a contract of employment.
REVIEW QUESTIONS
1. Explain why an intention to create a legal relationship is an important element of a
valid contract.
Answer:
Intention distinguishes those situations where enforceable rights are created from those where
the parties do not intend to be legally bound by their promises.
2. Why is it important that an offer must be communicated before acceptance may take
place?
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Answer:
Communication must take place first because a party should not be bound by an offer of which
he or she is not aware. In addition, a party must be fully aware of the terms of the offer before
acceptance may be made.
3. How does an advertisement offering a reward for lost goods differ from an
advertisement offering goods for sale?
Answer:
An advertisement of a reward is treated as a binding offer to the public at large. It is accepted
by the performance of an act. An advertisement of goods for sale is usually not considered as
an offer because the seller is not expressing an intention to be bound by the advertisement –
only inviting offers based upon availability of stock, etc.
4. Describe the rules for acceptance of an offer, and why such rules are necessary.
Answer:
Acceptance must be unconditional – because it must be in accordance with the terms of the
offer. Acceptance must be communicated in accordance with the terms of the offer because
the offeror determines how acceptance should be made. See also rules for time and mode of
acceptance in text.
5. List four instances where an offer might lapse before acceptance.
Answer:
An offer may lapse if:
(1) either party dies before acceptance.
(2) either party becomes bankrupt.
(3) no acceptance within the time period specified in the offer.
(4) no acceptance within a reasonable time, if no time of acceptance specified.
6. What condition must be met before revocation of an offer is effective?
Answer:
Revocation of an offer is not complete or effective until it has been received by the offeree, or
the offeree has been clearly made aware of the revocation.
7.
Betacorp holds personal information about its customers. What limitations exist as to how
Betacorp may use that information?
Answer:
Betacorp must only collect, use or disclose personal information with the consent of the person
in question. To disclose information without consent would be a violation of the PIPED Act (or
provincial equivalent).
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8. What is the legal effect of a counter-offer?
Answer:
A counter-offer has the effect of terminating the offer to which it relates. The original offeror
may accept or reject the counter-offer, but is under no obligation to revive the original offer if
the counter-offer is rejected.
9. Why do courts refuse to address the adequacy of consideration?
Answer:
The courts are reluctant to address the adequacy of consideration because they have no way of
knowing the minds of the parties at the time of the agreement.
10. Explain the nature of consideration as it applies to a contract and why its presence is an
important requirement for a valid contract.
Answer:
Consideration is something which a person receives in return for a promise.
11. Why is a seal important on certain types of contracts, and how does it relate to
consideration?
Answer:
A contract under seal does not require consideration for historical reasons. The act of sealing
the agreement was indicative of the person’s intention to be bound by the promise made after
giving the matter considerable thought. This type of contract derives its validity from its form
rather than from the presence of consideration.
12. Why, at Common Law, do the courts consider the acceptance on the due date of a lesser sum
as payment in full by a creditor, a gratuitous promise?
Answer:
The promise is considered to be gratuitous at common law because the promisor receives
nothing in return for the promise. There is no consideration given for the promise to forego the
balance owing.
13. Explain promissory estoppel and its uses in a contract setting.
Answer:
Promissory estoppel may arise where a person states a material statement of fact as being true,
and another relies upon the statement to his or her detriment. If the person making the untrue
39
statement brings a claim against the other party, the truth of the statement cannot be denied,
and may be raised as a defence to the claim of the party who made the statement.
14. Outline the Common Law rules relating to the capacity of minors to contract, and the
rationale of the courts in establishing these rules.
Answer:
Public policy dictates that certain persons, due to their inexperience (or immaturity) or their
inability to appreciate the nature of their acts should be protected, and are thereby not held to
their contracts except where it is in their interests to be bound.
15. If a minor is engaged in business, how would the courts deal with contracts entered
into by the minor?
Answer:
A minor engaged in business is engaged in “non-necessary” activity, and consequently, the
agreement between the infant proprietor and another would likely be voidable at the infant’s
option.
16. Explain the difference between minors and drunken persons in terms of their capacity to
contract.
Answer:
Infant contracts and those negotiated by insane or drunken persons differ in the sense that an
insane or drunken person will normally be bound by all contracts unless they can show that:
(1) they were drunk or insane at the time,
(2) the other contracting party was aware of this, and
(3) the contract was repudiated promptly on returning to a sane or sober state.
17. How is the basis for legality in a contract determined?
Answer:
Legality is based upon public policy. A legal contract does not offend public policy; an illegal
one does.
18. Describe the three main classes of contract that may be in restraint of trade.
Answer:
3 classes of contract in restraint of trade:
(1) agreement contrary to the Competition Act.
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(2) contracts between vendors and purchasers of businesses where the vendor’s future
actions are restricted unduly.
(3) Employment contracts where the employee’s future employment right is unduly
restricted.
19. Why are the courts reluctant to enforce restrictive covenants in contracts of
employment? Under what circumstances would the courts enforce such a restriction?
Answer:
A restrictive covenant could prevent a person from earning a living if it was enforceable under
all circumstances. Hence, the limitation on its applicability.
20. Explain the purpose of a devotion to business clause in a contract of employment and
outline the circumstances where the clause would be enforced by the courts.
Answer:
A devotion to business clause is sometimes used to ensure that an employee devotes the
required time to the employer’s business, and to prevent an employee from engaging in other
activities which might be in competition with the employer’s business. Such clauses are usually
enforceable because an employer is normally entitled to the time and energy of the employee
as long as it does not unnecessarily affect the employee’s personal freedom.
21. If specialized e-business legislation is silent or absent on a particular point of law, is there a
complete void in the law, at least as far as e-business is concerned?
Answer:
The ordinary contract law would apply to all e-business, and if the specialized legislation did not
cover a point, the Common Law might be expected to address the issue.
22. At what point is an offer no longer revocable?
Answer:
An offer is no longer revocable after the point in time when it is accepted by the offeree, and
the offeror made aware of the acceptance. Acceptance by mail is an exception, as it occurs
when the letter of acceptance is placed in the mail.
DISCUSSION QUESTIONS
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1. Ask A Lawyer raises two contract issues (1) the testing and purchase of a very complex
machine, and (2) the hiring of an employee to operate the machine. The company needs to
know if the machine will ‘work’ before buying. What contract issues does this raise and what
can be done to protect the company in the purchase? How might the company protect its
trade secrets in the hiring of an employee to operate the machine? What limits does the law
impose?
Comment:
With respect to the purchase of the complex machine the company should make certain that
the contract includes a proviso that would give the company the right to test the machine at its
place of business, and if it does not operate satisfactorily, it may be returned and any money
paid be returned. The contract should also contain a confidentiality clause that would prohibit
the machine manufacturer and any of its employees from revealing to anyone the information
provided by Chemical Products Co. in its testing of the machine.
With respect to the hiring of an employee, it is important that the contract of
employment contains a clause that would prohibit the employee from revealing the
confidential and secret processes of the company to anyone during employment, and
afterwards, if the employee should leave the company.
2. Under what circumstances would a restrictive covenant in a contract for the sale of a
business be enforceable? Explain why this is the case when contracts in restraint of trade are
contrary to public policy.
Comment:
Restrictive covenants in a contract for the sale of a business must be reasonable in terms of
time and geography to be enforceable. This type of restriction is permissible, as it protects the
goodwill purchased as a part of the business. The restriction is mutually beneficial to both the
buyer and seller, as the goodwill would be of no value if it was not protected in this fashion.
3. To what extent are parties able to ‘make their own law’ by way of the contents of an
enforceable contract? What limitations does the court impose on the rights that the parties
can make under a contract?
Comment:
Contracts are generally enforceable unless they are illegal, or against public policy (such as in
restraint of trade, etc.).
4. How do you think the rule for acceptance by email will evolve? Will it follow the postal rule,
or the receipt rule?
Answer:
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The email rule will probably evolve along the lines of the postal rule, since the law as it
currently stands indicates that a message sent by email is deemed to be sent when it enters the
information stream outside the sender’s control. This is similar to the postal rule, which deems
acceptance complete when the letter is delivered to the postal service.
5. Julie is employed as a purchasing clerk by Herbatech, an Ontario firm. She send an offer by
email on behalf of her company to Karim, to purchase equipment. Karim replies by email three
days later, accepting the offer, but in the interval Julie left her job at Herbatech. Her email
account is closed, and Karim’s reply is bounced back as undeliverable. After a cumbersome
effort of some days to find out who replaced Julie, Karim is informed that the offer has lapsed
as Julie’s replacement found an alternate supplier for the equipment. Was there an
enforceable contract between Karim and Herbatch?
Answer:
When Karim is made aware of the undeliverable email, to ensure his acceptance reaches the
offeror, he should have contacted the offeror by telephone. However, since the subject matter
of the offer is not a perishable product, and no time limit specified for acceptance, the offeror
would be obliged to revoke the offer before acceptance by Karim. This may have taken place
before Karim could accept the offer, if the replacement clerk advised him of the purchase
elsewhere.
COMMENTS RE: DISCUSSION CASES
CASE 1
Grand Island Development Corporation owned several cottage lots on Vancouver Island, and on
September 10 sent a letter to Onshore Construction Company offering to sell the lots for
$300,000. Onshore Construction Company sent a reply by return mail on September 13
offering to buy the lots for $250,000.
Grand Island Development Corporation did not respond immediately, but a week later,
on September 20, the President of Grand Island Development Corporation met the President of
Onshore Construction Company at a charity dinner, at which time the President of Onshore
Construction Company indicated that his company was still interested in the purchase of the
cottage lots, and enquired if Grand Island Development would be willing to reduce the price of
the lots. The President of Grand Island Development stated that the $300,000 price was ‘firm’.
On September 23 the Onshore Construction Company sent a letter to Grand Island
Development Corporation accepting its offer to sell the cottage lots for $300,000. Due to a
delay in the delivery of the mail, the letter was not received at the office of Grand Island
Development Corporation until September 28.
In the meantime, when Grand Island Development Corporation had not heard from
Onshore Construction Company by September 26, it accepted an offer to purchase the lots
from Cottage Contracting Ltd.
Identify the various rights and liabilities that arise from the negotiations.
Comment:
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This case is a useful fact situation for the discussion of offer, acceptance, lapse, counter-offer, and
revocation. An approach that may be taken would be to deal with the case in a sequential fashion,
asking in turn the questions: Is there an offer? Identify it. Was the offer accepted? If not, did it
lapse? Did it constitute a counter-offer? etc. An analysis of the facts on this basis should
determine that Grand Island Development Corporation’s offer of September 10 was not accepted,
and instead, Onshore Construction Company made a counter-offer to buy the cottage for
$250,000 by letter on September 13. The President's inquiry of September 20 should be identified
as an inquiry, and Onshore Construction Company’s comment as an affirmation of the offer at
$250,000. The question of whether the offer lapsed on September 20 should be explored.
Onshore Construction Company wrote the letter of acceptance on September 23, and
sent it by post. Before the letter was received, however, Grand Island Development
Corporation accepted an offer from Cottage Contracting Ltd. The date was September 26.
From the facts, the offer and acceptance of September 27 would constitute a contract
between the parties, but the acceptance sent by Onshore Construction Company on September
23 must also be considered. According to the decision in Henthorn v. Fraser, [1892] 2 Ch. 27
(see also Sibtac Corporation Ltd. v. Soo (1978), 18 O.R. (2d) 395) an offer of this nature would
probably contemplate acceptance by mail, and the acceptance would be complete when the
letter of acceptance was placed in the mail. Assuming that the affirmation of the offer by Grand
Island Development Corporation on September 20 did not lapse on that date, on the basis of
the above cases, Onshore Construction Company would have accepted the offer on September
23, and a contract was formed at that time (see: Adams v. Lindsell (1818), 1 B. and Ald. 250;
106 E.R.250).
CASE 2
Base Metal Co. wrote a letter to Steel Manufacturing Co. on May 2 offering to sell it 350 tonnes
of rolled steel at $2,200 per tonne. Steel Manufacturing Co. received the letter on May 3. A
few weeks later, the President of Steel Manufacturing Co. checked the price of the particular
type of steel and discovered that the market price had risen to $2,280 per tonne. On May 22,
Steel Manufacturing Co. wrote Base Metal Co., accepting the offer. Armstrong Metal Co. did
not receive Steel Manufacturing Co.’s letter until May 30. Base Metal Co. refused to sell the
steel to Steel Manufacturing Co. at $2,200 per tonne, but expressed a willingness to sell at the
current market price of $2,310 per tonne.
Steel Manufacturing Co. instituted legal proceedings against Base Metal Co. for breach
of the contract that it alleged existed between them.
Discuss the rights (if any) and the liabilities (if any) of the parties, and render a decision.
Comment:
In this case, the question of lapse of an offer must be considered. Base Metal Co.'s offer was made
on May 2, and no acceptance was made until May 22. As a general rule, a written offer will
normally lapse after a reasonable time, and it is necessary to determine if a reasonable time had
elapsed, before the acceptance took place. Where non-perishable goods are sold, a reasonable
time is not usually short (hours, or a few days) but a longer period of time, depending on the
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volatility of the price, etc. If steel should be normally subject to wide fluctuation in price, then
nineteen or twenty days may be too long a period of time, and the offer could have lapsed before
the acceptance date. See: Shatford v. B.C. Wine Growers Ltd., [1927] 2 D.L.R. 759.
CASE 3
The Silver Mining Company decided to sell of two of its less productive mines, the Blue Lake
mine and the Silver Lake mine, and authorized the company president to find a buyer. On June
10, the president wrote a letter to the Amalgam Mining Corporation offering to sell the two
properties for $3,000,000.
On June 22, Amalgam Mining Corporation replied by mail to the letter in which it
expressed an interest in the purchase of the Blue Lake mine at a price of $2,000,000 if Silver
Mining Company was prepared to sell the properties on an individual basis.
On June 28, the president of Silver Mining Company replied by fax that he would prefer
to sell both properties, but if he could not find a buyer for the two parcels within the next few
weeks, the Company might consider selling the properties on an individual basis.
On July 6, the Amalgam Mining Corporation made an inquiry by fax to determine if
Silver Mining Company had decided to sell the properties on an individual basis. The president
of Silver Mining Company responded with a fax which stated that it was still looking for a buyer
for both properties.
Following this response, Amalgam Mining decided to examine property the Silver Lake
mine, and sent out its two geologists to do a brief site evaluation. On July 12 they reported
back to say that they had examined the mine, and from company core samples, found what
might be a potentially economic ore body worth between 10 and 30 million dollars. Amalgam
Mining then prepared a letter accepting the offer of Silver Mining Company to sell both
properties for $3,000,000. The letter was mailed on July 15.
On July 16 the president of Silver Mining Company found a buyer for the Silver Lake
mine at a price of $1,200,000, and signed a sale agreement the same day. He then wrote a
letter to Amalgam Mining in which he accepted their offer to buy the Blue Lake mine for
$2,000,000. The president of Silver Mining Company received the July 15 letter of Amalgam
Mining on July 17.
Discuss the issues raised in this case, and indicate in your answer how the case might be
decided if it was brought before the court.
Comment:
The facts of this case concern the timing of offers and their acceptance. Students should
identify the June 10 offer by Silver Mining Company and the response by Amalgam Mining
Corporation as what might be considered a counter-offer (or perhaps an inquiry and offer to
purchase Blue Lake Mine). In any event, the response of July 6 probably revived the original
offer of June10, which Amalgam Mining Corporation could then accept or reject. Amalgam
Mining Corporation accepted the offer on July 15 (applying the rule that an offer of mail invites
acceptance of mail, etc.) even though it was not received until July 17. If this reasoning was
followed by a court, Silver Mining Company would be bound in contract to sell both mines to
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Amalgam Mining Corporation when it 'sold' the Silver Lake mine to another buyer.
CASE 4
Rafting Company offered white water raft trips involving a relatively short 10 km journey down
a swift river. The price of the trip, including overnight hotel and meals, was advertised at $300.
Hillary and Hal, in response to the advertisement, entered into a verbal arrangement with the
operator of the tour to join in on the journey, and they agreed to appear at the designated
hotel the evening before the date of the excursion.
At the hotel, they met the president of the tour company and paid him the tour price.
The next morning, as Hillary and Hal assembled their gear with the nine other passengers, a
representative of the company spoke to the participants and instructed each of them to sign a
form entitled “Standard Release.” The form stated that the operator of the tour was “not
responsible for any loss or damage suffered by any passenger for any reason, including any
negligence on the part of the company, its employees, or agents.” They were reluctant to sign
the release, but when they were informed by the tour representative that they would not be
allowed on the raft unless they signed it, they did so. When the release was signed, the
representative gave each of them a life jacket with a normal adult buoyancy rating. After they
donned the life jackets, they were allowed to climb aboard the raft.
During the course of the journey, the raft overturned in very rough water, and Hal and
two other persons drowned. An investigation of the accident by provincial authorities indicated
that the life jacket Hal had been wearing was not adequate to support the heavy weight of a
person his size. The investigation also revealed that, due to the swiftness of the river at the
place where the accident occurred, a more suitable life jacket would probably not have saved
Hal’s life.
Hillary survived the accident and brought an action against the tour company under the
provincial legislation that permitted her to institute legal proceedings on behalf of her deceased
spouse.
Discuss the issues raised in this case and indicate the arguments that might be raised by
each party. Render a decision.
Comment:
The case raises a number of contract issues as well as the tort of negligence. Some contract points
to note are: would the "release" exempt the tour operator from any breach of contract, etc.? Did
the tour operator negligently perform the contract? Was the tour operator in breach of the contract
by providing an inadequate life jacket to Hal? If it was a term of the agreement to provide a life
jacket could the tour operator argue that he had done so? Could Hillary argue no consideration for
the signing of the waiver? What would be the response of the tour company to the argument?
The facts of the case are essentially those found in Delaney v. Cascade River Holidays Ltd.
et al. (1983) 44 B.C.L.R. 24, where the court found that the consideration for the waiver was the
company allowing the deceased to continue on the trip. The release as a result was valid and
enforceable.
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CASE 5
Metro Developments Ltd. owned a parcel of land upon which it wished to have a commercial
building constructed. An architect was engaged to design the building, and a contractor was
contacted to carry out the construction. Contracts were signed with both.
Before the construction was completed, the Municipal Building Department inspected the
building and informed the architect that the building violated a municipal by-law, and would
require certain safety features to be included in the building. Neither the architect nor the
contractor were aware of the by-law at the time they entered into their respective agreements
with the company.
The safety features required by the by-law could be incorporated in the building at a
cost of approximately $15,000, but the contractor refused to do so unless he was paid for the
work as an “extra” to the contract price. Metro Developments Ltd. refused to treat the
required changes as an ‘extra’, and it withheld all payment to the contractor on the basis that
the construction was illegal. The contractor then instituted legal proceedings against the
company.
Explain the nature of the contractor’s claim, and explain the defence, if any, that might
be raised by Metro Developments Ltd.
Discuss the issue of responsibility in the case. Render a decision.
Comment:
The contract for the construction of a building in itself is not illegal, but the failure of the
building to conform with the municipal building code suggests the questions: Is the contract
illegal because it violates a local building code? What is the significance of the fact that neither
the architect nor the building contractor were aware of the law? Is ignorance of the law an
excuse in the case of the architect? The contractor? The property owner? What are the
ramifications of illegality in this case? If the contract is illegal, and the contract unenforceable,
the property owner would acquire a building perhaps at no cost to him. Would this then be
"unjust enrichment"? Are not all parties expected to be aware of the law? As a general rule, if
a contract cannot be performed without violating a law, the contract will be considered void,
regardless of whether the parties were aware of the law or not. According to One Hundred
Simcoe Street Ltd. v. Frank Burger Contractors Ltd. (1968), 66 D.L.R. (2d) 602, a case with
similar facts to the case here, the fact that the design incorporated an error which violated the
law, and which was unknowingly made by the architect, would not necessarily render the
entire contract illegal, and therefore unenforceable. The cost of changing the building to
comply with the building code, however, would fall on the negligent party or parties. The
property owner, therefore would likely be bound by the contract, but would be entitled to
compensation for the negligence in an amount which would be required to bring the building in
conformity with the building code. The liability of the contractor would depend upon
whether the nature of the design error was one which the contractor would likely be
aware. The contractor may however, have a claim against the architect if the architect was
negligent in the preparation of plans that failed to incorporate the safety requirements of the
by-law.
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CASE 6
A medical clinic that had been established for many years advertised in the medical press for an
obstetrician. Silvano, a medical specialist, answered the advertisement. Following an
interview, Silvano was employed by the clinic and signed an employment contract that
contained the following clause:
Should the employment of the Party of the Second Part by the Parties of the First Part terminate
for any reason whatsoever, the Party of the Second Part COVENANTS AND AGREES that she
will not carry on the practice of medicine or surgery in any of its branches on her own account,
or in association with any other person or persons, or corporation or in the employ of any such
person or persons or corporations within the City or within ten kilometres of the limits thereof for
a period of five years.
Silvano worked well with the other doctors at the clinic, and developed a good
reputation with the patients at the clinic, but after some years, an argument arose between
Silvano and one of the founders of the clinic. As a result of the argument, Silvano resigned. She
immediately set up a practice in the same city in an office building located across the street
from the clinic. The clinic continued to operate without the services of Silvano and later brought
an action for damages and an injunction against her.
Discuss the factors the courts should consider in deciding this case. Render a decision.
Comment:
This case is based upon the case of Sherk v. Horwitz, [1972] 2 O.R. 451. The case illustrates a
very common form of restrictive covenant found in employment contracts. The first question
to be decided is whether the "10 k.m., 5 year" limitation is reasonable.
The nature of the protection required by the employer should be examined in this light,
and the issue of public policy should be raised. What effect (if any) would the fact that the
medical profession itself supports a policy of universal access to medical care have on the public
policy considerations in the case? What attempt would the courts make to balance the need
for protection from competition for the employer with the "right" of the public to medical care?
Would it have any effect on the public policy aspect if the employer had hired a replacement
for Silvano immediately after she resigned? Would this have been adequate protection for the
public? An essential part of the plaintiff's case clearly must be to satisfy the court that the
public would be protected if the covenant was enforced. In the Sherk v. Horwitz case, this was
not done, and the plaintiff was unsuccessful.
CASE 7
In 1998, Einstein entered into the employ of Security Technology Limited as an electrical
engineer. He was employed to design electronic testing equipment, which the company
manufactured. At the time he was hired, he signed a written contract of indefinite hiring as a
salaried employee. The contract contained a clause whereby he agreed not to disclose any
confidential company information. The contract also required him to agree not to seek
employment with any competitor of the company if he left the employ of Security Technology
Limited.
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Some years later Einstein was requested to develop a home security device suitable for
sale to home mechanics through a particular hardware store chain under the chain’s brand
name. He produced a prototype in less than a week, and then he went to the president’s office
to discuss the development and production of the equipment.
During the course of the discussion, Einstein and the company president became
involved in a heated argument over manufacturing methods. At the end of the meeting, the
president suggested that Einstein might begin a search for employment elsewhere, as his job
would be terminated in three month’s time.
The next morning, Einstein went to the president’s office once more, ostensibly to
discuss the home security device. Instead, Einstein informed the president as soon as he
entered the room that he no longer intended to work for the firm. He complained that the
company had never given him more than a two-week vacation in any year, and that he often
worked as much as 50 hours per week, with no overtime pay for the extra hours worked. In a
rage, he smashed the prototype of the device on the president’s desk, breaking it into a dozen
small pieces. He then left the room.
The following week, Einstein accepted employment with a competitor of Security
Technology Limited to do a type of work similar to that which he had done at his old firm. He
immediately developed a home security device similar in design to the previous model; then he
suggested to the management of his new employer that they consider the sale of the
equipment through the same hardware chain that Security Technology Limited had
contemplated for its product. The competitor was successful in obtaining a large order for
home security devices from the hardware chain a short time later.
Security Technology Limited presented its new product to the hardware chain a week
after the order had been given to the competitor, and only then discovered that Einstein had
designed the equipment for that firm. The hardware chain had adopted the competitor’s
product as its own brand and was not interested in purchasing the product of Security
Technology Limited, in view of its apparent similarity in design.
Security Technology Limited had expected a first year’s profit of $60,000 on the home
security device if they obtained the contract from the hardware chain.
Discuss the nature of the legal action (if any) that Security Technology Limited might
take against Einstein, and indicate the defences (if any) that Einstein might raise if Security
Technology Limited should do so.
Comment:
The facts of this case raise the question of the use of confidential information by an employee
after he leaves the employ of his employer. The nature of the information must, however, be
considered: that which is truly confidential may not be used by the employee to the prejudice of
the employer. The onus rests on the employer to prove that the disclosed information was
confidential, and was first disclosed to the employee as such. (See: Consolidated Textiles Ltd. v.
Central Dynamics Ltd. et al. (1974), 18 C.P.R. (2d) 1). Students should be encouraged to identify
the confidential information.
The restrictive covenant with respect to employment should also be examined. Since the
covenant contains only a restriction "not to work for a competitor" is it too wide? Would the
courts likely strike it down since it contains no time limit? What obligation rests on the plaintiff in
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the enforcement of the covenant?
The home security device, from the facts of the case, would appear to be a relatively
standard electronic device, and one which would unlikely contain anything of a confidential
nature such as a "trade secret," or use a secret production process in its manufacture. The
identity of the customer in this case, however, might be confidential if the "contact" for the
purchase had been made only between the two companies. While the restrictive covenant on
employment might not be enforceable, the action for the breach of confidentiality might be
successful.
CASE 8
Tom was tired of running his business and was looking for a buyer so he could retire before the
winter. Bill wanted to buy the business, but needed another month to raise the necessary
finances. Tom said to Bill: “Look, for $5,000, I’ll give you an option to purchase in 30 days, but if
you’re not ready to buy then for fifty thousand, I’m going to sell it to Dan”. Bill paid Tom the
$5,000. Thirty days later, Bill appeared at Tom’s door with $45,000. Tom said: “Sorry, I’m going
to sell it to Dan. I said the price was $50,000.” Bill was confused, and sought legal advice.
What advice would the lawyer provide to Bill?
Comment:
The case raises a number of issues: Is the $5,000 consideration for the option to keep the offer
open for 30 days? Does the statement “to buy then for $50,000” represent the consideration
to buy separate from the option agreement? Does Bill’s tender of $45,000 consititute a
counter-offer, effectively terminating the original offer, or is it an inquiry as to the price? The
lawyer may advise Bill that the wording would appear to be clear that for $5,000 Tom was
offering to hold the offer open for 30 days, and since no reference was made to a reduction of
the final price by the option monies, the statement “to buy then for $50,000” may be
interpreted as the offer price for the business. Bill’s tender of $45,000 may be interpreted as a
counter-offer and terminate the original offer.
CASE 9
Janine owned a shop selling fine bone china. After a customer dropped an expensive bowl and
shattered it, Janine made a new policy by posting a sign reading “Lovely to look at, lovely to
hold, if you break it, consider it sold”. In time, another customer broke a vase she was
examining but refused to pay for it. Discuss the legal position of both Janine and her customer.
Comment:
Can a sign constitute a contract between the shopkeeper and the potential customer? A first
point to query is whether the customer noticed the sign before picking up the vase. If yes, then
perhaps she agreed to the terms when she picked up the vase, and an agreement was made. If
she did not see the sign, then clearly no contract was made as she was unaware of the offer.
Apart from the contract issue, the customer may be liable for the damage if she was careless in
her handling of the vase.
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CASE 10
Ann’s electric clothes dryer was unreliable, and she sought a replacement. She noticed an
advertisement in the newspaper for a used dryer, in like-new condition, at a price of $200. She
visited the residential address given, and was shown the dryer, sitting against the wall inside a
garage. The elderly lady who owned it had died, and her son was selling her possessions. Ann
was delighted, paid $200 and took the dryer home. When she tried to install it, she discovered
it was designed to run on natural gas rather than electricity, a fact that had not even occurred
to her to check. Does a contract exist in this situation?
Comment:
In this case, Ann failed to carefully examine the clothes dryer, and since the seller made no
representation that it was a gas dryer rather than electric, Ann would appear to have no
recourse against the seller.
CHAPTER 4
ENFORCEABILITY OF CONTRACTUAL RIGHTS
LEARNING GOALS
1. To identify contracts that require special form or writing to be enforceable.
2. To examine the effects of misrepresentation, mistake, undue influence and duress on the
Enforceability of a contract.
3. To outline how contracts may be assigned.
CHAPTER COMMENTARY
Chapter 4 is concerned with the various elements which must be present to establish a binding
agreement at common law. To some extent these have been altered by statute. For example,
in the area of legality and capacity, statute law has imposed a number of restrictions, but apart
from these alterations, the requirements are essentially those established by the courts. In
addition to these basic elements, it is necessary to examine two additional requirements that
affect only certain types of contracts.
Formal contracts, derive their validity from the form which they take, and they must of
course, also be in writing to be enforceable. The Statute of Frauds and the Sale of Goods Act,
however, have expanded the writing requirement to cover a number of different kinds of contracts
which were not formal agreements in the past. The Statute of Frauds, in particular, is unusual in its
application with regard to writing, as it does not render the contract void, but merely unenforceable
by the courts. This point should be emphasized in class discussion. So, too, should the methods
employed by the court to overcome the hardships that the statute has produced. Some emphasis
should be placed upon the doctrine of part performance, and the exceptions to the parol evidence
rule under the Requirements for the Written Memorandum (pp. 105-108).
Because the courts have established certain exceptions to the statute, these should be
carefully reviewed. Among these are the rules for part performance of a contract concerning
land, and the exception for contracts which may be performed by either party in less than one
year.
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Students should be aware that the guarantee is a special type of agreement, because it
involves three persons: the creditor, the debtor, and the guarantor. To have a guarantee
situation, a debtor-creditor relationship must exist, or be created. This in turn, will be
supported by the guarantee, thus creating a secondary relationship between the creditor and
the guarantor. The guarantor, however, does not have primary liability for payment of the
debt. The debtor is primarily liable for the payment. Where the guarantor becomes liable is
when default occurs on the part of the principal debtor. It is important to note as well that
payment of the debt by the guarantor does not release the debtor from all obligation on the
debt. When the guarantor has paid the debt, the guarantor is entitled to a transfer of the
security, and the claim for payment from the creditor. The guarantor then becomes entitled to
claim payment from the debtor.
Students should also be aware that the failure to create an enforceable contract may arise
when the parties have formed an untrue view of the agreement which they have made. The
different forms of mistake should be examined, and its effect on the contractual rights of the parties.
The implications of void and voidable contracts as a result of mistake should also be reviewed.
With respect to unilateral and mutual mistake (p. 112 of the text) the remedy of rectification
should be noted, and particularly its limitations. It may not be used to revise an established
agreement, but only to correct obvious typographical errors, or to save the agreement by correcting
terms which through error or oversight were omitted or wrongly inserted.
Misrepresentation, in its two forms which render a contract voidable, should also be noted.
In particular, the fact that fraudulent misrepresentation gives rise to a tort action (deceit) as well,
should be emphasized.
Undue influence and duress, while less common grounds for rendering a contract voidable,
should be reviewed, and some attention given to the conditions under which the rights arise. In this
regard, the need for prompt action on the part of the party subject to the influence or duress to
avoid the contract once free of the influence should be underscored.
The extent of contractual rights deals essentially with the concept of privity of contract and
how a third party may perform or acquire rights under the contract. The basic rule for performance
of a contract by the parties should be emphasized before branching out into the different ways that
a third party might be introduced to the contract. In this fashion, the privity of contract rule might
be highlighted, as well as the methods used to circumvent the effects of the rule (such as formal
contracts, and the doctrine of constructive trust). One approach might be to examine the various
statutes which provide exceptions to the privity of contract rule, (such as the Insurance Act) and
then some examples of common law exceptions. The various methods for the assignment of
contractual rights might next be considered, beginning with novation, and then on to equitable and
statutory assignments. With respect to the latter type of assignment, a review of the requirements
for a statutory assignment (pp. 124-125) and in particular, the requirement of notice would probably
be a useful exercise.
Students sometimes have difficulty understanding how a third party may obtain rights under
a contract. Instructors might explain that these are generally acquired by assignment, or by a
second contract which relates to the initial contract. Novation, for example, is such a method. By
novation, the contracting parties agree with the third party that the third party may replace one of
the original parties to the contract. The important point to note is that the intention of the parties
to create a novation must be shown from either the writing of the parties, or their actions.
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Students should be informed that novation is not necessary in order that a third party
might perform a contract. In many cases, the actual performance of a contract is done by a
person other than the contracting party, but the difference here is that the original contracting
party remains liable for the performance if it is done improperly. Performance of a contract of
this type is called vicarious performance, and the most common situation where it occurs is
where an employee of a contracting party actually performs the work required under the
agreement. If the employee does the work negligently, the employer is liable. This is due to the
contractual relationships and the privity of contract rule.
Party A
Party B
CONTRACT
EMPLOYMENT
CONTRACT
PERFORMANCE OF
CONTRACT
Employee C
A and B have a contract which requires performance by B. Under a contract of
employment, C does the actual work, but B is vicariously liable for C's actions. The arrangement
does not violate the privity of contract rule unless the contract required B to perform
personally because of B's special skill or talent. This might arise, for example, where B is a
musician or a skilled surgeon.
Some time might also be given to the assignment of a debt, where performance is usually in
the form of payment of a sum of money. In the past, this was initially quite cumbersome, but with
the development of the statutory assignment, the process was streamlined. Students should be
made aware that the law requires only that the assignment be in writing and signed by the assignor,
be absolute, and with notice in writing to the party charged with performance. Under these
circumstances, the assignee takes the contract as it stands between the assignor and the other party.
The assignee, as a result, is exposed to a certain amount of risk, but the benefits of the simplified
process make such transactions attractive to business persons.
REVIEW QUESTIONS
1. Outline the effect of the Statute of Frauds on the enforceability of a contract.
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Answer:
The statute imposes a requirement of writing on certain informal contracts.
2. What is the difference between a guarantee and an indemnity? Explain how the Statute of
Frauds affects these two contracts.
Answer:
In an indemnity the third party becomes a principal debtor. A guarantee creates a contingent
liability for the debt on the part of the guarantor: Only if the principal debtor defaults does the
guarantor become liable. The Statute of Frauds requires the guarantee to be in writing to be
enforceable.
3. Explain the doctrine of part performance and outline how it affects contracts caught by the
requirement of writing for contracts concerning land.
Answer:
The doctrine of part performance may be used to avoid the Statute of Frauds in a verbal contract
concerning land if a party can establish that the verbal contract is otherwise valid, and evidence is
available to establish it, that there was a reliance on the agreement by the party attempting to
enforce the agreement, the party would suffer a loss if the agreement was unenforceable, and
that the statute would constitute a fraud on the party if it was not enforceable. The injured party
must also show that the acts of part performance relate, and could relate only to the agreement in
question.
4. Describe the parol evidence rule and the rationale behind the rule in terms of its application
to a written agreement.
Answer:
The parol evidence rule limits evidence pertaining to a written contract to evidence which explains
the terms of the agreement. Evidence may not be admissible if it would have the effect of adding
to, changing, or contradicting the terms of the agreement.
5. What is the doctrine of implied term and how does it relate to the parol evidence rule and a
contract in writing?
Answer:
The doctrine of implied term states that the courts will recognize certain terms as being a part of
the agreement even if they are not included, if the terms are those that by custom or practice the
parties normally include, and the terms were omitted due to an oversight.
6. Explain mistake in its legal context, and indicate how it would differ from what one would
ordinarily consider to be a mistake.
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Answer:
Mistake at law refers to a situation where the parties have entered into an agreement in such a
way that it does not express their true intentions. It does not mean a simple "oversight".
7. What effect does mistake, if established, have on an agreement that the parties have made?
Answer:
Mistake renders the agreement voidable or void depending upon the nature of the mistake (e.g.:
mistake as to the existence of the subject matter would render the agreement void. Mistake as to
the identity of the party may render the agreement voidable when the error is discovered).
8. What is the difference between mistake and misrepresentation?
Answer:
Mistake is a failure of the parties to make an agreement that expresses their true intentions.
Misrepresentation is a statement of a material fact by one party which induces the other party to
enter into the agreement.
9. Distinguish innocent misrepresentation from fraudulent misrepresentation.
Answer:
Innocent misrepresentation is a statement of a material fact which the person who makes the
statement believes to be true, and which is later discovered to be false. Fraudulent
misrepresentation is a statement of a material fact which the person knows is false (or made
recklessly) and which is made with the intention to deceive. In both cases the other party must be
induced to enter into the agreement on the basis of the statement.
10. How does negligent misrepresentation differ from fraudulent misrepresentation?
Answer:
Negligent misrepresentation – a misrepresentation usually based upon carelessness.
Fraudulent misrepresentation – a statement made knowing it to be false, and made with the
intention to deceive the other party.
11. What sort of contracts are subject to a requirement of utmost good faith?
Answer:
The obligation to act in utmost good faith applies to partnership contracts, insurance contracts,
and a few other relationships where trust and full disclosure are essential for the relationship to
exist.
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12. Why are some contracts simply void, while others are voidable?
Answer:
Void contracts are generally those where the mistake is such that no contract can exist, such as
where both parties are mistaken as to the existence of the subject matter. Voidable contracts
tend to be those where a mistake or misrepresentation occurs that, when discovered, permits
one part (the injured party) the opportunity to reject the contract, if the party so desires.
13. Why do the courts consider non-disclosure to be misrepresentation under certain
circumstances? Give an example of where the rule would apply.
Answer:
Non-disclosure applies to the narrow range of contracts called contracts of utmost good faith.
With each of these, there is a duty to disclose all material facts. (e.g.: insurance, partnership, etc.).
For example: An insurer, in order to assess the risk and set a premium (or decide whether to take
on the insurance) must have all relevant information in order to make the decision. Only the
prospective insured has that information, and hence, must disclose it.
14. How does undue influence differ from duress?
Answer:
Undue influence involves persuasive means of influencing a person to enter into a contract.
Duress involves violence or the threat of violence to force the person to enter into the contract.
15. Explain the importance of the privity of contract rule.
Answer:
The rule prevents parties to an agreement from imposing liability on others not party to a contract.
16. What are the major exceptions to the privity of contract rule?
Answer:
The main exceptions involve partnerships, land transactions/ goods subject to restrictions,
vicarious performance situations, constructive trusts, and statutory assignments. These
exceptions are necessary to recognize standard business practices or cases where statute or public
policy dictates enforcement of such contracts.
17. Define novation and explain how it changes contract rights and performance.
Answer:
Novation is a process whereby the parties to a contract agree to a change in the parties by
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allowing one of the contracting parties to drop out of the agreement, and another to step into the
agreement. In effect, the old agreement terminates, and a new one is established. It is a useful
way to confer benefits on the third party and allow the third party to perform.
18. Discuss vicarious performance as an exception to the assignment of contractual rights.
Answer:
Vicarious performance recognizes trade practices where employees of an employer perform work
under contracts negotiated by the employer. The employer, nevertheless, is liable for any
short-fall in performance.
19. What are the requirements for a valid statutory assignment?
Answer:
A proper statutory assignment requires that the assignment be in writing and signed by the
assignor. It must be absolute, and notice of the assignment must be given in writing to the party
charged.
20. Outline the duties of a debtor when a statutory assignment is made of a debt.
Answer:
The debtor is obliged to make payment in accordance with the notice.
DISCUSSION QUESTIONS
1. Ask A Lawyer raises a number of issues. Should Manufacturing Supply Company carry on
with the agreement? If not, can it avoid the agreement? Should it agree to have Parts
Manufacturing Company take its place in the agreement? What issues, if any, would this raise?
Comment:
Students should discuss the nature of the untrue statements concerning the financial strength
of Product Supply Co. Are they material to the contract? Were they innocent
misrepresentation? Fraudulent misrepresentation? Note that in either case, the statements
would render the contract voidable at the option of Manufacturing Supply Co., and it may
terminate the contract if it does so promptly, without taking any further benefits under the
contract. Manufacturing Supply Co. would then be free to enter into a similar contract with
Parts Manufacturing Co., but it would not be a novation situation (unless of course, agreement
by all parties could be arranged – an unlikely situation).
The lawyer would probably advise the former course of action, as the questionable
financial status of Product Supply Co. would suggest a clean break, and a new contract.
2. A small-business person is in serious financial difficulty. One of his competitors is aware of
his financial problems and offers him a loan of $15,000 to pay off pressing creditors. The
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interest rate on the loan is 61%, and the loan due in three months. At the end of three months
the small business person cannot pay the loan.
Discuss the rights of the parties.
Comment:
In this case, a 61% interest rate is a violation of the Criminal Code, and the high interest rate
would be unenforceable against the debtor. The small business person was in financial
difficulty, but note that there was no duress to pressure him to take the loan. In the case of
C.A.P.S. International v. Kotella [2002] 6 W.W.R. 307, the court dismissed the plaintiff’s claim
for repayment of the loan where the interest rate was illegal under the Criminal Code. Other
courts have reached different remedies.
3. A young adult purchased a car for $20,000. To do so, he borrowed the money from a bank.
His parents guaranteed the loan that was for three years with payments of $400 per month. A
few months later, the young adult and the bank changed the loan agreement to a four-year
term with payments of $300 per month. How might this affect the parents’ guarantee
obligations?
Comment:
The alteration of the terms of the loan agreement without the consent of the guarantors would
probably have the effect of releasing them from their contingent liability as guarantors.
4. At a sports bar, Martin offers to sell an authentic Wayne Gretzky Edmonton Oilers hockey
jersey to his friend Alfred for $400. Unknown to both, Martin’s dog at home has just finished
shredding the jersey. Carl arrives at the bar, and hearing of the deal, tells Alfred he has
previously seen the jersey, and that it is not “game-worn” by Gretzky, but rather a current
authorized production official replica jersey, made by an NHL-licensed supplier. What legal
principles apply to this deal?
Comment:
The important point to note here is that the jersey was destroyed, unknown to both parties,
hence, the agreement is void based upon a mistake as to the existence of the subject matter – the
shredded jersey is no longer a jersey. Note that, if the jersey had not been destroyed, the contract
may be voidable by Alfred based upon misrepresentation by Martin if Martin had offered the
jersey as ‘game worn’ by Gretsky.
5. An industrial bakery agrees to supply one hundred thousand loaves of bread monthly to a
major Canadian grocery chain at a price of $1.00 per loaf. Before deliveries begin, the baker
rethinks the deal, feeling it should have charged more. On review, it discovers that the contract
recites “one hundred” loaves of bread monthly at $1.00 per loaf. What recourse will the
grocery chain have if the bakery refuses to honour its price beyond 100 loaves?
Comment:
The facts of this case may give rise to a situation where the grocery chain could ask for rectification
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of the contract to read ‘1,000 loaves’, particularly if 100 loaves/month would make no sense given
the size of the grocery chain’s store operation.
6. Eric, at age 80, owns a large property of about 100 forested acres, half of which is covered
with walnut and butternut trees he had planted as a boy. Eric is approached by a real estate
agent who tells him he has client who is looking for land with trees where a new house can be
built. Eric severs the treed half of his property and sells it, and the new owner builds a family
home. In talking with his new neighbour, Eric discovers to his horror that the buyer is the
owner of a custom sawmill, and intends to cut down all of the hardwood trees for furniture and
veneer. Does Eric have any recourse?
Comment:
Eric probably has no recourse against the new owner of the property, as he made no agreement
concerning the trees. The contract is not one where any ‘obligation to disclose’ was required, and
the new owner did build a house on the property as stated by the real estate in the negotiations.
COMMENTS RE: DISCUSSION CASES
CASE 1
Central Apartments Ltd. borrowed $800,000 from the Exchange Bank and secured the loan by
way of a five-year mortgage on the security of its apartment building. The bank required
additional security for the loan, and Ebbers, the president of the corporation, personally
guaranteed repayment of the loan.
Ebbers was voted out of office as president along with most of the board of directors a
few years later, and a new president and board of directors were selected by the shareholders.
The new president and board of directors reorganized the corporation's operations. As a part
of the reorganization, it was necessary for the corporation to
rearrange its mortgage loan with the bank. The bank agreed to extend the loan for a new fiveyear term, but at a higher interest rate. Ebbers, who was still a shareholder of the corporation,
was unaware of the new refinancing arrangement that the corporation had made with the
bank.
The corporation, unfortunately, ran into financial difficulties a year later. As a result of
tenant problems and a high vacancy rate, the corporation was unable meet its mortgage
payments, and the mortgage went into default. When the corporation failed to pay the
mortgage, the bank turned to Ebbers and demanded payment under his personal guarantee of
the loan.
Discuss the rights of the parties in this case and explain the possible outcome if the bank
should take legal action against the corporation and the guarantor.
Comment:
The guarantee of the mortgage by Ebbers was in writing, and accordingly would comply with the
requirements of the Statute of Frauds. The issue raised in the case, however, is whether the
corporation, by changing the terms of the original security (extension of term, and a higher
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interest rate) without Ebber’s consent released him from his guarantee.
Since Ebber’s was unaware of the changes, he would be in a position to argue that he was
discharged from any liability as a result of the corporation's action, and would probably be
successful. See: Manulife Bank of Canada v. Conlin et al. (1994) 20 O.R. (3d) 499.
CASE 2
A general contractor invited sub-contractors to submit bids for mechanical work in the
construction of a large office building. Several written bids were received by the contractor.
Just before bidding was to close, the general contractor received a telephone call from a subcontractor who submitted a bid about 10% below the lowest bid price of the written
submissions. All written bids were within 2% of each other.
The next day, the sub-contractor who had submitted the telephone bid, checked his
estimates. He discovered that he had made an error in his calculations, and immediately called
the contractor to withdraw his bid. The contractor, however, was out of town, and the subcontractor could not reach him at his office. He left a message with the contractor’s secretary
to the effect that his bid was in error, and that his bid price for the contract would be 12%
above the figure that he had quoted on the telephone to the general contractor.
The general contractor, while out of town, prepared his contract price for the
construction of the building, using the original telephone bid price for the mechanical work. He
was awarded the construction contract. When he returned to the office, his secretary informed
him of the sub-contractor's error.
The sub-contractor refused to enter into a written contract or to perform the
mechanical work at the original price. The contractor then arranged to have the work done by
the sub-contractor who had submitted the next lowest bid. When the contract was fully
performed, the contractor brought an action against the telephone bidder for the difference
between the contract price quoted on the telephone and the actual cost incurred in having the
work done.
Discuss the arguments that might be raised by the parties in this case. Render a
decision.
Comment:
This case is based upon the facts of Northern Construction Company Ltd. v. Gloge Heating &
Plumbing Ltd. [1984] 3 W.W.R. 63 where the court found the defendant liable for reasonable
damages that the general contractor had suffered as a result of the breach of contract by the
defendant. In arriving at this conclusion the judge observed that an invitation to tender is
essentially a request for an option, leaving it open to the subcontractor to set a price, which if
accepted, would constitute a binding contract. The points to note would hinge in part on
acceptance of the bid. Was the "bid" by the subcontractor binding? Could he withdraw it? Did
the general contractor have any constructive notice of the subcontractor's mistake? Would this
render the contract voidable? In the Northern Construction case the judge held that the bid was
an irrevocable option which the subcontractor was bound to perform if called upon to do so by the
general contractor. The judge found no constructive notice of the error because so many variables
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affect price, and noted that the 12% difference was not sufficient to render the error obvious.
CASE 3
A customer rented a motor vehicle from a car rental company. The customer was offered
collision damage coverage in the written agreement, and he paid the additional premium for
the coverage. The agreement stated that the coverage would not apply if he was in violation of
the agreement. The customer had rented vehicles on similar occasions where he was informed
that he had “full damage coverage”, and he signed the agreement without reading the fine
print on the back of the form.
On the back of the form in fine print, the agreement provided that damage coverage
would not apply if the customer consumed any amount of alcohol.
The customer was later involved in a minor accident that resulted in damage to the
rental car. The customer admitted that he had a consumed a small amount of alcohol, but was
not intoxicated, and no drinking/driving charges were laid against him. The car rental agency
sued the customer for the repair costs to the car on the basis that the collision damage waiver
did not apply, as he was in violation of a term of the agreement.
Advise the parties of their rights. Render a decision.
Comment:
Students should discuss the issue of whether the customer is bound by the proviso concerning
alcohol in the fine print on the back of the contract. The question might be asked: is the
customer under a duty to read the contract, and assume the risk if he does not do so? Does the
rental agency have a duty to inform the customer of the fine print? What might be the effect of
the rental agency statement that the customer had “full damage coverage” by paying the extra
premium? Could the customer rely on this statement?
In cases where an exemption clause is buried in the fine print, the courts have
frequently found that an obligation exists to draw the customer’s attention to the exemption
clause in the fine print. On this basis, and since the alcohol consumption was not a factor in the
accident, the customer might avoid liability for the damage to the vehicle.
CASE 4
Manufacturing Consultants Inc. offered to purchase the shares of Commercial Management
Ltd. from its shareholders, Bernard and Corrick. Manufacturing Consultants Inc. also agreed to
lease office premises from shareholder Corrick under a long-term lease.
Under the share purchase agreement, Manufacturing Consultants Inc. agreed to
purchase all of the outstanding shares which were owned 50% by Bernard and 50% by Corrick.
The total price payable for the shares was $100, being $50 for all of the shares of Bernard and
$50 for all of the shares of Corrick. Manufacturing Consultants Inc. also agreed to repay to
Bernard and Corrick loans that they had made to their corporation, Commercial Management
Ltd., in the amount of $450,000. The purchase agreement provided that Commercial
Management had accounts receivable outstanding in the amount of $350,000 which Bernard
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and Corrick warranted were all in good standing and could be collected by Commercial
Management Ltd. from its customers within 60 days.
Under the terms of the agreement, Manufacturing Consultants Inc. agreed to pay
$100,000 as a deposit on the signing of the agreement and the balance of the money in 90
days. The shares of Commercial Management Ltd. were to be delivered at the time of signing
on payment of the $50 to each shareholder. The Agreement was signed on
May 1 and the $100,000 paid. Bernard and Corrick signed over their shares on the same day
and each received $50 as payment in full.
By June 30, Commercial Management Ltd. (now owned by Manufacturing Consultants
Inc.) had collected only $225,000 of the accounts receivable, and the balance had to be
considered uncollectable. At that time they informed Bernard and Corrick that they expected
them to provide the company with the remaining $125,000 that Bernard and Corrick had
warranted were collectable accounts. Bernard and Corrick did not pay the balance owing.
On July 31 the accountant at Manufacturing Consultants Inc. inadvertently sent Bernard
and Corrick a cheque for the $350,000 balance owing under the agreement. When the error
was discovered, the company claimed repayment for the $125,000. Bernard and Corrick
refused to do so, and Manufacturing Consultants Inc. instituted legal proceedings against
Bernard and Corrick to recover the $125,000, or in the alternative, to set off rent owing to
Corrick against the amount unpaid.
Outline the nature and basis of the claim against the two former shareholders, and any
defences Bernard and Corrick might raise. Render a decision.
Comment:
Students should carefully examine the facts of this case before attempting to consider the legal
aspects. Students should note that the transaction involved not only the purchase of shares from
Bernard and Corrick, but included a lease of the premises from Corrick. The transaction also
included a warranty by Bernard and Corrick that the purchaser would be able to collect $350,000
in accounts receivable within 60 days. The purchaser was unable to collect $125,000 of these
accounts in the end. Manufacturing Consultants Inc. as a result, could look to Bernard and Corrick
on their warranty that the accounts receivable were collectable and should have been a set-off
from the $350,000 balance owing to Bernard and Corrick. Manufacturing Consultants Inc. would,
therefore, claim payment made under a mistake of fact.
Manufacturing Consultants Inc. could also argue that it was entitled to deduct the amount
from rent payments owed to Corrick, as Bernard and Corrick jointly warranted the accounts
receivable.
The facts of this case are essentially those of Ferrum Inc. v. Three Dees Management Ltd.
et al. (1992) 7 O.R. (3d) 660. In that case the court held that the purchasers were entitled to
recover the money under mistake of fact or set-off the $125,000 from the rental payments owed
to Corrick as an equitable set-off.
CASE 5
Winter Snowmobiles Inc. had two snowmobiles for sale at the end of the snow season. The
company advertised them in a local newspaper. While both were current year racing models,
one was relatively new, being only used as a demonstration. The second machine had been
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raced for most of the season, and had seen some very hard use. At a local snow festival, the
company had both machines on display. The racing machine was displayed on a raised
platform with the numerous trophies that it had won. The other machine had been displayed
along with other models and equipment in the Company display area.
In response to the newspaper advertisement, a prospective purchaser called the
company. He referred to the advertisement, and asked if the advertised machines were still for
sale. The Company salesman said “yes”, and added that one had seen some use as it had been
raced during the season. The prospective purchaser then asked if the machine was the one
that the company had in its display at the local winter festival. The salesman replied ‘yes’. The
prospective purchaser then offered to buy the machine for $8,000, and the salesman accepted
his offer. The purchaser provided his credit card number to cover the purchase price. The
company prepared the raced snowmobile for the customer and marked it with a ‘sold’ label.
Later that day, it sold the demonstrator model.
The next day, the purchaser arrived to pick up the snowmobile, only to discover that it
was the machine that had been raced, and not the demonstrator.
The purchaser demanded his money back, and when the Company refused to do so, he
instituted legal proceedings.
Discuss the nature of the purchaser’s claim and the arguments of the parties. Render a
decision.
Comment:
The issue raised in this case is mistake. Students should consider the type of mistake. The
salesman mentioned the ‘raced’ machine, and this was followed by the purchasers query about
the machine being on display. The company might argue that at the time, the discussion
concerned only the used machine, and therefore there was no mistake, as the demonstrator
machine was never discussed.
The purchaser’s claim would be based upon mistake, as he would argue that he was
interested in the demonstrator, and not the raced model. He would argue that there was no
‘meeting of the minds’ on the subject matter, and no contract.
Since both parties appeared to be talking about different machines, the court might side
with the purchaser on the basis of mistake as to the nature of the subject matter of the
contract.
CASE 6
The Stonehouse Hotel Inc. was offered for sale, and several interested parties agreed to
purchase the company by a share purchase. The agreement called for a mortgage to be placed
on the hotel and the proceeds used to pay for the shares. The lawyers who acted for the
purchasers arranged with a local trust company for the mortgage to be placed on the hotel.
The trust company then asked the lawyers to act on behalf of the trust company to register the
mortgage after examining the title to the property to ensure that the trust company had a good
first mortgage. The lawyers did so, and after registering the mortgage, wrote a letter to the
trust company in which they certified that the trust company had a good and valid first
mortgage on the hotel property.
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A few years later, Stonehouse Hotel Inc. ran into financial difficulty, and the mortgage
went into default. The trust company attempted to foreclose on the mortgage, at which time it
discovered that the mortgage was void. Under the Companies Act of the province, a company
was not allowed to mortgage its property for a share purchase, and any mortgage used for this
purpose was void.
When the trust company made this discovery, it decided to look to its lawyer for
compensation for their error in overlooking the restriction in the Companies Act.
What would be the basis for their claim? What defences, if any, could the lawyers raise?
How might the courts decide?
Comment:
The facts of this case are based upon Central Trust Co. v. Rafuse [1986] 2 S.C.R. 147. Students
should realize that the case involves two contracts. The mortgage between the corporation
and the trust company, and the contract between the trust company and the lawyer who
assured them that they had a valid mortgage.
Because of the provision in the Companies Act of the province, the mortgage was void and
unenforceable. The lawyer, however, who was negligent in the performance of his duties (he was
expected to be aware of the law concerning the corporation and the use of the mortgage proceeds
to purchase the shares of the corporation). He was in breach of his agreement to perform his
services with the care and skill of a competent solicitor. The court concluded that the duty of care
would be the same under contract or tort, as the solicitor was negligent in the performance of his
duties, and responsible for the loss suffered by his client, the trust company.
CASE 7
An industrial firm purchases a rivet-making machine from a distributor whose advertising
materials claim that the machine will produce up to 300,000 rivets per day. After purchase and
installation the firm discovers that the machine, at maximum settings, will produce only
100,000 rivets per day. After an exchange of emails, the distributor asked if the firm was
running three 8-hour shifts, or just one. The firm was running only one production shift, and
could not afford to consider 24-hour operations. Discuss the legal issues that apply here, and
what factors might influence a judge to decide the case in favour of one party over the other.
Comment:
This question raises the issues of mistake and misrepresentation. Were the parties talking
about different meanings for the word ‘day’? Did it mean a typical 8 hour shift or 24 hours (3
shifts)? The court might be interested in the ‘customs of the trade’ concerning the sale of
manufacturing equipment such as the machines in question. Is it normal to operate this type of
equipment on a continuous (24 hours) basis? On the question of misrepresentation, was the
advertisement misleading? If so, was it deliberately so? Was the manufacturer of the
equipment aware that from the wording it might be misinterpreted by a prospective
purchaser? A decision may well hinge on the interpretation of the advertising material, and if
so, may entitle the purchaser to rescind the contract.
CASE 8
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Gavin is a real estate agent, and suggests to his dentist, Ravi, that he should invest $250,000 in
commercial condominium real estate in a distant city. Gavin provides Ravi with legal papers to
sign, but in the end the property address is not a commercial development, but rather a
residential condominium. Ravi claims “non est factum”. Discuss the nature of Ravi’s claim
against Gavin.
Comment:
This is a case where Ravi may not succeed in a claim of non est factum. In order to succeed in this
claim, Ravi would be required to establish that he was not careless in signing the legal documents.
Clearly he was, as he did not obtain legal advice on the documentation he was signing. Gavin had
obviously given him the documentation, and at that point he could have sought advice on the
nature of the documentation. See: Marvco Colour Research Limited v. Harris [1982] 2 S.C.R. 774.
CHAPTER 5
PERFORMANCE AND BREACH OF CONTRACT
LEARNING GOALS
1. To examine the requirements for performance of a contract.
2. To identify events that may prevent performance of a contract.
3. To understand what constitutes breach of contract
and its consequences.
CHAPTER COMMENTARY
The performance of contractual obligations must always be exact and precise, and until such
time as the performance is complete, the contract remains in existence, unless discharged by
some other means (such as frustration, etc.). As tender is an important part of performance,
the two forms of tender should be examined, particularly in terms of their effect on the
performance of the contract. Of the various other forms of discharge, the doctrine of
frustration is perhaps the most difficult for students to understand.
The concept of condition precedent might be reviewed. The various other forms of
termination, which include discharge by agreement, and by operation of law are also
important, and a review of the examples of each of these in the chapter would be useful to set
the stage for the part of the chapter dealing with breach and, the consequences when a
contract is not properly performed.
The chapter lay-out, concerning breach of contract deals first with express repudiation,
then the concept of anticipatory breach and the doctrine of substantial performance. Implied
repudiation, which is by far the most difficult to determine, is covered on pp. 145-147. A
discussion of this concept should perhaps be tied in with the Ask A Lawyer scenario at the
beginning of the chapter.
Fundamental breach, and the attendant problem of exemption clauses deserve
particular emphasis, since most purchase agreements contain clauses of this nature, and their
implications to the buyer should be fully understood. Students should be made aware that the
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courts often employ the doctrine of fundamental breach to provide relief from onerous
exemption clauses.
The concept of compensation for loss as a result of breach of contract, and the
determination of the limits of liability are also discussed in the test reference to Hadley v.
Baxendale (p. 150). This should, however, be considered in connection with the duty imposed on
the injured party to mitigate his or her loss (pp. 151-152), and the various remedies available.
REVIEW QUESTIONS
1. Explain performance of a contract under contract law.
Answer:
Performance in contract law means that a party must carry out a promise exactly and precisely
in order to discharge the contractual obligation. Anything less is a breach.
2. Explain “tender” and how tender relates to performance of a contract.
Answer:
A valid tender is a demonstration by the party obliged to perform an act or make a payment of
money that he or she was ready, willing, and able to make the exact payment or perform the act
at the time and place for performance.
3. Describe the effect of a valid tender on the payment of a debt.
Answer:
A valid tender of payment of money as payment of a debt causes interest to cease running, and
ends the debtor's obligation to make further attempts to pay the debt to the creditor. The debt
remains, however, but the creditor must seek out the debtor for payment.
4. Other than by performance, how may a contract be discharged?
Answer:
Contracts may also be discharged by: operation of law, agreement, condition subsequent,
condition precedent, frustration, implied terms, express terms, and by breach.
5. What are the usual consequences that flow from a refusal or failure to perform a valid
contract?
Answer:
A failure or refusal to perform a contract at the time required for performance constitutes a
breach of the contract, and would entitle the injured party to seek redress through the courts.
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6. Explain the effects of an unanticipated event that renders performance impossible. How
has this been altered by statute law?
Answer:
At common law, where performance is rendered impossible, the courts generally treat the
contract as being at an end, and the parties are discharged from further performance. Any
money paid for which a person received no benefit may be recoverable, but otherwise it may not.
Frustrated contracts legislation permits the courts to apportion the loss in a more equitable
fashion.
7. Describe the effect of a material alteration on the enforceability of a contract.
Answer:
Material alteration affects the enforcement of an agreement where the parties have in effect
substituted different terms for those in the original agreement, and essentially replaced it with a
new agreement
8. Outline the nature and purpose of a force majeure clause in a contract. Give an example.
Answer:
A force majeure clause in a contract usually set out conditions under which performance may be
excused or the agreement terminated. For example, an Act of God may be set out as grounds to
termination, should such an event occur.
9. Describe the difference between express and implied repudiation of a contract, and give an
example of each.
Answer:
Express repudiation occurs where one party informs the other that he/she will definitely not
perform the contract at the required time. E.g.: where A writes B informing her that he will not
perform his obligations under the agreement.
Implied repudiation occurs where one party, by his or her actions gives the other the impression
that performance will not take place at the original time. E.g.: where a person contracts to haul
goods for another, then just before the date for performance, sells his only truck.
10. What are the rights of a party to a contract when informed by the other party to the
contract that performance will not be made?
Answer:
The party informed of the express repudiation may treat the contract as at an end and sue for
damages, or may refuse to accept the repudiation, then wait until the date for performance and
take action for non-performance.
11. Explain the doctrine of fundamental breach as it applies to a contract situation.
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Answer:
Where the performance of a party is so far below that required by the terms of the contract, the
performance may be treated as a fundamental breach, and will release the injured party from the
agreement.
12. How does the doctrine of substantial performance affect the rights of a party injured by the
repudiation of the contract when the contract has not been fully performed?
Answer:
The doctrine of substantial performance does not permit a party injured by the failure to complete
the contract to avoid payment. The injured party must pay the contract price less the cost of having
some third party complete the work.
13. Describe the concept of damages as it applies to Common Law contracts.
Answer:
The concept of damages in contract law means that the court will attempt to put the injured
party in the same position following a breach as he or she would have been had the contract been
fully performed
DISCUSSION QUESTIONS
1. In Ask A Lawyer, Ashtown Foundry Co. is faced with a dilemma: Will Hygrade Iron Mine
perform its contract? What is the position of Ashtown? Are there risks involved? What can it
do? What are its rights and remedies?
Comment:
The fact situation in Ask A Lawyer raises the kind of dilemma associated with implied
repudiation. It raises the question: will the short-falls in delivery continue? Is the breach
sufficient to entitle the Ashtown Foundry Co. to treat the contract at an end? Given the
rumours about Hygrade Iron Mine, the lawyer might advise that a letter be sent to the
company stating that all future deliveries must be in accordance with the contract, otherwise
Ashtown Foundry Co. would treat the contract at an end for breach.
Students may wish to discuss this advice as well as it raises the question of whether the
short-falls in delivery have reached the point where future performance has become
impossible.
2. What tests will a court apply to determine the remoteness of a damage claim for breach of
contract?
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Comment:
The courts will generally apply the test set out on page 150 of the text, containing the excerpts
from Hadley v. Baxendale and the later statements of the court. In essence, the test is the
damages that would be reasonably foreseeable as flowing from a breach at the time the
contract is formed.
3. Apart from money damages, what other remedies are available for breach of contract?
Under what circumstances would the remedies be awarded?
Comment:
While money damages are the usual remedy for breach of contract, breach of a term such as a
‘no competition’ clause in the sale of a business, may be enforced by way of an injunction.
Injunctions are usually used to enforce negative clauses in a contract. For contracts concerning
land, specific performance may be ordered by the courts.
4. Explain why mitigation of loss by the injured party is important where breach of contract
occurs.
Comment:
Mitigation of the loss when breach occurs is important because the injured party is expected to
take steps to reduce the loss suffered. A failure to do so, if established, may result in the court
only compensating the injured party for those losses that would have been suffered if mitigation
had occurred.
5. A Canadian exporter sends goods to an importer in Phantasia. While the goods are at sea,
the United Nations declares a trade embargo on Phantasia, and the ship is prohibited from
entering Phantasian waters. What has happened to the contract between the Canadian and
Phantasian businesspersons?
Comment:
The imposition of the trade embargo would probably be a frustrating event that would end the
contract between the Canadian exporter and the Phantasia buyer. See: Frustrated Contracts
Act, text pp. 136-137.
6. Through their lawyers, Wilson agreed to buy Jackson’s business for $500,000. On the date
fixed for closing the transaction, Wilson’s lawyer gave Jackson’s lawyer a certified cheque for
$550,000, drawn in error. Describe whether Jackson can keep the $50,000 extra, is obligated to
return the $50,000, or avoid the transaction altogether.
Comment:
Jackson would be obliged to return the extra $50,000 assuming that the contract specified the
payment of $500,000 for the business. There would be no consideration for the payment of the
extra $50,000.
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COMMENTS RE: DISCUSSION CASES
CASE 1
Victor owned and operated a large refrigerated highway transport truck. He entered into a
contract with Meat Packers Ltd. to haul large sides of beef for them at a fixed price per load for
a period of six months, commencing July 2nd. On June 28th , he appeared at the packing plant
with his truck to see the loading facilities. When he examined the freezer plant he discovered
that he would require an extra employee to help him load, and unload the meat. He then
realized that he had made a contract that he could only perform at a substantial loss.
He approached one of the owners with whom he had contracted, to inform him that he
could not perform the agreement. The owner persuaded Victor to wait until the next day,
when he could discuss the matter with the other owners. Victor agreed to wait and left his
truck in the company’s garage overnight.
During the night, a fire at the garage destroyed the garage and Victor’s truck.
Analyze the events that occurred in this case and discuss the legal position of both
parties.
Comment:
The first issue raised in the case is the issue of express repudiation of the contract by Victor. The
repudiation by Victor would entitle the contractor to treat the contract as being at an end, but
from the facts of the case, the partner in the firm did not accept Victor’s repudiation, but instead,
urged him to reconsider, and this might be taken as a decision to keep the contract alive pending
performance by Victor. This is due to the fact that Victor was not required to perform until July 2.
The events that followed the attempted repudiation, however, altered the rights of the
parties substantially. The fire at the garage, which destroyed Victor’s truck, might release Victor
from performance on the basis of frustration. This might raise the question: Should Victor be
expected to replace the truck (if it is insured) and be ready to perform by July 2? Does the event
constitute frustration if performance is really not rendered impossible on this basis? How far does
the doctrine extend?
In the cases dealing with this type of problem, the courts have generally treated
destruction of equipment by fire as a frustrating event, since it is something not usually
contemplated by the parties at the time the contract was made. See: Reid v. Hoskins (1856), 6
E.R. & B.L. 953; 119 E.R. 1119 where the repudiation was not accepted, and the contract
subsequently ended by operation of law, and in Cromwell v. Morris (1917), 34 D.L.R. 305, which
also dealt with a refusal to accept repudiation, where the court decided that the refusal to accept
repudiation kept the contract alive for the benefit of both parties.
CASE 2
Highway Contractors Inc. owned and operated a number of gravel pits that it used as a source
of supply for its highway construction projects. Evans, the company president was always on
the lookout for additional sources of supply, and while driving along a country road noticed
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what appeared to be an odd shaped formation on a farm property that he suspected might
contain a quantity of gravel.
He decided to purchase the farm in his own name and later transfer it to his company.
He offered the owner of the property $350,000 for the land, and the farm owner agreed to sell
the property. A purchase agreement was prepared and signed by the parties.
Before the date for exchange of the deed and the money, the farm owner heard
rumours that Evans was buying the farm because it contained a large amount of gravel. The
property owner accused Evans of trying to steal her farm, even though the purchase price
offered was slightly more than the value of most other farms in the area.
The farm owner instructed her lawyer not to prepare the deed, and when Evans arrived
at the farm gate, the farm owner refused him entry.
Evans pointed to his brief case and said he had the money, but the farm owner refused
to sell the farm, and he returned to the city.
Discuss the rights and duties of the parties in this case. If the case came before the
court, render a decision.
Comment:
This case deals with the requirements for tender, and the issue of repudiation by a party. An
approach to the case might be to review the requirements for a valid tender by a series of
questions such as: What are the requirements for a valid tender? What would Evans be obliged to
do to comply with these requirements? Did his actions constitute a valid tender? When the
tender was refused, what were Evans’ rights? His duties? Tender must be exact, and in
accordance with the terms of the contract. This would mean that Evans must show that he was
ready, willing, and able to complete his part of the contract at the required time, and at the
required place. By having the cash in hand (as required by the contract) and tendering it to the
vendor at the vendor's farm on the required day, he established a valid tender, which would in
turn entitle him to apply to the court for an order for specific performance of the agreement.
This case is based upon an unreported case in which the author acted as counsel for the
purchaser, but a number of other reported cases deal with the same type of problem. See: O'Neil
v. Arnew (1976), 78 D.L.R. (3d) 671 as an example.
CASE 3
Highway Grading Contractors purchased a new back hoe from Construction Equipment
Company, a firm that specialized in the sale of large, earth moving equipment. In the six
months following delivery, the back hoe experienced numerous breakdowns, both major and
minor. The equipment was out of service on 12 occasions, usually for minor problems such as
parts breakage. On six occasions, the breakdowns were serious and required major parts
replacement, causing the back hoe to be out of service for several days. All of the repair work
was done under warranty by the manufacturer’s dealer, at no cost to Highway Grading
Contractors.
At the end of the six months, on the thirteenth breakdown, Highway Grading
Contractors left the back hoe with the dealer and demanded that the purchase price be
returned. Construction Equipment Company Ltd. refused, and Highway Grading Contractors
decided to take legal action against the seller for a return of the purchase price.
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Indicate the nature of the claim of Highway Grading Contractors and the defences (if
any) of Construction Equipment Company. Render a decision.
Comment:
Students should recognize that the numerous break-downs of the backhoe raise the issue of
fundamental breach of the contract. Did the purchaser get what was contracted for? Is a reliable
backhoe an implied term in the contract? The repairs were done under warranty and cost the
purchaser nothing. Would this preclude the purchaser from taking legal action? Students should
recognize that the time lost while the equipment was out of service may well result in lost business
and revenue for the purchaser.
The case problem is based upon the case of Rosseway v. Canada Kenworth Ltd. (1978) 6
Alta L.R. (2d) 177. In that case the court found fundamental breach of the contract as the
purchaser received something other than what was bargained for, and entitled to a return of the
purchase price. The judge did not grant compensation for time lost while the backhoe was out of
service, because the purchaser had use of the backhoe prior to the date of rescission of the
contract.
CASE 4
Tina entered into a contract with Home TV Production to perform the leading role in a
television mini-series the company wished to produce. The contract called for Tina, who was
an experienced actress, to devote her time exclusively to the production until the recording of
her part was complete, a period of some six weeks. Her compensation was to be $30,000. A
week after the contract was signed, Tina notified the company that she did not intend to
perform the role, and that the company should find a new leading actress for the production.
The company immediately made an effort to find a substitute for Tina, but after an
exhaustive search, could not find a suitable replacement for her role. As a consequence, they
were obliged to abandon their plans for the production. During the week after signing Tina, the
company incurred liability of $25,000 under contracts they had entered into for services and
commitments made in anticipation of her starring the production. They also incurred the sum
of $3,000 in expenses paid to a search group to find a substitute, when Tina refused to perform.
The company instituted legal proceedings against Tina to recover the total expenses
incurred as a result of her repudiation. In response, Tina offered a settlement of $3,000 to
cover expenses incurred in their search for a substitute performer.
Discuss the arguments off the parties and render a decision.
Comment:
This case raises the question of damages where express repudiation of a contract takes place.
Note in the case that the contract was one for personal service and Tina should have been aware
at the time that she would be difficult to replace in the role in the play. Tina could argue that her
liability should only be for the $2,500 expended to find a replacement for the part in the play.
However, her repudiation caused the company to abandon the project when a substitute could
not be found. The question should be asked: Was this a reasonably foreseeable result of the
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breach? Was it something which could reasonably be contemplated at the time the contract was
entered into? According to the case of Anglin Television Ltd. v. Reed [1972] 1 Q.B. 60, the plaintiff
succeeded in claiming the full costs of the abandoned production.
CASE 5
On June 1, Bethune entered into an agreement to purchase the Happy Hour Bar and
Restaurant. The purchase price was $400,000, with a down payment of $50,000. The balance
was payable September 1, when Bethune was to take possession of the business. In
anticipation of his start in the restaurant business, Bethune quit his job and enrolled in a three
month community college course on restaurant management.
On August 1, the owner of the restaurant notified Bethune that she had received
another offer to purchase the restaurant for $425,000, and she intended to sell the businesses
to the offeror. Bethune objected to the restaurant owner’s actions and threatened to take
legal action against her if she proceeded with the proposed sale.
A few days later, the restaurant owner did in fact enter into an agreement to sell the
business to Volrath, the new purchaser, for the purchase price of $425,000. The closing date of
the transaction was to be September 1. She then mailed a cheque to Bethune for the $50,000
she had received from him previously as his deposit.
Bethune immediately returned the cheque and insisted that the restaurant owner
proceed with the sale of the restaurant to him in accordance with their agreement.
On August 28, the local newspaper contained an announcement of the opening of a new
restaurant in a large office building across the street from the Happy Hour Bar and Restaurant.
The office building housed most of the customers of Happy Hour Bar and Restaurant, and the
new restaurant could be expected to take about two-thirds of the lunch customers and onethird of the dinner customers from the Happy Hour Bar and Restaurant.
The announcement came as a surprise to all parties. Volrath immediately wrote a letter
to the owner of the Happy Hour Bar and Restaurant in which he indicated that he did not
intend to proceed with the transaction unless the owner reduced the purchase price to
$200,000. Bethune was out of town on other business on August 28, and he did not become
aware of the new competitor until September 1, the proposed closing date for his purchase of
the restaurant.
Advise each of the parties of their legal position in this case. Assuming that each party
exercised their rights at law, indicate how the issues raised in the case would be resolved by a
court.
Comment:
The actions of the parties in this case raise issues of breach, alleged damages, and performance.
Students should note that a binding contract was established between Bethune and the owner of
the restaurant on June 1st. The restaurant owner then sold the restaurant to Volrath, and advised
Bethune of the sale. At this point Bethune would be entitled to treat his contract as at an end and
sue the restaurant owner for damages. He did not do so, and insisted that the transaction proceed
in accordance with the agreement.
The second sale to Volrath was repudiated by Volrath when the new competitor was
discovered. This would allow the restaurant owner to treat the contract at an end, and complete
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the transaction with Bethune on September 1st, as provided in the agreement. Bethune under the
circumstances would be obliged to complete the purchase on that date as he lost the opportunity
to avoid the agreement earlier. For a case with different issues and varied facts, see: Williams
and Gnettler v. Copperfields Hotels Ltd. and Ward (1992)
6 O.R. (3d) 557.
CASE 6
Robot Software Corporation produced sophisticated software programs for computer-assisted
robots. Robot Software Corporation was engaged by Robot Equipment Ltd. to develop
software that would enable it to design robots to do more technically difficult jobs on
production lines. Robot Equipment Ltd. provided the engineering data necessary to develop
the program, and Robot Software Corporation prepared the software.
The software was tested by both Robot Software Corporation and Robot Equipment Ltd.
using a simple robot with known design and performance characteristics as a model. The
software appeared to work properly, and Robot Equipment used the program to design a new
complex, multi use robot.
Unknown to Robot Equipment Ltd., the input of design data in a particular sequence
would have the effect of canceling out the safety factor to be built into the robot. The input
sequence was not the sequence used in the test, but a technician used the particular input
sequence in testing the new robot model. As a result, when the new robot was tested the
electrical system overheated and caught fire. The fire destroyed the equipment.
Robot Equipment Ltd. brought a legal action against Robot Software Corporation
claiming $500,000 damages as its loss in the construction of the faulty robot.
Discuss the various arguments that may be raised by the parties in this case, and
prepare a decision as if you were the judge. Outline your reasoning in reaching your decision.
Comment:
The issue raised in this case concerns the alleged breach of an agreement to produce a
software program for the development of robot. Questions that might be raised include:
Would a skilled software producer be aware of the problems the key stroke sequence would
produce? Did it have a duty to warn the user? Given the facts of the case, the Complex
Software Corporation should have foreseen the possibility of the key stroke sequence, and its
failure to do so would perhaps constitute breach of contract. The damages that would flow
from the breach would be those damages reasonably foreseeable at the time the agreement
was entered into, and might include the full value of the robot.
CASE 7
A wholesale florist decided to grow a variety of patented, hybrid flowers, based upon the
success that its competitors had with the particular varieties. The florist purchased seeds for
the flower varieties from the catalogue of a commercial seed supplier.
The seeds were planted according to proper planting instructions and cultivated in
accordance with accepted agricultural practices. Weather conditions were “normal”
throughout the growing season, but in spite of this, the seeds produced a very poor crop.
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The florist informed the seed supplier that the crop had failed, even though it had used
proper growing techniques. The florist demanded that the seed company compensate it for the
loss. The seed company rejected the complaint and noted the seed purchase contract term
which stated:
The vendor warrants seeds only as to variety named and makes no warranty
express or implied as to quality or quantity of crop produced from the seed
supplied. Any responsibility of the vendor is limited to the price paid for the
seed by the purchaser.
When the seed company refused to entertain the complaint, the florist decided to take
legal action to recover it loss.
Discuss the arguments that might be raised in this case, and render a decision.
Comment:
The facts of this case are essentially those in Kordas v. Stokes Seeds Ltd. (1992) 11 O.R. (3d)
129. The case concerns the application of an exculpatory clause and the doctrine of
fundamental breach, when the seeds failed to provide the crop results the buyer expected. The
buyer alleged fundamental breach when the crop was unsatisfactory, but the court held that
the buyer did not receive seed that was fundamentally different than what he had ordered, and
the defendant seed company was entitled to rely on the exculpatory clause.
CASE 8
Megamalls Inc. is known for its ability to create “retail experiences” for customers visiting any
one of its six malls in major Canadian cities, with each mall being in the 80-120 store range. To
further its reputation, Megamalls specially selects its qualifying tenant stores for a very
particular mix of goods and services it feels will create the greatest customer draw. Moreover,
it draws up tenant contracts to ensure that retail offerings are in accordance with its wishes.
Recently one chain of stores with tenancies in each of the six Megamalls began changing its
own retail image by altering its line of goods and marketing tactics. Megamalls feels that this is
in contravention of the tenant contract. What remedy or remedies should Megamalls seek and
why?
Comment:
This case concerns the performance of contractual obligations by the tenant. If the lease
specifically describes the particular mix of goods and services, including the marketing approach
permitted, then the tenant would have an obligation to comply with the terms of the lease
agreement. If the proposed changes represent a substantial charge, the changes may constitute a
breach of the lease, and entitles the landlord to obtain an injunction to prevent the tenant from
making the changes, as damages would not represent a satisfactory remedy. As an alternative,
Megamalls Inc. may seek termination of the lease as a remedy for the breach in order to protect
its marketing image, and the interests of its other tenants.
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CASE 9
One summer, Gianni visits an all-terrain-vehicle dealer, and, thinking about the autumn hunting
season, signs a contract to purchase a $7,500 ATV, not putting the slightest effort to reading or
understanding the terms of the deal. He puts down the requested 10% deposit of $750 and
sets about to finding the balance, which is due a week prior to hunting season. As the date
approaches, Gianni admits financial failure to the dealer, who tells him, “You’d better keep
trying to find the money. Your deposit will be forfeit as liquidated damages if you don’t come
up with the balance. Didn’t you read your copy of the contract?” Advise Gianni, and explain
the likely outcome of the situation. What facts would have to change to reverse your opinion
of the outcome?
Comment:
Gianni in this case is in breach of contract, as he is unable to pay for the ATV as provided in
the contract. Students should discuss the amount of the $750 deposit paid, and decide if it
represents a part payment or a reasonable estimate of the damages that would flow from
a breach of the contract by Gianni. If it is a reasonable estimate of liquidated damage, then
the ATV dealer would be entitled to keep the deposit. Change of outcome: The $750 is
perhaps a reasonable estimate, and in order to change the outcome, the ‘deposit’ would
probably need to be much larger, in which case Gianni would be entitled to a return of the
excess over the actual damages the seller suffered as a result of the breach. As a second
change of outcome, Gianni would be obliged to pay the balance of the purchase price in
order to change the basic outcome of the case.
CASE 10
Roland Exploration and Drilling Co. purchased mobile two-way radios for use by its crews at
outlying natural gas wells. One day a small fire broke out in a storage shed near one such well,
and the crew called for help on its radio. The radio failed internally, and made no transmission.
As a result, what was a small fire burned continuously and grew until it enveloped the wellhead,
while a member of the crew drove forty kilometres to the nearest telephone. Once the call got
through to an aerial fire crew, it was only ten minutes before a firebomber dropped chemical
smothering powder onto the well and extinguished the flames. Damage to the shed amounted
to $2000. Damage to the wellhead amounted to $1.5 million. The purchase agreement
between Roland and the radio dealer stated: “Damages limited to cost of replacement radio.
Not responsible for consequential damages of any kind, regardless whether caused by defect in
materials or manufacturing”. The same terms appeared on a card inside the packing box in
which the radio was originally delivered. Advise Roland.
Comment:
The contract for the purchaser of the mobile two-way radios contain in exemption
clause, limiting the liability of the radio dealer. Students should consider this limitation
on liability. Is it effective in limiting liability to the replacement cost of the defective
radio? Was the fire loss foreseeable when the contract was made? Was the purpose of
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the radios stated when the purchase was made? Was the limitation on liability
reasonable? Contracts made between business persons are more likely to be
interpreted more strictly than consumer agreements, and the courts are willing in many
cases to enforce exemption clauses in agreements of this nature. In the case, Roland
might argue that the total failure of the radio represents a fundamental breach, but
given that this is only one of the many radios purchased under the contract, the court
may reject this argument, and let the exemption clause stand, limiting damages to the
replacement cost of the unit. Roland may be unsuccessful in it claim for the $1.5 million
and $2,000 damages to its property. According to Borg-Warner Acceptance Canada
Ltd. v. Wyonzck (1981) 4 W.W.R.R. 193, these would be considered consequential
damages, and excluded in the contract as a result of the breach.
PART II
BUSINESS ORGANIZATIONS AND EMPLOYMENT
CHAPTER 6
SOLE PROPRIETORSHIP, AGENCY, AND PARTNERSHIP
LEARNING GOALS
1. To consider the legal environment of business organizations.
2. To examine the forms of business organizations.
3. To outline the areas of law applicable to sole proprietorships.
4. To examine the law related to the agency relationship.
5. To examine the law of partnership.
CHAPTER COMMENTARY
Chapter 6 examines three distinct classes of business organizations: The sole proprietorship,
the agency relationship, and the partnership. The sole proprietorship, due to its apparent
simplicity, will be easily understood by most students, but it is important to point out that even
this simple form of business will be subject to a great many regulatory rules and laws.
From a business point of view, the agency concept is undoubtedly one of the most
important. Apart from the extensive use of agents to carry out specific activities for principals,
(such as real estate agents, manufacturer's agents, etc.) the concept represents an essential
part of many other business relationships. For example, in a partnership, (which is also covered
in the chapter), every partner is the agent of every other partner, and can bind the partnership
in contract where the contract falls within the ordinary scope of partnership business.
Similarly, in the case of corporations (covered in Chapter 7) the corporation can only act using
the concept of agency. Agency, consequently, must be fully understood by students before
moving on to the next chapter in the text.
An approach to the topic might be to spend some time on the duties of the agent, with
special emphasis on the duty of the agent to act in good faith, and always in the best interests of the
principal. This is desirable, since the type of agent that most mature students are familiar with is
the real estate agent.
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The entire area of third parties and agency should be clearly examined to establish the
position of the parties in those situations where an agent acts for a disclosed and an
undisclosed principal. Since students sometimes find it difficult to imagine a third party would
contract with the agent for an undisclosed principal, the topic should be fully examined.
Termination of the agency relationship is relatively clear, but the effect of failure to notify
customers of termination, and the question of apparent authority are worth examining in class.
The partnership relationship employs the law of agency in the determination of some of the
rights and liabilities of partners with respect to each other, and to third parties. As the text indicates,
the law relating to partnerships is for the most part settled, due to the age and maturity of the
relationship. This was recognized almost a century ago in England, and permitted the clear
codification of a large part of the law relating to partnerships. The result of this maturity has been
limited change in the law since the introduction of the statute.
As with the agency relationship, some emphasis should be placed upon the "good faith"
aspect of partnerships, and this should be explained in conjunction with the rule that each partner
may bind the partnership in contract in the ordinary course of partnership business. The topic may
also be included with a discussion of the conduct of business by a partner in competition with the
partnership where no consent to do so is granted.
The liability of partners in general, and in particular the liability of retiring partners, might be
discussed along with the registration requirements, and the importance of giving notice of a change
in a partnership to third parties.
The example on p. 182 of the text illustrates the court decision in Garner v. Murray and
explains the effect of the insolvency of one partner on the liability of the others when the
partnership is dissolved. As the case indicates, the loss would not be borne on an equal basis,
but distributed according to the ratio of their capital accounts at the time of dissolution.
Students could work through Case 5 as an application of the rule in Garner v. Murray to reach a
decision on the liability of each individual partner to the others.
REVIEW QUESTIONS
1. How does a sole proprietorship differ from other business organizations?
Answer:
A sole proprietorship differs from other business organizations in the sense that it has only one
owner who makes all important decisions, receives all profits, and has unlimited liability for any
losses. Except for employees, the sole proprietor is the only person involved in the operation of
the business.
2. What is the role of an agent?
Answer:
An agent is usually used to bind his or her principal in contract with a third party.
3. Must an agency agreement always be in writing? If not, why not?
Answer:
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A written agency agreement is not necessary unless the relationship cannot be carried out within
the space of one year. (Note: exceptions here re: long term agreements).
4. Outline the various types of agency relationships that may be formed.
Answer:
Agency relationships may be established by: Express agreement, by conduct, by operation of law,
and by necessity.
5. Explain the difference between an express authority and implied authority in an agency
relationship. Give examples of each.
Answer:
Implied authority may arise where the principal has expressly withheld certain authority of the
agent which agents of that type normally possess. E.g.: leaving goods with a selling agent but
denying the agent authority to sell. Since agents of this type normally have authority to sell, if a
third party buys the goods, the principal would be bound by the contract. The principal, however,
would have a right of action against the agent for breach of the agency agreement.
6. Outline the duties of an agent to his or her principal.
Answer:
An agent’s duties are: act in best interests of his/her principal, obey all lawful instructions or
directives of principal, keep confidential information given by the principal, report all
information to the principal, account for funds received, and maintain the standard of the skill
he/she possesses.
7. Explain “agency by estoppel”.
Answer:
Agency by estoppel arises where the principal by words or conduct gives a third party the
impression that a person is his or her agent. If the third party enters into a contract with the
person as agent, the principal is estopped from denying that the agency exists.
8. Outline the circumstances where a principal would be entitled to ratify a contract
negotiated by agent.
Answer:
A principal may ratify a contract if the principal was capable of making the contract at both the
79
time it was made by the agent and when it was ratified, if it is ratified with a reasonable time.
9. Under what circumstances would an agent alone be liable if the agent exceeded his or her
authority in the negotiation of a contract?
Answer:
If the agent acted alone without disclosing that he was acting as an agent, the agent alone
would be liable.
10. Outline the various ways that an agency relationship may be terminated.
Answer:
Agency may be terminated by:
(1) death of agent or principal,
(2) by agreement,
(3) completion of the task,
(4) incapacity,
(5) bankruptcy of the principal,
(6) on notice.
11. What essential characteristic distinguishes a partnership from other associations of
individuals?
Answer:
A partnership is a relationship which carries on business with a view to profit.
12. How is a partnership formed?
Answer:
A partnership may be formed by two or more persons entering into an agreement to carry on
business for profit, on the understanding that they would share losses as well, and would
participate in its management
13. Why is a simple sharing of gross profits not conclusive as a determinant of the existence of a
partnership relationship?
Answer:
Sharing of gross profits is often a method of compensating employees. Such sharing does not
indicate whether a loss is shared as well.
14. How does a partnership differ from co-ownership?
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Answer:
Partnership differs from co-ownership in a number of ways: each is subject to a different statute;
a share of co-ownership may be reality or personality, while a partner's share is always personality;
a partner may bind other partners in contract, a co-owner may not; a co-ownership share may be
sold or pass to others by will, while a partner may not transfer the interest without the consent of
other partners to the admission of the new partner.
15. Explain how agency and partnership are related in terms of the operation of a partnership.
Answer:
In a partnership, every person is an agent of the partnership, and may bind it in contract.
16. Under what circumstances would a partnership be liable for a tort committed by a partner?
Answer:
The partnership would be liable in tort for the act, provided that the partner committed the tort in
the course of partnership business.
17. What is the extent of the liability of the partners for the tort of a partner or for contracts
entered into by a partner?
Answer:
All general partners have unlimited liability to third parties
18. Under what circumstances may a partnership be dissolved?
Answer:
A partnership may be dissolved on the death of a partner, on notice, at the end of the project
(if for a profit), at the end of a term, if for a specific term, if for an unlawful purpose, if a
partner becomes mentally incompetent, or by the courts for a number of reasons.
19. Is it possible for a partner to sell his or her interest to another person? What is the status of
the purchaser of the interest if it should be sold?
Answer:
Yes. The person does not become a partner, however, but only acquires the partner's share,
which is determined on the dissolution of the partnership. The purchaser may not participate in
the business.
20. Explain the rights of creditors of a partnership when the partnership is dissolved.
Answer:
The creditors are entitled to payment of these debts from the assets, then any surplus is divided
between the partners. If the assets are insufficient to pay the creditors, the partners must pay the
81
creditors from their personal funds.
21. Why is registration of a partnership important?
Answer:
Registration is important to inform the public of the identity of the partners and to provide
information concerning the business.
22. What is a retiring partner obliged to do in order to avoid liability for future debts incurred
by a partnership?
Answer:
A retiring partner is obliged to notify all customers and suppliers at the time of his retirement and
also notify the public-at-large through an advertisement in the Provincial Gazette. A dissolution of
partnership document should also be filed to correct the registration of the partnership.
23. Explain the nature of a limited partnership.
Answer:
A limited partnership is a special type of partnership that has partners with limited liability, but
at least one general partner who has unlimited liability and responsibility for the management
of the business.
24. In what ways does a limited partnership (LLP) differ from other partnerships?
Answer:
A limited liability partnership (LLP) differs from other forms of partnership in that an individual
partner (instead of the partnership generally) may be liable personally for his or her own
negligent acts or omissions.
DISCUSSION QUESTIONS
1. In the Ask A Lawyer case at the beginning of the chapter, Able may adopt one of several
forms of business organization. What are they, and what are the advantages and disadvantages
of each? Which one in your opinion might be the best for Able and his uncle? Why?
Comment:
Since Able is staring out in his own business, the logical organization would be that a sole
proprietorship. See text pp. 164-165 for the advantages and disadvantages of this type of
business organization. The Uncle may be hired by Able as his bookkeeper if necessary, and Able
may borrow the necessary capital from the Uncle, rather than establish a limited partnership.
Case must be taken, however, to ensure that the loan and employment of the Uncle are
separated. The lawyer would probably suggest a proper loan agreement, and an employment
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contract that would outline the Uncle’s duties as well as his remuneration for his services.
Registration of the sole proprietorship would also be an important step if Able intends to
operate the business under a name other than his own.
2. Agents provide a useful role in the contract process, but some risks exist. What steps should
a principal take in the selection of an agent? What limits should the principal place on the
agent’s authority? What steps should the principal take when the agency is terminated?
Comment:
Agents should be selected on the basis of their skills and honesty. A written agency agreement
clearly setting out the agent’s duties and responsibilities would be important to avoid the
question later. When the agency is terminated, the principal should notify all third parties of
the termination of the agent’s authority to represent the principal.
3. Three partners carry on business together, and one now declared personal bankruptcy.
What happens to the partners and the partnership? How are the partnership assets divided?
Comment:
Students should note that the personal bankruptcy of a partner terminates the partnership.
The remaining partners would be obliged to ‘wind up’ the partnership and pay all of the
creditors. Any surplus would be divided amongst all of the partners, but if a loss, the remaining
partners would be obliged to cover it according to their capital accounts on dissolution (see
Garner v. Murray in text).
4. What is the purpose of a joint venture, and how does it differ from a partnership? From a
limited partnership?
Comment:
A joint venture is an agreement between business organizations (usually corporations) to carry out
a business project. Each party is responsible for their own part of the project. It is not a
partnership and their agreement usually tries to make this point clear. It differs from a limited
partnership, because each of the parties is actively performing a part of the venture. A limited
partnership involves only an investment by a limited partner.
5. Realty Limited employed Louis as a salesman. Martine listed a building lot with Realty
Limited for sale at $178,000. Louis found a buyer, Jeanne, but Jeanne could not raise the full
purchase price. Louis and Jeanne agreed that Louis would purchase the lot personally and to
sell it to Jeanne once Jeanne had finally raised the necessary $178,000. Louis then purchased
the lot from Martine for $170,000 and six months later resold it to Jeanne for $178,000.
Discuss.
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Comment:
Whatever the motives of Louis (even if originally well-intentioned to create an early sale) the
arrangements with Jeanne, if undisclosed to Martine, are a breach of the agent’s duty of utmost
good faith owed to his principal. The damages would include the $8,000 secret profit, a refund of
commission paid, and any punitive damages. Realty Limited will further be vicariously liable for
the tort of its employee.
6. Albert, Charles and Emily carry on business under the name ACE as a registered partnership.
Emily wishes to retire from the partnership and allow Albert and Charles to carry on the
business. What advice would you give Emily?
Comment:
Emily should notify all customers and suppliers at the time of her retirement and also notify the
public-at-large through an advertisement in the Provincial Gazette. A dissolution of partnership
document should also be filed to correct the registration of the partnership.
COMMENTS RE: DISCUSSION CASES
CASE 1
A property owner wished to sell a small apartment building that she owned. She consulted a
local real estate agent and listed her property. Because she was about to leave on her lengthy
winter vacation, she provided the agent with authority to sell the property on her behalf if the
terms of any offer received met the terms set out in the listing agreement. A prospective buyer
inspected the property during the period of time that the property was listed for sale, but did
not make an offer to purchase.
Before the property owner returned from her vacation, but after the agency agreement
had expired, the prospective buyer returned and made an offer to purchase the property that
corresponded with the terms of the listing agreement. The agent accepted the offer on behalf
of the property owner.
After the purchase agreement was signed, the buyer discovered that the agency
agreement had expired. He then began a legal action against the agent.
Explain the nature of the buyer’s action and indicate how the case may be decided.
Could the property owner ratify the agreement? What factors would affect the ratification?
Comment:
One cause of the action would be against the agent for breach of warranty of authority to sell the
property. The case, however, also concerns the question of the seller's ability to ratify the
contract, and this issue should be discussed as well, since the buyer's action would only arise if the
principal refused to proceed with the transaction. For the latter, the "rules" for ratification should
be reviewed, and the question of whether the principal could satisfy them should be determined.
84
In particular, the question should be asked: Does an action against the agent for breach of
warranty of authority constitute repudiation of the agreement, and if so, would it at that point be
too late for the principal to ratify
If the case is viewed as a situation where the principal has refused to ratify the agreement,
then the question of the agent's authority becomes a key issue. If the agent had the authority to
sell the property at the time of first negotiation with the buyer, then the buyer would be aware of
the agent's authority. Later, however, the authority would not be present, but the question which
might be raised here is: If the authority was for a specified time, was the buyer aware of the expiry
date? Was it incumbent upon him to determine if the authority had been extended?
The authority to sell, and the authority to convey are two distinct authorizations under real
property law. While an agent may bind a principal in contract under ostensible authority, the
expiry of authority to convey the property would terminate the agent's authority to convey, and
any conveyance given after the expiry of the authority would not convey the principal's interest.
See: Taylor v. Wallbridge (1879), 2 S.C.R. 616 at 678-679. If the agent lacks the authority to bind
the principal, then an action by a third party for breach of warranty of authority might lie against
the agent. See: Wickberg v. Shatsky (1969), 4 D.L.R. (3d) 540.
CASE 2
Lumber Agents Ltd., which frequently acted as an agent for wood processing mills, was
contacted by the Finished Flooring Ltd. to find a supply of a particular hardwood for its new
product line. Under the terms of the agreement, Lumber Agents Ltd. was entitled to a flat
commission rate based upon the quantity of lumber purchased. Lumber Agents Ltd. contacted
several small mills and arranged for each to supply a quantity of the type of hardwood required
by Finished Flooring Ltd. In each case, Lumber Agents Ltd. charged the mill a fee for arranging
the supply contract. In due course, the wood was delivered to Finished Flooring Ltd., and the
agreed upon commission was paid to Lumber Agents Ltd., based upon the quantity of
hardwood supplied.
Some time later, when Finished Flooring Ltd. discovered that Lumber Agents Ltd. had
also charged a fee to the other mills for arranging the supply contracts, it took legal action
against Lumber Agents Ltd.
Discuss the nature of the claim that would be made by the Finished Flooring Ltd. and the
defences, if any, of the Lumber Agents Ltd. Render a decision.
Comment:
The claim that Finished Flooring Ltd. would make would be based upon the agent's failure to make
a full disclosure to the principal of the contract arrangements it had made with the Mills. The
collection of a commission on the supply contracts by the agent would be a breach of the agent's
fiduciary duty to its principal Finished Flooring Ltd., and would entitle Finished Flooring Ltd. to
receive from the agent the secret commissions made on the transactions.
For a similar case see: Moores v. Sequeira (1983) 41 Nfld. & P.E.I.L.R. 129, affirmed
(1985) 55 Nfld. & P.E.I.L.R. 128 (Nfld. C.A.).
85
CASE 3
An investor carried on the business of buying business firms that were in financial difficulties.
Once purchased, he would use his management skills to turn the businesses into profitable
operations, or break up the firms by selling their assets.
In his search for value, he became interested in the purchase of the shares of Cabinet
Manufacturing Ltd. which was in financial difficulties due to a high debt load. He contacted
Harris, a business consultant, and requested an assessment of the firm. Harris was also
authorized to negotiate the purchase of the shares of the business on the investor’s behalf if his
investigation indicated that the purchase of the shares represented a good investment.
Harris suggested that Danzil, a consulting engineer, be engaged to assess the condition
and value of the manufacturing equipment. Danzil was also to provide some advice on what
might be done to improve the profitability of the operation. The investor agreed, and Harris
and Danzil proceeded with their assessment of the firm.
During the examination, Harris and Danzil realized that the firm represented a good
investment if the equity to debt ratio could be altered and some manufacturing processes
changed to improve efficiency. The two then established a corporation for the purposes of
buying the manufacturing firm. They indicated to the present owners of the manufacturing firm
(whom they had met through the investor) that they also represented a corporation that might
be interested in the purchase if the investor should decide against the investment.
Harris and Danzil provided a written opinion to the investor that the business was worth
approximately $3.1 million. They submitted accounts of $5,000 and $5,500 respectively, which
the investor promptly paid.
A few days later, as a bargaining approach, the investor presented the owners of the
manufacturing firm with an offer to purchase the shares for $3million.The offer was prompt1y
rejected. Before the investor could submit a new offer, the corporation that Harris and Danzil
had incorporated made an offer of $3.1 million for the business. The second offer was
accepted, and the shares were transferred to the corporation for the $3.1 million.
When the investor discovered that Harris and Danzil were the principal shareholders of
the corporation that had made the $3.1 million offer, he brought an action against them for
damages.
Describe the nature of the investor’s action. Discuss the possible arguments that might
be raised by both the plaintiff and the defendants. Identify the main issues and render a
decision.
Comment:
The issues raised in this case concern the duties of an agent to his principal. The first involves the
duty of Harris to the investor. What was his duty in this case? When did the duty end? Was Harris
free to use the information gained as the investor’s agent for his own benefit? The same
questions may be raised with respect to Danzel.
Further questions raised by the case might include: Would Harris and Danzel be obliged to
reveal the incorporation of their company for the purpose of competing with the investor? Did
they have the right to suggest to the owner of the manufacturing firm that they were interested in
a possible purchase if the investor should decide against the purchase?
The investor’s action would probably be based upon the failure of both Harris and Danzil to
86
act in good faith and in his interest in their dealings with the owner of the firm. In the case of
Sinclair v. Ridout and Moran, [1955] O.R. 167, which was, in part, a similar situation, the court
held that the agents had violated their duty to their principal not only by the use of their position
as agent, but by competing with their principal through the corporation without revealing their
conflict of interest to their principal.
CASE 4
A successful businessman died, leaving his son and daughter his business, and his widow a life
annuity. His widow was quite elderly at the time of his death, and his son and daughter
concluded that the life annuity might not be sufficient for their mother to maintain her home
and cover her living expenses, since she required a housekeeper and a live-in nurse. To provide
her with additional income, the two children placed $500,000 in the hands of the family
stockbroker in their mother’s name.
The funds were placed with Lacey, an investment adviser of the brokerage firm. She was
instructed to invest the money in the shares of Canadian corporations only, in order to provide
their mother with income and dividend tax credits. No part of the fund was to be placed in
bonds or the securities of foreign corporations.
Their mother had no investment experience, and the son and daughter so advised Lacey. Their
mother also informed Lacey that she intended to leave the choice of investments with her, as she
did not wish to make investment decisions.
During the next two years, Lacey invested the funds in the shares of Canadian
corporations. The investment income was approximately $50,000 per year. The widowed
mother was pleased with the results and, at the end of the second year, wrote a note to Lacey
that thanked Lacey for her hard work and success to date. The note also read: “Invest as you
see fit, until you hear from me."
During the third year, Lacey switched most of the Canadian shares to bonds, foreign currency
holdings, options, and speculative issues, at a very high investment turnover rate. The high
trading activity resulted in very high sales commissions for Lacey, but very little in earnings for
the widow, and by the end of the third year, the mother’s income was down to $9,000. The net
worth of her investment fund had diminished to $280,000.
At the end of the third year, the mother notified her son that something seemed to be
wrong with her investment income. Her son immediately contracted the investment firm. At
that point, Lacey’s trading practices were discovered, and the value of her investment fund was
determined. On the advice of her son, the mother brought an action against the stock broker
and Lacey, an employee of the firm.
Discuss the nature of the action that the mother might bring, and the issues involved.
Render a decision.
Comment:
The brokerage firm was engaged to buy and sell securities on behalf of the principal, the mother.
Lacey was an employee of the firm, and the firm would be liable for any breach of her duty
towards the firm's principal. Lacey’s instructions were clear initially: to invest only in shares of
Canadian corporations in order to provide dividend income eligible for dividend tax credits. Due
87
to the mother’s lack of knowledge of investments, should Lacey have followed these instructions?
Did Lacey put her own interests before those of her client in her choice of investments? From the
facts of the case, Lacey began trading in securities on behalf of her client in speculative issues
which could not provide the type of income required. Since it was made known to Lacey by both
the mother (and her children) that she had no knowledge of investments or the stock market, her
comments to Lacey could not be taken as instructions concerning investments to make. Lacey
(and her employer) were consequently in breach of their duty to (1) carry out the principal's
directives and (2) to put the principal's interests above their own.
The facts of this case are based upon the facts in the case of Ryder v. Osler, Wills, Bickle
Ltd. et al. (1985) 49 O.R. (3d) 609 where the court held the brokerage firm liable for the losses
suffered due to the employee's breach of her duty.
CASE 5
Hardware Wholesale was a partnership business that served hardware retailers in a number of
small towns and cities for many years. Over the past two decades, competition from a
combination of ‘big box’ stores and the creation of franchise operations by large wholesalers
seriously affected the fortunes of the partnership, and eventually the partners found
themselves at a point where their business could no longer be carried on at a profit.
Consideration was given to selling the business, but before anything could be done, one
of the partners became insolvent, and it was necessary to dissolve the partnership in
accordance with their partnership agreement.
The partnership agreement provided that the partners share profits and losses equally.
On dissolution, the capital accounts of the partners were as follows:
Partner ‘A’
Partner ‘B’
Partner ‘C’
Partner ‘D’
$60,000
$40,000
$30,000
$
0
(insolvent)
Creditors claims at dissolution were calculated to be $350,000. Total assets of the firm
were $250,000. What is the liability of the firm? Calculate the liability of each of the partners
between themselves and with respect to creditors’ claims.
Comment:
This case is based upon the facts in Garner v. Murray (p.176). The case raises the question: How
are losses to be dealt with where one of the partners becomes insolvent, and partnership debts
exceed assets? The partners are liable to the creditors for the full amount of the claims, and the
creditors are free to look to any one partner to satisfy their claims. That partner, in turn, may look
to the other partners to contribute their share of the creditors' claims.
In this case, the partners have agreed to share profits and losses equally. Partner ‘D’,
unfortunately, cannot make any contribution towards the $100,000 loss suffered by the firm
($250,000 assets, but $350,000 creditors' claims). The three remaining partners must therefore
bear the loss. Should this be shared equally? Each partner would ordinarily be liable for
one-quarter of the loss, or $25,000. Partner ‘D’ however, has no funds. Garner v. Murray
indicates that the solvent partners bear the loss of the insolvent partner in the ratio of their capital
88
accounts at dissolution. This would mean that the share of the loss which Partner ‘D’ would be
expected to pay ($25,000) would be paid by the other three partners (in addition to the $25,000
that each must pay) in the ratio of their capital accounts, viz: Partner ‘A’ 5/10, Partner ‘B’ 3/10,
and Partner ‘C’ 2/10 ($12,500, $7,500 and $5,000 respectively).
CASE 6
Ceramic Tile and Flooring was operated for many years as a sole proprietorship by Luigi Roma.
The business was very successful, and eventually Luigi employed Julius as an assistant. Julius
worked for Luigi for several years, until his earnings reached $600 per week.
A year later, Julius approached Luigi and requested an increase in his wages, but Luigi
refused on the basis that new competition in the flooring business limited his ability to pay
Julius more than $600 a week.
The two parties discussed the problem of competition and the ability of the business to
expand its operations, and eventually an agreement was reached that provided as follows:



Julius would receive his $600 per week salary, and would receive 20% of the net profits.
He would continue to work with the installation of tile and flooring, but would take on
the responsibility for ordering materials and inventory control.
Luigi would continue to handle the general management of the business, be entitled to
$1,000 per week and 80% of the net profits.
The parties further agreed that Julius would be entitled to examine the business and
account books, and would be consulted on all major business decisions.
A few months later, Luigi discovered that Julius was selling his friends tile at below cost,
and in a rage, told Julius he was discharged, and would be sent his severance pay by mail.
Advise Julius of his position if he suggests that he should take legal action for a
declaration that he is a partner in the business.
Discuss the arguments of the parties and how the case might be decided if Julius should
proceed with the legal action.
Comment:
The facts of this case may be used to review the requirements for the establishment of a
partnership. Since a partnership relationship usually requires something more than the mere
sharing of profits, questions asked should attempt to identify these additional requirements.
Would responsibility for the ordering tile and inventory control be enough participation in the
management decision-making process to make Julius a partner? What about the right to examine
the account books? What significance would you attach to Luigi’s promise to "consult" Julius on all
major business decisions? Is this the same as participating in the decision- making? Would Luigi
be obliged to agree with Julius (or vice versa) before a decision could be made? Is only Luigi
responsible for losses? Could a sharing of losses be inferred? What was the intention of the
parties in entering into such an agreement?
The intention of the parties would not make Julius a partner. If the parties intended by the
agreement to give Julius full rights to participate in all major decisions concerning the business,
89
and that the consent of Julius was necessary before a major decision was made, then the
relationship could be that of a partnership, and Luigi would not be entitled to dismiss.
The arguments raised by the parties would, of course, be related to the purpose of the
agreement, with Luigi arguing that it merely gave Julius greater responsibility in his job, along with
additional compensation for assuming the additional responsibility. An important part of Luigi’s
argument would be based upon the reservation of general management, and his limited obligation
to "consult" with Julius on major decisions. The fact that only profits, and not losses, would be
shared would be strong evidence of an employment relationship, and an important part of Luigi’s
argument.
Julius, on the other hand, would argue that the agreement established a partnership in
that it gave him a share of profits and the participation in the management of the business. The
question of the sale of tile by Julius should be raised as a part of the discussion of the nature of the
relationship. Would such a sale violate the obligation on Julius to act in good faith?
The sharing of profits and not losses, if this should be the case, would tend to indicate an
employment relationship rather than a partnership. See: Bussieres v. Canadian Exploration Ltd.,
[1938] 1 D.L.R. 257.
CASE 7
Parker Oil Ltd. and Oil Exploration Ltd. agreed to explore the possibility of finding oil in a
relatively open and accessible area near Parker Oil’s producing field. Parker Oil agreed to
acquire an option to purchase the property and the underlying mineral and petroleum rights. Oil
Exploration agreed to provide drilling equipment and surface crews to drill potential sites on the
property. Parker Oil also agreed to pay for 30% of the costs of the drilling operations. The two
companies agreed to share any profits on an equal basis. Oil Exploration Ltd. also provides
drilling services on a straight contract basis to a number of other oil companies in the area.
What type of formal relationship should the two corporations establish for the project?
What issues should be addressed in the agreement. What risks does the relationship raise?
Comment:
Case 7 provides students with the opportunity to consider not only partnership as an
organization for the new business venture, but also a joint venture. The advantages/
disadvantages of each should be discussed. Note that Oil Exploration Ltd. also provides services
to other companies in the area, and its business with these companies should be considered.
Given these other business relationships, a joint venture approach would be better suited for
the project, with an agreement setting out the specific duties of each party and a clear
statement that their relationship is not one of partnership.
CASE 8
Earl, Louise and Erik carried on business in partnership for many years under the firm name ELE
Sales. The partnership was registered under the provincial partnership registration legislation.
Earl and Louise were the two partners that dealt with customers and suppliers, and Erik worked
for the most part out of sight of everyone in a back office where he did the bookkeeping for the
business.
90
Erik eventually retired, leaving the business without informing either customers or
suppliers. Earl and Louise carried on the business for another few years, but without the
management skills of Erik, the business ran into financial difficulties. Earl and Louise decided to
close the business, and paid most of the creditors. The remaining creditors now wish to take
action to recover their debts.
Advise the creditors.
Comment:
The creditors may look to Erik as a general partner for settlement of their debts just as they may
look to Earl and Louise. Erik’s out-of-sight contribution while active in the business does nothing to
save him from liability, and he took no steps upon his retirement to terminate his liability. Even if
he had originally been a limited partner, his active participation in the business renders him as a
general partner.
CHAPTER 7
CORPORATION LAW
LEARNING GOALS
1. To understand the nature of the corporation.
2. To examine the incorporation process.
3. To outline the division of corporate powers.
4. To understand shareholders’ rights.
5. To consider securities legislation.
6. To examine the conduct of trading of securities.
CHAPTER COMMENTARY
The corporation, as the text points out, is a very different type of legal entity when compared to the
partnership. The various forms of incorporation (General Act, Special Act, and Letters Patent) are
worthwhile topics to review. In addition, the separate legal existence of the corporation and its
powers should be examined, perhaps by way of comparison to the partnership. Since a partnership
is a relationship subject to the "utmost good faith" duty for partners, an approach to the rights and
duties of shareholders and directors might be to chart each as a part of classroom discussion.
Corporation law includes a number of doctrines, principles, and rules which should also be
reviewed. In particular, the doctrine of corporate ultra vires (p. 198), corporate opportunity (p.
203) and the indoor management rule (p. 199) should be covered in classroom discussion.
The Case Law included in the chapter represents two important aspects of corporation law.
The Salomon case on p.196 established the nature of the corporation at law, and its existence as
an entity separate and apart from its shareholders.
After learning about forms of business organisations, most students will naturally
consider the problem of financing the growth of a venture. Securities regulation governs the
nature of securities, the method of their distribution and trading, and obligations to disclose
information as to their riskiness, in order that investors may make informed purchase decisions.
While the chapter clearly focuses on shares of a corporation, students must bear in mind that
“securities” are broadly defined and can include not only shares and debt instruments, but
many “non-traditional” investment vehicles as well. The definition of a security includes any
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document commonly known as a security, typically evidence of title to or interest in the capital,
assets, property, profits, earnings or royalties of any person or company.
The regulation of securities is, constitutionally, an area of provincial responsibility, and
the paramount policy goal behind regulation is to balance the twin needs of capital market
efficiency and market integrity. Students must understand that both policy objectives are
important, and require balanced achievement. The consequence of failure is capital market
failure; either a market that is not trusted, or one so encumbered by regulation that it has no
liquidity. Disclosure requirements are the chief means of informing investors and are the chief
responsibility of reporting issuers. With a few important exceptions, securities are subject to
the obligations of true, full and plain disclosure within a prospectus, and to continuous
disclosure thereafter on a timely basis. Students should recognise these measures as being the
most straight-forward means to achieving the policy goals. By the same token, there are
special times when increased protection for investors is required. These occur when owners of
securities are solicited for their voting rights (proxies), in the case of take-over bids and issuer
bids, and in cases of insider trading. Students should recognize that this is the first chapter
where powerful administrative tribunals arise, in the form of the provincial securities
administrators. The provincial securities administrators have considerable powers to act on
specific matters and even more generally in the public interest, and the consequences of
enforcement action can be extremely serious for those found in violation of the legislation,
including imprisonment, fines and civil liability.
REVIEW QUESTIONS
1. What is the legal nature of a corporation?
Answer:
A corporation is created by the state and possesses a legal existence separate from those who
from time to time possess shares in it, or who are responsible for its direction and control.
2. How does a corporation differ from a partnership?
Answer:
A corporation differs from a partnership in a number of significant ways:
(a) It has a separate existence.
(b) Shareholders have limited liability.
(c) The shareholders do not actively manage the corporation. (The directors
manage).
(d) Share interests are readily and easily transferred.
(e) Corporations have a theoretical unlimited term of existence.
3. What is a special act corporation? For what purpose would it be formed? Give two examples.
Answer:
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Special Act corporations are created by the state to do specific things, usually of a public
nature. For example: A provincial hydro-electric corporation, or the Canadian Broadcasting
Corporation.
4. What drawbacks are commonly associated with partnerships are overcome by the use of the
corporate form?
Answer:
Shareholders of a corporation have limited liability, share interests are easily transferred, and
control is limited to elected directors.
5. Describe briefly the relationship between a corporation and its shareholders. How does a
shareholder's relationship with the corporation change if the shareholder becomes a director?
Answer:
A shareholder may not bind the corporation in contract. A shareholder may engage in activities
in competition with the corporation, such as own shares in a competing corporation. If a
shareholder becomes a director, then the shareholder becomes liable for certain acts (such as
improper declaration of dividends) and must act in good faith and put the best interests of the
corporation before his/her own.
6. Explain the doctrine of corporate opportunity.
Answer:
The doctrine of corporate opportunity arises when a director becomes aware of an opportunity
to acquire property through his position as a director. He may not use the opportunity for his
own benefit because the opportunity to acquire must be given to the corporation.
7. What are the obligations of a director of a corporation in an instance where the director has
a financial interest in a firm with which the corporation wishes to do business?
Answer:
The director must reveal the interest in the other corporation, must not take part in the discussion,
and not vote on the proposal.
8. Indicate how the principle of "majority rule" is applied in the decision-making process of a
corporation. What protection is available to a dissenting minority shareholder where a
fundamental change in the corporation's object is proposed?
Answer:
"Majority rule" applies for most decisions, but for some, which involve a fundamental change in
the corporation, a larger majority is required (2/3 usually). A dissenting minority of shareholders
may apply to the courts for relief, and the corporation may be obliged to purchase the
shareholders interest.
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9. Distinguish a "public" corporation from a "private" corporation. Why is this distinction
made? What other terms are used for each of these types of corporations?
Answer:
A public corporation is a corporation which offers its shares or securities for sale to the public. A
"private" corporation is a corporation which does not offer its shares or securities to the public.
"Private corporations" are sometimes called "Closely-Held Corporations."
10. If a corporation wishes to sell its securities to the public, what requirements are imposed
upon the promoters, directors, and others associated with the sale and distribution of the
securities?
Answer:
Promoters, directors, etc. involved in the sale of a corporation's shares to the public are subject to
the securities legislation of the jurisdiction. Under this legislation they must issue a prospectus to
potential customers before any sale of securities is made. They must also certify that the
information contained in the prospectus is correct. The prospectus must be approved by the
regulating body before it is issued.
11. What is the expected standard of prospectus disclosure?
Answer:
True, full, and plain disclosure of all material facts relating to an issuer is the expected standard,
mandated by both statute law and the Supreme Court of Canada.
12. What is meant by continuous disclosure?
Answer:
The timely release to the public of all material information that would significantly affect the
valuation of a reporting issuer’s securities.
13. To be registered as an Investment Advisor, what criteria must an individual meet?
Answer:
The individual must complete the Canadian Securities Course on market and investment
knowledge, a Conduct and Practices course on ethical professionalism and account operation,
and must work under close supervision for six months.
14. What is a tippee, and what are the consequences of being one?
Answer:
A tippee is the recipient of a tip, such a tip being undisclosed material facts about a reporting
issuer. A tippee therefore may liable for trading on that undisclosed information, and subject to
imprisonment and/or fines of 1 million dollars or three times profit made or loss averted.
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15. What are the twin policy goals of provincial securities legislation?
Answer:
To balance the twin needs of capital market efficiency and market integrity.
16. Describe what a proxy is, and why it is important.
Answer:
A ‘proxy’ is a transfer of voting privilege by a shareholder to an agent on the basis of a trust,
being either particular instructions to vote, or conversely, the right of the agent to vote as the
agent sees fit. It is important because a block of solicited proxies, voted as one, can be very
influential in the outcome of votes held at a meeting of shareholders, particularly in
determining the directors of a corporation.
17. What is a take-over bid, and what steps are involved in the process?
Answer:
A take-over bid is an attempt to acquire a controlling interest in the voting shares of a
corporation. The bid must be made to all holders of securities of the class being sought, and
the bid must disclose the full financial terms of the proposed purchase. The investors normally
have 21 days to deposit these shares with the trustee. 10 days after the bid expires, the bidder
must take up the shares and pay for them within 3 days.
DISCUSSION QUESTIONS
1. In Ask A Lawyer, the partners wish to know if the corporate form has any particular
advantages over the partnership. What advantages might it have? If they should decide to
incorporate what is the process? What must be done to end their partnership if they
incorporate?
Comment:
Ask A Lawyer in this chapter is designed to review the advantages and disadvantages of a
corporation versus a partnership. This is covered in detail on pages 195-196 and the chart on
page 197. These may be discussed in the business setting of the three partners. If the lawyer
advises the corporate form, the incorporation process on pp. 299-200 should be discussed.
2. If the partners in Ask A Lawyer decide to sell shares to the public to raise additional capital
to expand their operations, what additional issues would this raise? How would they go about
doing so?
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Comment:
The decision to incorporate a public corporation and sell shares to the public requires the
corporation to follow the requirements of the securities legislation of the province to make a
public offering of shares. Students should note the difference between a ‘private’ and public
corporation, and the fact that disclosure requirement of a public company must be followed if
shares are offered to the public. This requires filings of a prospectus, etc. to ensure that the
public is properly informed about the corporation before they purchase shares.
3. A large publicly traded corporation has decided to make a take-over bid for control of one of
its competitors, the bid to be made in a few months time. At a dinner party on the night after
the decision was made, the Corporation Treasurer mentioned the plan to a lawyer who does
work for the corporation from time to time. The lawyer’s spouse overhead the conversation.
The next morning at breakfast, the lawyer and his spouse discussed the take-over bid in the
presence of their 20 year old daughter. She later told their neighbour of the take-over plan of
the corporation.
The Treasurer, the lawyer, the lawyer’s daughter and their neighbour each immediately bought
shares in the corporation. The take-over bid was successfully made by the corporation, and a
month after, the corporation’s stock had increased in value by 50%. The lawyer’s daughter, and
the neighbour sold their shares.
Discuss the position of each of the parties in this case.
Comment:
Students should recognize the facts of this case as one that involves ‘inside information’ and
‘tippees’. Note that the acquisition and sale of shares as a ‘tippee’ would be a violation of
securities legislation, and the lawyer’s daughter (and perhaps the lawyer) as well as the
neighbour could be prosecuted. The Treasurer who continued to hold shares may not be in
violation of the securities act for the purchase of the shares, as the bid had not been made at
the time, and it may not have succeeded. However, by divulging the confidential information
to the lawyer (if the lawyer was not to be engaged to perform professional services with
respect to the take over bid) he would be in violation of the securities legislation. If the lawyer
was to act for the corporation on the take over, the lawyer would be in violation of the act by
passing the information on to his daughter.
4. The directors of B Corporation wished to purchase a vacant property adjacent to their office
building and an offer to purchase was made at a price of $120,000. The offer was rejected by
the property owner. Director D of the corporation then immediately made a personal offer to
purchase the lot for $125,000, and the offer was accepted. What is the position of D? What is
the position of B Corporation?
Comment:
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Director D will argue that the doctrine of corporate opportunity should not apply as he or she
refrained from offering until the corporate offer had been rejected. Corporation B may well see
this differently, as D now owns the object of its desire. Perhaps such a plan may even have tainted
D’s input into the board deliberations which resulted in the $120,000 offer. In all probability this
still represents the appropriation of a corporate opportunity as B Corporation might have been
interested in continuing the bidding process, which is now derailed and redirected toward a
director who would certainly now, if not prior, be in a conflict of interest. The simple resolution
which would prove the bona fides of the director in securing the property would be for him or her
to offer to sell it to B Corporation at $125,000 proving that D’s intent was simply to ensure that the
property did not slip away.
5. Carla, the President of a small corporation, wishes to raise $500,000 in new investment
money for the firm. What are her options to do so without the requirement of filing a
prospectus? Give examples.
Comment:
Carla must find any combination of:
Accredited Investors – banks, investment dealers, or individuals with financial assets
exceeding $1,000,000, or individuals with net assets of at least $5,000,000, or individuals with
income in excess of $200,000 in this and the past two years.
Private Issuer trades- Carla’s firm’s securities must have transfer restrictions and the
firm’s shares may not be owned my more than 50 persons, which may then be issued to
persons close to the issuer (directors, officers, employees, relatives, close friends, founders and
control persons, existing securities holders) as well as to accredited investors.
Purchasers willing to purchase a minimum investment amount of $150,000 each.
COMMENTS RE: DISCUSSION CASES
CASE 1
A consulting engineer incorporated a company for the purpose of carrying on his business and
to allow for expansion in the future should he wish to expand his operations. Most of the
corporation’s clients were located in Canada, but in 2002 the Corporation obtained two very
large contracts for consulting services from a corporation located in the United States. The
engineer spent eight months working in the United States to complete the contract work, and
at the end of the taxation year, the engineer filed his personal income tax return, claiming the
overseas tax credit allowed to employees working abroad. The Minister of Revenue denied the
engineer his overseas tax credit on the basis that he was not an employee, and therefore not
entitled to the tax credit. The engineer challenged the ruling.
Discuss the arguments that the taxpayer and the Ministry may raise. Render a decision.
Comment:
The facts of this case are based upon Meredith v. Canada (Attorney General) (2002) 291 N.R.
352. The issue here concerns the use of the corporate form by an individual for business
purposes. The Minister was essentially saying the ‘one man’ corporation was a sham for tax
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purposes, but the court disagreed. It held the corporation was a legitimate form of business
organization, and the single shareholder could be employed by the corporation as an employee.
In essence the court applied the Salomon case. This allowed the employee to claim the
overseas tax credit on his tax return.
CASE 2
Mall Landholdings Ltd. owned a strip mall was located at a busy intersection in a small city. The
corporation wished to sell the mall, and in order to make the property more attractive, decided
to purchase a competing strip mall located on the opposite side of the street at the same
intersection.
The directors of Mall landholdings Ltd. made inquires as to the possibility of purchasing
the second mall, and was advised that it could be purchased for $600,000. A subsidiary
corporation was incorporated to purchase the second mall, and the corporation was to be a
wholly owned subsidiary of Mall Landholdings Ltd. The bank, however, would only lend the
corporation $450,000 on its assets, and the corporation was ‘short’ $150,000 to makeup the
$600,000 purchase price.
In order to make the purchase possible, two of the directors each agreed to invest
$50,000 in the purchase, and a lawyer, who frequently acted for the corporation, agreed to
invest a similar amount to makeup the required $600,000. The subsidiary corporation then
issued 600,000 shares: 450,000 to Mall Landholdings Ltd, and 50,000 to each of the three other
investors in return for their investment. The subsidiary corporation then proceeded with the
purchase of the second strip mall for $600,000.
The two malls were put up for sale as a ‘package’, and eventually a purchaser was
found. The purchaser however, wished to acquire the second mall by way of a purchase of the
shares at a purchase price of $1.50 per share, and Mall Landholdings Ltd. and the other
shareholders of the subsidiary corporation agreed to the sale.
Mall Landholdings Ltd. was satisfied with the sale of the two malls, but later, some of
the shareholders of Mall Landholdings Ltd. discovered the details of the share sale of the
subsidiary corporation, and concluded that while Mall Landholdings Ltd. earned a profit of
$225,000 on the sale of its shares in the subsidiary, each of the directors and the lawyer had
made a $25,000 profit on their share sale.
The shareholders demanded that the two directors and the lawyer pay over their profits
on the sale of the shares to Mall Landholdings Ltd. When the two directors and the lawyer
refused to do so, the shareholders of Mall Landholdings Ltd. instituted legal proceedings against
them.
Discuss the nature of the shareholder’s claim, and the arguments that might be raised
by each party.
Render a decision.
Comment:
The facts of this case were adapted from the facts in the case of Regal (Hastings) Ltd. v. Gulliver
and others, [1942] All E.R. 378. The case raises the important issue of the duty of directors
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towards the corporation, and the question of whether the directors should be permitted to make
a personal profit as a result of a transaction negotiated in their capacity as directors. Since the
directors used their own funds for the purchase of shares, are they entitled to the profit made on
the transaction? Does their duty extend beyond their dealings with corporation's assets to deliver
up any profits earned by the use of their own funds? Was the profit made by virtue of the fact
that they were directors (i.e.: The doctrine of corporate opportunity)?
It is perhaps best to deal with the position of the lawyer in the case first. He is not a
director, and hence, he has no duty to the corporation as such. In the Regal (Hastings) Ltd. case,
he was permitted to keep his profit. The directors, unfortunately, were obliged to pay over to the
corporation their profits on the basis that they were in a fiduciary relationship with the
corporation. It should be noted here that had the directors obtained the sanction of the
shareholders for the scheme beforehand, the situation might have been different. Had they
received prior approval, they probably would have been entitled to keep the profits earned.
CASE 3
A private corporation contacted an investment advisor who was employed by a stock brokerage
firm, and requested him to act on its behalf to place $200,000 among a small group of
investors. The corporation provided the investment advisor with some promotional material
about the corporation’s products and a document showing sales projections for the next three
years. The corporation also informed the investment advisor that the corporation intended to
‘go public’ within another three years. The investment advisor was told that the corporation
had a manufacturing facility in the United States, and the investment advisor accepted this
information without arranging a visit to the factory.
The investment advisor made no further enquiries about the corporation, and sold the
shares to a number of clients of the brokerage firm. A short time later, it was discovered that
the sales projections were overly optimistic, the corporation did not own the manufacturing
facility in the United States, but only possessed distribution rights for the product in Canada,
and the United States corporation was in the process of terminating the corporation’s right to
distribute its products. As a result, the shares in the private Canada corporation became
worthless. The investors, on discovering this information sought redress from the brokerage
firm and from the investment advisor personally.
Discuss the issues raised in this case, and if you were the Provincial Securities regulator,
how would you deal with the case if it was brought before you.
Comment:
This case is loosely based on a BC Securities Commission decision in settlement of In the matter
of Brian Paul Kuhn, 2002 BCSECCOM 786 (BCSEC). The first issue raised is whether there is a
duty upon an investment advisor to inform him or herself as to material facts relating to the
proposed distribution of shares (exercising due diligence), particularly where these shares are in
the capital of a private corporation. The answer is clearly yes, that such a duty of due diligence
exists, requiring verification of the representations made by the corporation, particularly where
the investor is unlikely to be able to obtain information from any source other than the advisor.
In terms of redress, the Kuhn case decision imposed, on similar facts, a fine of $10,000, costs of
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$5,000, and a prohibition for seven years from becoming or acting as a director or officer of any
issuer and from engaging in investor relations activities in British Columbia for that period.
CASE 4
A stock brokerage employed Amelia, a registered investment advisor, in a junior capacity due to
her inexperience. Her job duties were essentially that of a telemarketer of unlisted shares,
making cold sales calls to prospective clients. If a prospective client wished to purchase shares,
Amelia would pass the client on to a more senior investment advisor who finished the
paperwork and collected the payment for the shares. The brokerage required her to verify that
each client she contacted had an income of at least $20,000, and a personal net worth of at
least $20,000 before she proceeded with a sale, and in every case she carefully followed this
verification procedure. If she sold unlisted shares from the brokerage’s own share holdings, she
received a commission of 20% and her senior advisor received a further percentage on each
sale.
Several years later, Amelia moved to another brokerage firm and applied to the
provincial regulator for authorization to sell shares on behalf of her new employer.
If the provincial regulator was made aware of Amelia’s work at her previous employer,
would the regulator grant her request? Give reasons for your answer.
Comment:
This case is loosely based on an Ontario Securities Commission decision In the matter of
Chateram Ramdhani, an unreported decision dated March 29, 2002. The first issue raised is
whether Amelia is displaying an understanding of her responsibilities as a registered
salesperson and of the “Know-Your-Client and Suitability” provisions that are the duty of an
investment advisor. In her telemarketing efforts it appears that her selling from inventory did
not involve real steps to inquire into the investment objectives of her clients. Merely working
from two tests, income of $20,000 and net worth of $20,000, does not live up to her obligations
as a registered salesperson. This failure in performing acceptable due diligence is sufficient to
support a suspension of registration and a refusal to transfer an existing registration of the
employee from one firm to another. Such a suspension is not likely to be for a fixed period, but
rather confined to requiring her re-enrollment in and successful completion of the Canadian
Securities Institute’s Conduct & Practices Handbook Course, and then any other remedial
conditions placed on her future registration.
CASE 5
The DC Corporation, a public corporation, produces a line of computer games and other
software in a highly competitive market. At a director’s meeting in late January, the
Corporation’s Finance Manager reported that December sales of the Corporation’s products
were disappointing and the decline in sales would probably result in a loss for the Corporation’s
fourth quarter. Zal, one of the directors, contacted his broker after the director’s meeting, and
instructed the broker to immediately sell a large block of his share holdings in the Corporation.
A few day’s later, the Corporation issued a media report of its quarterly operations, and
the shares of the Corporation fell by $10 a share on the stock exchange.
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An investor purchased 1,000 shares in the Corporation the day before the Corporation
announced its quarterly loss, and as a result suffered a $10,000 loss on his share purchase.
What are the rights (if any) of the investor? What is the possible outcome in this
situation?
Comment:
Students should recognize the issue in this case as insider trading by a director of the
corporation. The director is in breach of the securities legislation of the province, and could be
fined or imprisoned for the illegal trade. The investor, who purchased shares of the corporation
prior to the public announcement would have no recourse against the corporation when the share
price declined, as the corporation complied with the securities legislation by making its report to
the public for the quarter.
CASE 6
PR Plastics Inc. was a small publicly traded corporation that manufactured outdoor furniture.
Brown and Smyth, a professional accounting firm was for many years their auditors. During
most of this time, demand for outdoor furniture remained high, and the corporation
experienced significant growth. Because of their knowledge of the corporation’s operations,
both Brown and Smyth purchased shares in the corporation in the names of their parents and
family members. Neither Brown nor Smyth owned any shares in their personal capacity.
During a recent audit, Brown noted a number of irregularities in the firm’s invoicing practices
and the recording of sales. The firm reported the irregularities in its audit report to the
corporation, but prior to the delivery of the report, Brown advised his parents and family
members to sell their shares in the corporation. The corporation in due course issued a news
report concerning the accounting irregularities, only with a president’s statement that the
practices had been corrected on the advice of its auditors. The price of the shares nevertheless
dropped by $10.00. An investigation revealed that Brown’s parents and family members had
sold their shares in the corporation prior to the announcement by the corporation. Discuss the
issues raised in this case.
Comment:
Brown is in a “special relationship” with the issuer, as he is an auditor of the firm. Brown’s
family members are also in a “special relationship” with the issuer as they are in a “special
relationship” with one whom they know or ought to know is in a “special relationship” with the
issuer. As a result, Brown is tipping and the family members are tippees, being Criminal Code
offences. By not refraining from trading until the information had been made publicly
available, the family has traded on the basis of undisclosed information, a further offence under
the Securities Act.
CASE 7
The Board of Directors of Speedy Roofing Ltd. directed the corporation President to draw up
and enforce site safety rules for the performance of work at the various kinds of construction
sites where the corporation would likely bid for roofing work. In accordance with the directive,
the President set out job equipment requirements for three types of projects: small residential
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home roofing work, apartment and commercial building roofing work, and large industrial and
high rise building roofing work. In each case, the Site Manager was expected to select the
proper equipment to perform the work (scaffolding, portable elevators, material handling
equipment, etc.) and enforce the safety rules dictated by provincial government work safety
regulations. The directors made no further inquiries after the President advised them what
rules were in place.
Site managers at small residential roofing jobs frequently used only ladders and minimal
scaffolding on the job, and most roofing materials were moved to the roof by manual labour.
The reasoning here was that the roofing work was usually completed in only a day or two; and
the roof surfaces were usually gentle slopes or relatively flat. Safety equipment was considered
unnecessary, and only a rope safety harness was used on the steeper roof surfaces. On a small
residential roof repair project on a two-storey home, a worker slipped on some loose shingles
and fell over the side of the roof. His safety harness arrested his fall, but in the process he was
thrown against the brick wall of the house and suffered a serious head injury. Provincial
workplace safety inspectors investigated the accident, and may charge the corporation and
management with a violation of the provincial workplace safety legislation.
Advise the directors of the corporation and consider the possible outcome, if the corporation
was charged with a violation of the act.
Comment:
While the directors recognized their responsibility to have site safety rules created, they may
have failed to exercise sufficient due diligence as to implementation to avoid being held liable
under the workplace safety legislation. To their further credit, the directors did receive a report
on the rules implemented and they are entitled to place some reliance on this. However, the
fact would presumably also have been reported that safety equipment was considered
unnecessary for residential work. This may be enough to call into question whether the
president’s report had really been considered by the board, or simply accepted and rubberstamped. If the position is justified that a harness was sufficient, based on “reasonable
reliance” and industry standards, this was an unforeseeable accident and the corporation and
board may escape liability. However, if due consideration of the report would have revealed
deficient rules, or the industry would find such practice clearly deficient, the corporation and
the board can expect to be found liable. The board would have failed to fulfill its due diligence
requirements as imposed by the legislation.
CASE 8
Ludwig carried on a machine shop business for many years under the name Ludwig’s Machine
Shop. On advice from his accountant, he transferred the shop and all of its equipment to a
corporation that he incorporated with himself as the sole shareholder. As payment for the
shop and equipment, the corporation issued Ludwig 10,000 common shares, and a debenture
in the amount of $250,000. The corporation carried on the business as Ludwig’s Machine Shop
Ltd., with Ludwig as the corporation’s president. The large advertising sign on the front of the
shop, however, was not changed, and continued to read: Ludwig’s Machine Shop. Ludwig
continued to operate the business as he had done prior to incorporation, and did not inform his
customers or suppliers of the change of ownership of the business. Business invoices
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nevertheless were issued in the corporation’s name and all correspondence was on corporation
letterhead. Several years later, the corporation experienced a loss of business to new
competitors, and was soon in financial difficulty. When the corporation found that it could no
longer carry on profitably, the corporation ceased operations. Business assets were liquidated
for the amount of $175,000. Ludwig, who held the $250,000 debenture, claimed payment in
priority over the creditors claims of $100,000. The creditors claimed priority of payment over
Ludwig on the basis that they were unaware of the change of ownership. Discuss the issues
raised in this case, and how the dispute might be resolved.
Comment:
As a number of years have passed between the issuance of the debenture and the creditor’s
claims, we can reasonably assume that the debenture transaction was not designed to defeat
creditors, but to pay for the assets that were in fact transferred to the company. This and other
aspects of bankruptcy law are considered in later chapters. Ludwig has a reasonable claim to
priority, which could be strengthened had he changed the sign and advised the suppliers of the
change of ownership. Despite this, as he did change the corporate stationary (which presumably
included his orders and payments), most if not all of his creditors would have had quite some time
to become familiar with his true status. Since they were willing to carry on business with him
under these circumstances without inquiry as to who his secured creditors may be (if any, and
including Ludwig himself), there seems to be little basis to give any greater priority to unsecured
creditors over Ludwig. One wonders whether to even give credence to the notion that they did
not know of the change to a corporation, or understand its significance.
CHAPTER 8
EMPLOYMENT LAW
LEARNING GOALS
1. Examine the employment relationship.
2. To outline the duties and responsibilities of employers and employees.
3. To consider the termination process and wrongful dismissal.
4. To consider employer liability to third parties.
5. To examine collective bargaining.
6. To outline the role of unions in the employment relationship.
7. To consider the union-member relationship.
CHAPTER COMMENTARY
The employment relationship is subject to a great deal of legislation in each province which
dictates minimum wages, hours of work, notice of termination, and working conditions. Other
legislation, at both the federal and provincial levels, mandates benefits, etc. for employees.
This cannot be adequately covered for all provinces in an ordinary text, and consequently, the
legislation of a particular province may be examined in class if the instructor has such material
available, and should desire to do so.
A helpful approach to the examination of the employment relationship might be to
compare it to the agency and partnership relationships, and in this fashion, highlight its
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differences. An alternate approach would be to begin with the basic element of control, and
then expand on this by reference to the four fold test. The organization test might then be
examined to distinguish the employment relationship from the position of the independent
contractor. The rights and duties both of the employer and the employees may next be
considered, together with some additional emphasis placed upon the duties of employees,
particularly where the employee signs a restrictive covenant concerning competition with the
employer.
Dismissal and unjust dismissal have been subject to a certain amount of judicial re-thinking,
particularly in recent years. This has been especially true with respect to the matter of reasonable
notice. While in the past, notice of termination could be quite short (a day or two, or even a few
hours in the case of an unskilled, hourly paid employee), this is no longer the case. It is not
uncommon for long service, unskilled employees and persons in low level management positions to
be entitled to lengthy periods as notice of termination. Recent cases have calculated the reasonable
notice requirement for a long service senior management employee to be in the neighbourhood of
a year, but notice periods of up to two years have been determined as "reasonable." The Bardal v.
The Globe & Mail Ltd. case
(p. 233) notes the duty of the employee to mitigate loss in the case of wrongful dismissal,
a requirement that should be discussed along with the topic of reasonable notice.
The Judicial Decisions outline two important areas of employment law: The
determination of the existence of the employment relationship, and the matter of wrongful
dismissal. The case of Mayer v. J. Conrad Lavigne Ltd. (p. 223) provides an example of the test
for the employment relationship, in which the judge outlines the four fold test, and how it has
been applied in other cases. He then proceeds to discuss and examine the organization test.
The Bardal v. The Globe & Mail Ltd. case (p. 233) illustrates the factors considered by the court
in determining wrongful dismissal, and outlines the consideration given to the various factors
that constitute reasonable notice in the particular circumstances. Each component of the
employee's remuneration was considered, as well as the employee's attempt to mitigate his
loss. The court then calculated the amount of the damages based upon the period of
reasonable notice.
The text also deals with the liability of an employer for the torts of an employee, and where
the employee fails to properly perform the employer's contracts with third parties. This should also
be examined in class.
The last part of the material in this chapter is devoted to collective bargaining, and to an
explanation of the basic processes related to the collective bargaining relationship. These processes
are explained in general terms, since much of the law is found in provincial collective bargaining
legislation.
One approach to this topic might be to organize your lecture in the following manner,
since collective bargaining law is concerned with four distinct forms of activity:
(1) The organization process.
(2) The certification process.
(3) The negotiation process.
(4) The administration process.
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Instructors might emphasize that in many cases, the employer and the employees are
concerned with the organization process and the certification process only once, as these
processes establish the collective bargaining relationship. When the union is certified by the
Labour Relations Board, the bargaining process becomes an on-going cycle of the negotiation
process and the administration process until such time as the employer ceases business, or the
employees collectively decide to end the relationship.
With the organization process, it is important to note that the employer is obliged to take a
relatively passive role in the selection of the bargaining agent by the employees. While the employer
may make "fair comment" on collective bargaining, no attempt to interfere with the formation of
the union or the organization of employees may be undertaken, nor may any other unfair practice
be engaged in by the employer. This obligation also applies throughout the certification and
negotiation process as well.
Note also that the negotiation process differs from individual bargaining at common law
where the parties negotiate of their own free will, and where no penalties are imposed if they fail
to reach an agreement. Under collective bargaining legislation, the parties are obliged to meet and
bargain in good faith with a view to making a collective agreement. If the parties fail to reach an
agreement, (and there is no legal obligation to do so) the parties may impose sanctions on each
other to force an agreement. This is not so at common law.
Finally, you might point out that once an agreement is negotiated, the parties move into
the administrative stage, where any disputes that arise must be settled by binding arbitration,
rather than by the courts. This provides a simple and expedient method of dispute resolution,
and in addition, gives the parties some element of control over the type of person or persons
who will be charged with making the decision. The decision of the arbitrator, or arbitration
board, however, is binding on the parties, and is not subject to review, unless the arbitrator
acts in an unfair or biased manner, or exceeds his or her jurisdiction.
REVIEW QUESTIONS
1. How is an employment relationship established? What elements of the relationship
distinguish it from agency or partnership?
Answer:
The employment relationship is established by a person called an "employee" entering into an
agreement with another called the "employer", whereby the employee agrees to perform services
for the employer in return for the payment of a wage or other remuneration. The employment
relationship is distinguishable from agency or partnership on the basis that the employer has the
right to direct the work to be done and the manner in which it is done.
2. Explain the fourfold test for employment. Why did the courts find it necessary to establish
this test?
Answer:
The four fold test was established because "control" as a test was inconclusive in the
determination of the employment relationship, given the complex relationships which modern
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business developed for employment. The test involves not only "control" but also (2) ownership
of tools, (3) risk of loss and (4) chance of profit.
3. Distinguish an employee from an independent contractor.
Answer:
An employee is subject to the control of the employer as to the work to be done and the
manner in which it is done.
An independent contractor controls the work to be done and the manner in which it is done,
and may have the work done by his or her own employees.
4. Outline the general or implied duties of an employee under a contract of employment.
Answer:
An employee has the implied duty to carry out the reasonable orders of the employer, provided
that they are made within the scope of the employment. The employee must use the employer's
property in a reasonable manner, and must keep confidential any information given during the
course of employment. There is also a duty to devote the required hours to the employer's work.
5. What duties of an employee extend beyond the period of employment? In what way would a
breach of these duties be enforced?
Answer:
The duty not to divulge confidential information about the employee's business extends beyond
the employment relationship. The employer may enforce this duty by way of injunction if
necessary, or claim damages if the duty is breached.
6. Why are employers, under certain circumstances, vicariously liable for the torts of their
employees? Identify the circumstances under which vicarious liability would arise.
Answer:
Because employees are considered to be carrying out the orders of their employer, if a tort is
committed during the course and scope of their employment, the tort is considered to be a tort of
the employer, and the employer liable. For vicarious liability, the tort must be committed during
the course of the employee's work.
7. Identify the conditions or circumstances under which an employer would be justified in
terminating a contract of employment without notice.
Answer:
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An employer would be justified in terminating an employee without notice if the employee is
incompetent, grossly negligent in the performance of his duties, or concurs in a crime against the
employer. The right would also exist where the employee's actions constitute a breach of the
employment contract.
8. What factors must be considered in determining reasonable notice, if an employee or
employer should decide to give notice of termination of a contract of indefinite hiring?
Answer:
Reasonable notice would take into consideration the employee's length of service, position within
the firm (responsibility), opportunities for other employment, age, customs of the trade, and any
representations made at the time of hiring concerning the employment.
9. If an employee is wrongfully dismissed, explain how a court would determine the money
damages that should be paid by the employer for the wrongful act.
Answer:
Damages are determined on the basis of what the employee would have earned during a period of
reasonable notice, had it been given, less any earnings of the employee during that time period.
10. Why must an employee mitigate his or her loss when wrongfully dismissed?
Answer:
The courts expect an employee to mitigate his or her loss on the basis that a reasonable person
would attempt to find employment immediately to reduce the loss resulting from the breach.
11. Explain briefly the role of a union in collective bargaining.
Answer:
Labour unions act as bargaining agents for employees in their dealings with their employer on
matters concerning working conditions and the employment relationship.
12. Define a collective agreement.
Answer:
A collective agreement is a written agreement made between an employer and a union recognized
or certified as the bargaining representative of the employees' employer, which establishes the
terms and conditions of employment of the employees, and the rights and duties of the employer,
the union, and the employees.
13. Explain how a union acquires bargaining rights.
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Answer:
A union may acquire bargaining rights either by voluntary written recognition of the bargaining
agent by the employer, or by certification of the union by a Labour Relations Board
14. What is a bargaining unit? How is it determined?
Answer:
A bargaining unit is a group of employees determined to be appropriate for collective bargaining
by a Labour Relations Board (or voluntarily determined by the employer and the union).
15. Outline the steps in the negotiation process and its purpose.
Answer:
The negotiation process begins with a notice to bargain given by one party (usually the union),
following which the parties are obliged to meet and bargain. If they cannot reach an agreement,
the next step is to follow through a conciliation process, whereby a third party conciliator (or
board) assists the parties. If the conciliator (or board) fails, the parties are then free to strike or
lock-out after a short "cooling-off" period. The purpose of this process is to postpone the use of a
strike or lock-out until after all efforts (including third party assistance) have failed to produce an
agreement.
16. How are disputes between parties resolved during the negotiation process if third party
assistance fails?
Answer:
If third party assistance fails, the parties may use the force of a strike or lock-out. In the public
sector, compulsory arbitration is sometimes imposed in lieu of a right to strike or lock-out.
17. If a collective agreement is negotiated, what methods may be used to resolve disputes that
arise out of the collective agreement?
Answer:
Disputes which arise while a collective agreement is in effect must be resolved by way of
compulsory arbitration.
18. Explain compulsory arbitration.
Answer:
Compulsory arbitration is an arbitration process which the parties are obliged to follow because
the right to strike or lock-out is denied them under the labour legislation.
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19. Describe the legal obligations a union has towards its members.
Answer:
A union has the duty to fairly represent its members, and to permit all persons that it represents to
join the organization. It may not expel a member except in accordance with its constitution and
the rules of natural justice.
DISCUSSION QUESTIONS
1. In Ask A Lawyer, the five shareholders of the company must consider the obligations that
employees and the employment relationship will impose on their operation of the business.
What are these obligations? What risks might they also assume if they hire employees that
were previously represented by a union?
Comment:
In Ask A Lawyer, the shareholders must consider their obligations to employees. The lawyer
would probably advise the shareholders of the various statutes that must be complied with:
employment standards, Human Rights Code, employment insurance, tax requirements, and other
legislation. The lawyer would perhaps explain that the hiring of unionized workers might result
in union organization of their business – and this would result in a more formal relationship
between the corporation and its workforce with a union representing the employees.
2. On the based of the chapter information, what terms and conditions would you suggest that
an employer should include in a contract of employment with a senior employee?
Comment:
In answering this question, students should consider a number of terms: duties, salary, notice
period for termination. The reading of the chapter should cover most of these, and their
purpose, particularly in the event of termination.
3. How does an employment contract between an employer and a non-union employee differ
from a collective agreement for a group of unionized employees?
Comment:
Students should use the chapter information to identify the principal terms referred to in
question 2 above. These should be distinguished from a collective agreement, which is a formal
agreement administered by the union on the employee’s behalf. Students should also note
that the difference between the two is significant in terms of resolution of disputes, as in the
case of a common law contract, resort is usually the courts, while arbitration is used to settle
disputes arising out of a collective agreement.
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4. A school board suspended a teacher for allegedly harassing a student, but no formal
complaint was made against the teacher. The teacher objected to the suspension, and
requested the teacher’s union ‘to do something’. What are the obligations of the union? How
might the dispute be resolved?
Comment:
The union has a duty of fair representation for the members it represents. This is not mandatory,
however, but in this instance it would probably be obliged to do so, given the nature of the
complaint. The union would file a grievance objecting to the suspension, and demand that it be
removed from the employees record. If the employer refuses, the grievance can be taken through
the grievance procedure to arbitration. The arbitrator would then make a decision that would be
binding on the employee, union, and the employer.
COMMENTS RE: DISCUSSION CASES
CASE 1
Electronics Source Agency Ltd. was a manufacturers’ sales representative that operated branch
offices in most major population centers across Canada. In 1995, the corporation hired Felix as
its senior Sale Manager for a large metropolitan city, an important sales area of the
corporation. At the time of hiring, Felix had advised the President of the corporation that he
had extensive sales experience in the sale of electronics, and the previous year had
incorporated his own corporation with a view to establishing an electronics sales agency similar
to the President’s company, but had decided not to proceed with the project. Felix and the
President had no further discussion of Felix’s corporation, and proceeded to negotiate a written
agreement that provided Felix with an annual salary of $150,000 year. The agreement was for
indefinite hiring, but provided that either the employer or Felix could terminate the agreement
on 6 month’s notice.
Felix was very successful in his position as Sales Manager of the Metropolitan office for
his first year on the job, but during the second year, he discovered that a large U.S. electronic
manufacturer was seeking a manufacturer’s representative for its products in Canada. Based
on this information, Felix decided to contact the U.S. manufacturer with a view to becoming the
manufacturer’s representative in Canada, not for his employer, but for his own corporation that
was presently dormant. Using his employer’s computer, he prepared an extensive Power Point
presentation, incorporating a great deal of market information concerning the Metropolitan
sales area as well as the Canadian market as a whole. The presentation required a significant
amount of time, and Felix remained home from work for a week on the pretence of being ill
with the flu while he completed the presentation. When his presentation was ready for
presentation to the U.S. Manufacturer, he contacted the company, and a date two weeks hence
was set for his presentation.
A week before the presentation was to be made, the President of Electronics Source
Agency Ltd. was made aware of the intentions of Felix. Rather than confront Felix immediately,
the President decided to wait and see if Felix would inform him of his intentions, but Felix did
not, and the day before Felix was to make his presentation to the U.S. Manufacturer, the
President confronted Felix, and demanded an explanation. Felix admitted that it was his
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intention to make the presentation on behalf of his own company, and explained that he
intended to resign if the presentation was successful. The President then advised Felix that he
was dismissed, effective immediately.
Felix proceeded with his presentation to the U.S. Manufacturer, but it was unsuccessful.
Felix then took legal action against his employer, claiming wrongful dismissal.
Discuss the arguments that may be raised by Felix and Electronics Source Agency Ltd.
Render a decision.
Comment:
This case is based upon the facts in Felker v. Cunningham et al. (2000) 191 D.L.R. (4th) 734. The
issue in the case is the duty of the employee to the employer. What was the duty? To act in the
best interests of the employer at all times. He had a duty to disclose to the employer his plan to
make the presentation for his company and obtain the permission of the employer to do so. By
keeping his intentions to himself, he was in breach of his fiduciary duty to his employer. The fact
that he revealed the existence of his corporation would not be full disclosure as it was made
before he became an employee. The court concluded that the employee was in breach of his
duty, and the employer was entitled to dismiss him without notice.
CASE 2
A large department store that was located in a metropolitan shopping center employed a staff
of 90 full-time and part-time employees. The store was required to remain open for business
for all of the hours stipulated by the shopping center management, which meant that the store
was to remain open on a six day, Monday to Saturday basis. To meet the six day time schedule,
all full-time employees were required to work on a 5 day rotation that included two Saturdays
each month, with a week-day off when Saturday work was scheduled.
Laura S. had been employed by the department store for many years in the drapery
department of the store, and over the years had acquired an extensive knowledge of the
materials and goods carried by the store. A second employee, who was also the Department
Manager, was the only other employee with equivalent knowledge, as the remaining
employees worked only on a part-time basis in the department, and were frequently assigned
work elsewhere in the store if sales were ‘slow’ in the department.
Until very recently, Laura willingly worked her Saturday shift, but then joined a religious
denomination that considered Saturday as their holy day. As a result, Laura wished to devote
her Saturdays to the religious activities at her place of worship, and requested her manager to
change her work schedule to a 5 day, Monday to Friday work week, with no Saturday work.
Laura’s manager explained to her that she could not change her Saturday work schedule,
because her expertise was required on Saturdays, and the part-time staff lacked her skills.
Laura’s response was that she would not work on Saturdays, and when she failed to report for
work on the next scheduled Saturday, her employment was terminated.
Discuss the issues raised in this case, and speculate as to the outcome of the dispute.
Comment:
The issue in this case concerns human rights legislation. Most provinces prohibit employers from
discriminating against employees for their religious beliefs. In this case the employee joined a
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religious sect which treated Saturdays as a holy day. The question here is: Must the employer
change its work schedule to accommodate Laura’s new-found religious belief? Does her refusal to
work on Saturday's constitute insubordination? These issues should be discussed. The broader
issue of human rights and whether an employer should accommodate all employee rights of this
sort should be considered. Does an employer have a right to expect accommodation on the part
of the employee as well?
In the case upon which this problem was based, the employer was held to have violated
the employee's rights by discharging the employee. As a general rule, employers are expected to
make reasonable efforts to accommodate an employee's religious belief. In this case it failed to do
so.
CASE 3
Furniture Manufacturing Co. employees were represented by the Furniture Maker’s Employees’
Union. When the union and the company could not agree on the terms of a collective
agreement, and all mediation efforts failed, the union called a lawful strike at the company
manufacturing plant.
The manufacturing plant was surrounded by a high wire fence, with only one entrance
facing a street. When the strike began, the employees set up a picket line at the street
entrance to the plant, and twenty or thirty employees attended each day to picket the
entrance.
A week later, it became obvious to the company that the strike would be a lengthy one,
as in the opinion of the company, the employee compensation demands were impossible to
meet if the company wished to remain competitive in the market place. The company then
decided to hire replacement workers (as they were permitted to do under provincial labour
legislation) and the employer would deliver the new work force to the plant each morning in
hired buses.
Each morning and evening, when the buses wished to enter or leave the plant, the
striking employees would block the entrance, and prevent the buses from entering or leaving
the plant until the police would arrive and clear the entrance for the buses. Because of other
duties, the police could not always arrive immediately when called, and because the picketing
was not violent, the call to the police was not treated as an emergency situation. The delays,
however, were often as much as an hour, particularly in the morning, when the buses arrived
with the replacement workers.
What cause of action might the employer take in this situation, and on what evidence?
How might the union respond to the employer? What might be the possible outcome?
Comment:
The facts of this case are based upon Industrial Hardwood Products 91996) Ltd. v. TWACanada Local 2693 (2001) 196 D.L.R. (4th) 320. Students should note that the employees were
on a lawful strike, and entitled to picket. The question here is were their actions improper by
blocking traffic into the plant? Note that pickets are not entitled to block traffic as it did.
The role of the police should also be considered. Their failure to promptly clear traffic
into the plant affected the employer’s operations. This allowed the employer to ask the court
for an order prohibiting picketing. The court of appeal, however, did not prohibit all picketing
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but ordered the union and its members to cease interfering with the entry of vehicles to the
employer’s plant. It allowed pickets to provide information, (but only to those who wish to
accept it, and then only for 5 minutes).
CASE 4
A bank embarked on a recruitment campaign of university graduates, and Francis, a recent
graduate applied for a position. Francis was interviewed by the bank, and following the
interview, the bank offered Francis a position by letter which set out a salary, and a starting
date. Francis accepted the position by return mail.
A few days after Francis began work for the bank, he was called into the Manager’s
office and presented with an employment contract that contained a confidentiality clause, and
a proviso that either party could terminate the contract on three month’s notice, or in the case
of the bank, payment of three month’s salary and accrued benefits. Francis signed the
agreement.
Francis worked for the bank for almost fifteen years, moving from the position of
trainee through various promotions to the position of Branch Manager of a small branch of the
bank. Some month’s later, he had a disagreement with the Regional office of the bank over the
quality of certain loans he had made to local businesses, and his employment was terminated.
On termination, he was paid three month’s salary and his accrued benefits.
A week later, Francis instituted legal proceedings against the bank for wrongful
dismissal.
What might be the basis of the claim for wrongful dismissal? What likely response
would the bank make to his claim? Render a decision.
Comment:
This case is not only an employment case, but one which relates back to the general laws or
rules on contract in its findings by the court. From the facts the bank and the applicant entered
into a contract of employment by an exchange of letter. It would be a valid contract with offer,
acceptance, consideration, etc. This raises the question of consideration for the “employment
agreement” later signed by the employee.
While the bank would argue that it complied with the notice requirements of the
employment agreement, Francis would argue that there was no consideration for the
agreement, and he was entitled to ‘reasonable notice’ of his termination.
The facts of the case are based on those of Francis v. Canadian Imperial Bank of
Commerce (1994) 75 O.A.C. 216. In its decision, the court agreed with the argument of Francis,
and ruled that he was entitled to reasonable notice, which the court fixed at 12 months salary.
CASE 5
Henri was employed as an executive chef at an exclusive restaurant for many years. He was
internationally famous for many of his gourmet dishes, and was the author of several books on
gourmet cooking.
A small chain of exclusive hotels wished to incorporate gourmet restaurant facilities in
each hotel as an added incentive for executives and wealthy clientele to patronize its
establishments. Henri was approached by the President of the hotel chain and offered the
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opportunity to manage the gourmet restaurant facilities throughout the chain, and to assume
responsibility for all aspects of the operation. Henri accepted the position, and proceeded to
set up the restaurants at each hotel, to hire and train the new staff, and to plan all menus and
food management.
The restaurants proved to be a great success initially, and for several years proved to be
a significant contributor to the profits of the hotel chain. A downturn of the economy,
unfortunately, affected the hotel industry generally, and the small chain in particular. In an
effort to economize, the President approached Henri with a request to reduce the costs of
operation of the gourmet restaurants through staff reductions, and the use of lower cost food
ingredients. Henri refused, and in the heated discussion that followed, Henri was terminated
for insubordination. Henri then instituted legal proceedings against the hotel chain, claiming
wrongful dismissal.
Outline the positions of each of the parties in this case. How might the court consider
these arguments? Render, with reasons, a decision.
Comment:
Henri would argue wrongful dismissal on the basis that the president had no grounds for
dismissal. He would also argue that reasonable notice should be lengthy, given his position and
long service.
The employer would argue termination was justified by Henri’s insubordination, as
Henri had refused to reduce expenses. The justification would hinge on whether the
President’s request was reasonable, and if Henri properly carried out the request.
In resolving the case, the court might uphold the employee’s claim of wrongful
dismissal. It would probably apply the factors in the Bardal case in determining the appropriate
period of reasonable notice. Given the length of service and position of responsibility of Henri,
the court may conclude that a lengthy period of notice should be awarded.
CASE 6
Chang was employed as a Material handler at a large manufacturing plant. The employees at
the plant were represented by the Manufacturing Employees Union, and worked under a
collective agreement.
One evening after work, Chang went to a local bar to watch a soccer game on a large
screen TV. During the course of the game, Chang and Zak, his work supervisor, who was also at
the bar, became involved in a heated discussion over the game. Eventually, the supervisor
called Chang ‘an idiot’. Chang responded to the remark with a right hook to the supervisor’s
jaw, knocking the supervisor down. Bar employees stopped the fight immediately, and both
Chang and Zak were escorted out of the bar.
At work the next day, Zak said nothing to Chang about their previous night’s dispute.
However, he ordered Chang to clean a large chemical storage tank, a task usually done only by
a crew of two workers wearing protective gear due to the danger associated with chemical
fumes generated by the cleaning process. Chang was not prepared to do so without a second
employee to assist him, and when his request for assistance was refused by the supervisor,
Chang refused to do the work. He was suspended for the rest of the day by the supervisor for
his refusal to obey the order.
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When Chang returned to work the next day, he met with his union representative, and
complained about his suspension.
Identify and outline the process that would follow to resolve this complaint. What
arguments might be raised by each side, and what might be the outcome?
Comment:
In this case, the union would file a grievance on Chang’s behalf. A typical process would involve a
meeting between the union first at the supervisory level, and if not resolved, move the grievance
to a more senior supervisory level. Unresolved at that level, the discussion might move to the
plant level with the Plant Manager and the Union executive. It might then move to arbitration if
not resolved at the senior management level.
The union would probably argue that Chang’s refusal to obey the supervisor was based
on safety grounds. The employer would argue that he refused to obey a reasonable order. If
the arbitrator accepted the union position that Chang’s refusal was based on safety concerns,
and the fact that a crew of two was normally required to do the work, the arbitrator would
probably order the employer to remove the suspension from Chang’s record, and pay him for
the lost time.
CASE 7
Harold’s Variety and Smoke Shop served a local neighbourhood in a large city with the usual
types of products carried by small independent retail businesses. However, unlike most small
stores, Harold’s carried a large selection of soft drinks and tobacco products. This was due to
the fact that most workers at a nearby manufacturing plant walked by the store on their way to
and from work, and many were regular customers who purchased these products at Harold’s
on a daily basis.
A lawful strike at a soft drink bottling plant in the city resulted in a cut off of supply of
the brand of soft drinks manufactured at the plant, but Harold’s had a large supply on hand.
When the strike failed to achieve a collective agreement, the union decided to picket local
merchants who carried the manufacturer’s soft drink product line, and Harold’s was identified
as a ‘target’ because it was still selling the soft drink line.
Picket lines were sent to Harold’s store, bearing signs that informed the public of the
lawful strike, and urging them to not purchase the particular brand of soft drinks manufactured
at the struck plant. Unknown to the union, several union members who were on strike were
also members of a local anti-tobacco group, and used the picketing to urge customers to not
buy tobacco products in the store. Picketing was peaceful until one of the anti-tobacco group
became involved in an argument with a customer who had purchased both soft drinks and
cigarettes, and struck the customer with a picket sign as the customer came out of the store.
Harold immediately came to the rescue of the customer, but both he and the customer was
pushed back into the store by the anti-tobacco picketers.
Harold called the police, but before the police arrived, the union called off the picketing,
and the picketers had left the scene.
Discuss the issues raised in this case. What is the legal position of Harold, the customer,
the union and the picketers?
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Comment:
The employees of the soft drink manufacturer were engaged in a lawful strike at the
manufacturer’s plant, and according to the Pepsi Cola v. RWDSU Local 558 [2002] 4 WWR 205
case, (text p. 240) were entitled to carry out peaceful picketing of the customers of the
manufacturer (e.g. Harold’s Variety and Smoke Shop). However, the picketing must not
interfere with the operation of the retailer’s business. When the picketers assaulted Harold
and his customer the union members committed a criminal act. The union itself, however,
would probably not be responsible for the actions of the particular picketers, as it would be
unaware of their personal intentions to stop smokers, and acted immediately to call off the
picketing. Both Harold and the customer would have a right of action against the individual
picketers if they suffered some injury.
CASE 8
Local Delivery Ltd. operated a local package delivery service, and engaged the services of Margo
to assist in parcel delivery. Margo was expected to provide her own truck, but would be paid
on a per-kilometer basis for its use. In addition, Margo would be paid at an hourly rate for her
services. Local Delivery Ltd. would provide magnetic signs that Margo was expected to attach
to the sides of her vehicle while engaged in delivery work for Local Delivery Ltd.
Margo agreed that she would work exclusively for Local Delivery Ltd, and would be
expected to send Local Delivery Ltd. invoices for her work hours and truck use on a monthly
basis.
Margo delivered parcels for three years for Local Delivery Ltd. At the end of the third
year, she received a written notice that stated that her services would no longer be required,
effective in one month’s time. The letter also required her to return the magnetic signs on the
expiry of the notice period.
Margo objected to the short notice of the termination of her services, and took the
position that she was an employee.
Discuss the position of the parties in this case, and the arguments that each may raise to
support their position. Speculate as to how the matter may be decided if the case should come
before the court.
Comment:
The issue here is the nature of the employment relationship between Margo and Local Delivery
Ltd. Students should apply the tests set out on pp. 222-223 of the text to determine if Margo is
an employee or an independent contractor. Note that she has an exclusive work agreement
with Local Delivery Ltd. and to use its signs on her vehicle, but apart from this, Local Delivery
Ltd. exercises very little control over Margo. The fact that she invoices the company for her
services might also point to an independent contractor for her relationship with Local Delivery
Ltd.
CASE 9
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Betty Melnik, or “Blue Sky Betty” as she is called by fellow flight staff, is employed as a flight
attendant with Uplands Airlines. She has twelve years experience with the airline, and
maintains a blog on her home computer under the blogname “Blue Sky Betty”. On her blog she
relates her funny experiences as a member of the cabin crew of “Upchuck Airlines, as she calls
it. She has thumbnail pictures of herself in uniform, a fairly industry standard light blue suit and
tie. Close inspection shows the red collar piping used by Uplands Airlines. Some of the “funny”
things Blue Sky Betty reported are drinks spilled over passengers, a runaway food trolley on
take-off, and late arrivals causing stampedes of passengers for connecting flights. An executive
of Uplands Airlines discovers the blogsite and immediately has Betty Melnik fired, “for just
cause”. Discuss the issues surrounding Melnik’s dismissal.
Comment:
The case raises the question of employer control of an employee’s after work time and
activities. Note that the picture of “Blue Sky Betty” placed her as an employee of Uplands
Airlines, and as a consequence, identified the airline in question. She obviously did not have
employer consent to use the picture of her in uniform.
Employees must be careful with the use of company property (her uniform) in ‘after
hour’ activities, particularly if their job is to deal with the public as a representative of the
employer. Employees must also take care in the course of their employment not to damage the
employer’s business or its ‘good name’. Did Betty do this by way of her website? Given the
sensitivity of the flying public to air line problems (albeit funny in some cases) she may have
caused damage to the airline’s reputation, and justified her dismissal.
PART III
BUSINESS RELATIONSHIPS
CHAPTER 9
SALE OF GOODS AND CONSUMER PROTECTION LAW
LEARNING GOALS
1. To examine the contract of sale and the Sale of Goods Act.
2. To determine when title (and risk) passes to the buyer.
3. To identify implied conditions and warranties in a contract of sale.
4. To identify the rights and duties of the buyer and seller.
5. To examine the remedies available to buyers and sellers.
6. To review legislation designed to provide consumer protection.
7. To examine the role of credit reporting agencies and collection agencies.
CHAPTER COMMENTARY
The sale of goods, which is covered in this chapter represents an area of law that has been subject
to much codification and legislative activity. This originated with the general codification of the law
pertaining to sale of goods at the end of the 19th Century, and now includes the original legislation
supplemented by "consumer protection" activity of the past two decades. As a result, much of the
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law pertaining to the sale of goods is now found in the statutes, rather than in the common law.
The codification of the law was a beneficial change in many ways, the most important being:
(1)
(2)
(3)
(4)
It clarified and simplified the law;
It established the circumstances under which title passed, and when;
It established the rights and duties of the buyer and seller under a contract of sale,
and
It outlined the various remedies available to the parties in the event of breach.
For classroom purposes, the nature of the contract of sale should be examined, and the rules
for the transfer of title (and hence, risk of loss) should be reviewed. In addition, the distinction
between a condition and a warranty should be emphasized. The duties of both the buyer and the
seller are worth noting, and may be reviewed using the case problems. Discussion Case problems 1
and 2 may be useful in this regard, as they not only raise the issue of the seller’s duty, but deal with
the remedies available to the injured buyer.
The principle of caveat emptor (p. 261), is briefly examined in this chapter, and provides an
outline of the position of the parties under the Sale of Goods Act with respect to those contractual
activities that have been subject to much legislative activity under the guise of consumer protection.
The Sale of Goods Act rules for when title posses should be examined in class to ensure
that students understand the importance of timing and the issue of notice for the passing of title.
Consumer protection legislation to some extent reflects the reluctance on the part of the public
to seek redress from the courts in cases where unscrupulous merchants pass off shoddy goods,
or use deceptive trade practices in the sale of goods. The courts have always provided a degree
of "consumer protection" through the common law, but as a general rule, they have been
reluctant to provide much in the line of relief for the careless shopper or foolish user of credit.
This has not been the case with governments in the preparation of consumer protection
legislation. In some instances, consumer protection legislation has imposed strict requirements
or obligations on sellers and those whose extend credit to buyers. In many cases,
nevertheless, the legislation was necessary to deal with practices that could not adequately be
dealt with by the courts, such as credit reporting, and itinerant sellers.
The variation from province to province in consumer protection legislation dictated a
broad survey approach to the topic in the text, and for classroom purposes, the chapter may be
examined in this fashion. As an alternative, provincial legislation for a particular province may be
presented to the students to supplement the text, if detailed information on the legislation of the
province is necessary. Some of the more important federal statutes are noted in the footnotes, as
are some of the typical provincial laws.
REVIEW QUESTIONS
1. Distinguish a sale from an agreement to sell. Why and when is this distinction important?
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Answer:
A sale refers to a transaction where ownership is transferred to the buyer. An agreement to sell
refers to goods not in existence or subject to some condition before transfer of ownership can
take place.
2. Why is the time of passage of title important in the sale of goods?
Answer:
Risk of loss follows title. Hence, the time of passing of title is important.
3. What are the implications of an unconditional contract for the sale of specific goods in a
deliverable state?
Answer:
Title passes immediately. (Rule 1)
4. Indicate the significance of notice in the sale of goods.
Answer:
Notice applies in those cases where the seller must do something to put goods in a deliverable
state. When the buyer is given "notice" that this is done, the title passes.
(Rule 2-3).
5. Outline the contractual duties of a seller under the Sale of Goods Act.
Answer:
Seller must deliver the required quantity of goods to the buyer in accordance with the contract at
the required time and place for delivery. (Note also that seller makes certain implied conditions
and warranties).
6. What implied warranties are part of a sale of goods?
Answer:
Implied warranties are:
(1) goods are free from encumbrances.
(2) buyer will have quiet possession of the goods.
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7. Distinguish between a warranty and a condition. Why is this distinction important?
Answer:
A condition is a fundamental or essential term of the contract, which if broken, would entitle the
innocent party to treat the breach as a discharge. A warranty is not an essential term of the
contract, and would not entitle the injured party to treat the contract as at an end. It would only
entitle the injured party to claim damages.
8. Explain the significance of caveat emptor in the sale of goods.
Answer:
Caveat emptor places the onus on the buyer in a transaction to satisfy himself/herself that the
goods will be satisfactory for the purpose intended, without recourse against the seller if they are
not.
9. Under what circumstances would a buyer of goods be entitled to rescind the contract? Give
an example.
Answer:
The buyer could rescind the contract if the seller is in breach of a condition. Example: Where the
seller is in the business of selling a particular line of goods, and the buyer makes it known that he
requires goods for a particular purpose, or relies on the skill of the seller to supply suitable goods,
there is an implied condition in the agreement that the goods will be reasonably fit for the use
intended.
10. Outline the remedies available to a seller of goods if the buyer fails to comply with the
contract
Answer:
Remedies of a seller are:
(1) lien
(2) action for the price,
(3) damages
(4) retention of deposit,
(5) stoppage in transitu
(6) resale.
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11. Explain stoppage in transitu.
Answer:
Stoppage in transitu is a procedure whereby the seller may stop delivery of the goods by a carrier
if the buyer becomes insolvent.
12. Under what circumstances would the skill and judgment of the seller give rise to an implied
warranty or condition upon which the buyer might rely?
Answer:
Where the seller is in the business of supplying a particular line of goods, if the buyer makes the
seller aware of his or her purpose for the goods, and relies upon the skill of the seller to provide
a suitable product, there is an implied condition that the goods are reasonably fit for the
particular purpose. If the goods are not reasonably fit for the use intended, the seller may be
liable for breach of the condition.
13. If goods that are the subject matter of a contract for sale are stolen by a thief during the
cooling-off period, which bears the loss: the buyer or the seller?
Answer:
Since the contract does not become effective until the cooling-off period expires, and the goods
are in the possession of the seller, title and possession would be with the seller. Loss follows title,
and the seller would therefore bear the loss.
14. Describe the impact of much of the consumer protection legislation on exemption clauses
in the sale of goods.
Answer:
Exemption clauses in consumer good contracts were not permitted to exclude the implied
warranties as to fitness, etc.
15. How has consumer protection legislation addressed exaggerated advertising claims?
Answer:
Exaggerated advertising claims are now subject to the false or misleading advertising prohibition in
the Competition Act. Provincial legislation in some provinces also makes sellers liable for any
statement made about the goods which proves to be untrue.
16. Explain the need for legislative control over the selling practices of door-to-door sellers.
Answer:
The control of high-pressure selling practices of door-to-door salespersons was found necessary
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because persons were vulnerable when sold goods in their own home, as the lacked the
opportunity to simply "walk away" from the seller.
17. What is the purpose of the "cooling-off period" that the consumer protection legislation
frequently imposes on contractual relations between buyers and door-to-door sellers?
Answer:
The cooling-off period enables persons who purchased goods from a door-to-door salesperson to
review the purchase at their leisure then make a decision as to whether they should proceed with
the sale.
18. Describe some of the practices of credit reporting agencies that resulted in legislative
control over their activities.
Answer:
Credit reporting agencies tended to collect a great deal on information of a personal nature about
persons, some of it inaccurate, and stored it in large computer data books. Concern over the use
made of this information and the inability of persons to examine and correct information
concerning them led to the control of the agencies and their use of the information.
19. What practices of some collection agencies led to legislation controlling the collection of
debts generally?
Answer:
Collection agency practices of harassment of debtors, contacting their employers, pressuring
their families to pay, and the use of documents similar to court forms led to legislation
prohibiting or controlling their activities.
DISCUSSION QUESTIONS
1. In Ask A Lawyer, the technology company is considering a change from merely providing a
service and advice, to supplying equipment to its clients. This will involve the purchase and sale
of goods. What specific considerations and what aspects of the Sale of Goods Act will be
important to the company? Would you suggest any special provisions to include in its sales
contracts? If so, why?
Comment:
The Ask A Lawyer scenario involves the purchase and sale of goods by the technology
company. The lawyer in this case would probably explain the different rules for the purchase
and sale of goods under the Sale of Goods Act. If the equipment is not a standard off-the-shelf
product, but customized equipment, special care would be necessary in fixing when title would
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pass. The lawyer would probably suggest a written purchase agreement be prepared
containing clauses that would protect the company in its purchase of goods that would set out
clear conditions and warranties.
For the onward sale of goods to the client, the lawyer would probably suggest a
different contract, perhaps one that contained exemption clauses to protect the seller. The
seller would want to be careful not to extend its’ own warranties and guarantees beyond those
offered by the original supplier as to operation and quality.
2. Has consumer protection legislation carried consumer protection too far in terms of the
onus it places on the seller? Does this not simply increase the cost of goods to the buyer?
Comment:
To answer this question, students should consider added costs that a seller may incur to comply
with the legislation. In some cases this might be negligible, but in other cases the costs may be
passed on to the buyers. For example, the added costs that restrictions on collection agencies
may be passed on to users, or the costs of compliance with the Hazardous Products Act or Food
and Drugs Act regulations may increase product prices. Added costs compared to protection
achieved should be discussed.
3. The general thrust of consumer protection legislation has been to provide accurate
information or disclosure of essential terms to the buyer. Has consumer protection legislation
generally met this goal?
Comment:
This question should be discussed in terms of particular types of products. Students should note
that where a product has a hazard or safety issue associated with its use or consumption, accurate
information is very important. In most cases this has addressed by government legislation but
note the Media Report of the “Killer Candy” on p. 269 of the text. Is this a unique situation or
should it also be regulated? Note the problem that this would raise if every product was regulated
as to size and shape – it might constitute regulatory overkill if regulated.
COMMENTS RE: DISCUSSION CASES
CASE 1
Ashley arranged for a week long ski vacation at an exclusive ski resort. She then visited a local
merchant that specialized in ski equipment and ski wear. She sought the advice of a clerk who
appeared to be quite knowledgeable about ski equipment, and purchased a new paid of skis,
poles, and boots. As she was about to leave the store, she noticed an attractive ski jacket, and
asked the clerk if would be suitable for the cold weather she might encounter on her vacation.
The clerk suggested that it would be ideal for her ski vacation, and Ashley bought the jacket.
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Ashley did not use the jacket until she arrived at the ski resort, at which time she
immediately went out to the slopes. Within the first hour, she noticed that her wrists had
become swollen and irritated where the knitted cuffs of the jacket contacted her skin. She wore
the jacket the second day, but found that after skiing for a short time, she had to return to the
lodge because her wrists had again become badly irritated and had blistered.
Ashley required medical treatment for the injury to her wrists, at which time the injury
was determined to be a corrosive chemical that had been used to bleach the knitted cuffs of
her jacket. The chemical was one that was normally used to bleach fabric. However, from the
evidence, the chemical had not been removed from the material before the cloth was shipped
to the manufacturer of the jacket. Neither the manufacturer nor the retailer were aware of the
chemical in the cloth, and its existence could not be detected by ordinary inspection.
The injury to Ashley's wrists ruined her holiday and prevented her return to work for a
week following her vacation.
Discuss the rights (if any) and liability (if any) of Ashley, the sports clothing merchant,
the manufacturer of the jacket, and the manufacturer of the cloth.
Comment:
This fictional situation raises the question of liability to the buyer for the injuries she sustained as a
result of the chemical in the fabric used to manufacture his ski jacket. Ashley purchased the jacket
after examining the material, but the defect was hidden in the fabric. On a strict interpretation
basis, the buyer would be bound, but this is not the case where the defect is not apparent to the
eye. The buyer is not obliged to perform extensive tests on the fabric in order to determine
suitability, but employ only those tests that might be performed by a "reasonable person." The
seller would be liable in this case for the sale of goods that were not merchantable if the buyer
acted promptly on discovery and rescinded the contract. Where the seller and the manufacturer
of the clothing could not detect the chemical, the manufacturers of the cloth could be held liable
in tort for Ashley’s injuries. See: Grant v. Australian Knitting Mills, Ltd., [1935] All E.R. 222.
CASE 2
The Township of Upper Ridge required an additional tank truck for fire fighting purposes. It
contacted Tank Fabricators Inc., a company familiar with the regulations and specifications for
fire fighting equipment, and negotiated a contract to have the tank and its equipment made, to
be fitted to a truck chassis that the township would supply.
Under the terms of the contract, the tank and its equipment were to be completed in
three months time, with delivery to take place on April 1st. The township was to provide the
truck at that time, and the work crew to assemble the tank on the chassis, using the Tank
Fabricators Inc. crane.
On March 28th, Tank Fabricators Inc. advised the township that the tank and its
equipment were completed, and would be moved the next day to its warehouse where the
township could take its truck, and affix the tank to the truck chassis using the company’s crane.
The township truck and its crew of workers arrived at the warehouse late in the day on
March 31st, and it was mutually agreed that the truck could be stored in Tank Fabricators Inc.
warehouse beside the new tank, until the next day. Unfortunately, during the night, an arsonist
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set fire to the building, and the tank, the truck, and the warehouse were totally destroyed by
the fire.
Discuss the rights (if any) and the liability (if any) of the parties in this case. Indicate the
possible outcome if legal action should be taken.
Comment:
This case is concerned with risk of loss when the subject matter of a contract of sale is destroyed.
A discussion of this case should involve the transfer of title, and a determination of when the title
in the goods passed.
When the tank and its equipment were completed and ready for delivery the seller notified
the buyer as required under the rules (Rule 5) for the transfer of title. The question here is: was
the tank and equipment unconditionally appropriated to the contract at this point? Did the buyer
assent? Probably yes. The buyer was to arrange for the pick-up, and the seller's obligation under
the sale was probably complete when the tank and equipment were moved to the warehouse.
The loss was probably not due to the negligence of the seller, since the fire was caused by an
arsonist. Consequently, the seller may not be liable for the loss. The buyer, however, would be
liable to the seller for the contract price of the tank and equipment.
CASE 3
Produce Brokers Inc. operated a produce brokerage, buying agricultural produce and reselling it
to a number of small regional food wholesalers. Each wholesaler served an area that was
usually no greater than a city. The wholesalers generally sold to independent grocers,
convenience stores, and other volume buyers such as hospitals and institutions.
Faroldi, the President of Produce Brokers Inc. visited a farmers' co-operative in an
agricultural area, and after some discussion, secured a truckload of tomatoes at the wholesale
market price for Number 1 Grade Hothouse Tomatoes, boxed four to the box and cellophane
wrapped.
Three weeks later, a commercial freight company truck arrived at Produce Brokers Inc.
with the tomatoes. Faroldi had the driver open the van, and examined the frames of cellopacked tomatoes visible from the door. They appeared fine, so he handed over his $4,400 bank
draft to the driver in return for the bill of lading.
He endorsed the bill of lading and gave it back to the driver with instructions to him to
carry on, as was often the case, to one of his larger customers, a wholesaler in the next town.
The driver was to turn over the bill of lading against a payment of $6,700. When the driver
returned to the Produce Broker’s warehouse, he had no payment to deliver, but rather, still had
the entire load of tomatoes. The wholesaler had insisted on unloading the tomatoes before
payment. He had found that the tomatoes near the doors were Number 1 Hothouse, but those
beyond the doors were at best Number 3 Hothouse, or perhaps even Field Grade. The
wholesaler rejected the shipment, packed it back on the truck, and sent the driver back to
Produce Brokers Inc.
Faroldi demanded a return of his bank draft and ordered the tomatoes to be returned to
the co-operative. The driver said his company rule was that a driver must always leave the load
with the last person who pays, and that a driver must not return money once it is received.
Accordingly, he off-loaded the tomatoes despite the protests of Faroldi, and drove away.
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Advise the parties. Include a commentary on the trucking company's policy. Render a
decision.
Comment:
Students should determine that Produce Brokers Inc. entered into a contract for the produce by
description as the goods were not in existence at the time. According to the Sale of Goods Act for
goods sold by description there is an implied condition in the contract that the goods will conform
to the description. In this case the goods were to be Number 1 Grade Hothouse Tomatoes. On
delivery, the buyer is entitled to a reasonable time to inspect the goods to determine if they meet
the description. Did Faroldi’s careless examination represent that opportunity? Did his
endorsement of the bill of lading constitute acceptance of the tomatoes? Students should
consider these questions.
Normal practice of the trade was to confirm that the goods meet the description before
signing the title over (bill of lading) for delivery to the customer. Faroldi may have accepted the
goods and it may be too late to later object to the seller about the quality. Signing the bill of lading
would be an act of the 'owner' of the goods, and this might constitute acceptance of the goods,
caveat emptor. However, if the packing of the tomatoes could be considered a deliberate
misrepresentation of the goods to induce Produce Broker’s Inc. to accept them without examining
the entire shipment, Produce Brokers Inc. may be able to avoid the contract on the basis of
misrepresentation.
CASE 4
John Jones lived at 112 Main Street in a 1arge city. He had no debts and had never previously
purchased goods on credit. He did, however, wish to purchase a particular new truck. He
entered into negotiations with a local truck dealer to obtain the truck on credit. He consented
to the truck dealer making a credit check before the transaction was completed, and was
dismayed when the truck dealer refused to proceed with the transaction because he was not a
good credit risk according to the credit report.
The credit reporting agency apparently had provided a credit report on a J. Jones who
some months before had resided at 121 Main Street in the same city, and who had defaulted
on a number of substantial consumer debts. John Jones knew nothing of the other J. Jones, nor
had he ever resided at 121 Main Street.
What avenues are open to John Jones in this case to rectify the situation?
Comment:
This case concerns credit reporting agencies, and the use of credit reports in business transactions.
A point to note in the case is that John Jones consented to the credit check. The problem was due
in part to the carelessness of the credit reporting agency in failing to carefully check the street
address. While it was a rare coincidence that persons with the same surname lived at different
house numbers, but on the same street (one was 112 Main Street, the other 121 Main Street), the
mistake was nevertheless made by the reporting agency.
Under the laws of most provinces, where credit is refused or the charges adjusted to
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reflect a poor risk, the purchaser is entitled to know the name of the agency and to examine his
file. If an error exists, the individual can have the agency correct the error, or if a conflict of
opinion exists, the individual can have an explanation added to the file to reflect his view of the
matter. See text p.273 for a discussion of credit agencies, and provincial legislation such as the
Consumer Reporting Act, R.S.O. 1990, c. C-33.
CASE 5
Commercial Properties Inc. was concerned about paint peeling from the iron fire escape railing
and stairs on its small commercial building in an older part of the city. The company had
purchased some inexpensive paints in the past, and each time, after two or three months, rust
had bubbled up from beneath the paint.
In an effort to find a more permanent solution, the manager of the building was
instructed to get a better paint. He went to the local hardware store for paint. On this
occasion, the store had a glossy cardboard end of aisle display of a premium-priced paint made
by Rustfree Paints Ltd. Printed on the display were the words “stops rust,” and on the labels of
the cans were the words “prevents rust." The Manager inquired from a clerk if it was a good
rust proof paint for fire escapes, and the clerk replied that it was “O.K.”.
The Manager bought the paint and set out to apply it to the railing. The directions called
for the removal of all prior paint and primer. For the most part, he was successful in removing
the prior paint, but not the primer beneath.
After twenty-four months, the rust returned, and flaked the paint. The Manager
complained to the store about the paint, but to no avail. He then informed the government
consumer ministry, who brought suit against Rustfree Paints.
An internationally recognized expert on paint gave evidence that no paint known to
industry can stop rust indefinitely. He stated that the ability of paint to stop rust ends when the
seal is broken, and some paints keep a seal better than others. The expert advised the court
that the Rustfree formulation was one of the best in the industry, using the finest possible
ingredients.
Render a decision on behalf of the court.
Comment:
Students should note that this is not a situation where the buyer was relying on the skill of the
seller to select an appropriate paint for the fire escapes, as the Manager was only seeking
confirmation of the use of the brand he wished to buy.
This case, however, may be considered in terms of product labeling. Were the statements
false? In what context should they be taken? Under what circumstances, and for how long?
The legislation under which the complaint may have been brought would probably be the
Consumer Packaging and Labeling Act. If the label information was in fact false, the manufacture
might be guilty of false labeling. The label stated that the paint 'prevents' rust, but also sets out
instructions that must be adhered to for the paint to prevent rust. Based upon the expert
evidence the paint would prevent rust as long as the paint seal was not broken, the
manufacturer might, therefore, successfully argue that the statement was accurate provided
the paint surface was properly prepared and not damaged.
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CASE 6
Harry Davison was the owner-operator of a large highway transport truck that he used to
transport citrus fruit from the USA to Canada under a contract with a food wholesale
corporation. When the truck engine required replacement, Harry contacted a diesel engine
supplier that operated its business in a building adjacent to his office, and purchased a
replacement engine. The engine supplier installed the engine, and provided Harry with a
written invoice that contained the following:
“Sale and installation of diesel engine complete with oil cooler, water pump and
turbocharger. Engine includes a one year unlimited mileage warranty on parts and labour.
Total cost $11,000”.
Harry paid the invoice, and the next day left for a Florida fruit pickup. Two days later, on
his return trip, his truck experienced engine problems that required a further two-day lay-over
while a repair shop replaced a defective engine oil cooler. Harry was obliged to stay overnight
at a motel, and as a result of the delay, had a loss of profits he estimated at $1,000.
On his return to Canada he submitted a repair account of $969 for the engine repair
together with his $275 motel and meals receipt, and a claim for his estimated $1,000 loss of
profit. The engine supplier agreed to pay the $969 engine repair invoice, but refused to pay for
the motel and meal expenses or Harry’s loss of profit.
Harry instituted legal proceedings against the engine supplier for the cost of the motel,
meals and his estimated loss of profit. Discuss the arguments that may be raised by each of the
parties. Render a decision.
Comment:
The case invites discussion about remoteness of damage and consequential losses and the
possibility of their exclusion. The seller rightly makes good for the engine repair as it is wholly
within the contract and warranty that the seller explicitly offered. Parts for heavy engines are
not usually at ready hand everywhere, so the two day motel stay is reasonably foreseeable, and
as most applications of heavy engines are in commercial trucks, the business losses are not
unforeseeable either – clearly as the supplier was Harry’s neighbour, it knew what his business
entailed. One is left to wonder why a supplier to the commercial truck industry would not
include some limitation of liability on their printed invoices. Having not excluded consequential
losses, the engine supplier could take the position that it never foresaw the possibility of their
existence, or the trucker can take the position that they were so obvious as to be implicit in the
warranty given. Courts will tend to look more favourably on the party that advances the most
believable position, in this case being the trucker, as long as the amounts claimed remain
“reasonable”.
CASE 7
Lisa, a mid-level executive in a large corporation decided to replace the living room furniture in
her apartment, and visited the showroom of a high-end home furnishings establishment. Lisa
found an expensive set that she thought would fit her apartment and life style. The cost was
$12,000, and Lisa enquired if the store offered time payment plans for purchases. The store
sales attendant stated that the store did so for ‘good customers’, but the customer was
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expected to make a 10% down payment and pay the balance over the next 12 months, with
interest calculated at 10% per annum. Lisa signed the purchase agreement and provided the
attendant with a cheque for the 10% down payment. The purchase agreement included an
authorization for the store to obtain a credit report on Lisa.
Lisa returned to work, but later in the day, the receptionist for her department came to
her office to inform her that the furniture establishment had called to say that they were
returning her cheque and cancelling the contract, as she was a ‘bad credit risk’ according to her
credit report. Lisa immediately telephoned the store, as she was embarrassed by the news that
she was a ‘bad credit risk’. The store employee advised her that the credit report indicated that
she had defaulted on a car loan, and was delinquent on payments of a personal loan. The
credit report provided no other information.
Lisa recalled that she had purchased a car on credit, but the car had defects, and was
taken back by the car dealer, and the loan cancelled. She also could recall a personal loan
where she had missed several loan payments while on an extensive vacation, but the loan had
been eventually paid in full.
Discuss the issues raised in this case, and the rights (if any) and responsibilities (if any) of the
parties.
Comment:
Whether or not Lisa’s past credit experience makes her a bad credit risk in the eyes of the home
furnishing store, that is a matter between her and store, not a matter for the store to
communicate to the staff at Lisa’s workplace. Such disclosure to unauthorized persons would
violate the regulations in most provinces, and regardless of the truth of the statement, the
damage to Lisa’s reputation by the disclosure of a fact that the store was under a duty not to
reveal would be actionable by Lisa as well.
CHAPTER 10
LAW OF BANKING AND NEGOTIABLE INSTRUMENTS
LEARNING GOALS
1. To examine the law relating to cheques, bills of exchange
and promissory notes.
2. To describe the various kinds of negotiable instruments and
their role in business transactions.
3. To consider their enforceability and defences to payment.
4. To examine how consumer protection legislation applies
to negotiable instruments.
CHAPTER COMMENTARY
The law of negotiable instruments has a long and interesting history, which explains in part many of
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the special features that attach to certain kinds of notes, and the reasons why special rights are
sometimes vested in the holder. For this reason, as a part of the review of this material, the various
instruments might be discussed in terms of their original purpose and present day use. For example,
the cheque, which is a bill of exchange, is now widely used as a result of the growth of the banking
system and commerce in general. While virtually everyone to-day is familiar with this type of
negotiable instrument, prior to the middle of the 19th Century, only business persons used them
regularly.
Because the law relating to negotiable instruments has its roots in the Law Merchant, it has
associated with it a legal vocabulary of its own. Such terms as drawer, drawee, endorser, holder in
due course, sight drafts, restrictive endorsements, bearer, and 'without recourse' have special
meanings in connection with bills of exchange, and their significance should be committed to
memory.
A systematic approach to the topic might be to suggest that the students read the chapter,
then prepare a list of definitions of the new terms. The text material may then be read again, using
the list of definitions where necessary, as each of the different negotiable instruments are discussed.
Most students are familiar with the cheque, which is a type of bill of exchange. It differs
from the ordinary bill of exchange in that it is always drawn on a bank, and is payable on demand
(except, of course, where the cheque is post-dated). The bank upon which the cheque is drawn is a
special type of drawee, however, and need only make payment when it has sufficient funds on hand
in the drawer's account to pay the face amount of the cheque. The significance of a certified cheque
is discussed on page 282.
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Negotiable Instruments - General Lay-out of Cheque:
Date
Payee
Order of Payment
July 4, 20-Pay to the
Order of-----------------Cross Country Stores Ltd.---------------------- $100.50
------------------------------One Hundred-----------------------------50/100 Dollars
The Friendly Bank
1 Any Street
Any Place, Canada
Annette Jones
Drawee
bank &
address
Amount
(in writing)
The bill of exchange resembles the cheque in many respects, as a comparison of the above
lay-out with the illustration of a bill of exchange on p. 286 of the text will attest. Comparing the two
illustrations, the similarities should become apparent. For example, the drawee in the bill of
exchange is "B.C. Sales Inc. instead of the bank above, and the order of payment is to Smith
Wholesale Co. In the text illustration, the bill has provision for acceptance in the upper left hand
corner, but this would not be necessary with a demand bill (such as a cheque), since payment would
be expected on presentation.
The promissory note is also covered by the Bills of Exchange Act, and differs from the bill of
exchange in that it is a promise to pay, and it does not require acceptance, since the maker is the
party who prepares and signs the promise. As the text indicates, it must meet the essentials of
negotiability if it is to be treated as a negotiable instrument. These essentials are set out on the
chart that accompanies this chapter. A promissory note, however, must be delivered before the
maker becomes liable on it.
The defences to the payment of a bill of exchange should be noted, because there are many
reasons why a bill may not be legally enforceable against a party. These defences may be divided
into the three categories set out in the text:
(1)
(2)
real defences.
defect of title defences.
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(3)
mere personal defences.
Consumer protection legislation, and its effect on transactions that involve negotiable
instruments should also be discussed, to illustrate the general trend of the law toward the
restriction of the special rights of holders in due course to non-consumer situations.
REVIEW QUESTIONS
1. Define a bill of exchange. Indicate how it is determined to be "negotiable."
Answer:
A bill of exchange is an unconditional order in writing, addressed by one person to another, signed
by the person giving it, and requiring the person to whom it is addressed to pay either on demand
or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified
person or bearer. The bill must meet these requirements to be negotiable.
2. How does a cheque differ from the usual type of bill of exchange?
Answer:
A cheque is a bill of exchange that is always drawn on a bank and is payable on demand as a
demand bill.
3. Why is acceptance of a bill of exchange important?
Answer:
Acceptance is important because it is the "signing" of the bill by the drawee that renders the
drawee liable on it.
4. What is the purpose of a bill of exchange in a modern commercial transaction?
Answer:
A bill of exchange in a modern commercial transaction is used to ensure payment by the buyer of
goods, and to enable the seller to use the promise of payment (the bill of exchange) as a means of
financing its own business by way of endorsement to others. It also reduces risk by replacing the
need to exchange money.
5. Distinguish a sight bill from a demand bill.
Answer:
A sight bill has 3 days grace added for payment. A demand bill is payable on presentation.
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6. Define a holder in due course. Explain how a holder in due course differs from an ordinary
holder of a bill of exchange.
Answer:
A holder in due course is a person who in good faith, takes a bill of exchange complete and
regular on its face, for value, before maturity, and without notice of any defect or prior
dishonour. A holder in due course of a bill of exchange is subject only to real defences in any
claim for payment.
7. Outline the procedure to be followed when a bill of exchange is dishonoured by nonpayment.
Answer:
When a bill of exchange is dishonoured, the holder must give notice to the drawer, payee and
any other prior endorser not later than the business day next after the dishonour occurs.
8. How does a certified cheque differ from an ordinary cheque?
Answer:
A certified cheque differs from an ordinary cheque in that certification renders the bank that
certified the cheque is liable when the cheque is later presented for payment.
9. Define a promissory note. Distinguish it from a bill of exchange.
Answer:
A promissory note is an unconditional promise in writing, signed by the maker of the note, to pay
to, or to the order of, a specific person or bearer on demand, or at a fixed or determinable future
time, a sum certain in money. It differs from a bill of exchange in that it is a promise rather than an
order to pay.
10. Explain how an endorsement in blank differs from a restrictive endorsement. Explain the
circumstances under which each might be used.
Answer:
An endorsement in blank turns the instrument into a bearer document. A restrictive endorsement
restricts the negotiation to the person named in the endorsement. The former permits anyone in
lawful possession of the instrument to negotiate it, the latter may be used to restrict negotiation
to one person, or to prevent negotiation to anyone if the endorsement is restricted to read "for
deposit only to the credit of _______."
11. Promissory notes that call for installment payments often contain acceleration clauses.
Why is this so, and what is the purpose of such a clause?
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Answer:
If a promissory note calls for installment payments, default on one payment would only entitle the
holder to take action to recover the single payment. An acceleration clause causes the balance of
the debt to become due and payable immediately on the default of a single payment.
12. When a holder in due course of a promissory note attempts to enforce payment, what
types of defences might be raised by the maker named in the note?
Answer:
Only a real defence (forgery, minority of maker, etc.) may be raised against a holder in due course.
13. What is a "defect of title" defence? What type of holder of a promissory note or bill of
exchange would this type of defence be effective against? "
Answer:
A defect of title defence may be raised against a holder (but not a holder in due course). Defect of
title defences include fraud, duress, undue influence, illegal consideration, total failure of
consideration, etc.
14. Outline the various personal defences available. Indicate the type of holder that they might
be raised against.
Answer:
A mere personal defence is a defence that may be raised against an immediate party. These
include: set-off, absence of consideration, release, or payment before maturity.
DISCUSSION QUESTIONS
1. In Ask A Lawyer, the small business owners have their first encounter with a bill of
exchange. Explain this document and how it will be processed to cover the payment for the
goods received.
Comment:
The advice of the lawyer in this case would probably be the information set out in Figure 10-2
on p. 286 of the text, as well as the definition and discussion of the bill of exchange on the
preceding page. The lawyer would also note that a cheque is a special type of bill of exchange,
and explain that the bill of exchange is a useful instrument to facilitate the sale of goods, as
once accepted it may be negotiated by the drawer for the financing of the drawer’s business.
Because most bills of exchange are time bills, they also give the drawee time to sell some of the
goods before payment is due, thereby reducing the financing costs of the purchase of the
goods.
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2. Explain how the changes in the law concerning consumer purchases affects the parties to a
transaction where a vehicle is purchased on credit using an instalment note that is then sold to
a finance company by the seller of the vehicle.
Comment:
The purchase of a vehicle is often for a significant amount of money. The installment note
permits the purchaser to pay for the vehicle over a period of time. The seller of the vehicle will
often sell the note to a finance company, who, as assignee, will collect the payments as they fall
due.
If the purchaser of the vehicle is a consumer, the note must be marked “consumer note”
as required by the legislation. This allows the consumer/purchaser to raise any defence to
payment against the finance company that the consumer would be entitled to raise against the
seller, if the seller should be in breach of the contract of sale. This protects the consumer, as
the finance company would otherwise be able to claim payment as a holder in due course,
leaving the consumer only with recourse against the seller if breach occurs in the contract of
sale.
COMMENTS RE: DISCUSSION CASES
CASE 1
Henri was in the process of negotiating the purchase of a high-end laptop computer from The
Computer Supply Co. As a result of a number of telephone calls to the Computer Supply Co.,
Henri eventually negotiated a price of $3,200 for the computer. He prepared a cheque in the
amount of the purchase price and signed it. However, because he was uncertain as to the exact
spelling of the company name, he left that part of the cheque blank. He placed the signed
cheque in his office desk drawer with the intention of making a telephone call to the company
later in the day for the information necessary to complete the cheque.
Henri determined the company's correct name while at lunch, but when he returned to
the office, he discovered that the cheque had been stolen.
Shar, a fellow employee of Henri’s, had taken the cheque, filled in the cheque payable
"to bearer," and used it to purchase items at a store where Henri frequently shopped. The
store owner accepted Henri’s cheque without question, as he was familiar with his signature,
and later presented it to Henri’s bank for payment.
Within minutes after the bank had paid the cheque, Henri telephoned to have the bank
stop payment.
Advise the parties of their respective rights (if any) and liability (if any).
Comment:
The cheque in this case was incomplete, but signed by Henri before it was stolen. The cheque
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appeared to be complete and regular on its face when presented for payment. Both the shop
owner and the bank recognized the signature as genuine. Henri did not notice the cheque missing
until after the bank had made payment. The question is: what should be done? The bank paid the
cheque as a genuine instrument. Should it suffer the loss? Should the shopkeeper? Shar was the
culprit in the case - should he not be liable?
Absence of delivery of an incomplete instrument is a real defence, good against all holders
(see text p. 292) but was Henri negligent in leaving the cheque in his desk? Probably not. Does it
make any difference that payment had been made? Henri would be entitled to recover the
amount from the shopkeeper, who in turn, could look to Shar for payment. For a example of a
case where a bill was stolen and negotiated, see: Baxendale v. Bennett (1878), 3 Q.B.D. 525.
CASE 2
Food wholesale Co. sold the Happy Restaurant Ltd. a large order of goods for $3,000 on 30 days
credit. As agreed by the parties, Food Wholesale Co. drew a bill of exchange on the Happy
Restaurant Ltd. naming itself as payee. The bill was payable in 30 days time. The Happy
Restaurant Ltd. accepted the bill and returned it to Food Wholesale Co. Food Wholesale Co.
then endorsed the bill to Speedy Transport Ltd. to cover its indebtedness for transportation
services provided by the company. Speedy Transport Ltd., a small firm, endorsed the bill in
blank to Hendriks, the company's office manager as a retirement gift, rather than wait until the
bill became due to obtain the funds. Hendriks, on receipt of the bill, delivered it without
endorsing it to his friend, Basil, whom he owed a sum of money. Basil, in turn, endorsed the bill
and sold it to Black for $2,800. On the due date, Black presented the bill for payment, and it
was dishonoured.
Advise Black of his rights. Explain the liability (if any) of each of the parties.
Comment:
The acceptance of the bill of exchange by Happy Restaurant Ltd. rendered it liable for payment to
the holder. When the bill was presented for payment by Black, who was a holder in due course,
and dishonoured by Happy Restaurant Ltd., Black must give notice of dishonour to all other
endorsers by the business day next after the dishonour. See: Bills of Exchange Act, s. 97). Prior
endorsers must follow the same procedure. Note, however, that Hendriks is not an endorser as
he received the bill endorsed in blank and delivered it to Basil without endorsing it.
Since all prior endorsers, the drawer, and the drawee are liable on the bill, Black may look
to them for payment. All of the parties (except Hendriks, who was not an endorser) gave value for
the bill, and each may hold the prior endorser liable if they should be obliged to pay. In the end, if
this process is followed, Food Wholesale Co. will be obliged to pay, and must look to Happy
Restaurant Ltd. for payment. (See: Bill of Exchange Act, s. 95-101).
CASE 3
Able bought a number of books from The Book Box Store Limited in a single mail order, and
enclosed a cheque for $240 with the order, drawn on the Big City Bank. In the interval between
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mailing the order and the arrival of the products, Able noticed a number of the books (totaling
$120) were available at a lower price at a local book store.
On the day the books arrived, he visited the bank and was pleased to see that his
cheque had not yet been cashed. He placed a stop payment order on the cheque, and in filling
out the request slip, placed the words "goods unsatisfactory" in the box allotted for the reason
for the request. Able sent back the part of the order that he had now bought more cheaply
elsewhere, and assumed that The Book Box Store Limited. would send him a new invoice for
$120.
The Big City Bank failed to immediately enter the request into its computer system, and
as a result, on the arrival of the cheque a day later, it paid Able's cheque out of his account in
the normal manner. Able discovered this error in the course of using an automated cash
machine a few days later, and asked the bank to correct the error. The bank put $240 back into
Able’s account and told him that they would collect back the $240 that they had paid The Book
Box Store Limited 's bank, The Business Bank. The Big City Bank returned the cheque in the
clearing system, now marked "Payment Stopped," and demanded $240 from The Business
Bank.
The Business Bank refused the stopped cheque and would not make payment back,
stating that by accepted banking convention, too much time had elapsed between acceptance
by the Big City Bank and the return of the item. While this had been going on, The Book Box
Store Limited had received the goods returned by Able and had mailed him a refund cheque for
$120, for as far as they knew, they had been paid in full.
Able was pleased. Clearly a computer error had sent him a $120 cheque rather than a
$120 invoice, and he ignored the whole matter.
Assume another week passes. Discuss the events that follow, and the positions of the
parties, with respect to the law of negotiable instruments as it is written. In advising the banks,
what would you suggest that they add to their standard form account operation agreements?
Comment:
Students should note that Able’s cheque is a promise of payment only, in the sense that if
honoured by his bank the holder will receive the money. When Able stopped payment on his
cheque the debt remained unpaid. Under the Bills of Exchange Act, if payment is stopped, it is a
dishonour of the cheque when it is presented for payment by the holder.
However, in this case the cheque was honoured, and it was not until several days later that
the Big City Bank realized that it had failed to comply with its stop payment order. Since the Act
provides that notice of dishonour must be given not later than the next business day, it was too
late for the Big City Bank to give notice of dishonour to the Business Bank and all prior endorsers
were free of liability. The Big City Bank in this case could not look to Able for payment as it had
failed to comply with his stop payment order.
CASE 4
The Commercial Laundry Corp. entered into an agreement to purchase the commercial laundry
equipment from a competitor, Laundry Mart Inc. Payment was made by way of a cash payment
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and a promissory note for $120,000, bearing interest at 6%, and due in 10 months from the
date of issue. The note provided that the principal was repayable in 12 monthly payments of
$10,000 each, with the interest payable at the end of the 12 months. The note did not contain
an acceleration clause in the event of default.
Commercial Laundry Corp. made the first monthly payment of $10,000. At that time
Laundry Mart Inc. suggested that the note be replaced by a new promissory note that
contained an acceleration clause, as this proviso had been discussed during negotiations, but
omitted in error when the transaction was finalized. Commercial Laundry Corp. agreed to do so,
and a week later they forwarded by mail a new promissory note for $110,000 on the same
repayment terms and containing the requested acceleration clause. A covering letter stated
that the new note was given in accordance with an agreement to have it replace the existing
promissory note.
Before the next monthly payment became due, a dispute arose over the condition of
some of the purchased equipment, and Commercial Laundry Corp. refused to make the
monthly payment when it became due and payable. During the course of the discussion that
followed, Laundry Mart Inc. threatened to implement the acceleration clause and sue for the
balance of the debt owing. Commercial Laundry Corp. replied that the second promissory note
had been signed by the office receptionist in error, so the note was not enforceable, as it was
not signed in the corporation’s name, nor was it signed by an officer of the corporation.
Commercial laundry Corp. also informed Laundry Mart Inc. that the receptionist was a 17-yearold minor.
Discuss the issues raised in this case. Advise Laundry Mart Inc. as to its rights
(if any) and its position on the debt owed by Commercial Laundry Corp.
Comment:
The second promissory note, if signed in error by the receptionist (who was a minor) would clearly
not be enforceable against her in her personal capacity. It would not be enforceable against the
corporation if it was not signed by the corporation or by an officer of the corporation, but this
would not relieve the corporation of its payment obligations. If the original note was still in
existence, the note might still be enforced, but only in accordance with its terms.
Commercial Laundry Corp. may be entitled to a claim under the contract if (for example)
the equipment was misrepresented or if there was a breach of warranty, but this would not entitle
Commercial Laundry Corp. to withhold payment under the promissory note.
CASE 5
Avril purchased a small pick-up truck from The Truck Mart Ltd. The vehicle was insured and
licensed as a commercial vehicle, but Avril intended to use it primarily as transportation to and
from her employment at a local garden centre. Apart from this type of driving, she expected to
use it occasionally to make local deliveries for her employer if the customer lived on her route
home. She would receive no compensation for this type of delivery.
As a part of the purchase price, Avil signed a promissory note to The Truck Mart Ltd. for
$9,500 that called for payments of principal and interest of $300 per month over a three-year
term. The Truck Mart Ltd. immediately sold the note to Easy Payment Finance Co. for $9,200.
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A few days later, Avril was notified by letter to make all payments on the note to Easy payment
Finance Co.
Before the first payment was due, Avril discovered that the truck was in need of
extensive repairs and returned it to The Truck Mart Ltd. The Truck Mart Ltd. refused to take
back the truck and return Avril’s money. Avril then refused to make payments on the
promissory note.
Some months later, Easy Payment Finance Co. brought an action against Avril for the
amount owing on the note.
On what basis would Easy Payment Finance Co. claim payment? What defences might
be available to Avril? Render a decision.
Comment:
An important question that must be answered in this case is whether the purchase of the truck
represents a consumer purchase. What effect does the fact that it is licensed as a commercial
vehicle have on the type of purchase? Does it matter if it is used occasionally to make a local
delivery for her employer? The determination of the nature of the purchase has important
implications to Easy Payment Finance.
If the truck is not a consumer purchase, then Easy Finance Co. may successfully claim that
it is a holder in due course of the note, and enforce it regardless of the contract dispute between
Avril and The Truck Mart Ltd. Avril's only recourse in that case would be to take action against The
Truck Mart Ltd. for breach of contract (unless the purchase was a caveat emptor situation). The
only way that Avril might bring the Easy Payment Finance Co. into the matter would be by showing
that it was not a holder in due course because of its close association with the seller. (See: Federal
Discount Corporation Ltd. v. St. Pierre and St. Pierre (1962), 32 D.L.R. (2d) 86.)
If the truck was a consumer purchase, then Easy Payment Finance Co. would not be a
holder in due course, and any defence to payment which Avril could raise against The Truck Mart
Ltd. would apply to Easy Payment Finance Co. as well.
CASE 6
White Water Kayak Company advertised the sale of its various models in a local newspaper.
Hector, age 17, noticed the advertisement, and in response, visited the company showroom
where he saw a kayak that he felt was suitable for a white water vacation that he had planned.
He purchased the kayak by giving the salesperson a cheque for the full price, and took
immediate delivery. The next day he set out on a two week white water vacation with his
kayak.
White Water Kayak Company in the meantime deposited Hector’s cheque in their bank
account, and the bank duly presented it for payment at Hector’s bank. Hector, unfortunately,
had insufficient funds in his account, and his bank returned the cheque marked ‘NSF’ to the
company’s bank.
While on his vacation, Hector realized that he did not have sufficient funds in his
account to cover the cheque for his kayak, but decided to leave the matter until his return
home. He was also uncertain as to what he should do about the kayak, as it did not handle well
in fast water, and had now been seriously damaged from contact with sharp rocks in the river.
Advise the parties.
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Comment:
Students should note that Hector is a minor who has purchased something that is not a necessity,
and thus he is capable of repudiating his contract on the basis of his own lack of capacity. This
incapacity is also a real defence against any holder of the note made by him, including a holder in
due course, and thus the Kayak Company’s bank will not have recourse against Hector. The Kayak
Company’s bank does however have recourse against the Kayak Company as a prior endorser, and
will recover the amount that it had previously credited on deposit by Kayak Company. Kayak
Company can neither sue Hector on the cheque nor on the contract, as both (separate) promises
were the promise of a minor. The Kayak Company on repudiation however is entitled to return of
its kayak, reasonable wear and tear excepted. The damage that exceeds this degree would have
to be made good at Hector’s expense.
CASE 7
H. J. Hall was a successful local business person. He decided to attend a business development
conference at a local hotel, where he checked his hat, coat and brief case with the coat check
person, and proceeded to the conference room.
The coat check person was Harry Hall, no relation to H. J. Hall, and a risk taker with a
past criminal record. He examined H. J. Hall’s brief case, and noticed that it was unlocked. He
opened the case and found H. J. Hall’s cheque book and driver’s license. He pondered what he
might do with his discovery, and decided that if he put on H. J. Hall’s coat and hat, and the
spare eye glasses that were also in the brief case, he bore a close enough resemblance to H. J.
Hall that he could pass as his double.
On his afternoon break, Harry put on the hat, coat and glasses, and visited a local
computer store where he offered to purchase by cheque a lap top computer using the H. J. Hall
driver’s license for identification. The clerk at the store went to the store owner, who was in an
office at the back of the store, to enquire if he should accept the cheque. The store owner, who
was familiar with H. J. Hall, went to his office door, looked at the customer, who at that
distance appeared to be H. J. Hall, and authorized the clerk to accept the cheque. Harry Hall,
who had signed the cheque “H. Hall”, gave the clerk the cheque and took the computer. He
then returned to the hotel, where he replaced H. J. Hall’s coat and hat in the coat check room,
and placed the glasses, driver’s license and cheque book back in the brief case.
The cheque was accepted and paid by H. J. Hall’s bank, and in due course returned to
him along with his other cancelled cheques. At that point in time H. J. Hall discovered the
cheque that bore a different signature. He immediately contacted the merchant, and was
advised that the cheque was used to purchase an expensive lap top computer.
Advise the parties in this case.
Comment:
The cheque is forged. As a result, any party to the cheque can resist a claim for payment if it is not
prevented from raising the defence by its own negligence or conduct. H.J. Hall took prudent steps,
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believing he was leaving his property with a person selected for the job on the basis of
trustworthiness, but was perhaps careless in not locking the case. Is this sufficiently careless that
he should not be allowed the defence of forgery? A successful defence by him places the cheque
back in the hands of H.J. Hall’s bank. Was his bank sufficiently careless in paying the note on
presentation by the computer company’s bank? Should it have noted that the signature varied
from the sample it held and accordingly refused payment? Perhaps the loss should fall on Hall’s
bank at that point, as Hall’s bank was in a position to defend him from forgers, but they failed. If
Hall’s bank could avoid liability, then certainly the computer company’s bank can avoid liability and
will charge the note back to the computer company on the basis that the computer company
should have been more diligent before accepting a forgery. If the cheque is returned to the
computer company in this manner, it will bear the loss as this was originally premised upon Hall’s
success in showing that he had been sufficiently prudent in trusting the coat-check. As a result,
much turns on the determination of whether leaving the case unlocked was sufficiently negligent
conduct on the part of H.J. Hall as to deny him the defence of forgery. If Harry Hall can be found,
he would be liable for his actions, but the chance of meaningful recovery would be slim.
CHAPTER 11
LAW OF CREDIT AND FINANCE
LEARNING GOALS
1. To outline the many security instruments that are available to creditors
to secure the payment of debt.
2. To understand how security instruments protect creditor investments.
3. To outline how public notice of a creditor’s claim is established.
4. To describe creditor rights on default of payment of a debt.
5. To examine the bankruptcy of a debtor and the distribution of a debtors
assets.
CHAPTER COMMENTARY
In addition to the land mortgage, this chapter explains a number of other commonly used legal
instruments to secure debt. Most of these instruments use chattels as the subject matter of
the security interest, and are in widespread use to finance consumer and business purchases.
One of the most common forms of security, and one of the oldest, is the chattel mortgage,
which is often employed by finance companies and banks to secure personal loans. Any
discussion of the instrument, however, should emphasize the importance of registration in
accordance with the provincial registration procedures in order to protect the mortgagee and
maintain mortgage priority over subsequent encumbrances or purchasers of the chattels.
The conditional sale agreement is also worth examination in class, as it is a common
method of selling goods on an installment basis. The simplicity of this form should be noted,
but again, the importance of adherence to the provincial registration requirements should be
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stressed, as these establish the seller's rights on default, or on disposal of the goods by the
buyer. The assignment of book debts, represents a form of security that is used to secure debt,
but to a lesser degree than the chattel mortgage or conditional sale agreement. The assignment
of book debts naturally has a use limited to business organizations with accounts receivable.
The instrument is not used to secure consumer debt.
The registration requirements for personal property security vary from province to province,
a point that should be explained. Particular emphasis should be placed upon personal property
security legislation in each province and its application to the various forms of underlying security.
The general trend toward a simplified personal property security registration system
should be examined carefully. It employs a single registry for most security interests, and a
single document to register all types of personal property security. It should be noted, however,
that not all forms of security are covered by these systems. Some are quite specialized in
nature, and, as a result, require special procedures for registration and enforcement. The Bank
Act and the Construction Lien Acts are examples of legislation that cover special types of
security interests. The Bank Act provides a different system for the securing of bank security
interests under the Bank Act. The use of this security interest is, however, limited to the types
of security specified in the Act.
Bankruptcy for the most part is a federal matter, and the principal legislation is the
Bankruptcy and Insolvency Act, which governs bankruptcies in general. The purpose and intent of
the legislation is explained on p. 315. However, students should note that the legislation places
emphasis on the opportunity for a debtor to make a proposal to creditors in order to save viable
businesses, and time is allowed for the debtor to do this before bankruptcy proceedings may be
taken against the debtor's assets. The Act sets out the rights of the receiver, trustee, debtor, creditor,
etc., and the method for the distribution of the debtors' assets amongst the creditors. From a
procedural point of view the steps are more or less straight forward. The priorities are set out on pp.
319-320 of the text.
Case 5 of the Discussion Cases may be used as a class exercise to review the priorities and
the distribution of assets to a variety of creditors.
Students should note that the Bankruptcy and Insolvency Act provides for a proposal
and three kinds of bankruptcy proceedings: Voluntary, summary, and creditor-initiated (by way
of a petition). Regardless of how the proceedings begin, the general thrust is the same, because
the purpose of the law is to have a trustee collect the debtor's assets and dispose of them, then
distribute the proceeds from the sale to the creditors. The distribution, however, recognizes
certain priorities amongst the creditors, as the text indicates on page 320, and subject to
certain initial restraints gives secured creditors the right to realize on their security outside the
bankruptcy proceedings.
Another point to emphasize is that the bankruptcy legislation is also designed to prevent
fraud, and to this end, penalties are included in the Act for a number of specified activities
known as bankruptcy offences. A debtor that commits any of these offences is normally not
given a prompt discharge, and depending upon the seriousness of the offence, may be subject
to fines or penalties.
In class discussion, it should be pointed out that the primary purpose of the legislation is to
permit the honest but unfortunate debtor to make a new start, free of debt, by surrendering his
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existing assets to his creditors. The Act also gives the debtor a greater opportunity to make a
proposal in order to save the business if restructuring of the debt would render the business viable.
REVIEW QUESTIONS
1. How does a conditional sale agreement differ from a chattel mortgage?
Answer:
A debtor pledges only the title to the goods as security for the debt under a chattel mortgage, and
retains possession. Under a conditional sale agreement, the seller retains title, but gives the buyer
possession of the goods.
2. Describe the effect of personal property security legislation on chattel mortgages and
conditional sales agreements.
Answer:
Personal Property Security legislation provides a standardized registration for both types of
security instruments using a central computerized registry that may be checked from anywhere
in the province.
3. What is the purpose and effect of an assignment of book debts? Identify the circumstances
where registration must take place.
Answer:
An assignment of book debts is a means by which a creditor takes the debts owing to the
debtor as security for payment of a debt and permits the creditor to collect the accounts and
apply them to the merchant's indebtedness. Registration is necessary to protect the assignee's
right to the debts.
4. Outline the special types of security instruments that may be issued by corporations as
security for debt.
Answer:
Corporations may issue bonds or debentures as security for debt.
5. Define: bond, floating charge, debenture.
Answer:
A bond is a debt instrument which pledges the assets of the corporation as security for the
debt. A floating charge is an equitable charge that does not attach to any specific asset until
and unless default occurs in the debt. A debenture is usually an unsecured subordinate security
issued by a corporation.
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6. What types of assets may be used as security by chartered banks for loans made under
section 427 of the Bank Act?
Answer:
A bank may make loans under s. 427 to manufacturers, wholesalers, retailers, shippers and
dealers in products of agriculture, of the forest, sea, lakes, quarry or mine, and on goods and
merchandise manufactured or otherwise.
7. Describe the procedure that a bank must follow to secure a loan under section 427 of the
Bank Act.
Answer:
To secure a loan under s. 427 the borrower must sign a form and deliver it to the bank to vest
the lien in the bank. The bank must also file a notice of intention to receive the security with
the Bank of Canada.
8. What is a bank credit card? In what way does it secure a debt?
Answer:
In most cases, the bank makes payment to the merchant or service supplier for the goods or
services supplied to the credit card holder, then looks to the card holder for payment.
9. Outline why legislation for a mechanics' lien (sometimes referred to as construction lien)
was necessary?
Answer:
Legislation was necessary to give contractors and sub- contractors some means of protection for
the labour and materials they apply to property. No protection was available under contract law,
and a security interest was created by statute to protect their interests.
10. Why is an insolvent person not necessarily a bankrupt?
Answer:
To be a bankrupt, a person must commit an act of bankruptcy.
11. Under what circumstances could a person have assets in excess of liabilities, yet be
bankrupt?
Answer:
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If a person has debts in excess of $1,000 and commits an act of bankruptcy, a creditor may
commence bankruptcy proceedings against the debtor.
12. What should a person do who finds it impossible to carry on business any longer without
incurring further losses?
Answer:
If the business cannot be made viable by restructuring the debt, the person should advise his
creditors of his financial condition, and cease any business activity that would result in greater
losses.
13. Describe the acts of bankruptcy that would entitle a creditor to institute bankruptcy
proceedings.
Answer:
The acts of bankruptcy as found in s. 42 (1) of the Act. See text p. 316.
14. Outline the requirements a creditor must satisfy in order to institute bankruptcy
proceedings against a debtor.
Answer:
To institute bankruptcy proceedings, a creditor must satisfy the court that the debtor has debts of
at least $1,000 and has committed an act of bankruptcy within the past six months.
15. If a debtor makes a proposal to his or her creditors, then fails to comply with the proposal
at a later date, what steps may be taken by the creditors?
Answer:
If a debtor fails to comply with the terms of an approved proposal, the default constitutes an
act of bankruptcy (s. 42 (1) (i)), and a creditor may then proceed to petition the court for a
receiving order.
16. Under what circumstances would a debtor be permitted to make a voluntary assignment
for the benefit of his or her creditors?
Answer:
A voluntary assignment may be made where the debtor wishes to make an assignment of his
assets for the benefit of his creditors. The assets are assigned to an official receiver who then
proceeds as if the matter is an ordinary bankruptcy.
17. Why are "inspectors" appointed by creditors at their first meeting in bankruptcy
proceedings?
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Answer:
Inspectors are expected to give instructions and supervise the trustee in the collection and
distribution of assets of a bankrupt estate.
18. What is a "preferred" creditor, and how does this status affect the right to payment?
Answer:
A preferred creditor is entitled to payment according to a list of priorities in the Act.
(s. 136) (1).
19. Outline the order of priority to payment of preferred creditors in a bankruptcy.
Answer:
The order of priority is set out in s. 136 (1) of the Act. The list is described on pp. 319-320 of the
text.
20. Explain the duties of an undischarged bankrupt.
Answer:
An undischarged bankrupt must not engage in any business without disclosing that he or she is an
undischarged bankrupt. An undischarged bankrupt must not purchase goods on credit except for
necessaries (and then only for amounts under $500), and may not become a director of a
corporation.
21. What is the effect of a discharge on a bankrupt debtor's obligation to pay his or her
creditors?
Answer:
A discharge releases the bankrupt person from all debts except those arising from wrongdoing
or from martial obligation.
22. Describe the role of the Superintendent of Bankruptcy in, bankruptcy proceedings.
Answer:
The Superintendent administers the Act, and has the power to investigate alleged offences
under the Act.
DISCUSSION QUESTIONS
1. Ask A Lawyer requires an assessment of two distinct issues: (1) the type of credit security to
use to enable buyers to purchase the new product line, and (2) to determine the best way to
finance the purchase of its larger building. For issue (1) What are the advantages and
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disadvantages of each credit instrument that you might consider? Which approach might give
the corporation the easiest access to the credit monies? For issue (2) which security instrument
might be best for raising the money necessary to build the new building?
Comment:
Ask A Lawyer looks for answers to two distinct questions. The first question deals with the type
of security instrument the business should offer to customers to finance their purchases. Since
the corporation does not wish to carry the credit itself, it should select an instrument that
would not only secure payment, but allow the corporation to sell it to a financial institution (or
perhaps arrange with the financial institution to handle the financing itself on a direct basis
with the customer). The lawyer in this case might suggest a conditional sale contract for the
sale, registered under the PPSA of the province. This would allow repossession of the goods if
default occurs.
As to the financing of the new building, a land mortgage or charge would probably be
suggested as the property could be used to secure the financing.
2. Chartered banks are in the business of lending money. In what ways might a bank provide
financial assistance to a merchant?
Comment:
As noted in the Ask A Lawyer scenario above, a bank may assist a merchant by lending it money
to finance its business. It might also agree to assist in the financing of its sales to customers.
3. In what way (or ways) does bankruptcy affect the rights of secured creditors? How would
they recover their debts if the security they held was insufficient to cover the amount owing?
Comment:
In a bankruptcy, secured creditors are entitled to look first to their security for payment, but if
the proceeds from the sale of the asset are insufficient to cover the debt owing, they are
entitled to claim the balance as an unsecured creditor.
4. If a corporation finds itself in financial difficulty, consider the approaches that it might take
in order to restructure its operations.
Comment:
A corporation may use the Companies Creditors Arrangement Act if it has bond holders and
finds itself in financial difficulties. This process may allow it to restructure its operation to
become financially viable again. The Bankruptcy and Insolvency Act also permits a corporation
to make a proposal to its creditors to restructure its debt and avoid winding up its operation.
COMMENTS RE: DISCUSSION CASES
CASE 1
Amelia, a B.C. resident, was the owner of a small yacht that was subject to an unregistered
chattel mortgage to Ace Finance in the amount of $20,000. She sold the yacht to her friend
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Donald, who resided in Vancouver, B.C. The friend purchased the yacht for $50,000. Some time
later, Donald purchased a larger yacht from a dealer and used the small yacht as a trade-in to
cover part of the purchase price. The dealer made a search of security interests under the
provincial Personal Property Security Act and found no claims against the yacht. The boat
dealer later sold the yacht to Martin, under a conditional sale agreement for $55,000, and
registered the security interest. Martin later sold the yacht to Wray for $50,000, and moved to
the province of Alberta. Wray did not search for claims against the yacht at the time of the
purchase, and paid over the money unaware that the boat dealer had a registered security
interest in the property.
The conditional sale agreement went into default when Martin neglected to make a
payment to the boat dealer. The ownership of the yacht was traced to Wray, and the yacht was
seized by the boat dealer.
Discuss the rights of the parties in this case.
Comment:
The first point to note in the case is that the yacht was subject to an unregistered chattel
mortgage. Ace Finance would lose its security in the yacht when it was sold to Donald.
However, Amelia would be liable for payment on her personal covenant to pay in the chattel
mortgage. Ace Finance could not claim against Donald or the yacht. The dealer that purchased
the yacht as a trade-in would also acquire good title, clear of the Ace Finance chattel mortgage,
and could sell to Martin under a conditional sale agreement. The registered conditional sale
agreement would permit the boat dealer to repossess the yacht when default occurred under
the conditional sale agreement. Wray in this case would have the right to sue Martin for the
purchase money paid (if he can find him).
CASE 2
Victor owned a block of land that fronted on a large lake, On May 1, he entered into a contract
with Ace Construction Company to have a custom designed cottage constructed on the site.
Ace Construction Company fixed the contract price at $80,000, payable
$10,000 on the signing of the agreement, and the balance on the completion of the contract.
Victor signed the contract and urged the building contractor to begin construction immediately.
On May 1, he gave the contractor a cheque in the amount of $10,000.
Ace Construction Company entered into the following subcontracts for the construction
work:
1. A $5,000 contract to Ground Excavating Ltd., the work to be completed on June
1.
2. A $15,000 contract with Larch Lumber Company for materials, the last
to be delivered by July 1.
3. A $10,000 contract with Baker Framing Contractors to provide labour
only to erect and close in the cottage by July 20.
4. A $15,000 contract with Roofing Specialty Company to install and
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shingle the building roof by July 20.
5. A $10,000 contract with Volta Electrical for wiring and electric heating
equipment, the work to be completed by August 1.
Ace Construction Company was to have the cottage completed and ready for occupancy
by August 6. Work progressed on schedule, and each subcontractor was expected to complete
the subcontract on time. By August 1, the cottage was almost ready for occupancy, and only
the front door and eavestroughing remained unfinished.
On August 1, the proprietor of Ace Construction Company approached Victor and asked
him if he might receive the balance of the contract price, as he wished to use the funds to pay
his subcontractors. Victor gave him a cheque for the remaining
$70,000, confident that the contract would be competed.
On August 2, a dispute arose between Ace Construction Company and Baker Framing
Contractors over the terms of the contract between them, and Ace Construction Company
refused to make payment. Baker Framing Contractors registered a construction lien against the
cottage lot later the same day. All of the other subcontractors immediately became aware of
the lien claim, and registered liens on August 3.
The next day, Ace Construction Company was found to be insolvent without having paid
the subcontractors.
Discuss the legal rights of the various subcontractors, Victor, and Ace Construction
Company. Indicate the probable outcome of the case.
Comment:
This case concerns the application of the mechanics' or construction lien legislation to a
construction situation. The first matter to be determined is the validity of the various lien
claims. Were all liens registered within the time period specified in the Act? For example, in
Ontario, the lien must be registered within forty-five days of the day on which the last work was
done. Using Ontario as an example, the contract of Able Excavation is outside the time period
for filing a lien, if the last work was done on June 1.
The remaining liens would be in time. This would entitle the subcontractors to claim
against the holdback, but Victor, in error, did not holdback the required 10%. He would, as a
result, be obliged to pay the amount over again in order to free the property of liens. Since the
amount of the liens would exceed the amount of the holdback, the subcontractors would be
obliged to claim for the balance as creditors in the bankruptcy of Ace Construction Company.
It should be noted that under the legislation in some provinces, Ace Construction
Company would be expected to hold the money received as trust money until the
subcontractors were paid. The failure to do so, would be a breach of the Act. (Ontario for
example).
CASE 3
The Luxury Housing Corporation required capital in order to finance certain land acquisitions for
its proposed housing project. The corporation made a $l,000,000 bond issue to acquire the
funds necessary for working capital and to cover a down payment on the purchase of a large
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block of land that it purchased for $5,000,000. The balance of the land transaction was in the
form of a first mortgage back to the vendor for $4,000,000.
Once the land was acquired, Luxury Housing Corporation entered into a building contract with
High Rise Construction Company to construct a large apartment building on the site. The
contract was for the sum of $15,000,000, which Luxury Housing Corporation expected to
finance by a construction loan of $19,000,000 from Apartment Finance Limited. The money was
to be advanced as construction of the building progressed. The building mortgage was registered
as a second mortgage, on the understanding that the part of the funds remaining after the building
was constructed (plus the corporation's working capital) would be used to discharge the first
mortgage.
After the contractor had completed $1,000,000 worth of work on the building, and after
Luxury Housing Corporation received a $l,000,000 advance on the building mortgage, Luxury
Housing Corporation decided to stop construction due to a sudden decline in demand for
apartment units in the City.
Assuming that the bonds issued contain a floating charge, and assuming that the
contractor files a construction lien against the property for $1,000,000, discuss the rights of the
various creditors if Luxury Housing Corporation decides to abandon the project and allow its
bonds and mortgage obligations to go into default, even though it has cash in the amount of
$1,000,000 and other assets (excluding land) in the amount of $500,000.
Comment:
The land is subject to a first mortgage in the amount of $4,000,000, and a second mortgage in
the amount $19,000,000, of which only $1,000,000 was advanced. The lien registered against
the property is in the amount of $1,000,000. If the corporation allows the mortgages to go into
default, and does not pay the lien claimant, the lands may be foreclosed by the first mortgagee
(or the second mortgagee), or sold by the courts to settle the claims of the lien claimant.
Assuming the land is sold for $5,000,000 the first mortgagee would receive $4,000,000
and be paid in full as first claimant to the money. The second mortgagee may be able to claim
the remaining $1,000,000 in priority over the lien claimant, (depending upon the province).
The bond holders would have a secured claim against the assets under the floating
charge, and would be entitled to the $500,000 in assets. The bond holders may also be entitled
to $500,000 of the cash, leaving $500,000. This would leave the lien claimants as the only
parties partially satisfied in their claims.
CASE 4
Motor Repair Ltd. carried on business as a service station operator. In addition to repairing
automobiles, the business maintained a small dealer franchise for the sale of a line of new
automobiles. It also sold gasoline and the usual lines of goods for the servicing of vehicles.
Business was poor, however, and the company made a voluntary assignment in bankruptcy in
which it listed as assets:
Land and building
New automobile (3)
Gasoline & oil
$150,000
62,000
3,000
150
Parts, supplies, and equipment
Accounts receivable
Bank loan
Misc. assets (furniture, tools, etc.)
Its creditors' claims were as follows:
1st registered mortgage on land and building
2nd registered mortgage on land and building
Registered conditional sale agreements on automobiles
Due and owing to fuel supplier
Due and owing to other trade creditors
Municipal taxes owing
13,000
12,000
100
1,900
$242,000
$120,000
19,000
62,000
25,000
33,000
6,000
$265,000
When the trustee went to the place of business he discovered that (1) the new cars had been
taken by the manufacturer; (2) the fuel tanks had been emptied by the fuel supplier; and (3)
Smith, an employee, was on the premises and in the process of removing an expensive set of
tools that he maintained had been given to him by the company in lieu of wages for his
previous weeks work.
Discuss the steps that the trustee might take as a result of the discoveries.
Comment:
The facts in this case illustrate a situation where some of the creditors have taken upon
themselves to seize assets of the debtor before bankruptcy proceedings have begun. It should be
noted, however, that some creditors have this right. For example, secured creditors may realize
upon their security outside the Bankruptcy and Insolvency Act. While the case does not so
indicate, the first and second mortgagees might look to the land and building for the satisfaction of
their mortgages, rather than proceed through the bankruptcy action.
From the facts, the manufacturer of the new cars apparently sold them under a conditional
sale agreement to Motor Repair Ltd., and on default, would be entitled to recover them, as title
had not passed. The fuel oil dealer, however, would probably not be entitled to take back his fuel,
but must rely on his claim as a creditor for payment. The trustee might recover the value of the
fuel oil from the supplier under the circumstances.
The employee, Smith, was caught in the process of taking a set of tools, which he explained
had been given to him by Motor Repair Ltd. in lieu of wages. If the tools had been given to him in
full satisfaction of his wages prior to the assignment in bankruptcy, the payment "in kind" to the
employee might be beyond the reach of the trustee. This would likely depend upon a number of
factors, the most important being whether the wages owing and the value of the tools were
approximately the same. The unusual method of payment may nevertheless, be open to
challenge.
CASE 5
For many years, the Specialty Mfg. Company carried on business as a manufacturer of
consumer products. In 2001, it embarked on an ambitious program of expansion that involved
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the acquisition of a new plant and equipment. Financing was carried out by way of real
property mortgages, chattel mortgages, and conditional sale agreements, with very few
internally generated funds used for the expansion.
By 2003, a general decline in demand for its product line due to a poor economic
climate placed the company in a serious financial situation. As a result of a failure to pay a trade
account to one creditor, bankruptcy proceedings were instituted. Specialty Mfg. did not object
to the proceedings, and did not make a proposal to its creditors.
The trustee disposed of the assets of the company and drew up a list of creditors entitled to share
in the proceeds. His preliminary calculations were as follows:
Sale of assets, etc.
Sale of land and buildings
Sale of production equipment
Sale of trucks & automobiles
Sale of inventory of finished goods, etc.
Accounts receivable
$350,000
35,000
25,000
30,000
48,000
$488,000
Expenses and Creditor claims
(all secured claims properly registered)
1st mortgage on land and buildings
2nd mortgage on land and buildings
3rd mortgage on land and buildings
1st chattel mortgage on trucks & automobiles
2nd chattel mortgage on trucks &automobiles
Bank claim under s. 427 of Bank Act
Unsecured trade creditors
Unpaid wages (10 employees@ $300 each)
Unpaid commissions to salespeople 1 @ $1,500
Bankruptcy expenses, fees& levy
Unpaid municipal taxes
Production equipment conditional sale agreement
$290,000
45,000
40,000
22,000
40,000
25,000
60,000
3,000
1,500
39,000
9,000
10,000
$584,500
Calculate the distribution of the funds to the various creditors and calculate the cents
per dollar amount that the unsecured trade creditors would receive.
Comment:
The purpose of this case is to illustrate a distribution of assets to the creditors in a bankruptcy. The
first point to note here is that the secured creditors may realize on their security outside the
bankruptcy proceedings. The first, second and third mortgagees may satisfy their claims in the
following manner:
Value of land and buildings
less lst mortgage amount
balance
less 2nd mortgage amount
balance
-
$350,000
290,000
-
45,000
$ 15,000
60,000
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3rd mortgagee gets the $15,000 balance, and may claim as an unsecured creditor for the
remaining, $25,000.
The chattel mortgagees with claims against the trucks and automobiles may exercise
their rights in a similar manner. Viz:
Value of trucks and automobiles less lst mortgagee's claim
balance
$25,000
22,000
$ 3,000
The second chattel mortgagee would get the $3,000 balance and claim as an unsecured
creditor for the remaining $37,000. The claim of the conditional seller ($10,000) would be satisfied
from the proceeds of the sale of the production equipment, leaving a balance of $25,000.
The claim of the bank ($25,000) against, say, the inventory ($30,000) would be fully
satisfied, leaving a $5,000 balance for other creditors, etc. The remaining claims would fall within
the priorities under the Bankruptcy Act.
To satisfy the priorities, the following funds would be available:
balance from sale of inventory
balance from sale of production equipment
accounts receivable
-
$ 5,000
25,000
48,000
$78,000
The preferred creditors, in order of preference (or right to the funds) would be:
Bankruptcy expenses and levy
unpaid wages
salesman's commission
municipal taxes
-
$39,000
3,000
1,500
9,000
$52,500
The remaining $25,500 would be divided between the unsecured creditors using the formula and
each creditor would receive:
total funds available x creditor's claim
total unsecured creditors' claims
The amount owing to unsecured creditors would be:
unsecured trade creditors
balance of 3rd mortgagee's claim
balance of 2nd chattel mortgagee's claim
Total
$ 60,000
25,000
$ 37,000
$122,000
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The cents on the dollar would be:
25,500 or about 21 cents.
122,000
CASE 6
Isobel was a professional accountant with a good credit rating, and for many years carried a
credit card with a credit limit of $5,000. She never used the card, but when her daughter
entered her final undergraduate year of education at a distant university, Isobel arranged for a
supplementary card for her daughter to provide her with access to money for living expenses in
addition to her paid tuition and residence fees.
During her final year at university, Isobel’s daughter occasionally used the card, and
from her own funds paid the full balance owing at the end of each month. On graduation, the
daughter obtained employment with a large marketing corporation, where her work involved
extensive travel. At times she used her credit card for non-business expenses while traveling.
The amounts charged to the supplementary card were sometimes large, but each month the
daughter paid the full balance owing. In view of the extensive use of the card, the credit card
issuer gradually increased the credit limit until it reached $20,000.
At the end of the daughter’s first year of employment, a corporate reorganization
resulted in the elimination of her job, and she was terminated. At the same time, a dispute
arose between Isobel and her daughter concerning the daughter’s association with a young
man that Isobel characterized as a ‘no good’. As a result of the dispute, the two ceased to
speak to each other.
Isobel was unaware that her daughter had been terminated by her employer, and paid
no attention to the large amounts charged to the daughter’s supplementary card over the next
few months. However, at the end of the third month she was notified that both her credit card
and her daughter’s credit card were cancelled, as her daughter had paid the account in the
amount of $20,000 with a fraudulent cheque drawn upon a non existent bank account.
When Isobel refused to pay the outstanding balance, the bank instituted legal
proceedings against both Isobel and her daughter for the full $20,000.
Discuss the arguments that might be raised by Isobel and the bank. Render a decision.
Comment:
Isobel has little in the way of defence to a claim for payment. One can confidently assume that like
all credit card / supplemental card arrangements, this bank has an agreement in place that both
the cardholder using the card and the cardholder who is the accountholder will be liable for
payment.
A weak argument founded on guarantee might suggest that Isobel could evade payment
above $5000 as she gave a card with a $5000 limit to her daughter, but that the bank had later
unilaterally raised the limit to $20,000. The weakness in this argument is that she would have
been made aware of the limit increase by a letter to her own address. Isobel was free to reject the
credit increase before it was consumed, if she did not want to liable for this larger amount.
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PART IV
PROPERTY RIGHTS
CHAPTER 12
BAILMENT AND INSURANCE LAW
LEARNING GOALS
1. To outline the nature of bailment, and its effect on risk allocation.
2. To examine the various forms of bailment.
3. To describe the various forms of insurance, and its use in risk management.
4. To examine the nature of insurance and concept of indemnity for loss.
5. To identify the parties associated with insurance contracts.
CHAPTER COMMENTARY
The law of bailment generally raises considerable classroom discussion, since most students readily
identify the concepts and their application. Everyone, on occasion, has either loaned a chattel, or
placed his or her coat on a coat rack in a restaurant or other establishment, and, as a result, can
identify personally with the activity. Because of this familiarity with the concept, a possible
approach to the discussion of the topic might be to employ the restaurant coat rack situation as a
means of determining the nature of a bailment, the actual and constructive possession of the chattel
by the bailee, and the question of liability for loss.
The diverse forms which a bailment might take frequently present problems for students in
the determination of the standard of care required of the bailee. Statements of the courts to the
effect that the bailee must care for the goods "as a skilled shopkeeper" or use "ordinary care" or
"reasonable care," are often difficult for students to comprehend, unless concrete examples are
used to illustrate the standard.
At this point it might be useful to emphasize that the rules for determining the liability of a
bailee are based upon the standard of care which the courts have established for the various kinds
of bailment. As the text indicates, these tend to vary according to the benefit received by the bailee,
with a higher standard normally applicable where the bailee receives a benefit from his or her
possession of the goods. A high standard is also likely to apply where the bailor receives little or no
benefit from the relationship. In certain cases, the bailee is virtually an insurer of the goods, but this
is generally limited to cases where the bailee has complete control over the goods, and the goods
are removed from the area where the bailor might inspect them from time to time. The common
carrier is an example of this type of bailee. Carriers of goods and innkeepers are subject to standards
of care that have developed over many years, and which have historical roots that date back to a
time when both shippers and travellers were to some extent at the mercy of carriers and innkeepers.
For both of these relationships, the historical basis for the liability should be stressed, and perhaps
applied to the present by way of the question: Has the situation really changed over the years? In
what way (if any)?
The case law in the chapter, Samuel Smith & Sons Ltd. v. Silverman (p. 335) deals with the
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storage of automobiles under the ordinary parking lot situation where the bailment is subject to the
usual disclaimers of liability. Because bailees for reward are subject to a high standard of care, it is
not uncommon for them to limit their liability by way of a disclaimer clause in the contract, or by
fixing a specific standard of care limitation on the liability assumed. Except in cases where a statutory
liability is established, a disclaimer or agreed standard will be enforced, provided that the limitation
on the bailee's liability has been brought to the attention of the bailor and agreed upon at the time
that the bailment was made. The Samuel Smith & Sons Ltd. v. Silverman case illustrates the general
liability of a bailee for reward, and the importance of providing notice of any limitation on the
liability of the bailee before the bailment is made. If the bailor is made aware of the circumstances
under which the bailee is prepared to accept possession of the goods, and if the bailor is willing to
enter into an agreement under those conditions, then the limitation on the liability of the bailee will
apply. The notice to the bailor, however, is the key point, as the case turns on that question.
Most students have a basic knowledge of the concept of risk reduction through insurance, but
most fail to realize that it is essentially a contractual relationship between the insurer and the
insured, where disclosure of all material facts is important. For this reason, disclosure should be
emphasized in the class examination of the nature of the insurance contract.
The concept of indemnity for loss, rather than profit from a loss is also important, and in this
respect the concept of insurable interest, contribution by insurers, the right of salvage, and the
doctrine of subrogation should be stressed. Co-insurance, another concept, might be illustrated by
way of example. See p. 348 of the text for the formula, and a sample calculation.
On the matter of insurable interest, and it might be worthwhile to emphasize that in the
case of life insurance policies the person who takes out the policy on the life of another need only
have an insurable interest at the time the policy is taken out. This is provided under the insurance
legislation of most provinces. See for example, The Insurance Act, R.S.O. 1990, c.I.8, s.155.
The role and liability of insurance agents and brokers are also covered in this chapter, even
though agency was dealt with earlier in the text. The liability of an agent to the purchaser of
insurance differs from that of most agents, and a review of the Fine's Flowers Ltd. case excerpt on
p. 349 of the text outlines the duties of such an agent at law.
REVIEW QUESTIONS
1. Define a bailment.
Answer:
A bailment is the delivery of possession of goods by the owner (bailor) to another person (a
bailee) on the condition that the goods be returned or dealt with according to the bailor's
instructions.
2. Explain the term constructive bailment.
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Answer:
A constructive bailment arises when goods are invited to be placed in the care of the bailor, but no
physical transfer takes place between the parties.
3. How is the standard of care of a gratuitous bailee determined?
Answer:
The standard of care of a gratuitous bailee ranges from taking reasonable care of protecting them
from foreseeable harm (when the bailee receives no benefit from the bailment) to a very high
standard (where the bailee receives a benefit from the bailment).
4. What rights over a bailed chattel does a bailee possess? Why are these rights necessary?
Answer:
The bailee has a right to take legal proceedings against any third party who interferes with his/her
possession of the goods.
5. Why do the courts impose a greater responsibility for the care of goods on a common carrier
than upon a gratuitous carrier?
Answer:
The common carrier is a carrier for reward and may make a sub-bailment of the goods to other
carriers. The bailor loses possession and control of the goods once delivered to the carrier, and
hence the carrier may be held responsible for any loss or damage.
6. Indicate the "defences" available to a common carrier in the event of loss or damage to
goods in the carrier's possession.
Answer:
The major defences of a common carrier are: Act of God, goods packed by shipper, goods
improperly described, goods of a type that self-destruct, damage caused by the Queen's enemies.
7. What standard of care is imposed on a bailor in a hire of a chattel?
Answer:
A bailor in the hire of chattel must provide the bailee with goods that are reasonably fit for the use
intended.
8. What essential element distinguishes the rental of space in an automobile parking lot from a
bailment of the vehicle? How does this affect the liability of the owner of the parking lot?
Answer:
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The rental of space in a parking lot leaves the vehicle in the possession of the owner, as the owner
has the keys. A bailment gives the bailee possession, and responsibility for the care of the
vehicle, as the bailee parks it where he sees fit.
9. Indicate the effectiveness of an exemption clause in a bailment contract for the storage of
an automobile. How do the courts view these clauses?
Answer:
Exemption clauses limit or exclude liability of the bailee while the goods are in the bailee's
possession. The clause would only be effective if made a part of the bailment contract and the
bailor was made aware of the clause at the time that the bailment was made.
10. To what extent is a bailee for reward entitled to claim a lien for storage costs against the
goods?
Answer:
A bailee for storage does not have a common law right of lien, but this is provided by statute. If
the storage is related to repair, a right of lien at common law exists for the repair costs.
11. Explain: (a) pledge, (b) sub-bailment.
Answer:
(a) pledge: A bailment of securities, shares, etc. as security for a debt.
(b) sub-bailment: A further bailment of bailed goods by a bailee to another bailee.
12. What is an innkeeper’s responsibility to its guests? Is it a bailment?
Answer:
Responsibility is set out in legislation for goods in the hotel room. The responsibility would be
as in a bailment where the guest places the goods in the hands of the Innkeeper for
safe-keeping.
13. Explain an insurable interest as it applies to a contract of insurance.
Answer:
An insurable interest is an interest in property or the life of another which if damaged or destroyed
would result in a financial loss. Except for life insurance, a person must have an insurable interest
both at the time the policy is taken out and at the time the loss occurs.
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14. Why is a contract of insurance a contract of utmost good faith?
Answer:
A contract of insurance is a contract of utmost good faith because full disclosure is necessary by
the prospective insured in order that the insurer will be in a position to decide to assume the risk
or fix a premium.
15. What right of the insurer prevents an insured party from making a profit by a loss?
Answer:
An insured is not permitted to profit from a loss because the insurer has (1) a right of subrogation
and (2) a right of salvage (3) a right to contribution from other insurers.
16. Is it possible for a creditor to insure the life of a person indebted to him or her? Explain.
Answer:
Yes. Because the creditor has an interest in the life of the debtor (in the sense that it is important
that the debtor remain alive to repay the debt).
17. Explain the doctrine or concept of salvage. Give an example of how it might apply.
Answer:
The doctrine of salvage is a means of preventing an insured from profiting from a loss where the
insurer pays the insured the full value of the thing damaged. The insurer in this instance would be
entitled to the damaged goods where such a payment is made, and the insurer may then sell the
damaged goods to reduce the loss paid.
18. In what way does the right of subrogation ultimately benefit the insured?
Answer:
Subrogation ultimately benefits the insured by reducing the premiums paid for insurance.
Because insurers may recover losses paid by claiming against the party causing the loss, the
cost of premiums will be less.
19. Describe the right of contribution and, by way of example, show how insurance companies
use it to determine their liability.
Answer:
Contribution arises where an insured has insured a certain type of loss with more than one insurer.
If a loss occurs, each insurer is only obliged to pay its share. For example: A insures a building for
fire with two insurers. A fire occurs causing $10,000 damage. Each insurer need only contribute its
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share of the loss, i.e. $5,000.
20. What mathematical principles are used to determine premium rates for life insurance
policies?
Answer:
Insurance premiums are based upon the chance of a person dying within a determined period of
time. Since all natural persons will eventually die, the premiums are based upon the chances of a
person of a particular age dying. These statistical "chances" are prepared in tables called actuarial
tables.
21. A creditor insured the life of a debtor to cover the amount of the debt owed. Two years
later the debtor died, having paid back over half the debt. Is the creditor entitled to the full
amount of the policy?
Answer:
Yes. The creditor is the beneficiary of the full amount of the policy, and is entitled to payment
of the full amount.
DISCUSSION QUESTIONS
1. In the Cabinet Manufacturing Ltd. scenario at the beginning of this chapter, the Plant
Manager was directed to seek advice from the company lawyers concerning a contract with a
nearby warehouse for the storage of inventory. What questions should the Plant Manager ask
in order to obtain the advice needed to proceed with the contract? Given the nature of the
relationship with the warehouse operator, what steps should the company take to reduce and
shift its risks in the venture?
Comment:
The lawyer for Cabinet Manufacturing Ltd. would probably advise the company that the
warehouse would be a bailee for reward and have a responsibility to care for the goods stored
in the warehouse. Care would be necessary in reviewing the storage contract to determine if
the warehouse limits its liability by an exemption clause. To avoid loss, the lawyer would
probably advise the company to provide off-premises insurance for its goods stored in the
warehouse. This would then protect it in the event of loss.
2. A retailer of electronic consumer goods developed a number of kits for the building of small
electronic devices such as small AM/FM radios, sound amplifiers, and digital clocks. Initially,
these kits were sold through its retail store, but it has decided to sell them by mail order or
through the internet.
What issues will this decision raise with respect to bailment and insurance?
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Comment:
By selling the kits by mail order or the internet, the retailer must consider how the goods would
be delivered to the consumer. Couriers are common carriers, and bailees, consequently they
have a duty to care for the goods placed in their hands. However, they usually limit their
liability in the event of loss. While the risk of loss may be small, the retailer might consider
insurance coverage for loss. Given the relative low cost of the product, this may not be a
reasonable solution for the minor risk of loss.
COMMENTS RE: DISCUSSION CASES
CASE 1
Sharon parked her automobile in a parking lot owned by the Parking Corporation. At the
request of the parking lot attendant, she left her keys at the attendant's office and received a
numbered ticket as her receipt for the payment of the parking fee. The ticket had the following
words written on the back: “Rental of space only. Not responsible for loss or damage to car or
contents however caused.” A 50 cm. Square sign on the side of the attendant’s office contained
a similar message. Before leaving her keys with the attendant, she made certain that the doors
of the vehicle were securely locked, as she had left a box containing her camcorder and
computer in the trunk of the car.
Sharon was not aware that the attendant closed his ticket booth at midnight, at which
time he delivered the keys to the cars on the lot to the attendant of the parking lot across the
street. The adjacent lot was also owned by the Corporation, but it remained open until 2 a.m.
Sharon returned to the parking lot to retrieve her automobile shortly after midnight, at
which time she discovered no attendant in charge, and her vehicle missing. By chance, she
noticed an attendant on duty at the parking lot across the street, and reported the missing
vehicle to him, only to find the attendant in possession of her keys.
The police discovered Sharon’s automobile a few days later in another part of the city. The
vehicle had been damaged and stripped of its contents, including her camcorder and computer.
Sharon brought an action against the Parking Corporation for her loss.
Identify the issues in this case and prepare the arguments that Sharon and the Parking
Corporation might use in their respective claim and defence. Render a decision.
Comment:
This case requires the student to determine the nature of the relationship between the owner of
the motor vehicle and the parking lot. Is it for "the rental of space only" as the ticket states? Bear
in mind that the ticket, in effect, is the written contract between the parties. Does it represent the
entire agreement?
What effect does delivery of the keys to the attendant have on the relationship? Does it
change it from rental to a bailment? How does the notice in the form of a sign affect the liability
of the lot owner? Does the removal of the keys to a lot across the street alter the relationship?
Does the exemption clause in the contract allow the parking lot owner to avoid liability for loss of
the car and contents?
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In Heffron v. Imperial Parking Co. et al. (1974), 3 O.R. (2d) 722, a somewhat similar
situation to this case, the court held that the relationship became a bailment on delivery of the
keys, and that the failure to return the car and contents when required constituted a fundamental
breach of the contract - hence the exemption clause was ineffective, and the parking lot owner
liable for the patron's loss.
CASE 2
Restaurant Supply Co. was an importer of various lines of cutlery, utensils and tableware that it
sold in quantity to hotels and restaurants. Approximately 50% of its sales consisted of hotel
grade dishes, and the remaining 50% consisted of cutlery and cooking utensils.
Restaurant Supply Co. used the services of Commercial Transport Ltd. to deliver its
goods to customers who were located in various parts of the country. All goods were shipped in
cartons, but those containing dishes were normally packed in a straw-like material to provide
protection in the event of impact or careless handling, and were marked ‘Fragile’. This reduced
breakage of the shipped dishware to a minimum acceptable level. Only occasionally would a
customer report breakage, and this usually consisted of only one or two dishes in a shipment of
perhaps many hundreds of pieces.
Restaurant Supply Co. recently tested a new type of foam packing material, and decided
that its use would permit the contents of a case to withstand a reasonable amount of impact if the
case should accidentally be dropped. Management then decided to use the new packing material
in cartons that were not marked with a "fragile" label in order to obtain a lower shipping rate.
The company informed Commercial Transport Ltd. of the removal of the "fragile" notice on the
containers and requested a lower shipping rate, Commercial Transport Ltd. agreed to handle the
goods at a lower rate.
During the month that followed, management of Restaurant Supply Co. monitored the
breakage rate and noted that it was approximately the same as when the other marked containers
were used. The next month the company shipped a very large quantity of dishes to a distant
hotel customer in 40 of the new containers. When it was received by the hotel, almost one third
of the dishes were found to be either cracked, chipped or broken. An investigation by the carrier
revealed that road vibration during the long trip had caused the packing material in the cartons
to shift, allowing the pieces to come in contact with each other, and to crack or break if the
carton received any impact or rough handling.
Restaurant Supply Co. took legal action against Commercial Transport Ltd. for damages
equal to the loss. Commercial Transport Ltd. denied liability for the damage to the goods.
Discuss the arguments (if any) that the parties might raise in this case. Render a
decision.
Comment:
This case is concerned with the liability of the common carrier of goods, and hence a bailment
situation. The issue is whether the carrier should be liable for the breakage of the china.
Restaurant Supply Co. would probably argue that the carrier was aware of the contents of
the cases, and failed to properly handle the goods. The carrier would have two lines of defence:
(1) The goods were packed by the shipper (2) the shipper changed the designation of the goods
from 'fragile' to ordinary in order to obtain the lower shipping rate, and in doing so, was not
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entitled to the extra care required to handle fragile goods.
The key issue here is the fact that the carrier agreed to handle the goods at the lower rate
knowing that they were in fact "fragile". This point should be discussed to determine its impact (if
any) on the defences which the carrier has raised. The knowledge might affect the carrier's second
defence but not the first one.
Since the carrier had no control over the way in which the goods were packed, it would
probably avoid liability, particularly in light of the evidence that ordinary road vibration caused the
protective packaging material to shift, leaving the china vulnerable to breakage if normally handled
by the carrier.
CASE 3
The son of elderly parents who died in an accident had his parents cremated (according to their
wishes) and because he had not decided where to have their cremation urns buried, left them
with the funeral home that had conducted the funeral service and cremation.
Some time later, the funeral home contacted the son and requested instructions for the
disposition of the urns. Arrangements were made to have the urns placed in a crypt at a local
cemetery, and the son paid for the temporary internment of the urns at the cemetery.
Some years later, the son wished to have the urns moved from the crypt for a
permanent burial in a cemetery near where he then lived. The cemetery that the funeral home
had sent the urns for temporary storage could find no record of receiving the urns, and the urns
could not be found.
If the son instituted legal proceedings against the funeral home and the cemetery, what
would be the nature of his claim? What defences might be raised by the funeral home and the
cemetery? Render a decision.
Comment:
This case is based upon the facts in Mason v. Westside Cemeteries Ltd. et al. (1996) 135 D.L.R.
(4th) 361. The case involved a bailment of the cremated ashes that the cemetery apparently
lost. The plaintiff sued for return of the ashes, or in the alternative damage for breach of the
contract of bailment. The court concluded that a bailment existed, and the cemetery was liable
for negligence as a bailee. The court valued the ashes at $1.00, but awarded $1,000 as
damages for the mental distress suffered by the plaintiff.
CASE 4
Swalm, who suffered from cystic fibrosis, contacted Dennis, who was authorized by a life
insurance company to take applications for its insurance policies, and requested a life insurance
policy for $200,000. Dennis provided Swalm with an application form that included a number
of questions concerning the applicant’s health, and any existing or prior medical conditions.
Dennis reviewed the form with Swalm and his spouse, and his spouse mentioned to
Dennis that Swalm suffered from cystic fibrosis, but the condition was under treatment and
control by certain drugs. Dennis, acknowledged the comment, but entered a ‘none’ on the
form with respect to existing medical conditions for Swalm. Swalm signed the form, and the
application was sent to the insurance company. A policy of insurance was then issued to
Swalm.
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Some months later, Swalm’s cystic fibrosis could no longer be controlled by drug
treatment, and a year later he died.
Swalm’s spouse, as the named beneficiary in the life insurance policy, claimed payment
under the policy. When the insurance company discovered the cause of death and Swalm’s
medical history, it refused to pay.
If Swalm’s spouse took legal action against the insurer, what would be the basis of her
claim? What defences might the insurer raise? Render a decision.
Would your answer be any different if Dennis was an employee of the insurance
company?
Comment:
The facts in this case are for the most part those in Platana – Swalm v. Clarica Life Insurance
Co. of Canada et al. (2001) 305 A.R. 220. The issue here is the misrepresentation in the
application for life insurance where the agent and the applicants for the insurance were aware
of the health problems of the applicant. When the applicant died, the insurer refused to pay
the policy proceeds to the plaintiff. The issue was whether the insurer was vicariously liable for
the acts of the agent. The court concluded that the insurer was not liable for the acts of the
agent, as the agent had no authority to bind the insurer. He was simply authorized to submit
applications for insurance to the insurer.
The court dismissed the plaintiff’s claim based upon the false statements made in the
application, and the fact that the applicants remained silent, knowing the false statement in the
application. If Dennis was an employee of the insurer, the insurer might be vicariously liable for
the act of the agent, but given the collusion by the agent with the applicants, the court might
find that the parties had conspired to defraud the insurer.
CASE 5
Gourmet Food Ltd. operated a food service out of a new concrete and steel building that used
large glass windows to provide natural lighting in the food preparation areas. Food preparation
was performed on stainless steel tables, and all sinks, stoves and food containers were metal.
Perishable food ingredients, and food products prepared for delivery were kept in large walk-in
commercial refrigerators or freezers.
Gourmet Food Ltd. arranged with an agent for a large insurance company for insurance
coverage for fire, theft, vandalism and damage to stock. The building had an actual value of
$800,000, but because of its largely fire proof construction the agent suggested a value of
$400,000. The agent also valued the contents at half their value, and the usual perishable stock
in a similar fashion. A policy was issued based upon the information supplied, but contained an
80% co-insurance clause.
Some months later, vandals late at night broke into the building, damaged the
refrigeration units, emptied the freezers and destroyed the food products. They then set fire to
wooden containers and furnishings and proceeded to smash all of the windows. Before the
police arrived, the vandals had vanished.
An appraiser’s survey of the damage estimated the cost of repair to the building and
equipment at $100,000, and the loss of stock at $10,000.
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Discuss the rights of the insurance company, the agent, and Gourmet Food Ltd.
Calculate the liability of the insurance company if the insurance company was prepared to pay
under the terms of the policy.
Comment:
The important point to note in this case is the fact that the building was deliberately
underinsured on the advice of the agent. Because the insurance policy contained a 80% coinsurance clause, the liability of the insurer would be limited less then the full amount of the
loss. Students should calculate the part of the loss that the insured and the insurer would pay
using the formula found on p.347 of the text. Using the formula, the insurer’s contribution
would be $68,750.
The liability of the agent who provided bad advice as to the valuation of the building
should also be considered. If the agent cannot bind the insurer, but why submit applications
for insurance, the insured may be able to recover its loss from the agent.
CASE 6
Plastic Manufacturing Ltd. produced a variety of plastic furniture in a leased building in an
industrial complex. Most of the furniture that the company manufactured was either of a
plastic composition or painted wood, and relatively large quantities of plastic raw materials,
wood and flammable solvents were stored on the premises.
Plastic Manufacturing Ltd. carried tenants fire insurance on its operations in the amount
of $500,000, as well as business interruption insurance designed to compensate the company
for any losses arising from the interruption of the business due to fire damage. The fire policy
agreement restricted the storage of flammable products to a single room of the plant area, and
prohibited smoking in that area. Containers of flammable products in the remainder of the
plant were to be kept to a minimum, and no container was to be opened in the storage area.
In accordance with the insurer’s directions, employees would take the large solvent
storage drums out of the storage room, open them, and fill smaller containers for distribution
to the various production areas, then return the drums to the storage area.
Some time after the insurance was in place, a maintenance employee of the building
owner was sent into the plant to repair a leaking water pipe near the solvent storage area.
While he was making repairs to the water pipe, an employee opened the door to the storage
area, removed a drum of solvent and filled several smaller containers. Just as the employee
was replacing the large drum, the maintenance employee lit a propane torch to solder the
water pipe. The fumes in the area immediately ignited. The resulting fire destroyed most of
the manufacturing equipment, damaged the building, and seriously burned the two individuals.
Discuss the issues raised by this accident, assuming that the building owner, and Plastic
Manufacturing Ltd. were insured for liability, fire, and business interruption loss. Consider also
the rights (if any) of the insurers.
Comment:
The fire was primarily the responsibility of the maintenance employee who lit a propane torch in
the area where flammable products were stored. The maintenance employee’s employer, the
building owner, may then be responsible for the loss. Note, however, that the Plastic
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Manufacturing Ltd. may have been partially responsible for the major loss by filling containers
at a time when the maintenance employee was making repairs.
CASE 7
While on a publisher’s book tour, the author of a new novel, while on a publisher’s book tour
was invited to a literary club meeting in a city that was on the author’s tour route. The meeting
was to be held at a hotel where the author intended to stay during her visit to the city. She
accepted the invitation to read excerpts from her novel at the meeting.
The author arrived late at the hotel on the day of the meeting, and instead of
registering, went directly to the meeting room for her reading. At the entrance to the room she
noticed a coat room with a number of coats hanging on a coat rack. A hotel employee was
standing at the door, but did not offer to take her coat. She placed her coat on the rack, and her
suitcase on the floor under the coat rack.
After her reading, she left the meeting room to retrieve her coat and suitcase, only to
find them missing. She reported her loss to the hotel desk clerk. An effort was made to find the
lost coat and suitcase, without success. The author registered at the hotel, and when the coat
and suitcase could not be found, demanded that the hotel compensate her for the loss of her
possessions, which she valued at $3,000. The hotel offered her $40, its statutory liability for the
loss of goods of a guest registered at the hotel.
The author rejected the hotel’s offer of $40, and took legal action against the hotel for
her loss.
What would be the basis for the author’s claim? Why would the hotel not deny that she
was a guest? How would the court likely decide the case?
Comment:
This case is similar to the case of Hansen v. 'Y' Motor Hotel Ltd., [1971] 2 W.W.R. 705.
For class discussion purposes, the question might be asked: Does this case concern an
ordinary bailment, or does it involve the liability of an innkeeper for the goods of a guest? Bear in
mind that the liability of an innkeeper differs from that of the ordinary bailee. The author would
obviously wish to hold the innkeeper liable for the value of the jacket, and may argue that the
relationship was that of bailor-bailee. In this case, however, it would be necessary for the bailor
to show that the innkeeper had taken constructive possession of the coat. In the Hansen case, the
court found that by providing a coat room, the innkeeper had invited the bailment, and was liable
for the loss.
If the club member was a guest in the hotel, and had left the coat in her room, the
answer would be different. As a guest in the hotel, the innkeeper's liability for the loss of goods
from the room would be limited to the amount specified in the Act, unless the loss was due to
the negligence or the deliberate acts of the innkeeper's servants, etc. (See text p 340).
CASE 8
The Happy Times Bar and Restaurant was located on a busy downtown street. The front part of
the premises consisted of the bar and a few small tables where patrons were served drinks.
The rear part of the building housed the restaurant, and a patron who wished to obtain a meal
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at the restaurant was required to pass through the bar room to reach the restaurant. On the
wall of the short passageway separating the two rooms the owner had installed a number of
coat hooks where employees could place their coats or jackets.
Jacobs, a stranger to the community, entered the establishment for the purpose of
obtaining lunch, and as he passed through the passageway connecting the bar to the
restaurant, noticed the coat hooks. He removed his overcoat, hung it on one of the hooks, and
proceeded into the restaurant where he was escorted to a table for his lunch.
After lunch, Jacobs proceeded to the passageway to retrieve his overcoat, only to find
that it was missing. He immediately spoke with the owner, who denied responsibility for the
loss.
Jacobs had just purchased the overcoat the previous day at a cost of $2,200. Since the
overcoat was expensive, Jacobs contemplates legal action against the establishment to recover
his loss.
Advise Jacobs. What arguments are likely to be raised by the restaurant owner? Render
a decision.
Comment:
Happy Times is not an inn as it does not provide lodging, and thus the Innkeepers Act does not
apply to these facts. Jacobs was not instructed to place his overcoat where he did, but rather
acted on his own initiative in doing so. Without instructing him to leave his coat on the hook,
and without otherwise placing the coat in the charge of an employee, there has been no
delivery of possession as is necessary to create a bailment. Unfortunately, the placement and
care of the overcoat remained as a matter for Jacobs to satisfy for himself, and he shall bear his
own loss as a consequence. There is no obligation for restaurant staff to police an open rack
where there has been no requirement that such items must be left upon it.
CHAPTER 13
REAL ESTATE LAW
LEARNING GOALS
1. To understand the various estates and interests in land.
2. To examine the title to land and the registration of property interests.
3. To understand leases and their uses.
4. To consider land as security for debt.
5. To understand mortgages as an interest in land.
CHAPTER COMMENTARY
Chapter 13 introduces the law of real property, and with it, the legal terminology associated with
land law. The distinction between real and personal property should be pointed out when dealing
with this topic, as students often tend to consider property in a very general sense, without realizing
that in some cases things that would normally be personalty become reality when attached to land
in the form of fixtures, etc. The significance of a chattel becoming a fixture is examined in the text
on p.357.
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The nature of land holding in Canada is sometimes a revelation to students, as most have
considered land ownership to be absolute, without realizing that the "owner" simply holds an estate
from the Crown, and it is the Crown that is the true owner. A useful approach in dealing with the
different estates in land might be to start with the Crown, show the Crown patent grant in fee simple,
then work from there for each different type of estate. In this fashion, the reversion to the owner
of the fee where a life tenancy has been granted may be highlighted as well. Lesser interest in land,
and the use of restrictive covenants to control the use of land, etc. are also concepts to review in
class, either by way of example, or using the case problems at the end of the chapter
Of some importance in any discussion of real property law is the difference between the two
major land registration systems. Under the Registry System for example, a possessory title to land
may arise by way of adverse possession, but may not under Land Titles. Consequently, these
differences should be emphasized in any review of the topic. The differences in determining a 'good
title' under each system should also be noted.
The leasehold interest has been subject to a certain amount of legislative change during the
past decade as a result of organized tenants groups and their supporters seeking greater security of
tenure, and the right to safe accommodation. The pressure from these groups has resulted in rent
controls in a number of provinces, and a greater obligation on the landlord to maintain leased
premises in not only a safe, but habitable condition. The law varies from province to province, and
the particular jurisdiction should be consulted for these matters before class discussion of the law
takes place. The nature of a tenancy is readily understood by students, but the sub-tenancy and the
assignment of a lease is often confused. Some time might be spent discussing these differences in
class.
Leasehold interests are basically concerned with the landlord-tenant relationship. It is a very
old type of land relationship that should be distinguished from a license, where the licensee does
not acquire exclusive possession of the property. See page 367-8.
Leases are always for a specific term, under which the tenant acquires exclusive possession
of the property for the term, provided that the rent is paid, and the other conditions of the lease
met. In the event of default under a lease by the tenant, the landlord may re-enter, or take steps to
have the tenant evicted, depending upon the jurisdiction, and the type of tenancy.
The law of mortgages in Canada is complicated to a degree because the two land registration
systems (in addition to the system in the Province of Quebec) affect the nature of the instrument.
In addition, each province has altered the rights of the parties to some extent, with the result that
much provincial variation exists.
From a conceptual point of view, the creditor, in return for the loan of money, either takes
title to the debtor's land by way of the mortgage, or obtains a claim or lien on the land in the case
of a charge under the Land Titles System or the hypothec (used in Quebec). Using the mortgage as
an example, the transaction may be graphically displayed in this manner:
Mortgage transaction
transfers (charges) legal title to B,
but retains possession of land
Party A
Party B
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(Mortgagor)
(Mortgagee)
B loans money to A with land
as security
Discharge of mortgage
repays loan to B
Party A
Party B
(Mortgagor)
(Mortgagee)
B reconveys title of land to A
by way of discharge
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In the case of a charge, the creditor has only a secured interest in the debtor's land, and on
repayment of the loan, the cessation of charge , given by the creditor as receipt of payment,
extinguishes the claim against the debtor's land.
The difference between first and second mortgages may be explained by way of diagram:
transfers (charges) legal title to B,
but retains possession of land
Party A
(Mortgagor)
Party B
(Mortgagee)
B loans money to A with land
as security
(holds legal mortgage)
C loans money to A with right of redemption as security
Mortgage of equity
(right to redeem from B)
Party C (Equitable mortgagee, or Second Mortgagee)
The terminology used in connection with mortgages is important and should be stressed in
class discussion. In particular, the terms mortgagor and mortgagee should be properly used to
identify the parties to the transaction.
REVIEW QUESTIONS
1. Describe briefly how land holding developed in Canada, and identify the system upon which it
is based.
Answer:
Land holding in Canada was based upon the system in England, which in turn dates back to the
feudal system introduced by the Normans in 1066. Under this system, all of the land is owned by
the Crown, and estates are granted to individuals.
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2. Explain the term “freehold estate.” How does this term apply to land?
Answer:
A freehold estate is an estate in land where the land may pass on by intestacy or by will to the
heirs of the grantee if the grantee should die. It may also be sold by a grantee during his or her
lifetime.
3. What lesser estates may be carved out of an estate in fee simple?
Answer:
Lesser estates would include (1) life estates (2) leasehold estates.
4. Once land is granted by the Crown, how is it recovered?
Answer:
The Crown recovers granted land by way of expropriation, if the land is required for public
purposes.
5. How are condominiums normally established?
Answer:
A condominium is usually established by a developer who buys the land, constructs the building,
follows the necessary steps for creating the condominium (declaration, etc.) and forms the
corporation to manage the operation. The developer then sells the individual units.
6. Indicate how a condominium organization deals with the problem of a unit owner who fails to
contribute his or her share of the cost of maintaining the common elements of the condominium.
Answer:
If a unit owner fails to pay common expenses, the corporation is usually entitled to claim the
expenses as a lien against the unit, and if necessary have the unit sold to cover the unpaid amount.
7. In what way (or ways) would an easement arise?
Answer:
An easement may arise by (1) express grant (2) prescriptive right (3) by necessity.
8. Under what circumstances would a restrictive covenant be inserted in a grant of land? Give
three common examples of this type of covenant.
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Answer:
Restrictive covenants are used to control the use of land conveyed to another. For example:
restrictions on the size of a house or building that may be built on the land, restrictions as to the
type of use made of the property (residential, commercial, etc.), or alteration of landscape (cutting
of trees, excavating, etc.).
9. What is the purpose of a land Registry System?
Answer:
The land registry system is a public registry system where deeds and other interests in land may be
recorded.
10. Explain how the Land Titles or Torrens System differs from the Registry System.
Answer:
The Land Title System differs from the Registry System in that the Crown certifies the title of the
registered owner under the Land Titles System, while under the Registry System, the individual
must determine the validity of a registered owner's claim to the land.
11. What special advantages attach to the Land Titles System?
Answer:
Under the Land Titles System the title of the present 'owner' of the land is confirmed and
warranted by the province as it is represented on the land register. There is no need to search the
title to establish ownership. It provides greater certainty of title.
12. Distinguish joint tenancy from tenancy-in-common.
Answer:
A joint tenancy is the ownership of an individual interest in common in land whereby if one tenant
should die the surviving tenant becomes the absolute owner in fee simple of the interest. Under a
tenancy in common the interest of each tenant passes to his/her heirs by will or intestacy on
his/her death.
13. What is the legal nature of a leasehold interest, and how does it arise?
Answer:
A leasehold interest is an estate inland whereby the lessee acquires possession of the property for
a fixed period of time.
14. In what way (or ways) does a tenancy differ from a license to use property?
Answer:
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A tenancy differs from a license in that a tenancy entitles the tenant to exclusive possession of the
land, whereas a license entitles the licensee the use of the land in common with others.
15. Explain how the term of a tenancy may be determined where the tenancy agreement is not
specifically set out in writing.
Answer:
The term of a tenancy when unspecified is usually determined from the periodic payment of rent.
If rent is paid monthly, the term is considered monthly, etc.
16. Outline the covenants which a tenant makes in an ordinary lease. Explain the effect of the
tenant's non-compliance with these terms.
Answer:
The ordinary express covenants which a tenant makes are: (1) to pay rent (2) to repair (3) not to
sub-let without permission (4) insure (5) pay taxes (6) not to commit waste. A breach of any
covenant would entitle the landlord to take action on the covenant.
17. What remedies are available to a landlord where a tenant fails to comply with the terms of
the lease?
Answer:
The landlord may: (1) take action on the covenant to recover unpaid rent (2) distrain against the
goods of the tenant (commercial leases) (3) re-enter the premises. For minor breaches of the
lease the landlord may only take legal action for the damages and for an injunction.
18. In a commercial lease in most provinces, landlords may distrain against the chattels of the
tenant for non-payment of rent. What does this mean, and how is it accomplished?
Answer:
To distrain means to seize the chattels of the tenant for rent due and owing, and to have the
chattels sold if the rent is not paid.
19. Define the term “mortgage” as an interest in land.
Answer:
A mortgage is an instrument whereby an owner of land pledges the title or interest in land as
security for the debt, but remains in possession of the property until such time as default occurs.
20. Outline the nature of a mortgagor’s interest in the mortgaged land.
Answer:
A mortgagor of land retains an equity of redemption, which entitles him to a reconveyance of the
title when the debt is paid.
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21. How does a "first" mortgage differ from a "second" mortgage?
Answer:
A first mortgage is the "legal" mortgage in the sense that the legal title to the property passes to
the mortgagee. A second mortgage is an equitable mortgage in the sense that it is a mortgage of
the equity of redemption.
22. What factors must be considered by a person who wishes to extend a loan of money to
another on the security of a second mortgage?
Answer:
The lender must be aware that there is a risk that the mortgagor may default on the first
mortgage, in which case the second mortgagee would be obliged to put it in good standing.
23. Why do mortgages usually contain an acceleration clause? What is the effect of the clause if
default occurs?
Answer:
If a mortgage is repayable by installments, default on each installment would require separate
legal action for payment. An acceleration clause renders the entire balance due an owing when
default first occurs.
24. Explain the relationship that exists between a mortgagee and a person who acquires the
mortgaged property from the mortgagor. Does the original relationship of mortgagor-mortgagee
continue as well?
Answer:
The mortgagee and the third party have privity of estate between them. The relationship between
the mortgagee and the mortgagor continues to exist, however, and the mortgagee may still look
to the original mortgagor for payment if default by the third party occurs.
25. Indicate what the rights of a mortgagee would be if a mortgagor defaulted on the payment of
the mortgage.
Answer:
On default, the mortgagee may take action against the mortgagor on the covenant for payment,
or may institute foreclosure or sale proceedings. As well, the mortgagee may demand possession.
26. If the original mortgagor sold the mortgaged lands to a purchaser, and the purchaser failed to
make payments or the mortgage, explain the possible courses of action which the mortgagee
might take.
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Answer:
Causes of action open to the mortgagee would be: foreclosure, sale and possession of the
mortgaged premises, or action against the original mortgagor on the covenant for payment.
27. What is the normal procedure used to re-vest the legal title of a property in the mortgagor
when the mortgage debt is paid? Does this differ in the case of a charge?
Answer:
The normal procedure is to deliver a discharge, which is a statutory re-conveyance, and receipt for
payment. A charge is extinguished by a cessation of charge, which removes the charge from the
title of the property.
DISCUSSION QUESTIONS
1. The Metro Manufacturing Ltd. President requires advice on not only the purchase of a 20
hectare parcel of land, but also information on financing the building. What information would
the lawyer provide concerning the purchase? What precautions would be suggested? What
would be the most likely financing for the construction of the new production facility?
Comment:
In this chapter-opening Ask A Lawyer scenario, the advice that the lawyer might give Metro
Manufacturing Ltd. would concern the process of buying the property, and the matter of
financing the purchase. Apart from the need to ensure that the seller had a good title to the
property, the lawyer would probably wish to confirm that the municipality in its zoning had
designated the land for industrial use, and in particular for the type of manufacturing carried
out by Metro Manufacturing. She or he might also suggest an environmental audit to ensure
that the property is clear of any environmental hazards (this is covered in Chapter 15, but might
be raised here as well).
On the question of financing, a building mortgage might be suggested as a means of covering
construction costs as the building is erected. Other suggestions by the lawyer might include
insurance of the building as well as an explanation of the nature of the mortgage and the rights
of the mortgage.
2. Southside Land Development Corp. offered to sell Trend Contracting Ltd. a small block of
vacant land in a large city for $50,000. Southside Land Development Corp. presented a deed
describing the property and showing Southside Land Development Corp. as the owner in fee
simple. What information should Trend Contracting Ltd. obtain before delivering the $50,000 to
Southside Land Development Corp.?
Comment:
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Trend Constructing Ltd. would probably wish to examine the title to the property to ensure that
the seller is indeed the owner in fee simple, and that the property is free from any mortgages,
easements or other restrictions. See comments with respect to Case 1 above for further
considerations.
3. The owner of a condominium unit also owned an exclusive use parking space on a surface lot
facing a sidewalk and street. The owner rented the space to his friend, who parked her chip
wagon in the space. She sold french fries and soft drinks to the public from the location. The
other residents of the condominium objected. Advise the unit owner of his rights (if any), and
the rights of the other residents.
Comment:
Under most condominium laws the unit owner also acquires exclusive use of the parking space
for the purpose of parking or storing a motor vehicle. By leasing the space for commercial
purposes, the unit owner is essentially changing the use of the space, and would probably
require the consent of the condominium corporation in order to do so. The other residents
may well object to the commercial use of the space, and stop the selling of the French fries and
soft drinks.
4. The Ready Packing Co. leased a large commercial building for its business. The lease called
for monthly payments of $5,000 per month on a two-year lease. At the end of the first year, the
Ready Packing Co. fell into arrears on its monthly rent payments. Three months' rent is now due
and owing. What action might the landlord take against the Ready Packing Co.?
Comment:
Since the tenant is in default under the lease, the landlord may seize the goods of the tenant,
and sell them to cover the arrears of rent. If the landlord wished to evict the tenant it could do
due to the default by Ready Packing Co.
5. Rosa gives a mortgage on Green Acres to Shelley, and it is duly registered. Rosa later gives a
mortgage to Tina, and it is registered. Rosa, a year later, defaults on the mortgage to Shelley.
What is the position of Tina and Rosa?
Comment:
Shelley may opt for any of the remedies provided for mortgage default, being power of sale,
foreclosure, sale or possession. Under power of sale, Shelley would give notice to Rosa and
Tina, and failing redemption, she would sell the property as she is empowered to do under the
terms of the mortgage. Otherwise, Shelley may opt for an action for foreclosure, again giving
Rosa and Tina an opportunity to redeem the mortgage, or to seek conversion of the foreclosure
into a sale. With foreclosure, failing redemption or conversion to sale proceedings, both Rosa
and Tina will lose all rights to the property. If the judicial sale route is taken, the proceeds of
sale will be used to pay Shelley, then Tina and then Rosa, if anything is left over. If Shelley seeks
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possession she will also extinguish the rights of Tina and Rosa, subject to their right to redeem
or convert the proceedings into a sale.
6. William owns a house and lot, and gives a mortgage on the property to Wallace. William
later sells the house and lot to Black, with Black assuming the mortgage. A year later, Black
defaults on the mortgage. Advise Wallace.
Comment:
Without having given a formal release to William when the property was sold, Wallace may
choose to enforce the mortgage against William OR Black. Wallace may enforce against the
property itself – a foreclosure, sale or possession – thus recovering from Black, or he may
choose to enforce William’s original promise to pay. William’s original promise to pay is
contained in the mortgage document, and William’s obligation to pay Wallace is completely
undisturbed by the fact that the property was later sold to Black. This dramatic remedy
underscores the importance of obtaining a release from the covenant to pay when the property
is sold to a person who will assume the mortgage.
COMMENTS RE: DISCUSSION CASES
CASE 1
Main Street Shopping Centre Inc. leased a small shop in a busy strip mall to Agricola for the
purpose of operating a convenience store. The lease was drawn for a three year term
commencing July 1. The lease provided for a total rental payment of $36,000 payable $1,000
per month. Agricola paid the first month’s rent, and moved into possession.
A few months later, when the rent had not been paid, the company manager visited
Agricola’s shop to collect rent, only to find that Agricola has sold his business to Primo, contrary
to the lease which could not be assigned without consent of the company. The manager told
Primo that Agricola had no right to assign the lease, and the company did not wish to rent the
shop to Primo.
Primo at this point decided not to pay the rental payment owing and decided to find
Agricola to demand his money back. In the meantime, the manager decided to treat the lease
as being in breach, and instructed a licensed bailiff to collect the rent that was now payable.
The bailiff went to the store, changed the locks, and took an inventory of stock and
equipment that he valued at $8,000 for the stock and $4,000 for the equipment. He then
posted a notice on the shop informing the public that the landlord had taken possession for
non-payment of rent.
Agricola and Primo were duly notified that he had distrained the chattels on behalf of
the landlord, and that they had five days to redeem the chattels by payment of the arrears of
rent, failing which he would sell the equipment.
When Agricola and Primo did not pay the rent, the bailiff unsuccessfully attempted to
sell the business. Main Street Shopping Centre made no attempt to rent the store, but retained
the non-perishable stock and equipment. Six months later, the company brought an action
against Agricola for breach of the lease.
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Discuss the issues raised in this case. What arguments might be raised by each party.
Render a decision.
Comment:
The first issue to be considered in this case is the nature of Agricola’s liability as a tenant. Could
the landlord distrain against the chattels of Primo (who was a sub-tenant) when the rent was
overdue? Was the landlord entitled to withhold consent when Agricola transferred the business
to Primo? Can the landlord retain the chattels and stock and still claim damages? Does it make
any difference if the landlord made no attempt to lease the premises after evicting Primo?
According to the case of Fuda et al. v. D'Angelo et al. (1974), 2 O.R. (2d) 605, when the
landlord evicted the tenants, changed the locks, and attempted to sell the goods and equipment of
the tenants "as a going concern", his actions constituted a termination of the lease.
In order to collect the unpaid rent, the landlord would be obliged to show that he had
given notice to the tenant that he intended to hold him responsible. This he would be obliged to
do if he expected to recover from Agricola.
CASE 2
Housing Corporation Ltd. constructed a luxury single family dwelling on a suburban lot in a new
development. The building was financed by a $200,000 building mortgage from Residential
Mortgage Inc. Housing Corporation sold the house to Hunter for $275,000, with payment
consisting of a $75,000 cash payment and assumption of the mortgage.
A few years later, Hunter sold the property to Smithers. Smithers purchased the
property for $280,000, part of the purchase price being the assumption of the mortgage.
Smithers found the property to be too large for his small family, and sold the house to Leblanc
for $275,000. The price again included the assumption of the mortgage. At this time, the
balance owing on the mortgage was $170,000. Leblanc placed a second mortgage on the
property for $50,000 with Second Mortgage Financing Inc.
Unfortunately, Leblanc ran into financial difficulty, and the mortgages fell into arrears.
Outline the rights (if any) and liability (if any) of each of the parties if Residential
Mortgage Inc. should decide to take legal action on the mortgage. What might be the best
approach for the company to take? Render a decision.
Comment:
This case concerns the rights of mortgagees on default, and the obligations of both the original
mortgagor and the person in possession of the property when default occurs. With respect to the
original mortgage between Housing Corporation Ltd. and Residential Mortgage Inc. it should be
noted that Residential Mortgage Inc. may decide to take action against Housing Corporation Ltd.
on its covenant to pay in the mortgage. If it decides to do so, and Housing Corporation Ltd. pays
the balance owing, it must assign the mortgage to Housing Corporation Ltd. in order that
Housing Corporation Ltd. will be in a position to foreclose on the property or seek payment from
the subsequent encumbrancer, Second Mortgage Financing Inc.
Second Mortgage Financing Inc. is in a difficult position where it must pay the first
mortgage in order to protect its investment in the property. If it does so, it is then in a position
to foreclose or sell the property to recover its investment.
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Note that both Hunter and Smithers, who owned the property at one time, would not be
liable on the first mortgage after they sold the property unless they had signed an assumption
agreement with the mortgagee that contained a covenant to pay.
CASE 3
East County Condominium Corp. No. 20 was formed just over a year ago, with all the usual
condominium documentation. Contained in its declaration was a reference that common
expenses included municipal water charges, unless the same were separately metered for each
unit. There were 90 units in the building, one of which was a ground-floor restaurant unit. The
restaurant represented 10 percent of floor space, and therefore 10 percent of common
expenses. Each of the other 90 dwelling units would bear
1 percent of common expenses.
After examination of the accounts for the first year of operation, the condominium
found that the restaurant accounted for almost half of water charges, and the amount
budgeted by the corporation of $60,000 would fall short of actual costs by over $20,000. The
directors passed a motion that a meter be installed on the water pipes to the restaurant unit to
charge it for actual use. The action was ratified by the unit holders
89 to 0, with one abstention (the restaurant owner) in protest.
The owner of the restaurant unit applied to the court for relief, stating that water rates
had figured into her calculations on whether to purchase the unit, and that the same
calculations must have figured into the condominium’s decision to sell the unit to her. The
condominium had the power to write what it has written and it should be bound by its
calculation. The corporation had set the price for her commercial unit, knowing it would
contain a restaurant. The restaurant owner acknowledged she was prepared to suffer her fate,
should the condominium on a vote, decide to install meters to all units.
Elaborate on the issues in the arguments and render a decision on behalf of the court.
Comment:
The operation of the condominium is subject to the charges set out in the declaration, and the
system of allocation of all expenses was determined on a floor space basis. The actions of the
corporation to assess the restaurant extra may be argued as discriminatory in the sense that only
the one unit would be metered and subject to a special levy. The corporation would probably be
obliged to place all units on meters to fairly apportion the charges. However, this may not make
economic sense where only one user was responsible for the excessive use. In the case upon
which this case was based, the court held that the existing system of charges represented unjust
enrichment for the restaurant owner and imposed an undue hardship on the rest of the unit
owners. The court then went on to decide that the metering of the one unit would fairly
apportion expenses. See: York Region Condominium Corporation No. 771 v. Year Full
Investment (Canada) Inc. (1992) 10 O.R. (3d) 670 (Ont. Ct. Gen. Div.).
CASE 4
The Duffer’s Golf Club owns a large block of land that was located at the edge of a municipality.
Most of the land was developed as an 18-hole golf course. A small stream runs through the golf
course part of the property and eventually drains into a lake some distance away. The stream
also passes through the municipality that is located upstream from the club property.
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Some years after the golf course was developed, the municipality installed new storm
sewers in an area of the city and constructed them in such a way that, in a heavy rain, overflow
from the sewers would drain into the stream.
Shortly after the construction of the new sewers, several days of heavy rains resulted in
a large quantity of water from the storm sewers being discharged into the stream. This in turn
produced flooding of the stream and serious erosion of the banks of the stream where it passed
through the golf course. Damage to the club property was estimated at $60,000.
The golf club instituted legal proceedings against the municipality for the damage.
Discuss the arguments that might be raised by each of the parties, and render a decision.
Comment:
This case is concerned with riparian rights, as the club owns land that is adjacent to the
watercourse. The issue here is can an upstream user (the municipality) introduce additional water
into the stream in such quantity that it damages the property of the downstream user?
The municipality might argue that it was simply directing the natural flow of water (rain
water) into the stream. It might also argue that the downstream user may object to actions that
decrease the flow of water. Would these be valid arguments?
The club would probably argue that the upstream user may not do anything with the water
flow to damage the enjoyment of the downstream user. The club might also argue that the
municipality should have foreseen the likelihood of downstream damage by its actions of directing
the additional water into the stream.
In the case upon which this fact situation was based, the court held that the
municipality was liable for the damage to the downstream user. See: Scarborough & Gulf
Country Club v. City of Scarborough et al. (1986), 55 O.R. (3d) 193.
CASE 5
Iron Mining Corporation held the mineral rights to a large area of land in a municipality where
the surface rights were owned for the most part by cottage property owners. In fact, Iron
Mining Corporation had the mineral rights to all of the land around a lake where 30 surface
rights land owners had built large, expensive cottages. Several years after the cottages had
been built, a geologist at Iron Mining Corporation examined some recent mineral surveys of the
area, and decided that the area warranted further investigation. He accordingly sent out a
drilling crew to drill some core samples “to see what was under the land by the lake.” The
drilling crew arrived at the lake, and made an effort to find a cottage owner present, but
because it was early April, no cottage owners were at their cottages. The drilling crew then
proceeded to drill a large number of drill holes in the yards of the cottages. While little
evidence remained of their drilling work, the cottage yards were torn up by the heavy
machinery and trucks. When the cottage owners arrived in May to open their cottages, they
discovered the extensive damage to their former manicured lawns, ornamental trees and
gardens. Advise the parties.
Comment:
As IMC does not own the surface rights, it has an obligation to compensate the property
owners for its interference with the surface owners’ enjoyment of their property. A note to
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students can made, while not discussed in the text itself, that provincial statutes generally
prohibit the more egregious abuses in the exercise of mineral rights, such as digging in the
cottage yards, digging up access lanes to cottages, disturbances of cemeteries, and protection
of lakeshore areas.
CASE 6
Headrick owned a house and lot in a very desirable residential neighbourhood of a large city. In
order to purchase a new luxury motor vehicle, new boat, and pay for a luxury vacation, he
arranged for a mortgage on the house and lot for $330,000. The property at the time had an
appraised value of $375,000. Once in funds, Headrick left on his vacation. While on vacation,
he decided to extend his travels, even though his vacation time had ended. A month later, he
returned home, only to find that he had been terminated by his employer. At this point in time
he had spent all of his money on the automobile, boat and vacation, and was unable to make
payments on the mortgage. Over the next number of months, Headrick searched for
employment without success. He ignored letters from the mortgagee demanding payment,
and eventually, the mortgagee decided to sell the property under its power of sale.
The mortgagee contacted an appraiser and requested an appraisal of the property “at a
fire sale price” as it was anxious to get rid of the property. The appraiser gave an appraisal at
$300,000, well below the value of the property if it was offered in a normal real estate listing.
The mortgagee proceeded with the sale under the power of sale, and quickly sold the property
at the appraised value of $300,000. The mortgagee then demanded the difference between
the sale price and the amount of the mortgage, which was still at $330,000.
Headrick had protested the listing of the property in the power of sale advertisements
at such a low price, and had advised the mortgagee that his friend Esson was prepared to
purchase the property for $345,000, but his objections had been ignored by the mortgagee,
who simply wanted to get rid of the property. He is now angry and upset that the mortgagee is
demanding payment of the additional $30,000 from him. Advise Headrick.
Comment:
While the mortgagee is not required to go to great lengths to obtain the highest possible price, the
issue here is whether it has sabotaged ever reaching any reasonable price by seeking a “fire sale”
appraisal, and subsequently listing and selling the property at $300,000. In such case, any
greater sale price sum could have only been reached through the creation of a bidding war
between potential buyers. Some of those bidders would no doubt be dissuaded in the belief that
there must have been a valid reason behind the original listing at $300,000. It is certainly
unlikely that a bidding war would even begin to approach $375,000, despite the recent appraisal
at that level. A “fire sale” suggests an urgency propelled by simple salvage, and that is clearly
not the case. Even if the property were listed between $330,000 and $375,000, and a low offer
of $300,000 was ultimately received and accepted in the absence of others, at least the waters
would not have been poisoned to the extent they have. In short, while there is no obligation to
obtain top price, there is an obligation not to undercut the possibility of a decent price, and by
ignoring a buyer in the wings (Esson) at $345,000, the mortgagee may have lost its opportunity
to demand the balance from Headrick, if the matter comes before a judge for resolution.
CHAPTER 14
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INTELLECTUAL PROPERTY – PATENT, TRADEMARK,
COPYRIGHT, AND FRANCHISING LAW
LEARNING GOALS
1. To outline the importance of intellectual property rights to business.
2. To examine patent law protection.
3. To examine trademarks and their protection.
4. To examine copyright and industrial protection.
CHAPTER COMMENTARY
Chapter 14 deals with the four principal methods available for the protection of industrial and
intellectual property. Patent law is designed to encourage and protect inventions, while copyright
law (and to some extent Trade Mark legislation) is designed to encourage and protect intellectual
creation. Industrial design legislation is similar in its objects.
This area of the law is for the most part statutory, since the rights of inventors, authors, etc.,
were either unclear, or did not exist at common law. It should also be noted that at the time of
writing of this chapter of the text, some of these statutes may be slated for revision, and the current
law should be consulted. These statutes represent a highly specialized area of the law, particularly
in the case of patents and trade marks, and the purpose behind the incorporation of material on
these topics in the text is to provide a general outline of the law only. For this reason, the chapter
simply provides an overview of each topic, to acquaint the student with the general nature and
purpose of the law, rather than an in-depth examination. The chapter may be deleted from a
business law course, if the instructor so desires.
Patent law deals with the right to a new invention. It is important to note that a patent will
only be granted for something which is new and different, and not already subject to a patent
application or an existing patent. The grant of a patent is essentially a reward in the form of a 20
year monopoly from the date of filing for the efforts of the inventor to produce something new and
different, because its purpose is to encourage invention.
Registered design legislation is similar to both patents and copyright in the sense that an
original artistic design of an industrial product may be protected from copy by others for a period of
time, if the design is registered. It is similar to a patent in the sense that a search must be made to
determine the originality of the design. Once the design is registered, it may be protected by an
action for infringement.
The Micropost case law (p. 401) may be used to illustrate the test used to determine confusion
of trade marks. The Judge carefully reviewed the history of the two companies and their trade marks,
then examined the marks which they used in order to determine the elements of each design which
might contribute to consumer confusion. In the end, he reached the conclusion that the marks were
unlikely to be confused. Since most students tend to be familiar with brand names, the case takes
on a familiarity not found in other cases, and may be remembered by students. Some reference to
the case might therefore be worthwhile. See also the Labatt/Molson case on p. 402.
The cases at the end of the chapter raise a number of common situations under the
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legislation.
Franchising is also covered in this chapter because it is a contractual matter largely
concerned with intellectual property rights. Students should be made aware that the franchise
agreement is essentially a licensing agreement whereby the franchisor permits the franchisee to use
trade names, trade marks and copyrighted material to operate a similar business to that of the
franchisor and other franchisees. Much of the agreement is concerned with maintaining the
integrity of the goodwill attached to the intellectual property rights.
REVIEW QUESTIONS
1. Under modern patent legislation, what is the purpose of granting a patent for a new product?
Answer:
The purpose of granting a patent is to give the inventor of a new product, etc. exclusive rights
to control its manufacture for (20 years from filing of the patent application). The purpose is
also to encourage invention of new and different things, and to reveal how they work.
2. How is the public interest protected under patent legislation?
Answer:
The public interest is protected by (1) requiring the inventor to reveal how the invention works
and (2) requiring the inventor to “work” the patent.
3. What steps must an inventor follow in order to acquire patent protection for an invention?
Answer:
Patent procedure involves the filing of a petition for a patent together with specifications and a
claims statement which describes how it works and why it is "new."
4. If an inventor has reason to believe that someone was producing a product which infringed on
his or her patent, what would the inventor's rights be? What remedies are available for
infringement?
Answer:
The inventor may take action for infringement. The remedies would be an injunction and an
accounting for damages.
5. Describe briefly the purpose of trade mark legislation. Why has it been necessary?
Answer:
Trade mark legislation is designed to protect the distinctive marks of makers of goods, etc., and to
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protect them from others who might be tempted to copy the mark for the purpose of passing off
their goods for those of the owner of the mark.
6. How does a trademark differ from a trade name?
Answer:
A trade mark is a mark used to distinguish the goods of a particular maker. It must be "distinctive".
A trade name is the marker's name for a product, etc., and is usually a "coined word" to identify
the maker or the product.
7. Distinguish between a service mark and a certification mark.
Answer:
A service mark is a mark used to identify a service or the provider of the service e.g.: the mark of
an air line.
A certification mark is a mark used to distinguish goods of a certain quality or service performed by
a certain class of persons, etc. The owner of the mark does not manufacture the goods.
8. Explain the term “distinguishing guise”.
Answer:
A distinguishing guise is a form or shape of a product or its container to distinguish it from similar
products of others. E.g.: Coca-Cola bottle.
9. What must a person who has a proposed mark do in order to establish rights to the mark?
Answer:
A person with a proposed mark need only use the mark to establish rights to it.
10. What constitutes infringement of a trade mark? What steps must the owner of a trade mark
take in order to prevent further infringement?
Answer:
Infringement would consist of copying the mark or distinctive guise, or using a mark or name
which resembles the mark so closely that it would be confused with the original, and constitute
"passing off". The owner of the trade mark would bring an action for infringement to obtain an
injunction and an accounting for damages. Note that "passing off" may also have criminal
implications as well.
11. Outline the purpose of copyright legislation. What type of work is it intended to protect?
Answer:
Copyright legislation protects the author's sole right to a creation, be it written works, music, art,
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etc. from unauthorized copy by others. It is intended to protect all original works of this nature.
12. How is notice of copyright usually given?
Answer:
Notice of copyright is usually given by marking the work with a © the date (year) of first
publication and the name of the author.
13. Where infringement is established, what remedies are available to the owner of the
copyright?
Answer:
If infringement is established, the owner of the copyright would be entitled to an injunction, an
accounting, and damages.
14. What is an industrial design? How does it differ from copyright?
Answer:
A registered industrial design is used to protect an original design produced by an industrial
process. It differs from copyright in the sense that the original design would be subject to
copyright protection, but copyright protection is lost where it is reproduced by an industrial
process.
15. Explain the protection which a registered design offers the owner of the design. How is this
enforced?
Answer:
The registered industrial design gives the owner the exclusive right to produce the design for a
period of 10 years. Infringement entitles the owner of the registered design to an injunction
and an accounting for damages against the person copying the registered design.
DISCUSSION QUESTIONS
1. In the Pharmaceutical Inc. case at the beginning of the chapter, the research staff have
developed a product that appears to be new and different. What rights should be protected
and in what way? Is it possible that other rights related to the product might also be
protected? In what way or ways?
Comment:
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The lawyer in this case would probably advise the company president to consider a patent for
the new measuring device and regulator, assuming that the products were new and different as
inventions. If a patent search determines that the measuring device and regulator may be
patented, then the lawyer would probably urge the president to proceed with a patent
application to protect the new invention. The new medical product should also be patented,
particularly since the measuring device and regulator complement it. The new names for the
products should also be trade-marked. Any manual written to explain how the new devices
should be used with various other drugs should be copyrighted in order to provide complete
protection for the products, their name, and how they should be used.
2. A manufacturer of sail boats developed a new design for an 8 meter day sailer, and hired a
photographer to take a number of pictures of the boat for use in the manufacturers’ sales
material and advertising brochures. The photographer was paid $1,000 for the photographs. A
few months later, the manufacturer recognized one of the photographs on the cover of a sailing
magazine, and discovered that it was sold to the magazine by the photographer.
What would be the position of each of the parties in this case?
Comment:
A photograph is the creation of a photographer and the photographer is usually the owner of
the copyright. However, where a photographer is employed to take a picture, the employer
may have a right to the photograph and its copyright. In this case the manufacturer paid
$1,000 for the pictures and may be the owner of the copyright (unless an agreement to the
contrary was made) as control of the photos would be important since they were to be used as
sales material and advertising.
The photographer would argue that the copyright belonged to her, as she was the
creator, and sold only the rights to reproduce the pictures for the manufacturers sales material.
In view of the importance of control of the use of the pictures, the court in this instance
may agree with the manufacturer’s position.
COMMENTS RE: DISCUSSION CASES
CASE 1
Snow Products Ltd. manufactures a line of shovels, ice scrapers, and similar products designed
to remove snow and ice. One of its products is a snow and ice remover used for cleaning the
ice or snow from automobile windshields. The manufacturer called the tool “The Snow Plow”,
and it was sold under that name for many years to automotive wholesalers and retail chain
stores.
One of its retail chain customers approached a competitor of Snow Products Ltd. with a
request to have it manufacture a windshield snow and ice remover similar to ‘The Snow Plow”
and its colour scheme. The competitor agreed to do so, and produced an ice scraper similar in
appearance to the snow plow that the retail chain sold through its retail outlets.
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The loss of the retail chain as a customer resulted in 20% drop in sales for The Snow
Plow during the next winter season, and Snow Products Ltd. took legal action against the
competitor.
Discuss the nature of the claim in this case and the arguments of the parties. Render a
decision.
Comment:
The facts of this case are similar to those of Ray Plastics Ltd. and Raywares Ltd. v. Dustbane
Products Ltd. (1990) 75 O.R. (2d) 37. The case concerns the ‘passing off’ of goods similar in
appearance and colour to a well-known brand, and a breach of the Trade-Marks Act. Students
should recognize that the original product had a unique appearance that made it easily
recognizable, and that the new product copied these features and colour scheme.
The court in this case concluded that the new product would be easily confused with the
original product, and mislead customers into believing that they were buying the original
product. In effect, the new product was a misrepresentation that would injure the business
and goodwill of the original product manufacturer, and constituted ‘passing off’. The
manufacturer of the new product was obliged to pay over its profits to the plaintiff, and was
subject to an injunction to cease production of the product.
CASE 2
Products Manufacturing Ltd. designed a simple and inexpensive device for removing pressure
sealed bottle and jar caps, and was granted a patent for the device. The device was sold
through hardware and retail chains, and was a financial success for the manufacturer.
Several years later, a device very similar to the patented product appeared on the
market that was manufactured by a competitor. The device performed the same functions, and
differed only slightly in appearance and size.
Products Manufacturing Ltd. took legal action for patent infringement against the
competitor. In court, the competitor introduced in evidence the model for its device along with
the testimony of a company manager who stated that he purchased the model some ten years
before at an antique store. The model was marked with a U.S. manufacturer’s name, and the
words “patent pending, 1953”. No record of any patent application was found in Canada.
Discuss the issues raised in this case, and the arguments of the parties. Render a
decision.
Comment:
The issue in this case is the validity of the patent held by Products Manufacturing Ltd. Note
that the competitor does not contend that its product was new or different, but rather, that the
patented product was not ‘new and different’ but an old invention, that apparently was subject
to a U.S. patent application a half century before, in 1953. On this basis, the invention would
now be in the public domain, and anyone would be free to manufacture it. Even though the
idea had never been patented before in Canada, the invention was not ‘new and different’. In
this case, based upon the evidence, the patent rights might be lost.
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CASE 3
The news announcer at a local radio station was driving to work one morning when he noticed
a large highway tank truck ahead of him seemingly weaving out of control. The swaying trailer
eventually caused the truck and trailer to swerve off the road and overturn in the ditch.
The news announcer pulled off the road and stopped his vehicle a distance from the
overturned vehicle. He took out his digital camera and began taking pictures just as the trailer
burst into flames. He put aside his camera at that point and ran to the wreck, where he helped
the driver, who was not seriously injured, escape from the truck. He returned to his vehicle and
was taking several more pictures when the trailer exploded.
At his vehicle, he downloaded the pictures to his laptop. He emailed a brief report of
the accident to the local TV station (that also owned the radio station where he worked) using
his cell phone, and sent several digital pictures along with his email. His email stated that he
expected to be paid the usual TV free lancer rate for the pictures and news report.
The news announcer was pleased to see his pictures on the local TV news. He was
equally pleased when he received the usual freelancer fee for his pictures. Some days later,
however, he discovered that his pictures had been on national network news, and on one U.S.
network.
Because freelancer fee rates for national network items were many times more than for
local station news, he demanded additional compensation from the local TV station, which had
apparently moved the news item to the national networks. The local TV station refused his,
payment demand, and he instituted legal proceedings.
Outline the nature of the news announcer’s claim, and the arguments of the parties.
Render a decision.
Comment:
The issue in this case is the ownership of the copyright to the photographs taken at the scene of
the accident. The general rule is that the creator of the work has the copyright, but where the
creator is employed by another under a contract of service for the purpose of producing the work,
the copyright may belong to the employer.
The news announcer may argue that he was not employed as a news photographer, but
as an announcer, and as such, he held the copyright in his photographs. Has email to his
employer clearly stated that he was submitting the photographs on a freelance basis, and he
expected payment for their use over and above his salary.
The employer would probably argue that as an employee he was expected to report the
news, and his report and photos were a part of his job.
Unless the employer can establish ownership of the copyright, the news announcer may
be successful in his claim. See Babran v. Bier (1958) 15 D.L.R. (2d) 595, for a case that discusses
ownership of photographs, etc.
CASE 4
Creative Toy Company was a producer of plastic toys that tended to be standard in design and
consisted of plastic automobiles, trucks, and trains. They also produced a line of plastic doll
houses and miniature furnishings. All of the toys were carefully designed to ensure that parts
could not be removed from the toys and ingested by small children.
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All of the toys were marked with a large company logo, which consisted of a ‘T’ and a ‘C’
inside a larger ‘C’. Each letter was also of a different colour. The mark was registered as a trade
mark of the company.
Copy Toys Inc. also produced a similar line of plastic toys, but of lower quality, and not
designed to prevent the removal of parts that could represent a hazard to small children. The
toys did not bear the maker’s name for many years, but it recently began producing its model
lines with a logo which consisted of a large ‘C’ with a ‘T’ and an ‘I’ enclosed in the ‘C’. The logo
was written in script, and without close inspection, resembled the logo of Creative Toy
Company. The letters, however, were all of the same colour, and produced to contrast with the
background colour of the toy.
When Creative Toy Company discovered its competitor’s use of a logo, it immediately
took legal action against Copy Toys Inc.
Discuss the nature of the claim by Creative Toy Company, and the arguments of the
parties. Render a decision.
Comment:
This case raises the issue of ‘confusability’ of trade marks. Creative Toy Company may argue
that the logo for Copy Toys Inc. was so close to the design of its own trade marked logo that
consumers would be confused, and led to believe that they were purchasing Creative Toy
Company products.
Copy Toys Inc. would probably argue that the letters in their logo were different (an ‘I’
instead of ‘C’), and were of a single colour, and this would distinguish their trade logo from that
of Creative Toy Company to the extent that the two logos could not be confused.
The court would probably view the issue from the perspective of an average person to
determine if the two marks could be confused.
CASE 5
Furniture Design Ltd. produced a modified French Provincial chair. It was concerned that
competitors might copy it once it was put on display at an upcoming furniture trade show. How
could Furniture Design Ltd. protect its product?
Comment:
The Industrial Design Act applies to artistic works produced by industrial processes. The design,
however, must be original, and not simply a copy of an old creation, or a composite of others. In
the case, Furniture Design Ltd must register the design within the time specified in the Act. (1
year). If so, the proprietor of the design could take action for damages against any person who
imitates the design. In addition, penalties are provided under the Act for fraudulent imitation and
infringement of the design. The right to proceed for offences under the Act is limited, as the
proceedings must be instituted within twelve months of the offence.
CASE 6
Karen wrote a novel that she self-published. She offered her novel for sale using an
advertisement in a literary magazine. The advertised price of the novel was $9.95, providing
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her with an after-cost profit of $2.00 per copy. The novel sold well, and had received
favourable reviews by book critics. A year later, she noticed that sales of the novel were falling
rapidly, and she decided to investigate. To her surprise, she found a small website that was
offering her novel for sale in a downloadable form for $5.00 a copy. The website proudly
announced that it had sold over 10,000 copies of the novel to date. Advise Karen. What would
be the nature of her claim, and how would the court likely decide the case?
Comment:
Karen’s claim against the website owner is based on her claim to copyright in her literary work. It
is not necessary for her to have registered her copyright. It would have been wise of her,
however, to have marked her copies of the novel with the © symbol to indicate copyright. If she
did not, all is not lost for there would be a presumption that the website owner knew, or ought to
have known, that the copyright did not belong to them to permit their reproduction of the novel.
In the absence of the © mark, the presumption would be rebuttable (the web publisher thought
copyright had expired, etc.), which might be a reason for it to avoid punitive damages, however it
will in any case be responsible to account for its ill-gotten revenues of $50,000 in general damages.
CASE 7
Dimitri carried on business as an independent consulting engineer. In addition to providing the
usual engineering work for firms, he also designed a number of production processes and
unique production equipment used in the production processes. He obtained patent
protection on both the production process and the equipment. He arranged with a
manufacturer to produce the ‘package’, which he would supply to and license users to use in
their production of goods.
Several years later, the manufacturer of Dimitri’s equipment carefully examined his
design, and developed a new and more efficient type of machinery that would perform the
same work as that of Dimitri’s equipment. The manufacturer applied for a patent on the
equipment, and when Dimitri discovered that the manufacturer had designed a new product,
he contacted the manufacturer and informed him that he would not permit the manufacturer
to use the new design with his production process.
Discuss the arguments of the parties. How is the dispute likely to be resolved?
Comment:
To the extent that the improvements are themselves patentable, the manufacturer has come up
with a marketable product of its own. This new product may replace a product of Dimitri’s own,
but it appears it can function in the production processes that Dimitri sells (a circumstance Dimitri
wishes to prevent). Perhaps Dimitri should reconsider this position; he may be overlooking a
commercial opportunity. The production process systems he sells may sell even better, or more
profitably, if he incorporates the new product, under licence from its manufacturer. He may even
consider cross licencing his own designs to the manufacturer. With Dmitri focusing on process
design, and the manufacturer focusing on the technical products, more profit may be generated
by the two of them working in co-operation and specialization, rather than by conflict.
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PART V
SPECIAL TOPICS
CHAPTER 15
COMPETITION LAW AND ENVIRONMENTAL LAW
LEARNING GOALS
1. To examine government regulation of a competitive
business environment.
2. To consider the legal responsibility of business operations
toward our natural environment.
CHAPTER COMMENTARY
Restrictive trade practices legislation is designed to control those activities which prevent the forces
of competition from operating effectively. The principal legislation is the Competition Act, and is
covered in this chapter. Some of the sections of the Act are reproduced, but if a detailed
examination of the various sections is desirable, copies of the Act or the relevant sections might be
obtained, and distributed to the class for reading in conjunction with the text. In any event, the
instructor should emphasize the criminal law aspects of the legislation, and the fact that for many
of these activities, the criminal standard of proof is required of the Crown. In recent years the trend
has been away from criminal penalty, and more in the direction of 'control', such as reviewable
practices, and control over mergers. These changes should be noted as well
The legislation in some respects requires considerable study in order that the various
kinds of activity subject to the Act may be determined. The reviewable activities, in particular,
should be carefully considered, as they represent a relatively new direction by the Federal
government in the control of restrictive trade practices. At the present time, only certain
activities are subject to review, but these could conceivably be expanded in the future, if new
business activities develop that have the potential for restraint of trade.
If the Act itself is reviewed, the importance of reading the definition section in
conjunction with the restrictive trade practices must be stressed, otherwise students will
acquire the wrong impression of the effect of the Act. See p. 417 for description of unfair trade
practices and p.423 for dealings between competitors.
Environmental law is included as an area of law that is of increasing importance to business
generally. This is so because much of the law is statute law in form, and much of it is directed at
business activities which the legislators believe are harmful to the environment. Nevertheless, it
is important to note that the common law remains as a source of control or remedy where
business activity damages the property of others. The limitations of the common law, however,
have resulted in much of the environmental law taking the form of legislation which casts a broad
net when environmental damage occurs or is discovered. Most of the legislation tends to place
personal responsibility on directors and officers of corporations in addition to the corporation
itself, and students should be made aware of this and the way in which the directors and officers
may discharge their duties in this regard. Regina v. Bata Industries Ltd. Bata, Marchant and
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Weston and commentary on pp. 434-435 sets out the standard imposed on directors when
environmental damage occurs, and the type of penalty a court may impose on a firm. The case
problems at the end of the chapter provide students with the opportunity to consider
environmental law under both common law and statute.
REVIEW QUESTIONS
1. Why did the Canadian government find it necessary to introduce restrictive trade-practices
legislation?
Answer:
Legislation was necessary because the common law was not capable of dealing with firms that
possessed considerable economic power and were in a position to restrict competition.
2. What activities are considered prohibited trade practices?
Answer:
Prohibited trade practices would include: resale price maintenance, price fixing conspiracies,
predatory pricing, discriminatory discounts and bait-and-switch advertising.
3. What activities are not "prohibited" but "reviewable" practices?
Answer:
Reviewable activities would include abuse of dominant position, exclusive dealing arrangements,
tied selling, refusal to supply goods, market restriction, and consignment selling.
4. Explain the following terms: bait-and-switch, loss leader, bid-rigging, exclusive dealing,
predatory pricing, tied selling.
Answer:
(a) bait-and-switch: a selling technique where the buyer is enticed to the seller's place of
business by an advertised low price product, and once there, told it is out of stock, but a higher
priced model is available.
(b) loss-leader: a selling practice which advertises a particular product for sale at a below cost
price for the purpose of enticing people to the seller's place of business.
(c) bid-rigging: a conspiracy in bidding where all bidders except one will bid for a job at a very
high price to permit the one designated bidder to obtain the contract.
(d) exclusive dealing: an agreement between a manufacturer and seller whereby the seller will
have exclusive rights to the sale of a product in that area.
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(e) predatory pricing: a practice whereby one seller prices products very low for the purpose of
destroying competition.
(f) tied selling: a selling practice whereby a manufacturer requires a purchaser of one
product to also purchase other products of the manufacturer.
5. Under what circumstances are investigations instituted under the Competition Act?
Answer:
An investigation would be instituted on the request of six persons, or may be instituted following a
complaint by any individual.
6. Why was it necessary for governments to introduce legislation to control environmental
damage?
Answer:
A broader, regulatory approach was needed to control or limit pollution levels where essential
activities had to be carried on. The legislation was also necessary to overcome the limitations of
the common law where the damage affected the public-at-large.
7. Identify the remedies available to the court to control damage to a person's property by his
or her neighbour's actions.
Answer:
At common law the remedies are usually an injunction and money damages.
8. Outline the various ways that legislation addresses environmental pollution.
Answer:
Legislation addresses pollution through prohibition of some activities and regulation or control of
others (often through licensing).
9. What steps may be taken by prospective purchasers of property to reduce the risk of facing
an environmental cleanup order?
Answer:
Prospective purchasers of industrial or commercial property should have an environmental audit
made to determine if any potential environmental hazards exist on the property.
10. Where environmental damage is prohibited under legislation, what defence may be
available to the directors and officers of the corporation?
Answer:
The only defence available would appear to be due diligence.
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DISCUSSION QUESTIONS
1. What factors (good and bad) might account for the market share enjoyed by Borealis
Manufacturing for the sailboat parts that it sells? Which of these factors could be grounds for
investigation and action by the Commissioner of Competition? What sort of defences or
explanations might Borealis raise to explain its possibly “dominant” position?
Comment:
Borealis is located in the area where the two largest boat builders are located, and it is logical
that both might use parts manufactured by Borealis. It is a logical extension of this to realize that
it would also have most of the after-market for both of these types of boats. It only has 60% of
the national market. The fact that it appears to have virtually all of the market for the two largest
boat builders is perhaps what resulted in the investigation. In its defence Borealis might argue
the above facts, and stress that it has regional ‘dominance’ only, and not national dominance.
2. The chromium dumping by Borealis Manufacturing took place over a quarter-century ago. It
may even have no effect at all on the health of local residents today. As the Borealis lawyer,
what types of liability can you identify? Who might be responsible for these liabilities? What
sort of remedies might be ordered? If an action is to arise, who might start the court procedure?
Comment:
The concern of the lawyer might be the fact that the chromium might be treated by the
Ministry as a contaminant that is hazardous, and order its clean-up. Since Borealis is the owner
of the property, it would be responsible for the clean-up costs if the Ministry ordered it. The
directors of the corporation might also be liable under the act for allowing the contamination to
exist.
3. Mergers of corporations or businesses are not unlawful just because they are mergers.
Under what circumstances would a merger likely be subject to review under the Competition
Act?
Comment:
Mergers that are subject to review are usually those that unduly reduce competition and may
result in one firm dominating the field. If this should be the case, the merger may be prohibited
in order to maintain competition.
4. Must a manufacturer of goods sell its products to all retailers? If not, why not? Give an
example of a case where a manufacturer might lawfully refuse to do so.
Comment:
Normally a manufacturer is not permitted to refuse selling to a customer, unless it can be
justified on the basis that the product requires trained service or maintenance or a parts
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inventory maintained. If the buyer/retailer makes a practice of loss leader selling of the
manufacturer’s products, the manufacturer may also refuse to sell.
5. What is the significance of a price advertised by a manufacturer as a "maximum retail
price"? How does this differ from a "suggested retail price"?
Answer:
The fixing of a maximum retail price does not represent price fixing, nor does suggested retail
price, provided that the manufacturer makes it clear that the retailer is free to sell the product
at a lower price.
6. "At Common Law, damage to property or the environment is actionable, but restricted in
terms of the type of case that may be brought before the court." Explain.
Answer:
At Common Law, damage to property is normally limited to tort laws of trespass or nuisance. In
this case, only the property owner affected has a cause of action.
7. To what extent does the legislation recognize the fact that environmental damage cannot be
eliminated from certain industrial processes?
Answer:
Certain industrial processes cannot be performed without causing some damage to the
environment (e.g.: smelting of ore, burning processes, or those using water as a cooling agent).
Many of these industries are essential to the economy – for example, coal fired power plants.
In recognition of this fact, the legislation usually fixes emission limits in these industries to
control damage to the environment yet permit the industry to function.
8. Why does the purchase of lands previously used for industrial purposes pose a risk to the
purchaser and why should mortgagees of industrial property be concerned when securing their
mortgages?
Answer:
Because the owner of property is responsible for any hazardous contaminants on the property,
the high cost of clean-up is a significant risk. To avoid or reduce this risk potential purchasers or
mortgages usually have an environmental audit made of the property to determine if any
hazards or contaminants exist.
9. Outline the method used by governments to ensure large industrial projects such as
hydroelectric dams or large land-development undertakings result in a minimum of
environmental damage.
Answer:
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Before large projects are undertaken, environmental assessments must usually be done to assess
their impact on the environment. This process will allow changes to be made in the project to
reduce its impact on the environment.
10. “Having potential or known polluters keep their own records is like putting the wolf in
charge of the sheep.”
Answer:
Requiring businesses that produce a certain amount of pollution to keep records of their activities
reduces the enforcement costs of the legislation. Because most of these businesses are careful in
their operation, the enforcement process can be directed at those who fail to maintain records or
meet the standards set for their industry.
COMMENTS RE: DISCUSSION CASES
CASE 1
In the example of Borealis Manufacturing, consider that the company intends to purchase the
operations of Raincoast Castings, a British Columbia based firm with substantially the same
corporate and sales profile as Borealis. What role will the Competition Act play in this
transaction, and what would your feelings be (and why) if you were the Commissioner of
Competition?
Comment:
Since Borealis Manufacturing already has 100% of the east coast market, and 85% of the east
coast aftermarket, it is essentially the dominant firm in that part of Canada. It also has 60% of
the National market. If it acquires the operations of Raincoast Castings, it would effectively
have all of the east and west coast markets, and a virtual monopoly of the market for its
product. Since the coastal markets are probably the largest, the Commissioner would perhaps
object to the merger of the companies in order to maintain competition.
CASE 2
Erhardt was engaged by O’Malley family to use a bulldozer to excavate around the foundation
of an old farmhouse they had just purchased. Unknown to all, the bulldozer smashed off the
valve to a forgotten underground furnace oil tank, which discharged 1000 liters of oil into the
groundwater. This contaminated the production of a local spring-water bottling company,
causing over $1,000,000 in damage. Who should be responsible (if anyone) for the losses of the
water-bottling company – Erhardt, O’Malley or the previous owner of the farmhouse? Justify
your assignment of liability using tort and environmental law principles.
Comment:
The property owner is normally responsible for any contaminants spilled on the property. In
this case the O’Malley family would be primarily responsible for the clean-up. They may,
however, have a claim over against Erhardt, if Erhardt can be shown to be negligent. If neither
party was aware of the existence of the tank Erhardt may not be liable in negligence. The
question arises: were the O’Malleys’ negligent in not obtaining an environmental audit before
buying the property? Would an environmental audit have discovered the oil tank? At common
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law, both Erhardt and O’Malley may have acted as reasonable persons and avoided liability, as
the damage was not foreseeable. However, under environmental legislation, O’Malley could
conceivably be liable for the clean-up cost of the contaminated water supply. The waterbottling company would be obliged to sue O’Malley for the contamination of its spring water
supply.
CASE 3
Carla was a director of the Alphacorp, an industrial solvents company. As a director, Carla
always attended meetings at the head office, but rarely visited the plant. Even so, as the plant
was a vast enterprise, she was unaware of the storage of waste products in a yard behind the
plant. However, the directors' meeting a year previously, she raised the issue of establishing a
company directive to management that would require managers to ensure the safe storage of
contaminants at all company plants. Advise Carla on her actions and liability if a government
examination of the plant site should take place.
Comment:
The facts of this case are similar to those of Regina v. Bata Industries Ltd. et al. (1992) O.R.
(3d) 329. In the Bata case (see text p. 435) the corporation was found liable for the spill of toxic
chemicals and the company and local management at the plant fined under the act. The director
in this case was exercising due diligence by recognizing the importance of compliance with the
control of hazardous products. Because of the vast operation of the enterprise the director may
not be expected to know every area around the plant, and if an environmental inspection was
made the director would probably not be liable, particularly since no environmental damage has
occurred.
CASE 4
Haber Wood Products Ltd. had a permit from the provincial government to extract water from
a nearby river for manufacturing purposes. It was also permitted to discharge the water, which
now contained harmless chemicals, into the river. The discharge was continuously monitored
for other contaminants to ensure that the discharge only contained the permitted harmless
chemicals. MD Manufacturing Inc. also had a permit to draw water from the river, and under
its permit it was entitled to discharge certain non-poisonous chemicals into the river. The
discharge water also monitored.
While the chemical discharge from each plant was harmless, and the combination was
non-toxic to humans, higher concentrations of the resulting mixture were toxic to fish.
Downstream from the two plants, Olsen operated a fish hatchery and fish farm. One day he
discovered his entire stock of fish dead or near death. He immediately contacted the
government ministry to determine the cause of his loss. Discuss, the issues raised in this case.
How would liability (if any) for Olsen’s loss be determined?
Comment:
The co-contaminators must accept the fact that despite their being individually within the limits
of non-toxic discharge, they have combined to cause damage in an innocent party. There can
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be no alternative but to require them to participate equally in the cleanup, and compensation
of Olsen. The more difficult question arises with respect to the future. Should both firms face
an injunction against river discharge, or just one to avoid the toxic combination? If it is to be
just one, which one should it be? Unfortunately, there is no simple answer; one solution
among others would be to give the discharge right to the one that was first present on the
river.
CHAPTER 16
INTERNATIONAL BUSINESS LAW
LEARNING GOALS
Many Canadian businesses engage in international business. They are subject to a body of law
that includes our own domestic law together with rules that Canada has agreed to in
international treaties. Accordingly, the purpose and objectives of this chapter are:
1. To examine international trade regulation.
2. To outline the various forms of contracts and international trade
relationships.
3. To consider the arbitration of international trade disputes and
the enforcement process.
CHAPTER COMMENTARY
The text points out the importance of international trade to Canada’s economic well-being. As
a Canadian firm is doing business with a foreign entity, it is important to emphasize to students
that three sets of law will come to bear: Domestic Canadian law, the foreign law applicable to
either the trading partner or the subject of the transaction, and aspects of international law
applicable to international business transactions.
As to domestic Canadian law, the law of contract naturally applies, and in addition, the
Customs Act, the Customs Tariff Act, the Export and Import Permits Act and the Special Import
Measures Act. These elements of Canada’s border control and taxation regime ensure
collection of appropriate revenues and the execution of the government’s competition policy
toward foreign imports to ensure a level playing field in domestic markets.
Students need to understand the private law side international transactions, including
the contract of sale and commercial invoice, and the contract of carriage (bill of lading, and its
use as a title document). Additionally, students must be acquainted with the importance of
insurance and the need for special permits for customs clearance and inspection certificates.
The case law sample in this chapter, which is based on La San Giuseppe v. Forti Moulding
Ltd. (1999) 90 A.C.W.S. (3d) 871 (Ont. Sup. Ct. of Justice) illustrates the importance of a wellwritten and enforceable contract. While this is true in any context, for international
transactions it is vital, and the case shows the result of this failure. Here the Italian supplier
provided components to a Canadian firm on the basis of a verbal agreement. Only when
pressed to pay did the Canadian firm raise objections, forcing the Italian firm to sue in Canada,
for there was no provision for arbitration, and the defendant had no assets to seize in Italy.
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Of course these immediate considerations are directly related to a sale transaction, but
students must understand that international business goes beyond simple import and export to
larger-scale distribution, licensing of technology, establishment of a joint venture for
manufacturing, or a wholly owned subsidiary to a similar end. In each case, risk and reward
tends to increase as overseas involvement increases. In every instance, knowledge of local laws
in the country of operations is essential.
On the public law front, students need to understand the high level effect of organizations
and arrangements dedicated to freer trade, most particularly the GATT/WTO and NAFTA. It is
important to stress the objectives of the WTO as including the reduction of tariff and non-tariff
barriers, the principles of non-discrimination which result from MFN and National Treatment of
trading partners and their goods, the new dispute settlement provisions, and the broadening of
the arrangement beyond goods to services and investment.
NAFTA should be used as an example of Canada’s commitment to free-trade and to
illustrate the importance of our continued and guaranteed access to markets in the US (and
Mexico). The European Union should be used as an example of a customs union (with a
common external tariff), despite the fact that it has gone yet further toward economic and
social union.
In raising the question of dispute resolution, students should be made aware of the
difficulties associated with international litigation, being time, expense and distance.
Commercial arbitration stands as a far more viable alternative, offering informality with speed
at a lower overall cost, as well as greater confidentiality. Arbitration clauses in the business
contract between the parties usually sets out the procedural details or refer to arbitration in
accordance with an internationally recognized procedure or set of rules.
Students must understand that the informality of arbitration belies its seriousness, where
arbitral awards, if not complied with, can be converted into court judgments through fairly
simple steps of national recognition. Once recognized, the award is enforced in the same
manner as a judgment of a national court.
REVIEW QUESTIONS
1. What Canadian laws directly affect the import and export of goods in Canada?
Answer:
Customs Act, Customs Tariff Act, Special Import Measures Act, and the Export and Import
Permits Act.
2. What does the Export and Import Permits Act accomplish?
Answer:
The Act requires government permits to be obtained for the export and import of certain goods
the government wished to control. Exports subject to permits are often military or strategic
goods. Imports subject to the Act are those whose large quantities and/or low prices would
otherwise threaten Canadian producers.
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3. What is the role of a customs broker in international transactions?
Answer:
A customs broker is a private business specializing in completion of border formalities on behalf
of exporters and importers.
4. What is the role of the World Trade Organization?
Answer:
To act as a multinational forum dedicated to the reduction to tariffs and trade barriers, creation
of rules of fairness and resolution of international trade disputes.
5. What is the difference between a bilateral and multilateral trade agreement?
Answer:
An agreement between two nations is said to be bilateral; between more than two,
multilateral.
6. What assistance does the Canadian government provide to Canadian firms that may wish to
enter the international market?
Answer:
Among other forms of assistance, the Canadian government may provide financial assistance
for feasibility or marketing studies, security and insurance for payment for goods sold as
exports, and loan guarantees to enable funding for international sales or operations.
7. Identify the usual documents required for an international contract of sale. What is the
purpose of each of these documents?
Answer:
Bill of lading – title document and shipping contract
Insurance policy – loss protection
Commercial invoice – invoice for the goods and record of same for customs purposes
Permits or certificates – as may be required by customs (by law) or by buyer (by contract)
Payment documents – to ensure timely payment
8. Outline the general provisions of a foreign licence agreement.
Answer:
Names, subject rights, ownership acknowledgement, royalty, quantity and quality standards,
duration, dispute resolution, termination, assistance, assignment, territory, confidentiality, and
improvements.
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9. Why is commercial arbitration often used as a means of dispute resolution in international
agreements?
Answer:
It tends to be quicker, cheaper and more private than public litigation in national courts.
10. Why do most international trade contracts provide that arbitration will take place in a
country other than the country of either of the contracting parties?
Answer:
The perception of neutral ground is often desirable.
11. Explain the difference between the Customs Act and the Customs Tariff Act. How does the
Special Import Measures Act affect foreign sellers?
Answer:
The Customs Act provides for the procedures for border clearance of goods, while the Customs
Tariff Act sets the rates of duty charged on those goods. Where dumping or subsidies are
taking place, the higher duties of the Special Import Measures Act affects foreign sellers by
making their goods commercially less attractive to Canadian purchasers.
12. What is the difference between Most-Favoured-Nation Status and National Treatment?
Answer:
Under the WTO MFN requirement, when a nation extends a benefit to one nation, it must
make that benefit available to all other members. National Treatment requires a nation, in its
domestic market, to treat imports no less favourably than it treats domestic production.
13. What aspects of the WTO represent significant improvements over the original GATT, and
why?
Answer:
It is now a true organization, with a dispute settlement mechanism, and goes beyond goods to
services, intellectual property and investments.
14. Explain the difference between a free trade agreement and a customs union.
Answer:
Free trade agreements allow the members to set their own external tariff for imports
originating outside the FTA, and only goods originating inside the FTA qualify for duty free
passage between members. On the other hand, members of a customs union all employ a
common external tariff, and all goods inside the union circulate on a duty-free basis, regardless
of origin.
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15. What is the significance of a bill of lading? How is it used, and for what purposes?
Answer:
It is a contract for shipping between the shipper and the carrier, and is a title document
representing ownership of the goods. It is issued by the carrier on receipt of the goods from
the shipper, and when the bill of lading comes into the hands of the buyer, he or she may
obtain the goods from the carrier. Often the seller gives the bill to the buyer’s bank, with
instructions that it may only be released when the buyer has made payment in full.
16. Explain the advantages of commercial arbitration and how arbitration awards are enforced.
Answer:
As per question 9, commercial arbitration tends to be quicker, cheaper and more private than
public litigation in national courts. Arbitration awards are enforced by first making an
application to the national court system where enforcement is desired, converting the award
into a judgement of the local court. It is then enforced like any other court judgement.
DISCUSSION QUESTIONS
1. What forms of international business operation could Maple Leaf Fittings use to take
advantage of opportunities in the Middle East? What would the chief advantages and
disadvantages be in each case?
Comment:
Form
Export
Distribution
Advantages
Simple, no investment required
Some local presence through
representative, quicker and
better customer service, better
access to market knowledge
Licence
Partner has vested interest in
success
Joint Venture Shared risk, additional capital and
management input
Branch or
Complete control and local
Subsidiary
market presence
Disadvantages
No local presence, poor market
information, customers must find
Maple Leaf
Must support foreign distributor.
Distributor may not act diligently,
has little or no vested interest in
success
Possible loss of quality control with
reputation at risk
Shared reward, incomplete control
Significant investment at risk
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2. How would Maple Leaf Fittings determine if its Norwegian competitor is “dumping” its
products in the Canadian market? What can be done about it if dumping is occurring?
Comment:
The Norwegian competitor is dumping if it offers its pipe fittings for sale in Canada at a price
lower than the price it sells for in Norway, and these Canadian sales threaten to cause injury to
Canadian producers. If dumping is occurring, the remedy is to seek application of an additional
higher duty on imported Norwegian pipe fittings, under the Special Import Measures Act.
3. What are the advantages and disadvantages of a foreign trading relationship in the form of
a joint venture? What are the advantages and disadvantages of a licensing agreement? How
does it compare to a joint venture?
Comment:
Joint ventures have the advantage of sharing risks, and providing additional capital and
management input, but at the cost of shared rewards and incomplete control. In a licence
arrangement the foreign partner also has a vested interest in success of the venture (a good
thing), and there is usually little or no investment required by the licensor. The grantor of the
licence (licensor) is however exposed to greater risk as it has no day to day management input.
If the licensor’s name is prominent on the finished goods, then its name and reputation are
exposed to risk of shoddy manufacture or service by the licensee.
4. Explain the different ways in which a Canadian firm may establish an international trading
relationship, discussing how their risks differ.
Comment:
Form
Export
Risks
No local presence, poor market information,
customers must find seller
Distribution
Must support foreign distributor. Distributor may not
act diligently, has little or no vested interest in success
Licence
Possible loss of quality control with reputation at risk
Joint Venture Shared reward, incomplete control
Branch or
Significant investment at risk
Subsidiary
COMMENTS RE: DISCUSSION CASES
CASE 1
A Canadian oil company engages a network of American distributors (a dozen large but
independent gas stations across the USA) to sell its “accessory products” – cans of transmission
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and brake fluids, cleaners and engine additives. Over a period of years, one American gas
station becomes very successful in selling these products, to the point that it closes its one
independent gas station and works full time developing a state wide distribution system to sell
the Canadian products. It sells to other smaller independent gas stations. In time, the Canadian
firm realizes the size of the market opportunity that has developed and refuses to sell to its old
customer. The Canadian firm wants to supply these gas stations directly, “cutting out the
middleman”. The American distributor, having closed its gas stations and without a source of
supply of the accessory products, quickly goes bankrupt and sues the Canadian firm for its lost
profits.
Discuss the range of issues that this case presents. What arguments might the American
distributor and the Canadian supplier raise? Where would you look for guidance in settling the
respective rights of the parties? What important factors would swing your judgement one way
or the other?
Comment:
The American firm would raise breach of contract and perhaps injurious reliance issues.
Presumably the Canadian firm would have included a termination clause (on notice) in the
distribution agreement, on which it would rely. One would be obliged to look at the
distribution agreement for the respective rights and duties of the parties. Factors which may
swing the judgment might relate to ambiguity of rights in the contract (held against the
probable drafter, the Canadian firm), giving of notice of termination in proper and timely form,
and the relative size of the parties and any possible imbalance and misuse of bargaining power.
The case is very loosely based on the Supreme Court of Canada in Hillis Oil & Sales Ltd. v.
Wynn's Canada Ltd, [1986] 1 S.C.R. 57.
CASE 2
An international contract of sale calls for a shipment of 1,000 cases of walnuts (with a value of
$100 per case) from Shanghai China to Vancouver, Canada with payment made in advance. The
ship’s captain (on behalf of his employer, the carrier) issues a bill of lading in Shanghai for 1,000
cases, but only 700 are received and loaded, with the balance overlooked on the dock. The
shipper (the seller) sends the bill to the buyer in Vancouver, who obtains the shipment on
arrival. There, the shortage is discovered, and moreover, the 700 cases are found
contaminated with seawater and are ruined.
Within whatever range of assumptions is reasonable and necessary, discuss the position
each party may take with respect to the others. What are the potential liabilities in this case?
Comment:
The seller will take the position that it delivered 1,000 cases of merchantable walnuts to the
carrier, and what has happened later is none of its concern. Holding the bill of lading as title, the
buyer will demand delivery of not only 700 cases but 1,000 in good condition, for this is what
the carrier attested to loading in Shanghai. The carrier will claim that the buyer cannot improve
on the sellers position, which was 700 cases of walnuts loaded (the reality of the loaded goods,
1,000 being in error); as to their merchantability, the contamination may be a result of defect in
the goods or natural deterioration, with no act or omission of the carrier shown. The potential
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liability is of course, monetary damages for the value of either 700 or 1,000 cases of walnuts.
Consequential business losses or punitive damages would not be an issue. The case is not based
on any particular reported decision. The disposition of liability will turn on the contemplated
point of passage of title (if any) in the contract of sale, and any particular provisions of the bill of
lading (being the contract of shipping).
CASE 3
You are an importer of goods from a foreign overseas manufacturer. Having fully paid for your
most recent shipment of goods, you find that most of them are not fit for resale. Your supplier
refuses to refund your payment. As your contract was merely an exchange of letters referring
to the description, price, quantity, delivery and payment for the goods, describe the main steps
you would be obliged to (1) take and (2) prove, in order to obtain a compensation equivalent to
your payment.
Comment:
Having not provided for arbitration, the only option for compensation (beyond negotiation) is
litigation. Jurisdiction of the Canadian court would have to be proved, or alternatively, the case
would have to be launched overseas. An overseas action has attendant costs and risks, but has
the advantage of taking place where the defendant’s assets are (presumably) located. Normal
contractual rules of the applicable law would have to support recovery of damages, and the
burden of proof would have to be satisfied. If the suit was successful abroad, the foreign
judgement could be enforced in its own land against the defendant’s assets located there. If
the suit had been launched in Canada, the Canadian judgement would have to be taken abroad
for recognition and enforcement, unless the defendant had some assets in Canada which could
be seized in satisfaction.
CASE 4
Assume Canada has taken the following actions:
a. Imposed a 12-percent duty on the value of Hungarian goods entering Canada whose
manufacturer is alleged to have received a 14-percent subsidy from the Hungarian
government.
b. Imposes a 5-percent import duty on Japanese steel and a 7-percent import duty on
Korean steel.
c. Provides a temporary 2-percent GST rebate on all imported goods (but none for
domestic goods) to encourage importing and reduce a large trade surplus.
Describe how each of these measures would be treated under the GATT/WTO rules.
Comment:
a. As the special Canadian duty does not exceed the amount of the alleged subsidy, the
duty is acceptable under WTO rules, although evidence of the existence of the subsidy
must be shown.
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b. The Canadian import duty on steel is unacceptable under WTO rules as it violates the
Most Favoured Nation rule. A duty of 5-percent (being the lowest) offered to Japanese
traders must be extended to all of Canada’s WTO-member trading partners.
c. The GST rebate on imports does not violate WTO rules, particularly the National
Treatment obligation, as imports and domestic goods do not need to be treated equally.
Imports must be treated no less favourably (i.e. imports may be favoured), compared to
domestic production, as is the case here.
CASE 5
Torque Manufacturing Ltd. produced a line of specialized machine tools used in the production
of parts for the automotive industry. The corporation’s product line was well-know in North
America for quality and durability, but virtually unknown in Europe. With the trend in the
automobile industry towards the production of vehicles for a world market, Torque
Manufacturing Ltd. decided to expand its operations to Europe. Management at Torque
Manufacturing Ltd. has narrowed its approach to either a foreign-distribution agreement on a
branch plant. A branch plant would require a significant capital commitment, as production
equipment for the specialized machine tools would be expensive, as would be the training of
employees in production methods. Since a certain amount of expertise would also be required
on the part of the sale staff, the question of training would be important in order to sell the
products in the new market. Advise Torque Manufacturing’s management on the range of legal
and contract issues that would be associated with the two proposed courses of action.
Comment:
Advantages of foreign distribution: low cost and risk, easier to terminate, few staff requirements.
Disadvantages of foreign distribution: lower returns, higher transport costs, little connection to
foreign market, success dependent on foreign distributor. The legal and contract issues for
distribution are import regulations, customs and tariff duties, foreign law relating to distribution
agreements. Advantages of branch plant operation: lower transport costs, more control over
operation, more contact with market. Disadvantages of branch plant operation: higher risk,
greater capital commitment, training of local staff, harder to exit. The legal and contract issues in
branch plant operation are foreign investment and capital flow regulation, foreign employment
and labour law issues, and general differences in business law. Issues surrounding taxation of a
foreign branch plant may be noted by students; however, this is not covered in the text.
CASE 6
Using the facts in Case 5, if Torque Manufacturing Ltd. should further decide to investigate a
joint venture approach to its European business expansion, what foreign law considerations
arise? Given its unfamiliarity with the European market, which of the three approaches might
be best for Torque, considering the legal issues that it may face?
Comment:
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In the case of a joint venture, all considerations applicable to a branch plant apply, with the
additional issues of: management and control of the enterprise among the participants and the
division of their profits, as well as dispute resolution and eventual termination of the enterprise.
Chapter Topics
Introduction
Development of the Law Courts
The Structure of the Judicial System
The Judicial System in Action
Administrative Tribunals
Alternative Dispute Resolution (ADR)
The Legal Profession
The Role of the Legal Profession
Summary
Key Terms
Review Questions
Mini-Case Problems
Chapter Objectives
Knowing where and how to enforce rights and obligations is a key business
survival skill. After study of this chapter, students should be able to:
• Describe the development, content and structure of the judicial system.
• Explain the sequence of steps in court procedure, particularly civil court
procedure.
• Identify how and why alternative dispute resolution may be the best
option for the settlement of business disputes.
• Explain the role of barristers and solicitors, the range of services provided
by the legal profession, and the concept and limitations of court costs.
CHAPTER COMMENTARY
Chapter 2 represents a continuation of the material contained in the previous chapter, but focuses upon the
administration of the law. The text material includes the structure of the courts in Canada, and as a class
exercise, it might be useful to carry simple criminal and civil actions (based upon easily understood incidents)
through the various steps and appeals to their final resolution at the highest appeal levels. In this fashion,
the text material may be re-enforced, and the various limitations on appeal, etc., noted in the process.
The distinction between criminal and civil proceedings should be emphasized, as experience has
indicated that students frequently fail to realize that an incident which gives rise to both civil and criminal
proceedings (such as a "criminal negligence" incident) would follow two separate legal paths, one dealing
with the criminal act, and the second, dealing with the civil aspect.
Some time should be given to the procedure by which judgments of lower courts may be appealed.
The conditions under which a judgment may be appealed should be stressed (error of law, rejection of
important evidence in reaching a decision, etc.) and the appeal routes examined for both civil and criminal
cases. These are depicted on the charts which follow.
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Since alternate dispute resolution (ADR) is considered by many business firms as a more efficient
system of resolving disputes, the topic should be opened for class discussion as an alternative to the court
system. Discussion should note the particular advantages of ADR over the court system (speed of resolution,
lower costs, etc.) but it should also be noted that certain kinds of disputes still lend themselves to court
resolution.
Review Questions
1. Why is arbitration sometimes a more attractive means of settling contract disputes between business
persons?
Answer: Arbitration is a confidential process as well as a relatively low cost and efficient process for
resolving disputes. Often business people do not wish to destroy a business relationship if a dispute
arises, and arbitration will often allow them to obtain an answer or solution to their problem that
will allow them to continue to do business with each other.
2. Discuss the importance of an independent judiciary.
Answer: Important because:
(a)
not open to manipulation by political action.
(b)
free to resolve differences between individuals without fear of the consequences.
(c)
able to determine differences between governments without concern that the powers of
the court will be attacked.
(g)
permanent body to administer the law is vital in order to maintain continuity and
confidence in the system.
(h)
"independence" generally equated to "fairness".
3. If a provincial government should pass a law which prohibits any person from expressing any criticism
of any elected government official on penalty of imprisonment, how might the law itself be challenged?
Answer: A person accused may ask the court to review the law in the light of the Charter of Rights and
Freedoms or the jurisdiction of the province to make such a law. The court will then determine if the
law is enforceable.
4. Explain the differences between a Small Claims Court and a Magistrate's Court.
Answer: A Small Claims Court deals with civil disputes between individuals where the monetary
amount is small (limit varies from province to province, $3,000 - $10,000, and in some, up to $25,000).
Magistrate's Court is a court which enforces by-laws, provincial statutes and the Criminal Code (except
for the more serious offences). It does not deal with civil disputes.
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5. On what basis is it possible to justify the right of the court to declare unconstitutional legislation
enacted by a legislature?
Answer: The right may be justified because the court represents an independent, permanent body that
is made up of persons with the expertise to interpret the constitution and to oversee its application. No
political body is able to do so in an unbiased or fair manner.
6. How does a criminal case differ from a civil action?
Answer:
Criminal:
-
Crown brings the charge against the accused. A two-step process in many cases: (1)
preliminary hearing, (2) full hearing.
-
Crown obliged to prove the particular offence was committed by the accused, and that the
offence is one which is set out in the criminal code.
-
Crown must prove act, identity, and intent to commit the offence (subject to certain
exceptions).
-
must prove its case beyond any reasonable doubt in order to obtain a conviction.
Civil:
-
the party who alleges a violation of his or her rights brings the action.
-
onus of proof of facts alleged rests on the plaintiff.
-
case is outlined through "pleadings".
-
plaintiff not subject to the higher standard of proof of criminal courts.
7. In criminal proceedings, what obligation rests on the Crown in order to obtain a conviction?
Answer: Crown must normally prove beyond any reasonable doubt that the accused committed the
particular offence, intended to commit it, and was the person who committed it.
8. What is the purpose of "pleadings" in a civil case?
Answer: The purpose of pleadings in a civil action is to set out the facts of the case and the issues in
dispute in sufficient detail to enable each party to know the matters in dispute and prepare their
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respective cases for the trial. They avoid surprise at trial, and minimize the time required by the courts
to dispose of the case.
9. How does "direct" evidence differ from "opinion" evidence? How do these types of evidence differ
from "hearsay" evidence?
Answer: "Direct" evidence is given by ordinary witnesses who testify as to what they heard, saw, or
did. "Opinion" evidence is evidence given by experts who have special knowledge about the subject
matter of the evidence, and who express an opinion about the matter based upon their specialized
knowledge or expertise.
Hearsay evidence is neither direct nor expert evidence, but evidence given by a third party who was
informed by someone else (usually a person who would normally be an ordinary witness) of the facts.
Hearsay evidence is usually not admissible in a court of law.
10. Describe the role performed by legal counsel in the administration of justice.
Answer: Legal Counsel are learned in the law and advise others of their legal rights and duties. They
also carry out on behalf of their clients the job of processing an action through the courts or negotiating
legal matters on their behalf.
11. Distinguish between a "barrister" and a "solicitor".
Answer: A barrister is a lawyer who handles litigation matters on behalf of clients. A
“court-room” lawyer. A solicitor advises clients of their legal rights and duties, and normally prepares
contracts, deeds, wills, and other legal documents for clients.
12. On what basis might an appeal be allowed from a judgment of a court of original jurisdiction?
Answer: An appeal may be allowed where the judge improperly applied the law, (improperly instructed
the jury as to the law) or made an error in rendering a decision.
13. Where a judgment is reviewed by a Court of Appeal, what type of decision might the court make?
Answer: A Court of Appeal may:
(1) reverse the decision, if the trial judge erred.
(2) affirm the decision of the trial judge, or
(3) send the matter back to the lower court for a new trial.
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14. What is a court of original jurisdiction? How does it differ from a court of appeal?
Answer: A court of original jurisdiction (sometimes referred to a court of first instance) is a court where
a case is heard for the first time. A court of appeal is a court which reviews the decision of the court of
original jurisdiction to make certain that the judgment was fairly and properly made.
15. How does arbitration differ from a court action?
Answer: Arbitration is conducted much like a court action, but in a much less formal setting. While the
rules of evidence and procedure are usually followed, the process generally does not require pleadings
or discovery. The parties are usually responsible for the selection of the arbitrator, and the arbitrator’s
fees. The hearing does not involve ‘court costs’.
16. Explain the nature of mediation, and how it is used in the resolution of disputes.
Answer: Mediation is an attempt to resolve a dispute between parties prior to formal court or
arbitration proceedings by a third party through a discussion process. A mediator has no authority to
impose a dispute by suggesting ways in which the parties may reach agreement on a solution to their
problem.
17. "In a free and democratic society, the courts perform the important role of guardians of the rights and
freedoms of the individual. While important, this is far from being the only part they play in society."
How do the courts perform this important role? What other functions do they have in society?
Answer: Courts guard the rights and freedoms of the individual by acting as the medium through which
rights and duties are determined and enforced. They also act as a "check" on government action which
might improperly encroach on the rights and freedoms of individuals protected by the Charter. Finally,
they preserve peace and order by providing an obligatory process for dispute resolution (replacing
vengeance).
Mini-Case Problems
1. Michael, an otherwise well-behaved boy of 11, fell in with Gavin, 13, a repeat offender as a
delinquent. The boys were arrested by police while spray painting a school and breaking into a
portable outside classroom. Under the provisions of the Youth Criminal Justice Act, there was no
public disclosure of their names, and the Youth Court proceedings were sealed from public scrutiny
now and future.
Are the provisions of the law appropriate for both boys?
Whether yes or no, explain why.
Answer:
The fact situation calls for a reasoned opinion, rather than a yes or no answer. In most
instances students will provide an answer that in some measure provides a reflection of their
personal values, as well as their perception of the criminal justice system.
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2. Anne is unsuccessful in her suit at trial and on appeal to the provincial appeal court. If she wishes to
proceed, where must she go, and what burden will she face before her case will be heard again? What
factors may prevent her case from being heard again?
Answer:
The only remaining route of appeal for Anne is to the Supreme Court of Canada,
however this appeal is not a matter of right. She faces the burden of being successful in
seeking “leave to appeal” before she can have her case presented. The Supreme Court of
Canada could give leave to hear any case it wishes, however it is doubtful that it will do
so unless it is in the public interest, and/or commonly, any of the following: errors at
appeal are evident such that a denial of fundamental justice would otherwise take place,
a significant Charter or other constitutional determination is at stake, or the lower ruling
employs outdated Common Law in need of reform.
3. Carlson invented a new valve for natural gas pipelines, and sold his drawings to Pipeco, a
manufacturer of such items. A dispute arose before production began, and both parties immediately
agreed to ADR. What would lie behind this mutual aversion to court proceedings?
Answer:
The most likely reasons behind the selection of ADR in this case are (in order of importance):
(a) Secrecy – the invention is new, which may have great value from a competitive standpoint.
(b) Speed – production is likely set up already and any delay is expensive.
(c) Cost – a cheaper proceeding producing a better result is in the interest of both parties.
Case Problems for Discussion
Case 1
A backhoe owned by Digger Ltd. was involved in the trenching for a water pipeline located along a city
sidewalk. In moving a bucketful of rock into a waiting truck, the backhoe operator accidentally struck and
cut an overhead power line. The cut power line fell to the sidewalk, injuring and electrocuting a pedestrian
who had been observing the trenching. The pedestrian required extensive hospitalization and reconstructive
surgery, and later commenced legal proceedings against Digger for the injuries suffered, including six
month’s lost wages while hospitalized.
Outline the various steps the parties to the action would take to bring the case to trial, and briefly
describe the trial process.
Answer:
The case is quite straightforward, and students should not be thrown off by the causal chain of backhoe,
power line and passer-by. Although students have not yet been exposed to the principles of negligence
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law, most will recognize the duty, breach, damage elements of this incident and as something more than
a simple and blameless accident. As to the substance of the question, the stages by which the case will
be brought to trial, and the trial process itself, are described the sections entitled “Civil Courts” and
“Civil Court Procedure”.
Case 2
As the Head of Information Systems at Equity Brokerage, you maintain the computer systems which
support all aspects of stock trading accounts at Equity, including access for trading purposes. Your firm is
being sued by a customer who alleges trading irregularities occurred on her account. When you testify at
trial as to the identity of the person who conducted the transactions and the actions that affected the status
of the account, what kind of witness are you, and what kind of evidence are you providing?
Answer:
Despite having some particular expertise, the witness would be considered to be only an “ordinary
witness”. As an employee of the defendant firm, the witness lacks the independence of opinion that is
usually one of the hallmarks of most “expert witnesses”. As the witness has direct knowledge of the events
(regarding the computer system itself), the witness is giving “direct” evidence rather than “hearsay”.
Case 3
Farhan is personally injured and his home is badly burned by a toaster oven that, on first use, burst into
flame. With Farhan successful in an action for damages, what factors should a judge take into consideration
in determining the issue of costs?
Answer:
The issue of an award of costs is covered in the section entitled “Court Costs”. The judge would take into
account the behaviour of the parties, especially the defendant, in forcing the case to a judicial hearing.
While there may be genuine issues for trial, including the amount of damages claimed, the judge will be
concerned as to whether the defendant manufacturer was simply attempting to stall or bankrupt Farhan,
thus perverting justice rather than seeking it. Such efforts will be penalized in costs, in addition to
disposing the court toward generosity in the award in the first place.
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