Chapter 1: Foundations of Business Law in Canada
Exercises
True or False?
1. Laws promote certainty and predictability because they never change. False
2. One of the purposes of the criminal justice system is to ensure that the victim of the
crime will be compensated for the harm done by the offender. False
3. A purpose of a legal risk management plan is to reduce the risk of being sued and to
reduce the amount of liability in the event of a lawsuit. True
4. The Canadian Charter of Rights and Freedoms replaced human rights legislation in 1982,
when Canada's Constitution was brought home from England. False
5. The courts are empowered to strike down any law that violates the Charter. True
6. The Charter does not prohibit businesses from discriminating against racial minorities if
they so choose. True
7. Administrative tribunals have less expertise than courts. False
8. Public laws govern actions of individuals and businesses when those actions occur in
public places such as parks, roads, waterways, and the air. False
9. Canada and all its provinces and territories operate under a common law legal system.
False
10. Judicial review is a process whereby a court reviews a tribunal's decision for errors of
law, errors involving fairness, or errors involving the tribunal's exercise of power. True
Multiple Choice
1. Which definition or definitions best describe "the rule of law"?
a. Everyone has equal rights before the law, and nobody is above the law,
including government.
b. The wealthy and educated are more likely to benefit from the law than are the
poor and uneducated, and all societies are ruled by law.
c. Punishment for breaking the law is imposed according to rules of conduct.
d. All of the above.
2. Which of the following best describes the protections afforded by the Canadian Charter
of Rights and Freedoms?
a. Freedom from discrimination and harassment in the workplace.
b. Freedom from unreasonable government interference with respect to rights
and freedoms such as equality, religion, and expression.
c. The legal right to sue a person or company for discrimination.
d. The legal rights and freedoms of Canadians are guaranteed and cannot be
limited by legislation in any way.
3. Which of the following best describes substantive law?
a. It defines international legal status.
b. It defines relationships between governments.
c. It defines the process by which to enforce legal protections set out in the
Charter.
d. It defines rights and sets limits on conduct.
4. What does the division of powers found within Canada's Constitution dictate?
a. Which powers are statutory and which are derived from the common law
b. Which powers are territorial, provincial, and municipal
c. Which powers are provided to Quebec through the civil law and to the rest of
Canada through the common law
d. Which powers are federal and which powers are exclusively provincial
5. In which of the following legal proceedings is Barney appearing in a matter categorized
as private law?
a. Barney appears as a witness for the prosecution in Fred's fraud trial.
b. Barney appears as a witness at a hearing where Fred is appealing the decision of
a worker's compensation tribunal.
c. Barney appears as a witness in a proceeding where Fred is suing a business
associate for breach of contract.
d. Barney appears as a witness at Fred's trial on a municipal noise by-law infraction.
6. Which of the following is an example of procedural law?
a. The rule that prohibits a restaurant from serving alcohol to persons under the
age of 19
b. The rule that requires the operator of a vehicle to drive within the prescribed
speed limit
c. The rule that prevents songs protected by copyright from being uploaded onto
the Internet without permission
d. The rule that requires that a lawsuit must be personally served on the
defendant in the case
7. Which of the following is not a legal term normally associated with civil law
proceedings?
a. Liability
b. Prosecutor
c. Plaintiff
d. Damages
8. Which of the following is not an example of how tribunals are different from courts?
a. Tribunal decisions are not binding on the parties in the same way as are court
decisions.
b. Tribunals usually have more informal and flexible procedures than do courts.
c. Tribunals may consider public policy to a degree that courts usually do not.
d. Tribunals may admit evidence that would never be admitted in a court.
9. The judicial branch of government creates case law when it interprets the law. However,
Canada has a constitutional principle that allows the legislative branch of government to
override judge-made law. What is this constitutional principle known as?
a. Ultra vires
b. Stare decisis
c. Rule of law
d. Parliamentary supremacy
Short Answer
1. Define "law" and describe its purpose.
Law consists of the body of norms, or rules, by which a society chooses to govern
itself. Through the law, society seeks to create a stable environment in which its
members can plan their affairs with a measure of certainty and predictability. It seeks
to help create productive relationships and interactions among individuals,
businesses, and governments and to resolve disputes peacefully.
2. Describe the steps to take in devising a legal risk management plan.
First, learn about the laws that govern your business so that you can identify the
activities that place your business at risk. Second, evaluate the risks that you have
identified so you understand their likely probability and severity. Third, devise and
implement a legal risk management plan to eliminate, or at least reduce, the risks you
have identified. Fourth, review and revise your legal risk management plan to ensure
that it is effective and that it reflects changes to your business and the law.
3. What is meant by "jurisdiction"? Provide examples to explain your answer.
Jurisdiction is the authority to make or enforce the law. The authority to make or
enforce law is granted through law. The highest law is the Constitution, and it
provides the “powers” that are granted to the levels of government. Federal
jurisdiction and provincial jurisdictions are examples where a different level of
government is granted the power to make or enforce law. Example: The federal
government has jurisdiction to make criminal law, regulate intellectual property, and
enforce laws relating to interprovincial trade. Governments and law enforcement
agencies must act within their jurisdiction (the power granted to them). They do not
have legal authority to exceed their power.
4. Describe the advantages and disadvantages of Canada's common law legal system.
Advantages: By requiring judges to follow the interpretation given to the law by
higher courts in the same jurisdiction, the common law legal system provides a sense
of uniformity, fairness, and predictability. Legal principles will be similarly applied in
similar cases.
Disadvantages: It is not enough to know the law. To appreciate how the law may
apply in a particular case, the doctrine of precedent will have to be considered, so it
will be important to know how similar cases have been decided. This often means that
professional legal advice may be required so that one can know the relevant case law
that applies.
5. Explain how the protections of equality rights under the Canadian Charter of Rights and
Freedoms differ in application from provincial human rights codes.
The Canadian Charter of Rights and Freedoms set a limit on government and the
government’s authority. The Charter sets out that every individual has the right to
equal protection and equal benefit of the law without discrimination, including
without discrimination based on race, national or ethnic origin, colour, religion, sex,
age, or mental or physical disability. This means that government must act without
discrimination, including in the laws they may enact and in the application of those
laws or enforcement of those laws by public bodies or officials. The Charter, however,
does not address discrimination by private individuals or in the private sector. Federal
and provincial human rights legislation, like the Human Rights Code of Ontario, also
prohibits discrimination on the basis of prohibited grounds similar to those
enumerated in the Charter, but these statutes address discrimination in the private
sector, including employment. If an individual feels they have been discriminated
against on the basis of a prohibited ground in the hiring process by a company, for
example, this would not be a Charter issue but rather an issue to be dealt with by the
relevant human rights legislation.
6. Explain how business law differs from business ethics.
Business law and business ethics intersect, but they are not the same thing. Conduct
that is legal may not necessarily be considered ethical, and vice versa. Legal risk
management is one aspect of protecting one’s business. Other aspects, such as
business reputation, should also factor into business decision-making. Compliance
with the law may not safeguard a company’s reputation if there is unethical, albeit
lawful, conduct.
7. Describe two reasons for which a court may determine legislation to be
unconstitutional.
One aspect in which legislation may be “unconstitutional” is if a level of government
exceeds the powers granted to it by the Constitution Act, 1867. For example, the
power to make criminal law is within the jurisdiction of the federal government. A
statute enacted by a provincial government that makes something a “crime” would
exceed the authority granted to provincial governments. If challenged, the law could
be struck down as being unconstitutional or ultra vires (beyond the scope of power
given to that level of government).
A second way a court may determine legislation to be unconstitutional is if the
legislation, enacted by any government, violates a section of the Charter. The Charter
is part of the Constitution, and thus is higher than other ordinary legislation. While
there may be reasonable limits to the rights and freedoms set out in the Charter, law
that unjustifiably limits those guaranteed protections (freedom of expression,
freedom of association, the right to be presumed innocent until proven guilty, etc.)
can be found to be unconstitutional.
Apply Your Knowledge
1. Review the following scenarios and identify whether the legal matter at issue will be
categorized as public law or private law. Discuss the terminology used in the scenario
and how that helps determine how the matter is categorized
a. Jessica must attend a hearing before an immigration tribunal regarding her
status to live and work in Canada. Public law. “Tribunal” is language that
suggests “government.” Instructors may wish to have a discussion about
jurisdiction using this exercise. In this case, the immigration issue relevant to
status in Canada indicates federal jurisdiction.
b. George has been fired from his job and plans to sue his employer for wrongful
dismissal. Private law. Lawsuits are categorized as private law.
c. Anastasia got a ticket for talking on her cellphone while driving and intends to
fight the ticket in court. Public law. Law enforcement officers issuing “tickets”
are an example of an individual dealing with government. Note that it would
be provincial jurisdiction.
d. Maria is bringing a legal proceeding against her competitor for patent violation.
Private law. The legal proceedings will be some form of court action where one
individual brings an action against another individual. Government will not be
involved. Note also that intellectual property is regulated by the federal
government, so this would be a matter that is federally regulated/under
federal jurisdiction.
e. Sarah has been fined for fishing without a licence. Public law. Issuance of
licences is done by government, and government enforces these regulatory
provisions. A key word that suggests it is public law is “fined” for something.
Note that, although the matter is most likely a matter within provincial
jurisdiction (because lakes and rivers fall within provincial jurisdiction), it
depends on where the alleged infraction took place (i.e., if it took place off the
federally regulated national coast, it may be federal).
f. Kosta is commencing legal proceedings against his business associate for breach
of contract. Private law. Contracts regulate our business relationships.
g. Sami has filed a complaint with the Canadian Human Rights Commission alleging
discrimination by their employer. Public law. Note that a lawsuit would be
private law, but this scenario involves a government body, the Human Rights
Commission. When the Commission reaches out to the employer, the employer
will be dealing with a government/public body. We do not have enough
information to determine what jurisdiction: if the employer is in a federally
regulated industry, the matter would be within the federal jurisdiction. More
commonly, and most likely, it would be a matter within provincial jurisdiction
and thus provincial human rights.
h. Rino's company has been fined by the provincial Ministry of Labour following a
workplace accident. Public law. The word “Ministry” provides insight that this is
a matter involving a government body (likely, although not necessarily, under
provincial jurisdiction).
i.
Sonya has received several notices from the Canada Revenue Agency about
failing to report income. Public law. There is a government body involved here.
Federal jurisdiction: “Canada.”
j.
Olga has applied for a liquor licence for a new nightclub, but her neighbours are
opposing it. Public law. This is not Olga versus the neighbours; the issue here is
whether Olga should get her licence. It is a government body that will
determine this. Jurisdiction: provincial.
k. Kira has made a complaint to the Privacy Commissioner about the disclosure of
her personal financial information by a bank manager without authorization.
Public law. The complaint is being made to a government body.
“Commissioner” suggests an arm of government.
2. Refer to sections 91 and 92 of the Constitution and identify which level of government,
federal or provincial, has the power to make law in relation to the following topics:
a. Protection of an invention – Federal
b. Disposal of waste products by hospitals – Provincial
c. Fees payable to register a real estate transaction – Provincial
d. Conspiring to commit fraud – Federal
e. Minimum wage for liquor servers – Provincial
f. Safety standards for trucking companies that carry goods between provinces –
Federal (because it is interprovincial; if it were intra-provincial, it would be
provincial jurisdiction).
3. Review the following matters and comment on whether the Charter applies:
a. A taxi company refuses to hire a Sikh because he wears a turban. Private sector
matter: Charter does not apply.
b. A city by-law prohibits the rental of community spaces to religious organizations.
Charter applies (limit imposed by government that may violate Constitutional
rights).
c. The federal government enacts legislation authorizing police to seize computer
data of anyone suspected of a computer crime without needing to apply for a
warrant. Charter applies (limit imposed by government that may violate
Constitutional rights).
d. A software development company fires an employee for expressing political
views on social media. Private sector matter: Charter does not apply.
Chapter 2: Resolving Disputes and Navigating Canada’s Court System
Exercises
True or False?
1. In the Superior Court, you are entitled to disclosure of the other party's documents and
evidence prior to trial. True
2. If you win a case in court, you can enforce your judgment by using garnishment to seize
and sell the defendant's car. False
3. A decision made in the trial division of the Superior Court is binding on the Court of
Appeal. False
4. The Small Claims Court has the power to grant injunctions. False
5. If you believe a decision of an administrative board was unfair and not based on
evidence, you have the right to have the decision reviewed in the courts. True
6. If you think someone has breached your legal rights, you can sue at any time. False
7. While the judgment of a court is enforceable, a mediated settlement cannot be
enforced. False
8. The procedures used at arbitration are similar to those used in the court system, but an
arbitration is less formal, quicker, and less expensive. True
Multiple Choice
1. Arbitration as a process is
a. more formal than negotiation.
b. more formal than litigation.
c. controlled by the parties.
d. none of the above.
2. If the parties have a history of conflict, and one is stronger than the other, which of the
following is probably the best alternative dispute resolution process?
a. Negotiation
b. Mediation
c. Arbitration
d. Either mediation or arbitration would work equally well
3. In talking about alternative dispute resolution, we often discuss rights and interests. In
this context, "rights" refers to
a. short-term goals.
b. long-term goals.
c. business concerns, aspirations, and priorities.
d. entitlements.
4. In positional negotiation, you
a. determine what outcome you want before you start, and stick to it as best you
can.
b. explore with the other parties what the source of the conflict is.
c. accept the other side’s position as legitimate and valid.
d. ask open-ended questions.
5. In the mediation process,
a. the mediator guides discussions and imposes a settlement after hearing both
sides.
b. the mediator guides discussions.
c. the mediator always keeps the parties apart during discussions.
d. the parties must not be in an adversarial position.
6. You should use mediation if
a. both parties are prepared to make serious efforts to resolve the issues.
b. both parties are prepared to explore mutual interests and wish to maintain an
ongoing relationship.
c. in settling a rights issue, the parties are more interested in making their own
rules than in having rules imposed on them by a neutral individual.
d. all of the above.
7. You should use arbitration if
a. the other party is stronger than you are.
b. you know the other party will comply with the arbitrator's decision.
c. you have a good working relationship with the other party and have successfully
resolved interest disputes in the past.
d. all of the above.
8. "Solicitor–client privilege" means
a. anything your lawyer tells you cannot be repeated by you to anyone else.
b. anything you write to your lawyer cannot be revealed by either of you.
c. your lawyer has a right, ahead of other creditors, to payment of their bill for
services.
d. your lawyer cannot reveal any information you give to them about the case
without your permission.
9. Small Claims Court cases differ from those in the trial division of the Superior Court in
which of the following way(s)?
a. There is a limit on the amount of money one can sue for in the Small Claims
Court.
b. Proceedings in the trial division of the Superior Court are quicker and cheaper
than those in the Small Claims Court.
c. There is no discovery process in the Small Claims Court.
d. The rules of evidence are more relaxed in the Small Claims Court than in the trial
division of the Superior Court.
e. Both a and d are correct.
10. If you sued a defendant and managed to prove that they damaged your equipment so
that you had to purchase a replacement for a specific price, and the defendant also said
things in your community that caused some harm to your business reputation, what is
the court is likely to award you?
a. Special damages
b. General damages
c. Injunctive relief
d. Special and aggravated damages
Short Answer
1. In the context of ADR, what are interests and rights, and why is the distinction between
them important?
“Interests” refer to short- and long-term business goals, concerns, priorities, and
aspirations. They tend to be particular to specific businesses and to the parties to a
dispute. Rights are entitlements determined by reference to an outside authority,
such as a law or a rule in a contract and create entitlements or obligations for the
parties.
The importance of this distinction for ADR is that dispute resolution focuses on either
interests or rights, although a dispute may involve both. Rights issues tend to be
simpler and can usually be determined by reference to an external authority. This may
favour more formal and more adversarial methods, such as arbitration. Interest
disputes, on the other hand, require consideration of a much broader range of issues,
including hopes, fears, aspirations, and goals. This may require a less formal
adversarial setting, which allows for more wide-ranging discussions.
2. When should you choose negotiation over other dispute settlement techniques?
Choose negotiation when the parties are establishing rules for resolving potential
conflicts in situations where no actual conflict yet exists and when both parties are
interested in advancing each other’s business interests as well as their own and are
willing to seek win–win solutions.
3. When should you choose mediation over other dispute settlement techniques?
Choose mediation when both parties are prepared to make serious efforts to resolve
the issues. Mediation is also useful when both parties are prepared to explore mutual
interests and maintain business relationships. Finally, it is useful if you and the other
party want to settle a rights issue and your mutual desire to set your own rules
exceeds your desire to have a third party set them for you.
4. When should you choose arbitration as a dispute resolution technique?
Arbitration works well if the parties agree to an arbitration system prior to the
development of a conflict. It also works if they wish to maintain a business
relationship even when they are involved in a difficult dispute that they cannot agree
to resolve through negotiation or mediation. Also, it should be considered by the
party who has less power in the relationship, to prevent the party with more power
from dictating the outcome.
5. What are the main steps in the litigation process in the trial division of the Superior
Court?
The process begins with the statements of claim and defence (the pleadings) in which
the parties set out a concise statement of material facts and the law relied upon to
support their case. The case proceeds to discovery, where the parties are entitled to
ask each other questions about the case and to examine relevant documents. The next
step is usually a pre-trial conference where the parties attempt to settle the case or at
least narrow the issues for trial. The process concludes with the trial, where the
parties present their case through the evidence of witnesses and physical evidence. At
the end of the trial, the judge—or the jury if there is one—renders a decision. If the
plaintiff is successful, they proceed to enforce the judgment if it is not paid.
6. How does a Small Claims Court case differ from one in the trial division of the Superior
Court?
First, the process is simpler: the forms used are shorter, simpler, and more userfriendly—and there are fewer of them. There is also no formal discovery, and the pretrial stage is relatively simple. At trial, the rules for presenting evidence are less formal
and technical, as are court procedures generally. Second, the Small Claims Court can
only order the payment of money or the return of personal property provided that the
value of the property does not exceed the monetary jurisdiction of the court. The
Superior Court has no limit on its monetary jurisdiction and can grant a broad range of
non-monetary remedies, such as injunctions and declarations of a right or
entitlement. Finally, the Small Claims Court is often quicker and cheaper than the
Superior Court. Parties may represent themselves or use less expensive court agents,
rather than lawyers, to represent them.
7. What is the hierarchy of courts in Ontario?
The highest court—the court that can overrule the decisions of other courts—is the
Supreme Court of Canada, which hears civil and criminal appeals from the appeal
courts of all provinces, including Ontario. Below it is the Ontario Court of Appeal,
which hears appeals from the Superior Court of Justice in both criminal and civil
matters. Below the Court of Appeal is the Superior Court of Justice. It hears civil and
serious criminal cases, but also has specialized divisions, such as bankruptcy court.
While it has some appellate functions, it is primarily a trial court. This court also
includes the lowest civil court, the Small Claims Court, which is limited to civil cases
where the damages claimed are $35,000 or less. Below the Superior Court is the
Ontario Court of Justice, which is primarily a lower criminal court, hearing less serious
criminal cases.
8. Why do business people increasingly opt for ADR rather than civil litigation to resolve
disputes?
Generally, business people opt for ADR because it is more flexible, less expensive, and
quicker than litigation. First, parties can try informal negotiation or mediation to
resolve issues in a non-confrontational way and move on to arbitration if their first
ADR efforts are not successful. They can adapt and choose the ADR technique that
best suits them. With litigation, the process is structured, formal, and inflexible—it
begins with a lawsuit and is highly adversarial by nature.
Second, ADR techniques are relatively inexpensive. Negotiation may involve no
upfront costs. Mediation and arbitration do require the use of paid third parties, but
because the process is simpler than the litigation process and less formal, the shorter
time helps to keep costs down. Litigation, on the other hand, requires a multi-step
process with complex pre-trial and trial procedures requiring lawyers to help navigate
the system.
Finally, ADR processes are controlled largely by the parties to the dispute, who can get
a dispute into the ADR process and out again relatively quickly. In contrast, because of
the complexity and formality of the process, litigation takes much longer. Plus, the
volume of cases to be heard often outstrips the judicial resources available, making
for systemic delays.
9. Your business is involved in a legal dispute over the performance of a contract. What
steps should you take if you are going to retain legal assistance?
You should consult colleagues for recommendations to find lawyers or paralegals
whose practice deals with the kind of legal dispute you are involved in. You should
also consider whether the case will be heard in Small Claims Court or the Superior
Court. If it is going to be heard in the Small Claims Court or before an administrative
tribunal, you could retain a paralegal, whose fees are likely to be less than a lawyer. If
you do decide to retain a lawyer, you can consult the Law Society to find a lawyer who
specializes in the area of law that you are concerned with, and you can arrange,
through the Law Society’s lawyer referral service, a free, short consultation with a
lawyer. You should interview the legal professionals you are considering retaining to
question them on their expertise and to see if you will have a good working
relationship. Once you have made a decision on who to retain, you may be asked to
sign a retainer, which is a contract for the legal services you need. You will also be
asked to pay a deposit, also called a retainer.
10. You have determined that you have a claim for damages of $37,000. What do you need
to consider to determine which court you should sue in?
Because this is technically over the monetary limit of the Small Claims Court, you
normally would sue in the Superior Court. However, you need to consider the cost of
doing so against abandoning $2,000 of your claim instead and limiting it to the
$35,000 monetary limit of the Small Claims Court. You might consider this because
Small Claims Court involves a much simpler process, which takes less time and will
greatly reduce the cost of legal services as well as court costs. The amount saved
would probably well exceed the $2,000 you abandoned to take a faster and cheaper
route to a judgment.
Apply Your Knowledge
1. Legover Industries Ltd is a custom furniture maker. Its president and only shareholder,
Hieronymous Firple, recently sold the company to BlackLeather Ltd, a company that is
also in the furniture business. The parties negotiated a lengthy contract of purchase and
sale. One of the clauses in the contract stated, "Any tax liabilities existing at the time of
the signing of the agreement shall be payable by the seller." Six months after the
contract was signed, Canada Revenue Agency (CRA) sent BlackLeather a notice of
reassessment. CRA had discovered a tax liability for a taxation year prior to the sale that
it had overlooked. BlackLeather could easily pay the amount owing to the CRA but
thinks that Firple is responsible for paying. Also, BlackLeather's principals found Firple
difficult to deal with and their feelings about him are mostly negative. On that basis,
they would not mind making him pay.
BlackLeather accordingly demanded that Firple reimburse BlackLeather for the $8,000 it
must pay to the CRA. Firple is now retired and plays golf in warm places on a year-round
basis. He is a rigid individual who spends most of the year outside of Canada. Firple does
not want to pay, on the grounds that this tax liability did not exist when the agreement
was signed. It only became a tax liability when the CRA said it was, which was after the
agreement was signed. In response, BlackLeather says that the liability existed prior to
the signing of the agreement. The fact that the liability was not known to exist until
after does not permit Firple to dodge the responsibility of paying, as the purpose was to
affix liability for taxes for the period when Firple controlled the company. When
consulted, lawyers on both sides said the answer was not clear-cut and arguments could
be made for both positions. Discuss the applicability of negotiation, mediation,
arbitration, and litigation to the facts of this case.
Negotiation: Considering the amount in question is small compared with the potential
costs of resolving the dispute in other ways, negotiation might be feasible and
desirable: there is no required structure or set of rules, and the parties could simply
do this through their lawyers and an exchange of letters. However, both parties have
to participate voluntarily. Since Firple is out of the country a lot, he may not want to
be bothered. Also, BlackLeather’s principals have already had difficulties in dealing
with Firple. Proceeding without rules or structure with a difficult person may not be
very productive. Still, it is inexpensive and simple, and given the low amount in
question, it is likely worth a try from BlackLeather’s point of view. This is less the case
for Firple, as he is not the party seeking a resolution. Another potential problem is
that Firple, being difficult, may participate only to spin things out and wear
BlackLeather down so that the issue goes away without a resolution.
Mediation: This case is a good example as to why a mediation or arbitration clause
might be included to compel parties to do one or the other or both. However, like
negotiation, mediation requires a degree of cooperation with respect to participation,
and the same problems that arise with negotiation arise here as well. The imposition
of structure and a neutral mediator is unlikely to be effective if Firple is not
cooperative or willing to abide by the rules. BlackLeather does not view Firple as a
cooperative candidate for either process, so it may be reluctant to waste time and
money pursuing these options if it thinks Firple will be difficult, particularly
considering the amount at stake.
Arbitration: Arbitration may work if the parties agree to it, because the arbitrator has
the power to make an order on hearing the facts and submissions on the law.
Arbitration orders may be registered in the courts in most jurisdictions and can be
enforced like a court order. Arbitrations are also less expensive than court
proceedings because they involve fewer steps and are less formal. However, they may
turn out to be relatively expensive where small amounts are at stake, as in this case.
Litigation: In general, the modern trend is toward mediation and arbitration rather
than litigation because the latter is seen to be overly formal, technical, timeconsuming, and expensive. However, where the parties have a poor relationship, as
described here, litigation may be the best option if no agreement to negotiate,
mediate, or arbitrate can be reached—and because a lack of trust exists between the
parties. With litigation, the process is compulsory for Firple, who, on these facts, is
unlikely to do anything voluntarily to resolve the matter. As well, because the amount
is relatively small, BlackLeather could use the Small Claims Court, hire a paralegal, or
have one of its officers act for it. Here, the procedure is simple and not overly costly,
making an action to obtain payment by Firple feasible.
2. Graymetal is a mining company that has a lease on a coal mine in Bearsnout, Ontario.
This small town used to have several mines, but now has only this one. The coal mined
here contains a rare element called germanium, which is used to make computer chips.
There is a huge market for germanium. However, germanium is extracted from the coal
ash, so the coal has to be burned. Burning coal, particularly this type of coal, is very
polluting. A company, CompVolt, is interested in buying the germanium from Graymetal.
CompVolt has a process for burning coal to create energy and reduce pollution as it
extracts the germanium from the ash. The town's current by-laws do not permit a coalburning operation. However, should the project materialize, the town would be
interested in obtaining electric power from the operation. It must also consider the
increased employment opportunities and property tax income that would result. What
resolution process would work best in this case?
This is probably a good situation in which to encourage negotiation between all
parties. Graymetal and CompVolt have an interest in advancing each other’s business
interests along with their own, since their interests complement each other’s and
there is profit to be made for both. The town also has an interest in what the two
companies are doing. CompVolt appears to have an acceptable solution to the
pollution problem, and if this is true, the town will benefit from increased tax
revenue, local employment, and access to an off-grid power source that can be made
clean. This could be a win–win situation for everyone. Further, because the
relationship here is a long-term business relationship, negotiation may work well.
However, the town may wish to be cautious: terms have to be worked out between it,
on the one hand, and the two companies, on the other. The mining and processing
companies could take their business elsewhere, perhaps reducing the town’s
bargaining power, especially since the town appears to have a shrinking economy.
Negotiation is not always a good choice if one party is somewhat weaker, particularly
if the other two parties are closely allied.
However, cases where there are three parties and the negotiations might be complex
or broken down into two sets (one between the two companies, and another with the
town) may be appropriate for facilitative mediation, where the potential relationships
are strong. The mediator’s key job is to keep communication open by helping each
party define and obtain the needed information. The mediator can also facilitate
brainstorming, which might be very useful where a complex series of interrelated
agreements is being developed. Where the parties might have trouble understanding
each other’s perspective (such as between the companies and the town),
transformative mediation might be useful to help each side understand the other’s
goals and how those might mesh, thereby “transforming” each side’s view of the
other.
Some form of mediation or negotiation should work here, as all parties are prepared
to make serious efforts to resolve the issue. All parties are interested in exploring
mutual interests and in maintaining a business relationship. As well, they appear to be
capable of developing their own set of rules without having an outside party, such as a
court, impose them.
Chapter 3: Tort Law
Exercises
True or False?
1. The standard of proof for tort actions is on a balance of probabilities. True
2. Many actions that were originally torts have become offences under provincial statutes.
True
3. To prove that a defendant has committed a tort, a plaintiff must establish that the
defendant's actions were the sole cause of the harm. False
4. A fiduciary duty is an enhanced duty of care that flows from a relationship of special
trust. True
5. The burden of proving a tort defence, such as voluntary assumption of risk, is on the
plaintiff. False
6. The law assesses professional negligence according to the "reasonable professional"
standard. True
7. An unlimited right to privacy is constitutionally recognized in Canada. False
8. Defamation in writing is called slander. False
9. The tort of assault involves violent touching. False
10. The Negligence Act codified the common law concept of contributory negligence into a
statutory provision. True
11. If a business operates in a context of unusual risk and offers an activity to patrons, it
may be required to exceed the "normal" or "typical" safety procedures common for that
kind of business. True
Multiple Choice
1. Contributory negligence
a. means that the plaintiff was partially at fault for the harm they suffered.
b. must be proven by the defendant.
c. can, if proven, limit the defendant's liability in tort.
d. all of the above.
2. Remedies available for torts include which of the following?
a. Prison sentences and damages
b. Specific performance and injunctions
c. Damages and injunctions
d. Restraining orders and restitution
3. A properly drafted waiver of liability, when signed by the customer of a business, can
form the basis of a defence of voluntary assumption of risk. Which of the following can a
waiver do?
a. It can protect the business from claims made under both the Occupiers' Liability
Act and the Consumer Protection Act.
b. It can protect the business from claims made under the Occupiers' Liability Act
but probably not under the Consumer Protection Act.
c. It can protect the business from claims made under the Consumer Protection Act
but probably not under the Occupiers' Liability Act.
d. Waivers have been ruled ineffective in Canada but may still be useful as a means
of communicating risks to customers.
4. Negligence is established only when the plaintiff proves that the defendant could
reasonably foresee
a. that the plaintiff would purchase the defendant's goods.
b. that the plaintiff or someone like them might be harmed or incur loss as a
result of the defendant's actions.
c. that the plaintiff or someone like them might be harmed or incur loss as a result
of the defendant's actions, and that the full extent of the harm actually suffered
by the plaintiff was also reasonably foreseeable.
d. that the plaintiff would rely, unjustifiably, on the defendant's warnings.
5. How can a business attempt to limit its liability in tort?
a. By conducting safety tests on products and services and documenting test
results
b. By maintaining retail and other premises in good repair and conducting regular
safety patrols
c. By printing warnings on products advising of potential dangers
d. By doing all of the above
6. To succeed in a defence based on fair comment, a defendant's comment must
a. be based on a conclusion that is reasonably supported by evidence.
b. not be motivated by malice.
c. be on a matter of public interest.
d. all of the above.
7. Which is the best strategy for business owners to manage the risk of lawsuits based on
the law of nuisance?
a. Restricting entry to dangerous areas
b. Conducting market research before designing new products
c. Complying with all land-use laws, such as zoning by-laws, building codes, and
environmental laws
d. None of the above
8. To establish that the defendant committed the tort of interference by unlawful means,
the plaintiff must prove that
a. the defendant's business is a direct competitor of their own and that the
defendant has gained an economic advantage over the plaintiff by unlawful
means.
b. the defendant intended to harm the plaintiff's business, that the defendant
committed an unlawful act to do so, and that the plaintiff suffered actual harm
as a result.
c. the defendant intended to harm the plaintiff's business and that the harm was
done with knowledge on the part of principals of the defendant's corporation.
d. the defendant committed an unlawful act with the intent to harm the plaintiff's
business, whether or not actual harm occurred.
9. An indemnification clause is used to do what?
a. Prevent suits in nuisance brought by neighbours when a business undertakes a
polluting activity
b. Require participants to waive their right to sue should they be injured when
participating in an activity provided by a business
c. Force the employee to assume liability for certain risks associated with their
work so that the employer is not exposed to vicarious liability
d. Any of the above
10. Who can sue a manufacturer for injuries related to the negligent design of a ski helmet
under product liability law? Choose the best answer.
a. The original purchaser only
b. The original purchaser and any second-hand purchaser, as long as the helmet is
sold with the original packaging bearing safety warnings
c. Any wearer of the helmet, whether or not they purchased it, as long as safety
warnings are visible on the helmet
d. Any wearer of the helmet
Short Answer
1. List five business practices that can help reduce losses from product liability lawsuits.
•
Conduct tests on newly designed products to uncover potential flaws.
•
Conduct regular quality control checks of products.
•
Encourage retailers to return merchandise that appears damaged or irregular
by making this process easy, efficient, and cost-free.
•
Implement a recall program as soon as a defect or potential defect is
discovered in a product.
•
Document all the above activities.
2. What is the difference between negligence and strict liability?
In a negligence case, the plaintiff must prove that the defendant failed to act
reasonably and that this resulted in harm to the plaintiff. In a strict liability case, the
burden is on the defendant to prove “due diligence”—that the defendant took every
reasonable precaution to prevent the harm.
3. Why might a party decide to commence a tort action based on events that also formed
the basis of a criminal prosecution?
A tort action allows the plaintiff to control the progress of the litigation and provides
an opportunity to seek compensation for injuries or losses.
4. If a defendant is attempting to argue voluntary assumption of risk as a defence to a tort
action, what must the defendant prove?
The defendant must prove that they fully explained the risks of their product or
service to the plaintiff, that the plaintiff understood these risks, and that the plaintiff
explicitly waived the risks (typically by signing a waiver). Finally, the defendant must
also prove that the actual harm caused was of a kind described by the defendant
when seeking the plaintiff’s waiver.
5. Describe an appropriate policy for a business with respect to the handling of
trespassers.
•
The property should clearly display a “no trespassing” sign.
•
The property should be regularly inspected to identify potential hazards to
trespassers.
•
Trespassers should initially be asked to leave voluntarily.
•
Trespassers who do not leave should be detained as provided in the Trespass
to Property Act.
•
Employees should be trained to detain trespassers with the minimum force
required and to call for police backup immediately.
6. How can a business protect itself from competitors seeking to pass off their
merchandise as that of the business?
•
Register trademarks and patents.
•
Monitor the marketplace to detect acts of passing off.
•
Prosecute all known instances of passing off under the common law or
relevant intellectual property legislation.
7. Explain the "but for" test.
The “but for” test is the basic test used to establish causation. When trying to
determine whether the actions of the defendant were a cause of the harm to the
plaintiff, the court asks, “But for the actions of the defendant, would the plaintiff have
suffered harm?” If the answer is no, the defendant’s actions were a cause (not
necessarily the only cause) of the harm to the plaintiff.
8. Why must a defendant's actions be the cause in fact and also the cause in law of a
plaintiff's harm?
The doctrine of cause in law is designed to avoid the unfair imposition of liability on
defendants in circumstances where the defendant’s actions were a cause of the harm
to the plaintiff, but the consequences of those actions were completely or almost
completely unforeseeable. If a defendant could not have anticipated the far-fetched
chain of events that led to the plaintiff’s loss, it generally follows that the defendant
also could not have taken steps to avoid that loss. Requiring a defendant to pay for
unforeseeable and therefore unpreventable losses is said to be contrary to public
policy.
Apply Your Knowledge
1. A house fire breaks out late at night on the upper floor of a two-storey house. A 16year-old boy who had been sleeping on a couch in the study where the fire was believed
to have begun and two girls—the boy's 2-year-old and 12-year-old cousins who were
sleeping in the next room—are killed in the fire.
An investigation reveals that the fire was most likely caused by a dropped cigarette. The
investigators' theory is that the boy fell asleep while smoking and dropped the cigarette
on the couch. The couch was 30 years old and made of highly flammable materials.
Surprised at how readily the fire started, the investigators inquire about which brand of
cigarettes the boy smoked. The boy's parents—who forbade him from smoking—did not
know, but his friends reported that he alternated between three brands. Two of those
brands were manufactured by the Company.
The Company's advertising claims that its cigarettes contain 20 percent more tobacco
than other brands. Since the 1990s, many, but not all, tobacco companies have changed
the way they fill cigarettes, packing the tobacco in a manner that makes the cigarettes
"self-extinguishing," so that when put down in an ashtray, they quickly stop burning
(which is safer and wastes less tobacco). This packing process also means each cigarette
contains about 20 percent less tobacco. These details lead investigators to suspect that
the dropped cigarette was not of the self-extinguishing variety; in other words, it was of
a brand that is less fireproof than 75 percent of the cigarettes on the Canadian market.
Answer the following questions from the Company's perspective.
a. If the bereaved families learn that someone other than the (underage) boy
bought the cigarette from the Company, does the Company still owe the boy a
duty of care? Yes. The Company is liable in negligence (product liability) even
though there is no privity of contract between the boy and the company.
b. Does the Company owe the boy's cousins a duty of care? Yes. It would be
foreseeable to the Company that any fire caused by its products could harm
people other than the immediate smoker.
c. Was the cigarette the cause in fact of the damages? Yes. “But for” the fact that
the boy was smoking when he fell asleep, there would have been no fire and
no deaths.
d. Was the cigarette the cause in law of the damages? Yes. The connection
between the dropped cigarette and the damage (death due to fire) was not at
all remote or unforeseeable.
e. Were there any other causes of the damages? Yes. The boy’s action of falling
asleep while smoking, contrary to well-known warnings on the subject, was a
cause. The couch’s construction from flammable materials was another cause.
Some students may allege that the parents’ failure to prevent the child from
smoking was a cause (debatable). It’s possible that deficiencies in the house
construction could have been a cause (fire separation, etc.).
f. Should the fact that there were other causes affect how the Company handles
the case? Yes. The Company should consider adding other defendants
(furniture manufacturer, homebuilder, etc.). In the portion of the lawsuit
where the cousins’ parents sue the Company, the Company should ensure that
the boy is added as a defendant. Most importantly, the Company should deny
liability based on the boy’s negligence and allege contributory negligence in
the alternative.
g. Is the type of harm that occurred (death by burning) sufficiently remote from the
cause that the Company could deny liability on that basis? While it’s true that
the public is more familiar with suits against cigarette companies based on the
health effects of smoking, harm from fire is not a remote kind of harm, so the
Company could not deny liability.
h. Did the Company breach the required standard of care in the design,
manufacture, or distribution of its cigarette product? This was the central issue
in the actual case on which this scenario is based (Ragoonanan Estate v
Imperial Tobacco Canada Ltd, 2000 CanLII 22719, 51 OR (3d) 603 (Sup Ct J)). In
choosing not to employ a packing process that increased the safety of its
product, the company knowingly put a non-“self-extinguishing” cigarette out
into the market. The issue was one of design. The plaintiffs alleged that the
Company knew of the self-extinguishing design and could have chosen to use
it, especially since it had become the industry standard. Instead, the Company
chose to continue with the fast-burning design. There was no evidence of any
defect in the manufacture of the cigarette (no evidence was left after the fire).
The issue of negligence in distribution (which could have been based on
allowing cigarettes to fall readily into the hands of an underage smoker) was
not forcefully argued either, likely because of a lack of evidence. Because the
case settled before a full trial, there is no way of knowing whether the
plaintiff’s arguments would have succeeded.
i.
If the plaintiffs were to rely on the standard of care argument, what arguments
might the Company raise in its defence?
•
There was no legislation in place requiring the use of the selfextinguishing designs.
•
Even self-extinguishing cigarettes pose a risk of fire if dropped while the
smoker is sleeping.
•
The cigarettes are marked with warnings about sleeping in bed,
flammability, etc. The boy ignored these warnings.
•
The flammability of a cigarette is a matter of common sense, even when
no warnings are applied (there is a principle in tort law that, for
example, a knife need not bear a warning saying it is sharp).
2. Your company makes a spray product designed to remove odours from carpets,
upholstery, and curtains. Your public relations department advises that a story is
circulating on the Internet specifically naming your product and alleging that it is toxic to
house cats. According to the source of the story, an alleged veterinarian in Manitoba,
hundreds of cats are reported to have died of liver and kidney failure after being
exposed to the product.
Your product is made mainly of water, baking soda, and mild natural fragrance oils. All
the ingredients have been extensively tested, and you know that the product poses no
threat whatsoever to house cats. Your own investigation reveals that the person who
leaked the story is actually a disgruntled former employee who now works for a
competitor.
Answer the following questions.
a. Has your former employee committed a tort by starting this story? Which tort?
These facts support the tort of slander of goods, also known as injurious
falsehood.
b. Did your former employee owe you a duty of care? Would your answer be
different had he signed a non-competition clause? With or without a non-
competition clause, the former employee owes you a duty of care. Harm to a
business caused by spreading false rumours is foreseeable, and harm does not
take a past business relationship into consideration.
c. Is your former employee's new employer—your competitor—liable for its
employee's actions? The chances are low, but if you can prove that the new
employer encouraged or knew of the employee’s slanderous activity, or that
the employee posted the story while at work, you may be able to argue that
the new employer is vicariously liable for the harm. You would likely have to
prove that the new employer actually encouraged, or knew of and tolerated,
the activity.
d. What are your damages? Your damages would be equal to any decrease in sales
or decrease in corporate goodwill directly associated with the story. These
damages will be difficult to prove, so you may need to spend money on
customer surveys, etc. If you can tie losses to the story, you may be able to
include the cost of a campaign designed to rehabilitate your company’s image
in your damage claim. If you have trouble quantifying the damage done by the
story, you may still be entitled to nominal damages if you can prove all the
elements of the tort.
e. Would you request any other remedies in this case? You might consider asking
for injunctive relief: asking the court to order that the defendant take down
their original posting and refrain from posting any other slanderous material
on the Internet and elsewhere. You may also be able to get an order requiring
that the defendant publish a retraction.
3. You have decided to open a mixed martial arts (MMA) training gym, offering classes for
recreational and competitive fighters aged six through adult. It occurs to you that this
business may expose you to potential tort liability.
Answer the following questions.
a. What research might you do before offering classes to the public? MMA is a
heavily regulated sport. Professional MMA competition was prohibited in
Ontario until 2011. It is essential that you research any legal restrictions on the
sport. You should also research industry standards for trainer credentials and
experience. To understand the business’s risk exposure, you should conduct an
extensive review of lawsuits that have arisen against other MMA gyms.
Because this sport is new, it would be useful to broaden the scope of that
research to include suits against boxing and wrestling clubs and against minor
sports organizations in general. You or your advisers should review medical
literature about injuries common to the sport to get a clear picture of these
risks and of preventive measures and equipment proven to decrease risk.
Finally, you should obtain quotes for liability insurance for the venture.
b. What would be the main purposes of your research? The purposes would be
threefold:
•
To determine if the liability risks and/or insurance costs for this venture
outweigh the potential profitability of the business
•
To determine the following steps: selection of safety equipment, plans
for trainer safety training, content of liability waivers, effectiveness of
waivers in light of s 9(1) of the Consumer Protection Act, and
procedures for handling waivers on behalf of minors
•
To ensure that the business and its employees fully understand and
communicate the foreseeable risks of the activity to participants so that
participants are in a position to waive liability for risks
c. If, after completing your research, you decide to go ahead with the venture,
what risk management steps would you need to take?
•
Purchase safety equipment in sufficient quantity and in appropriate
sizes for all participants.
•
Arrange safety training or credentials upgrading for staff.
•
Secure adequate liability insurance.
•
Draft appropriate waivers for both adult and minor participants.
•
Train staff in the communication of risks and waiver compliance.
d. If you complete the research and risk management tasks you listed in the
foregoing questions, are you guaranteed to escape liability if a participant is
seriously injured or killed while training at your facility or competing on behalf of
your gym? Why or why not? You are not guaranteed to escape liability. A
number of scenarios could cause you to be liable despite your precautions,
including the following:
•
In the context of a lawsuit after an injury, a court could find your waiver
to be invalid for one of a number of reasons, including
o it does not adequately explain the risks;
o it omits a risk that led to the injury;
o it does not displace s 9(1) of the Consumer Protection Act, which
creates a deemed warranty that services provided by a business
will be of reasonable quality, and your services are found to fall
below that standard; and
o it does not adequately explain the effect of signing.
•
A staff member could forget to explain the activity risks to participants
or to provide participants with waivers. They could misrepresent the
content or effect of the waiver or have the waivers executed at the
wrong time.
•
A participant’s injury could be of a novel type or could occur in a
manner not anticipated by your warnings or waivers.
•
Your staff could fail to enforce the policy that obliges participants to
wear safety equipment.
•
A participant, for whatever reason (e.g., very lean individual, person
with a very large head, person with a disability, etc.), may not fit in any
size of safety equipment you offer, or the equipment does not fit them
properly.
•
A staff member could instruct participants in some kind of technique or
move that you do not anticipate, that is unusually dangerous, or that is
not addressed by the waiver.
Chapter 4: Understanding Contracts
Exercises
True or False?
1. Family members or friends who enter into unwritten business agreements with one
another may have difficulty proving they intended the agreement to be legally binding.
True
2. When you pay cash for toothpaste at the local corner store and do not receive a receipt
from the cashier, the transaction is not a legally binding contract. False
3. Contract law presumes business people understand that their promises to one another
may be enforced by courts and tribunals. True
4. It is possible for a business to prove that it did not intend a promise to be legally
binding. True
5. If you shake hands on the essential terms of a business transaction, it will not be legally
binding until a contract is written up and signed by the parties. False
6. A business should always refuse to deal with businesses that do not put their
agreements in writing. False
7. If an essential term of a contract is not precise and results in a contractual dispute that
ends up in court, the plaintiff's subjective interpretation of the term will always prevail.
False
8. Standard form contracts are one-sided and will not be enforced by the courts. False
9. Legislation can be a source of terms that will be implied into a contract if the parties do
not specifically include or exclude them. True
10. A force majeure clause in a contract can allocate the risk of loss or specify the impact on
the respective contractual obligations of the parties resulting from circumstances
beyond their control. True
Multiple Choice
1. Leigh Miller operates a coffee shop called Coffee Crazed in a trendy area of town. She
wants to change coffee suppliers and recently met with Juan Carlos, a sales
representative for Columbia Coffee Beans Wholesale Supply Ltd to discuss the
company's products and prices. She agrees to purchase a six-month supply of coffee
beans. Which of the following is not an essential term of the contract?
a. Price per unit of the coffee beans
b. Payment and delivery terms
c. Signatures of the parties
d. Description of the quality standards for the coffee beans
2. If two sophisticated business people enter into a standard form contract, and one of
them later wishes to withdraw from it because the terms are one-sided and unfair, a
judge will generally
a.
allow the aggrieved party to withdraw from the contract.
b.
enforce the contract.
c.
add additional terms into the contract to make them fair.
d.
change the terms of the contract to make them fair.
3. Which of the following is an example of a disclaimer or limitation of liability clause?
a.
"This contract will automatically terminate in the event that the purchaser
orders less than the quota for four consecutive weeks."
b.
"If the supplier fails to deliver the weekly supply of products to the retailer
on or before the first day of each week, the supplier shall pay the retailer
$100 for each day the delivery is late."
c.
"The supplier shall not be liable to the retailer in respect of any losses,
damages, costs, or claims resulting from circumstances that are not within
the control of the supplier."
d.
"This is the entire agreement between the parties, covering everything
agreed or understood in connection with the subject matter of this
transaction. No oral promises, conditions, warranties, representations,
understandings, or interpretations were relied on by either party to execute
this contract."
4. Which of the following is an example of a liquidated damages clause?
a.
"This contract will automatically terminate in the event that the purchaser
orders less than the quota for four consecutive weeks."
b.
"If the supplier fails to deliver the weekly supply of products to the retailer
on or before the first day of each week, the supplier shall pay the retailer
$100 for each day the delivery is late."
c.
"The supplier shall not be liable to the retailer in respect of any losses,
damages, costs, or claims resulting from circumstances that are not within
the control of the supplier."
d.
"This is the entire agreement between the parties, covering everything
agreed or understood in connection with the subject matter of this
transaction. No oral promises, conditions, warranties, representations,
understandings, or interpretations were relied on by either party to execute
this contract."
5. A party to a contract might choose to include a condition subsequent clause in a
contract
a.
if there is a risk of forfeiting a deposit if a deadline is missed.
b.
if it does not want to be bound to the terms of the contract if a certain
situation arises.
c.
to avoid the high cost of litigation if the contract is breached.
d.
to ensure any dispute will be resolved according to the law in a designated
jurisdiction.
6. If a term in a contract is ambiguous and the parties disagree on its meaning, how will a
judge resolve the dispute?
a.
By applying the interpretation of the party who drafted the contract.
b.
By applying the interpretation of the party who commenced the lawsuit.
c.
By applying their own subjective interpretation of the term.
d.
By applying the interpretation of a reasonable person.
7. Unless the parties agree otherwise, business-to-business contracts contain all but which
one of the following implied terms?
a.
The purchaser has a right to purchase the goods.
b.
The goods are not subject to any claims by others, such as liens.
c.
The goods correspond accurately to a description or sample.
d.
The goods are of merchantable quality or reasonably fit for a purpose
specified by the purchaser.
Short Answer
1. Why is it important for business people to know about contract law?
Contracts are the sustaining force behind most businesses. Contracts can clarify your
business dealings, and thoughtful negotiation of their terms and conditions can
prevent unexpected and undesirable results. Businesses need to know when a
contract is formed and what constitutes its terms and conditions in order to live up to
their responsibilities, enforce their benefits, and avoid the economic and legal
consequences associated with breaching them.
2. Why is it important to uphold the integrity of contractual agreements?
Businesses depend on one another to fulfill their contractual obligations in order to
run their current operations efficiently and plan for the future confidently.
Maintaining the integrity of business transactions sustains the economy as a whole.
Businesses that consistently fail to meet their contractual obligations run the risk of a
bad reputation and loss of future opportunities.
3. Name some situations where a court will imply a missing term into a contract.
Custom within an industry, obligations of good faith, business effectiveness, and an
obvious omission.
4. What are the benefits of a well-written contract?
A well-written contract provides:
•
a record of the parties’ rights and responsibilities;
•
proof of the parties’ agreement if a dispute arises;
•
clarification of the scope of obligations and rights (e.g., quality of products,
deadlines, quantities, pricing, limitations); and
•
concise and clear terms, limiting the application of the court’s rules of
construction if terms are vague.
5. What is a disclaimer clause and how is it different from an exclusion clause?
A disclaimer (or limitation of liability) clause limits the amount or type of damages
that a party might otherwise be required to pay for a breach. It differs from an
exclusion clause by capping damages rather than barring them entirely for specified
losses.
Apply Your Knowledge
1. Niagara's Best Organic Foods Wholesale Distributors Ltd ("Niagara's Best") distributes
organic fruit, vegetables, and other organic products to several stores in Toronto. On
September 1, Niagara's Best entered into a one-year contract with Organics for You
("Organics"), an upscale specialty food shop. The contract was negotiated by Anton
Kokovski, president of Niagara's Best, and Ying Li, sales manager of Organics. Under the
terms of the contract, Niagara's Best is to supply a minimum weekly quantity of
products to Organics. Niagara's Best is to deliver two cases each of seven varieties of
organic fruit and vegetables, two cases each of two types of packaged organic pasta,
and two cases of pasta sauce, for a total of 20 cases of goods (the "quota") to Organics
on the first day of every week. Organics agrees to pay Niagara's Best $500 for each
weekly shipment, payable within 14 days of delivery. If Organics wants to add more
cases or to order fewer cases than the regularly scheduled quota, it must provide
Niagara's Best with notice of the change at least two business days before the scheduled
delivery date. Below are a number of additional terms or clauses contained in the
contract between Niagara's Best and Organics.
a. What category of typical business contract terms does each of the following fall
into?
i. "This contract will automatically terminate in the event that Organics
orders less than the quota for four consecutive weeks." (Condition
subsequent clause)
ii. "If Niagara's Best fails to deliver the weekly supply of products to
Organics on or before the first day of each week, Niagara's Best shall pay
Organics $100 for each day that the delivery is late." (Limitation of
liability clause)
iii. "Niagara's Best shall not be liable to Organics in respect of any losses,
damages, costs, or claims resulting from circumstances that are not
within the control of Niagara's Best." (Exclusion clause)
iv. "This is the entire agreement between the parties, covering everything
agreed or understood in connection with the subject matter of this
transaction. No oral promises, conditions, warranties, representations,
understandings, or interpretations were relied on by either party to
execute this contract." (Entire agreement clause)
v. "Except as otherwise provided in this contract, Niagara's Best's liability
shall include all damages proximately caused by the breach of any
condition or warranty in this contract or negligent conduct on the part of
Niagara's Best, but such liability shall in no event include any indirect,
incidental, or consequential damages, including any loss of profit."
(Limitation of liability clause)
vi. "Weekly shipment price = $500* [* Price is set on a sliding scale and will
be automatically adjusted to reflect fluctuations exceeding 10 percent in
costs associated with delivering the product.]" (Pricing clause)
vii. "Niagara’s Best shall not be liable for the $100 late fee or any losses or
damages resulting from its delay or failure to deliver the weekly supply of
products to Organics resulting from labour unrest, inability to procure
supplies, war, sabotage, unusually severe weather, government-imposed
restrictions, or other similar reasons beyond the control of Niagara’s
Best.” (Force majeure clause)
Niagara's Best employs Sam Singh on a part-time basis to help with deliveries. On
October 3, Sam accompanies the company president for the weekly delivery of 20 cases
of organic foods to Organics. Sam and Anton arrive at Organics at approximately 4:30
p.m. The cases are unloaded into a storeroom at the back of the store. Sam
inadvertently stacks the cases too high. They tip over, knocking over a 10-gallon drum of
organic cooking oil that spills onto the floor of the storeroom and seeps into the rest of
the store, creating a slippery mess. Organics is forced to close for the remainder of the
day while the spill is cleaned up. The cost of cleaning up and replacing products
damaged by the oil is $1,200. In addition, Organics estimates that it lost $1,500 in profits
because it was closed during its busiest time of the day.
b. What impact do the problems associated with the October 3 delivery have on
the continuation of the contract? Note: Answers will vary, but should
incorporate a discussion and application of some or all of the following issues:
•
business relationships
•
limitation of liability clause
•
condition subsequent clause
c. Discuss the terms of the contract. Are they fair? Are they sufficient? Would you
suggest any changes or additions to the contract on behalf of either party? Note:
Answers will vary, but should incorporate a discussion and application of some
or all of the following issues:
•
terms of a contract
•
well-written contracts
•
business relationships
2. After graduating with a diploma in business administration, Tony Nguyen is eager to run
his own business. Tony meets with Amira Abebe, a representative of Priority Printing Inc
(PPI), a company that franchises a chain of small businesses offering printing services
(e.g., photocopying, colour printing, and sizing and editing of images). Amira tells Tony
that an in-depth survey and feasibility study will be conducted to investigate the market
size, competition, pricing, and other factors necessary for a successful business in his
hometown in Ontario. She meets with Tony again several days later and gives him a
printout showing an estimated profit of $50,000 in the first year on estimated gross
sales of $380,000. She indicates that, based on her research, it is a "true and accurate
financial picture" of the first year of his franchise operation. Amira also tells Tony that
PPI offers substantial support in training, advertising, and office management, and that
the printing services franchisees are required to purchase from PPI will be cheaper than
what he could otherwise source locally. Relying on the positive financial forecast and
the information about training support and cost savings, Tony signs a franchise
agreement with PPI. The contract does not include the printout of estimated profit, nor
does it include specific provisions around support and cost savings associated with
supplies and equipment. Tony's financial consideration for the franchise is a one-time
payment of $75,000, an ongoing obligation to pay a royalty of 5 percent of gross weekly
sales, and a contribution of an additional 5 percent of gross weekly sales to a marketing
fund. The franchise agreement is a standard form contract drafted by PPI's lawyers that
also contains the following terms:
•
Termination. This Agreement and the rights conferred upon the franchisee
hereunder shall automatically terminate forthwith upon the happening of any of
the following events: (i) if the franchisee is delinquent in making royalty or
marketing service fund payments to the Company for a period in excess of two
(2) weeks; … (iv) if the franchisee ceases or takes any steps to cease the
operation of the franchised business.
•
Entire Agreement. This Agreement constitutes the entire agreement between
the parties and supersedes all previous agreements and understandings
between the parties in any way relating to the subject matter hereof. It is
expressly understood and agreed that the Company has made no
representations, inducements, warranties, or promises, whether direct, indirect,
collateral, oral, or otherwise, concerning this Agreement, the matters herein, or
the business licensed hereunder or concerning any other matter that is not
embodied herein.
Within a few months of opening his PPI franchise, it becomes apparent that the financial
projections were inaccurate; Tony's sales are lower and his costs much higher than
anticipated, resulting in a cash flow problem and an inability to keep up with the weekly
royalty and marketing fund payments under the franchise agreement. This is a breach of
the ongoing payment clause in the franchise agreement. PPI sends Tony a letter
demanding payment of the outstanding amounts and threatens legal action if he fails to
pay on the basis of his breach of the franchise agreement. (Adapted from Zippy Print
Enterprises Ltd v Pawliuk, 1994 CanLII 1756, 20 BLR (2d) 170 (BCCA).)
a. What steps could Tony have taken to minimize his risks associated with entering
into the franchise agreement? Note: Answers will vary, but should incorporate
a discussion and application of some or all of the following issues:
•
negotiating contracts
•
contract terms
•
legal advice