BUSINESS LAW 1 EXAM REVIEW
MODULE ONE: The Canadian Legal System
Questions:
Multiple Choice, 2 marks each:
1. In Canada:
1) the federal government has the power to overrule the provincial governments
2) the provincial governments have the power to overrule the
federal governments
3) the courts can determine whether each level of government has acted within
its own powers.
4) the courts can overrule the Constitution
2. Small Claims Court in British Columbia would not be bound by a precedent set in
which of the following Courts?
1) The Supreme Court of Canada
2) The British Columbia Court of Appeal
3) The Supreme Court of British Columbia (the superior trial court).
4) The Ontario Court of Appeal
3. Section 33 of Canada’s Charter of Rights and Freedoms permits the Parliament of
Canada to adopt legislation that overrides basic Charter rights. Which of the
following conditions must be satisfied in order for Parliament to adopt legislation that
overrides Charter rights?
1) The legislation must be approved by more than two-thirds of the Members of
Parliament.
2) The legislation must be expressly declare that it shall operate notwithstanding
that it violates one of the rights guaranteed by the Charter.
3) The legislation must be approved in advance by a majority of judges of the
Supreme Court of Canada.
4) The legislation must contain reasonable limits on the rights guaranteed by the
Charter.
4. What are the pleadings in legal actions?
1) The rules of equity that allow a court to alleviate the harshness of common
law rules
2) The documents that provide information as to what a party intends to prove in
court
3) The documents that must be filed if an unsuccessful party wished to appeal a
court decision
4) A pre-trial procedure aimed at settling legal actions outside of court
Answer the following 2 independent questions:
5. a. Jack, a Certified General Accountant, misappropriated $15,000 from a client.
Describe three different types of legal proceedings to which Jack might be
subject.
b. Explain what effect the division of powers in the Canadian Constitution has on
the ability of provincial and federal governments to enact legislation. Provide an
example of legislation that might be rendered invalid because of the
division of powers.
Answers:
1.
2.
3.
4.
3
4
2
2
5. a. The client could sue Jack in tort (or in contract). This is a civil action, and if
the client were successful, the court could order Jack to pay damages to the client.
The Crown could prosecute Jack for committing a crime. If the Crown were
successful, the court could impose penalties, such as a fine or term of
imprisonment on Jack.
Jack is a professional and, because he breached the rules of his professional
association by misappropriating funds, could be subject to discipline by his
professional organization, The Certified General Accountants Association. He
could be subject to reprimand, suspension, or expulsion.
b. In Canada, federal and provincial governments have the power to pass laws
only within the respective powers of each as outlined in the Constitution. If one
level of government passed a law that was not within the powers given it in the
Constitution, the law would be invalid. The court would determine whether the
Subject matter of the law fell within the powers of the level of government that
passed it.
For example, if the federal government passed a law concerning saloons and
taverns, the law would be invalid because the power to regulate saloons and taverns
falls under the jurisdiction of the provincial governments.
LESSON TWO: Tort Law & Professional Liability
Questions:
Multiple Choice, 2 marks each:
1. In an action for negligence, which of the following need not be proved?
1) That the defendant owed the plaintiff a duty of care.
2) That the defendant acted deliberately
3) That the defendant’s actions caused harm to the plaintiff
4) That the defendant was at fault.
2. Under strict liability:
1) establishing fault on the part of the defendant is a precondition to recovery by
the plaintiff.
2) the defendant will be strictly punished if found liable.
3) the plaintiff need not establish fault on the part of the defendant.
4) the standard of proof is much higher than in any other type of claim.
3. In a recent case involving an automobile accident, the judge found that the plaintiff
was contributorily negligent. What result flows from this finding?
1) The plaintiff will not be able to recover damages for any of his or her injuries
suffered in the accident.
2) The plaintiff will be liable for that proportion of the damages he or she
caused.
3) The plaintiff will be required to mitigate his or her damages.
4) The plaintiff will be required to claim all of his or her damages from his or her
insurance company.
4. Avril owned a clothing shop which she was anxious to sell. Avril asked Liam, a
Certified General Accountant, to prepare financial statements that she could show to
potential purchasers. Liam prepared the financial statements, which showed a profit
of $50,000 for the previous year. Unfortunately, in preparing the financial statements,
Liam omitted to include as an expense the $30,000 per year that the clothing business
had to spend on rent. Avril did not notice the error.
Bonita was interested in purchasing the business, but wanted financial information. In
order to inform Bonita of the business finances, Avril gave Bonita the financial
statements Liam had prepared. Bonita relied on the financial statements and bought
the clothing business.
Six months after buying the business, Bonita realized that profits did not meet the
projections and Bonita traced the source of the problem to the faulty financial
statements. She wants to transfer the business back to Avril and get her money back,
or at least recover damages.
Is there any potential legal liability on the part of Liam in this situation?
Explain.
5. Doran was a sales representative for Crazy Watersports Inc.Doran was driving his
truck along a busy country road on his way to a windsurfing championship at a nearby
lake where he intended to show off Crazy Watersports’ products. Suddenly the
windsurfing board that he had secured to the roof of his car flew off into the traffic
behind him. Bessie was driving behind Doran and swerved to avoid the windsurfing
board, hitting Jamil, who was cycling on the shoulder of the road.
Jamil was not wearing a helmet. Witnesses stated that Bessie was exceeding the speed
limit. Crazy Watersports Inc. says that it had equipped Doran’s truck with a proper
rack which should have made the board very secure, and that Doran must have ignored
instructions regarding attachment of the board.
As a result of the accident, Jamil suffered a broken arm and leg as well as facial
injuries and his $3000 mountain bike was wrecked. Assess the legal rights of Doran,
Bessie, Crazy Watersports Inc. and Jamil in this situation.
Answers:
1. 2
2. 3
3. 2
4. Bonita has no contract with Liam, so she would have to claim in tort. She could
sue for negligent misrepresentation. She would first have to show that Liam owed her
a duty of care. She would have to show that there was a special relationship between
Liam and her. Liam would owe a duty of care only to a limited group whom he knew
had a specific use for the financial statements, and would be using the statements for
the purpose for which they were prepared.In this case it seems that as Liam
specifically knew that the financial statements would be relied on by potential
purchasers of the business, he would owed a duty of care to those purchasers. He
presumably breached a reasonable standard of care by omitting an obvious expense.
Bonita suffered a loss as a result, and her damages were reasonably foreseeable from
this type of mistake. Bonita should therefore be able to recover her losses from Liam.
5. Jamil would likely sue Doran and Bessie for negligence.
In order to prove negligence one has to show the following:
1. Duty of care – owed to those who are reasonably foreseeable victims
2. Breach of a reasonable standard
3. Breach caused harm
4. Damages were reasonably foreseeable
If more than one person was to blame according to contributory negligence legislation
the court can apportion blame in terms of percentages and allocate damages
accordingly.
Doran owed a duty of care to other motorists and also to cyclists along the road. He
should have attached the windsurfing board in such a way that it could not come free,
and so breach of a reasonable standard seems likely. If he had attached the board
properly Jamil would not have been injured, and physical injury to both Jamil and his
bike is reasonably foreseeable.
Crazy Watersports Inc. appears to be Doran’s employer and will be vicariously liable
for his negligence as it was committed in the course of his employment.
Bessie owed a duty of care to cyclists, but did she breach a reasonable standard? It
would seem that a board coming at one’s windshield suddenly would cause a
reasonable person to swerve, so this may not be her fault. She was apparently
speeding though. She will be contributorily negligent if it can be shown that had she
not been speeding she would not have injured Jamil.
The defendants can argue that Jamil was a fault for not wearing a helmet. Reasonable
cyclists wear helmets and if it can be shown that his injuries would not have been as
serious had he been wearing his helmet his damages will be reduced as a result of his
contributory negligence. This seems unlikely though, as it was not a head injury that
he suffered.
MODULE THREE: Formation of a Contractual Relationship
Part 1: Offer, Acceptance & Consideration
Questions:
1. On Monday, Rita offered to sell Edith her car at a price of $5,000. Rita
promised to keep the offer open until Friday. On Wednesday, Melanie offered to buy
Rita’s car for $5,200, and Rita accepted Melanie’s offer.
On Thursday, Rita phoned Edith and said she was revoking the offer she made to
Edith on Monday. Edith replied that she would not agree to revocation of the offer,
and was accepting the offer Rita made to her.
a. Assess any legal obligations Rita has to Edith and Melanie in this situation.
b. Explain what consideration in a contract is. Is consideration present between
Melanie and Rita?
2. On January 1, 2003, Nigel mailed a letter in Halifax, Nova Scotia, offering to
sell 1,000 gizmos at $5 per gizmo to Sarah, located in Kitchener, Ontario. On
January 5, 2003, prior to Sarah’s receipt of the letter, Nigel mailed another
letter revoking the offer. Sarah received Nigel’s letter with the offer on January
8, 2003, and the next day sent a letter of acceptance. On January 10, 2003,
Sarah received Nigel’s letter revoking the offer.
a. Assume that Nigel and Sarah have a contract. On what date was the contract
formed? Explain.
b. Assume that Nigel and Sarah have a contract. Where was the contract formed?
Explain.
3. On January 1, 2004, Clementine offered to sell a grand piano to Mercedes for
$10,000. At the time of the offer, Clementine told Mercedes that she had 7 days
to accept the offer. Which of the following will terminate Clementine’s offer to
Mercedes?
1) On January 3, 2004, Seville purchases the piano from Clementine for
$15,000.
2) On January 4, 2004, Clementine receives an appraisal indicating that the
piano is worth $20,000.
3) On January 5, 2004, Clementine tells Horatio that she is no longer
interested in selling the piano.
4) On January 6, 2004, Mercedes informs Clementine that she cannot pay
$10,000 for a used piano.
Answers:
1. a. Generally, when offer and acceptance are present, a contract will result.
Melanie offered to buy the car for $5,200, and Rita accepted. There is,
therefore, a contract between Melanie and Rita.
Rita made Edith an offer, but then revoked it before Edith accepted. There is
no contract between Rita and Edith. Rita was not bound by her promise to keep
the offer open; There was no consideration for that promise and it was not
under seal.
b. Consideration is what parties exchange or promise to each other in a contract.
There must be consideration on the part of each party or there will be no contract.
There is consideration on the part of Rita and Melanie. Consideration on Rita’s part
is her promise to giver up the car consideration on Melanie’s part is he promise to
give up the $5,200.
2. a. An offer is effective when it is communicated to the offeree. In this case, Nigel’s
letter was communicated to Sarah on January 8, 2003. A letter revoking an offer is
effective when it is received. In this case, Sarah received the letter of revocation on
January 10, 2003. A letter of acceptance is effective on posting so long as it is
reasonable, in the circumstances, to use the mail. Sarah mailed the letter of
acceptance on January 9, 2003. As the letter with the revocation was not received
until after the letter with the acceptance was mailed, and as it is reasonable to use
the mail, a contract between Nigel and Sarah was formed on January 9, 2003.
b. A contract is formed where the acceptance becomes effective. When using the mail,
acceptance is effective on posting if it is reasonable to use the mail. This is the result
regardless of whether the letter actually reaches its destination. In this case, the
acceptance was mailed in Kitchener, Ontario; therefore, the contract was formed in
Kitchener, Ontario.
3. 4
MODULE 4: Formation of the contractual relationship
Part 2: Capacity, Legality, Intention & Writing
Questions:
1. In the presence of several witnesses, Srini verbally agreed to sell his house to Eve for
$150,000. Srini wrote a letter to Eve stating, “Dear Eve, This letter confirms our
agreement whereby I agree to sell the house located at 123 Merry Drive, City of
Fredericton, County of York, New Brunswick, for $150,000 cash. The closing date of
the sale is June 30, 2003.” Srini signed the letter and had it delivered to Eve.
a. Is the agreement for the purchase and sale of Srini’s house enforceable by Eve?
Explain.
b. Is the agreement for the purchase and sale of Srini’s house enforceable by Srini?
Explain.
2. Rhodes, a civil engineer, was hired by a firm of engineering consultants located in
Park Forest. In her work, Rhodes acquired an expert knowledge of costs for the
purpose of submitting tenders on various types of construction projects and the
sources of supply of the necessary materials. She worked almost entirely in the
offices of the firm: the partners handled most negotiations with the firm’s clients.
Rhodes contract of employment stated that, for a period of five years after the
termination of her employment, she would not “engage in the professional practice of
engineering either alone or in association with or as an employee of any persons
within Park Forest or two miles thereof.” Park Forest is a residential suburban
borough in the largest metropolitan area in the province: there are two other firms of
engineering consultants in Park Forest and some two hundred firms in the whole
metropolitan area.
Within a few days of terminating her employment with the firm, Rhodes advised the
firm’s partners that she considered the restrictive covenant unenforceable and that she
intended to open her own office as a professional engineer within Park Forest. The
firm then sued Rhodes to obtain an injunction to restrain her from breaking the
contract.
a. Identify the issue(s).
b. State the applicable legal rule(s) and apply them to the facts of the case.
c. State the conclusion.
Answers:
1. a. The Statute of Frauds requires that contracts concerning interests in land be in
writing to be enforceable. The memorandum of writing need not be formal but it
must contain the names of the parties, a description of the subject matter of the
contract, the consideration, and other terms, if any, and be signed by the party to be
sued. Eve could enforce the contract against Srini because she has a written
document signed by Srini that includes all of the terms.
b. Srini could not enforce the agreement against Eve because, although he has a
written document, it is not signed by Eve.
2. a. The issue is whether a court would refuse to enforce the restrictive covenant.
b. There is an initial presumption, albeit rebuttable, that agreements in restraint of
trade are against public policy and, therefore, are void.
With regards to a covenant granted by an employee to an employer that
restricts the future economic freedom of the employee, we must first
distinguish between restrictions which are in effect while the employee
remains in the employer’s service and those which come into effect upon
leaving the employer’s service.
The limitation on Rhodes is an attempt to govern her means of livelihood after
she leaves her employment. It is much more difficult to prove that this type of
limitation is valid.
If in the course of employment an employee has had access to valuable trade
secrets or secret processes, or has acted as the personal representative of the
employer in dealings with the customers of the business, it is more likely that
the restrictive covenant will be upheld by the courts. This will protect the
employer’s proprietary interest in trade secrets and goodwill.
Rhodes has worked mostly in the office and had very little contact with customers.
She has acquired expert knowledge on costing tenders and the
sources of supply that the firm uses. Expertise in the costing of tenders is a
skill that one would expect all employees to acquire as part of their
professional development. It is not a skill that is particular of specific to
Rhodes’ employment with the firm. There is nothing confidential about the
identity of the firm’s suppliers. It is difficult to see how the firm’s business
would suffer if the identity of their suppliers was no longer confidential
information. It is difficult to identify what valuable proprietary interest or
client goodwill would be upheld by enforcing the restrictive covenant.
c. The nature of Rhodes’ work was such that she would be unlikely to jeopardize
the firm’s continuing relations with its clients if she was to practice on her own
nearby. The firm has not met the heavy onus placed upon it to show that any
restrictive covenant would be necessary.
MODULE 5: Interpreting the contract & terminating the
contractual relationship
Questions:
1. Omar bought a delivery truck at a price of $10,000 for use in his floral supply
business. Before Omar bought the truck, he told the seller that he wanted a truck with
low mileage for use in his business. In the contract for purchase and sale of the
delivery truck, there was an express term that said that the delivery truck had been
driven for 150,000 kilometres. In fact, as Omar has now discovered, the delivery
truck had actually been driven for 150,000 miles. Shortly after Omar took delivery of
the truck, it broke down. Omar has spent three months and $1,500 trying to repair the
truck, during which period he has driven the truck intermittently. He has now teen
bold that the truck will never be reliable enough for his purposes, because it is simply
worn out.
a. Omar wishes to return the truck to the seller and get his money back, and
recover the $1,500 that he has spent trying to repair the truck. Will the
remedy Omar is seeking be available to him as a result of the breach of
contract by the seller? Explain.
b. Assume that Omar will be entitled to claim damages from the seller. Because
of the problems with the truck, Omar was unable to make scheduled delivery
of his flowers to retail outlets, and lost $12,000 in profits he would have made
had he been able to make the deliveries. Will the seller be responsible to Omar
for these damages? Explain.
2. Avril owned a clothing shop which she was anxious to sell. Avril asked Liam, a
Certified General Accountant, to prepare financial statements that she could show to
potential purchasers. Liam prepared the financial statements, which showed a profit
of $50,000 for the previous year. Unfortunately, in preparing the financial statements,
Liam omitted to include as an expense the $30,000 per year that the clothing business
had to spend on rent. Avril did not notice the error.
Bonita was interested in purchasing the business, but wanted financial information. In
order to inform Bonita of the business finances, Avril gave Bonita the financial
statements Liam had prepared. Bonita relied on the financial statements and bought
the clothing business.
Six months after buying the business, Bonita realized that profits did not meet her
projections and Bonita traced the source of the problem to the faulty financial
statements. She wants to transfer the business back to Avril and get her money back,
or at least recover damages.
a. Evaluate Bonita’s legal rights and remedies against Avril.
3. A dry cleaning store has a sign over its cash register that states “Not responsible for
loss or damage to clothing”. What is this sign an example of?
1) A limited warranty
2) A liquidated damages clauses
3) An exemption clause
4) A condition subsequent
Answers:
1.
If there is a breach of a condition of the contract, Omar may be able to
terminate the contract with the seller. A condition is a term that goes to the root of
the contact. Omar could probably successfully argue that there has been a breach
of condition; the distance traveled by a vehicle is usually a very significant factor in
making a decision to buy a vehicle as it has a significant impact on reliability and
life-span.
Rescission (returning the truck and getting the money back) is an option only if it is
possible to make integral restitution to the other party of the benefit received so as
to restore the parties to their pre-contractual positions. Because three months have
passed since the purchase, it is unlikely that Omar will be able to rescind. Omar has
repaired the truck and driven it since the sale, so it is not possible to make
restitution. Damages are a more likely remedy for Omar.
Omar is under a duty to take reasonable steps to mitigate damages; one would
expect him to try to rent a replacement vehicle so that he could carry on business
and reduce his lost profits. Because of the unpredictability of the truck, there are
likely business losses that he could not have mitigated. In order to recover these
losses, Omar must show that they were reasonably foreseeable. Omar told the seller
when he bought the truck what he would be using it for, so the seller should have
expected this type of damage to flow from the breach. Omar would likely be able to
recover some of these losses.
2. In giving Bonita the financial statements, Avril has made a false statement of material
fact before the contract, which induced Bonita to buy her business. Avril has therefore
committed a misrepresentation. This was an innocent misrepresentation, because Avril
did not know that the financial statements were not accurate. The only remedy for
innocent misrepresentation is rescission, and for rescission to be available it must be
asked for promptly, and it must be possible to restore the parties to their original
positions. Because six months have passed since the sale, it may be impossible to
restore the parties to their original positions. Rescission may not be available, in which
case Bonita will be without a remedy from Avril unless Bonita can show negligence on
Avril’s part, in which case Bonita can claim damages in tort.
3. 3
MODULE 6: Special Contracts: Sales
Questions:
1. a. Al purchased computer equipment from Computer Retail Inc. (CRI) for use in
his business. Before purchasing the equipment, Al Spent several hours at the
library and talking to friends with experience in the area, to find out what would be
suitable for his needs. The computer equipment was installed in Al’s office, but
proved to be totally inadequate to process the volume of data he required. Al
engaged a consultant to investigate the problem. The consultant told him that the
equipment he purchased would be suitable for use in a business with sales under $5
million annually. However, since the sales of Al’s business were much larger, Al
required a more sophisticated system. Al wishes to return the system he purchased
to CRI, but CRI refuses to refund the purchase price or exchange the equipment.
Evaluate the legal rights and remedies, if any, Al might have against CRI.
b. To update his system, Al decided to purchase some additional components
from CRI. Al ordered the equipment from DRI out of CRI’s catalogue, and
paid half the price upon placing the order, with the balance to be paid within
10 days of delivery. According to the contract, delivery was to be made by an
independent cartage firm. While removing the equipment from the cartage
firm’s truck, the driver carelessly dropped the computer equipment on the
road, and the computer equipment was severely damaged. The computer
equipment was delivered to Al, but it was not functional because of the
damage incurred during delivery. CRI is insisting that Al pay the balance of
the purchase price owing regardless of the damage to the computer equipment.
Al is demanding that CRI return to him the money he has already paid.
Evaluate the legal rights and remedies of Al and CRI in these circumstances.
2. Meg bought a propane barbecue from a department store. The department store
bought the propane barbecue from a distributor, which bought it from the
manufacturer. The propane barbecue leaked, causing a fire which destroyed the back
deck of Meg’s home. The reason for the leak was that the connections on the barbecue
were defective, because of faulty design of the barbecue. Meg is seeking to recover
the cost of replacing her deck and the cost of replacing the barbecue.
a. Assess Meg’s legal rights and remedies against the department store.
Answers:
1. a. Under the Sale of Goods Act, where goods are sold by a dealer by description,
the goods must be of merchantable quality. It appears that the computer
equipment was of merchantable quality, but that it did not conform to the
buyer’s purpose. Implied conditions as to suitability for purpose exist only
when the goods are sold by a dealer and the buyer makes a purpose known to
the seller in such a way that the buyer shows that she or he is relying on the
seller’s skill and judgment. It appears that Al was relying on his own
investigations as to suitability, and did not make his purpose known to the
seller. Al would therefore have no legal rights and remedies against CRI.
b. Under the Sale of Goods Act, unless a contrary intention of the parties can be
inferred from the contract, when there is a sale of unascertained goods and the
contract provides for delivery by a carrier, title to the goods passes when the
goods are delivered to the carrier, provided the seller does to reserve a right of
disposal. The Act says that risk of loss follows title. In this case, Al will bear
the risk of loss because title passed when the seller delivered the computer
equipment to the cartage firm. Al will have to satisfy the balance owing on the
purchase price, and will not be entitled to a refund on what he already paid.
2. The contract between Meg and the department store involved the sale of goods, and
therefore is covered under sale of goods legislation. Under the Sale of Goods Act, as
the goods were sold be a dealer who ordinarily deals in goods of this description, the
goods must suit the purpose that the buyer, either expressly or by implication, made
known to the seller, and relied on the seller to provide. The goods must also be of
merchantable quality, free of defects that would not be apparent on ordinary
inspection. The barbeque was sold by a dealer and was neither suitable nor
merchantable, so Meg will be entitled to damages which are reasonable foreseeable.
The cost of replacing Meg’s back deck and the cost of replacing the barbecue would
both be recoverable from the department store.
MODULE 7: Special Contracts: Insurance & employment
Questions:
1. Al purchased computer equipment from Computer Retail Inc. (CRI) for use in
his business. Before purchasing the equipment, Al Spent several hours at the library
and talking to friends with experience in the area, to find out what would be suitable
for his needs. The computer equipment was installed in Al’s office, but proved to be
totally inadequate to process the volume of data he required. Al engaged a consultant
to investigate the problem. The consultant told him that the equipment he purchased
would be suitable for use in a business with sales under $5 million annually.
However, since the sales of Al’s business were much larger, Al required a more
sophisticated system. Al wishes to return the system he purchased to CRI, but CRI
refuses to refund the purchase price or exchange the equipment.
To update his system, Al decided to purchase some additional components
from CRI. Al ordered the equipment from DRI out of CRI’s catalogue, and
paid half the price upon placing the order, with the balance to be paid within
10 days of delivery. According to the contract, delivery was to be made by an
independent cartage firm. While removing the equipment from the cartage
firm’s truck, the driver carelessly dropped the computer equipment on the
road, and the computer equipment was severely damaged. The computer
equipment was delivered to Al, but it was not functional because of the
damage incurred during delivery. CRI is insisting that Al pay the balance of
the purchase price owing regardless of the damage to the computer equipment.
Al is demanding that CRI return to him the money he has already paid.
Assume that Al bore the loss from damage to the computer equipment in part
but that he had insurance to cover his loss. Evaluate whether or not the
cartage firm would potentially bear any legal liability in these circumstances.
2. The nature of insurance is to provide indemnity for loss rather than to profit from loss.
Explain, using the example of automobile insurance, how profiting from loss is
prevented.
3. Sally successfully sued XYZ Company Ltd. for wrongful dismissal. Which of the
following describes the most likely result of this legal action?
1) Sally will be awarded damages to compensate her for past excellent
service to XYZ.
2) Sally will be granted reinstatement because of her unique skills and
experience.
3) Sally will be awarded damages to compensate her for XYZ’s failure to
give her reasonable notice.
4) Sally will be awarded damages to compensate her for XYZ’s failure to
mitigate its damages.
Answers:
1. Although the buyer had insurance, when the insurer satisfied the insured’s loss, it
acquired the insured’s legal rights by way of subrogation. This means that the insurer
could sue the cartage firm in the name of the insured. It appears that the cartage firm
would be liable in negligence because the damage to the computer equipment was
caused by the driver’s carelessness.
2. The right of subrogation provides that once the insurer has compensated the insured
by paying a claim for a loss, the insurer steps into the shoes of the insured to recover
the loss. The insured cannot collect losses from both the insurance company and the
party that caused the loss. For example, if A’s car is destroyed due to B’s fault and the
insurance company pays A, then the insurance company can step into A’s shoes and
sue B for the loss.
In order to purchase insurance, the insured must have an insurable interest in the item
insured. An insurable interest exists when an insured derives a financial benefit in the
continuing existence, or suffers a financial loss from the destruction, of the object
insured. The insurable interest cannot be greater than the amount of the loss. In other
words, an insured can only recover the value of the item insured regardless of the
amount of insurance. For example, if A has $50,000 in insurance on a car that is worth
$10,000, A can only recover $10,000 in the event that the car is destroyed.
3. 3
MODULE 8: Debtor & Creditor Relations
Questions:
1. Athena has a small potato harvesting business. She wants to sell 3 of her harvesters and
purchase new ones. She has found a purchaser who is willing to pay her $150,000 for
the 3 machines. George is willing to pay her $30,000 immediately and the balance in
equal installments over the next 12 months. Although George is willing to give postdated cheques, Athena believes that she should secure the debt through a chattel
mortgage.
a. Using the example of Athena and George, explain what a chattel mortgage is.
b. Assume that Athena and George enter into a chattel mortgage and the mortgagor
defaults. What remedies does the chattel mortgagee have? Explain.
Answers:
1.a. A chattel mortgage is the transfer of an interest in the property by the
mortgagor/borrower (George) to the mortgagee/lender (Athena) as security for a
debt.
b. The mortgagee (Athena) can sue the debtor (George) on his promise to pay, or the
mortgagee can take possession of the property.
MODULE 9: Business Organizations: Agency & Partnership
Questions:
1. JLK Ltd. engaged Mia as its representative to sell manufactured homes. JLK provided
Mia with JLK’s business cards and order forms, and a van with JLK’s corporate logo
on it. JLK restricted Mia from negotiating contracts involving credit terms without
first obtaining approval of JLK’s controller. Mia ignored this restriction and, on
behalf of JLK, concluded a contract to sell a manufactured home to Raj on credit
terms. She did not first obtain the approval of JLK’s controller. JLK refuses to
approve the contact with Raj, and will not provide the manufactured home to him.
a. Evaluate Raj’s legal rights and remedies, if any, against JLK.
b. Does Mia bear any potential legal liability to Raj and/or JLK in these
circumstances? Explain.
2. Herb, Ana, Conrad, and Kim established a tree-falling business under the name
of HACK Enterprises. They did not incorporate the business. Herb contributed
$2,500 in start-up capital; the others each contributed $500. Herb managed the
business, made all the significant decisions, and performed about 75% of the work.
The remaining work was shared by the 3 others equally. Herb, Ana, Conrad, and
Kim agreed that no expenditure over $10,000 would be made without unanimous
agreement.
a. HACK made a profit of $120,000 during its first year of business. Herb
claims that most of that profit should go to him because of his large contribution
both in capital and effort.
How would the profit be divided amongst Herb, Ana, Conrad and Kim?
b. Two months ago, without the knowledge of the others, Herb contracted on
behalf of HACK to buy a stump-grinder from Wood Suppliers at a cost of $15,000.
The stump-grinder has not yet been paid for because Ana, Contad, and Kim think
That HACK does not need it, and they did not authorize the purchase. Wood is
threatening legal action against HACK to collect what Wood says it is owed.
Will Wood succeed in collecting the $15,000 from HACK? Explain fully.
Answers:
1. a. Even though Mia had no actual authority to agree to credit terms, JLK had
done something to lead Raj to believe that Mia had authority to bind JLK. JLK has
made Mia its representative and provided her with cards, forms, and van with its
corporate logo. JLK did not bring limitations on Mia’s authority to the attention of
third parties. This is therefore a case of apparent authority, and JLK is bound to the
contract. JLK will have to honour the contract or be liable to an action for breach
of contract.
b. Mia bears no legal liability to Raj because Raj was unaware that Mia was acting in a
representative capacity, and was not contracting on her own behalf. Mia will, however,
be liable to JLK for breaching her agency agreement.
2. a. Herb, Ana, Conrad, and Kim are partners because they are carrying on
business together wit the intention of making a profit, and the business is
unincorporated. In accordance with the Partnership Act, unless the parties specify
otherwise, each of the partners is entitled to share equally in the profits of the
business and must contribute equally to losses. Herb, Ana, Conrad, and Kim will
be entitled to equal shares in the profits of the business. It does not matter that Herb
contributed more capital or effort, unless they had a partnership agreement
governing those matters.
b. Each partner acts as an agent of the partnership and can bind the partnersip
in dealings with third parties, provided that the third party is now aware of
special limits in the partnership agreement. The contract Herb made to
purchase the stump-grinder will bind HACK because Herb had apparent
authority as a partner in HACK. Wood Suppliers should be successful in
collecting the $15,000 from HACK.
MODULE 10: Business organizations: Corporations
Questions:
1. Assume HACK has now been incorporated under the name HACK Ltd. HACK has
issued a total of 100 shares. Herb, Ana, Conrad, and Kim each own 25 shares in
HACK, and all of them are also directors of HACK. HACK expanded and bought
$100,000 worth of equipment from Trucks Inc. It made a cash payment of $20,000,
but HACK still owes $80,000 to trucks. HACK’s business has collapsed and it is
unable to pay Trucks.
What share of this debt will Herb, Ana, Contrad, and Kim each bear? Explain fully.
2. GTX Corp. had been negotiating with Celine over the purchase of a silver mine that
Celine owned. However, as GTX’s chief interest was in gold mines, the silver mine
was not high on GTX’s list of priorities. In fact, negotiations were stalled because
Celine was asking a very high price for an unproven mine.
A couple of months later, Aja, one of the directors of GTX, approached Celine and
bought the land with the silver mine for his own company. He developed the mine and
made a substantial profit.
a. Does GTX have any legal action against Aja? Explain.
b. Would your answer to part (a) change if Aja were no longer a director at the time he
purchased land from Celine?
3. Corporate statues provide several protections for shareholders including the right
to bring a derivative action. In which of the following circumstances could a
shareholder most likely succeed in bringing a derivative action?
1) The directors of the corporation refused to bring an action against a
director who defrauded the corporation.
2) The directors of the corporation refused to declare a dividend although the
corporation had a very profitable year.
3) The directors of the corporation refused to purchase the shares of a
dissenting minority shareholder.
4) The directors of the corporation approved the sale of one of the
corporation’s major assets.
Answers:
1. As a corporation, HACK Ltd. is a legal entity separate from its shareholders and
directors. Shareholders enjoy the benefit of limited liability, and are not responsible
for the debts of the corporation beyond the value of their contributed share capital.
Directors are also not generally liable for obligations incurred by the corporation.
Herb, Ana, Conrad, and Kim would have no personal liability for the debts of HACK.
2. a. Aja and GTX are in a fiduciary relationship. Aja owes GTX a duty of good faith.By
taking an opportunity that belonged to the corporation, Aja breached the duty. Only
if a majority of the board of directors had rejected the opportunity would Aja be
free to take up the opportunity on his own account.
b. That depends on the length of time between Aja’s resignation from the board of
directors and his purchase of the property. Fiduciary duties do not immediately
cease upon termination of the relationship.
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