Problems in Canadian
Business Law
Pol/Soc Sci 3165 6.0A
Tuesdays, 2:30-5:30
pm
Simon Archer
sarcher@torys.com
Last class
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Consumer Protection
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Historical development
Consumer safety
Consumer information
Case study: PIPEDA legislation
Sale of Goods
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Codification of the Law
Nature of a Contract of Sale
Contractual Duties of the Seller
Caveat Emptor
Contractual Duties of the Buyer
Remedies of the Buyer
Remedies of the Seller
This class
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Trusts and fiduciaries
Trust - What is it?
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A particular form of creating rights to
property
Like contract, but with broader rights
Trusts a branch of equity, based on
division of legal title and equitable title to
property
Therefore these two titles co-existent in
same property
Can apply to any property
Example
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The “inter-vivos” trust: (during life of settlor)
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Dad (the settlor) transfers property to lawyer (the
trustee) who retains legal title, for the benefit of child
(the beneficiary of the trust property, and who holds
equitable title).
Types of legal forms of trusts
• Express trusts such as private trusts (persons named as
beneficiaries)
• Resulting and constructive trusts: imposed by law where a
trust relationship should have been
• Charitable trusts (purpose trusts, pick specific purposes to
give money to)
• Statutory: deductions from wages are held in trust until
they are remitted to government
Mini-background
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Rigidities in CL led to difficult transactions: primogenitur rules,
inheritance rules, transfer of title rules
People began to transfer property “for the benefit” of a third
person.
Transfers “to the use of” a “feofee of uses” (now a trustee)
CL recognized the owner of legal title, not a “beneficiary”. The
legal title owner had seisen, and owed the taxes, etc.
Which works fine where legal title owner and beneficial title
owner are not in conflict: but legally speaking, a legal title owner
could walk away
Petition to CL courts were dismissed. Petitions to Court of
Chancery (King’s Court) would permit a remedy for the
beneficiary: result: trust law
Chancery in effect enforced the trustee-beneficiary relationship.
Why bother dividing title?
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Create benefits for religious organizations, who
had various forms of property
To avoid feudal obligations (fees to lords when
parents died, etc.): pioneered by church wishing
to avoid taxes
Up to 1540, could not have land by wills, and
inheritance was primogenitor, so trusts were a
way to distribute property to none patrilineal
descendants
Could also use them to avoid creditors
Until limited liability corporation (mid-1800s),
was the main form of business unit
Sources of law
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The trust instrument itself
Equity (case law)
Treatises (learned books)
Trustees Act (Ontario), other statutes
Some aspects captured in other statutes
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E.g., Directors of a corporation are “like”
trustees and have the same duties as trustees
do, called fiduciary duties. These outlined in
some business law statutes
Express trusts
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4 requirements to create:
1.
2.
Settlor must have legal capacity
The “3 certainties” must be met:
1. Certainty of intent to create trust
2. Certainty of subjects (property in trust)
3. Certainty of objects (beneficiaries)
3.
Constituted by transfer of property to trustee (usually
of legal interest).
1. Settlor can can declare a trust and name self trustee,
and a beneficiary someone else (therefore no real
transfer of property)
4.
Formalities met: e.g., SoF w/r/t land, a valid will,
meets any other legislative requirements
Business uses of trusts
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Unincorporated associations:
• can use trusts to get officers of a club to be trustees
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Business trust uses:
• can be used in place of a corporation
• Liability issues, trust have more liability
• investment vehicles: income trusts
• pooled investment funds, e.g., mutual funds, in
which investors buy units of the trust as part of
larger pool, allow small investors to access wisdom
of larger ones
• Spitzer on the hunt for abuses here
• pension funds often held in trusts: largest investors
in the world)
BUT
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A trust is not a business “entity”, with a
legal personality, like a corporation
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With limited exceptions where statutes, for
the purpose of the statute only, treat it as an
entity (taxation, etc.)
It is a relational conceptual apparatus,
not a status in itself
MAJOR misconception
So why have a business
trust?
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Insolvency protections somewhat higher
versus unsecured creditors
Flexibility in design and regulation
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Access to fiduciary rules
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Trust law not developed to cope with business
yet
Also considered a liability by some
Conduit taxation
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For ITA purposes, taxation is by beneficiary
(in business parlance, unitholder), not trust
itself
Capacity
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Settlors
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Trustees
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anyone has legal capacity except: minors, legal
disability category (mental incapacity), bankrupts
minors can be trustees (but difficult to manage
property)
provision in the Trustees Act to allow another trustee
appointed in place of an incapable one
Beneficiaries
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generally, must have legal personality (natural person
or corporation) unless a purpose trust
Three certainties in
business context
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Intention - no different for business context, but
easy to create
Subject: property must be defined, can be any
property (nominal to create trust) and added to
later
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E.g., “bank account” not defined enough property,
“$100.00 in bank account” is.
Objects: unitholders.
All easy to do.
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NB: rights are created when beneficiaries named, not
when unit is paid for. Timing issue.
Formalities
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If object is land, need to meet SoF.
Otherwise, almost none.
NB: MUST be transfer/separation of title
for trust to be created, either by
declaration (“I declare this property held
in trust for X by me”) or by transfer
(actual transfer of title to another person
for the benefit of a third person)
Typical mutual fund trust
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To collect investment in a pool
Established by a trust agreement or declaration
of trust between trustees and “sponsor” (a bank
or something)
Beneficiaries are investors (unitholders)
Trust agreement usually provides
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Investment objectives and restrictions on management
(trustees)
Mechanisms for valuing and redeeming units
Procedures for unitholder meetings and amending the
trust agreement
Procedure for terminating the trust
Broad powers to delegate in pursuit of objectives or
motives of the trust
Remember…not a legal
person
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But they do look a lot like legal
persons in the business context:
Attempts to limit liability
 Provisions for voting, changing trust
instrument, contracting on behalf o
beneficiaries, boards, resolutions,
conduct of meetings, etc.
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Walks like a duck, talks like a duck…
But…
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Key difference
In corporations, liability is limited to the
property of the corporation
In trusts, liability is personal to the
trustee
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Key battle: how liable? When? For what?
What if they have limited liability…what
happens then?
Trustee’s role
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Primary trust law obligations
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Come from the trust instrument, then
equity, sometimes statutes
• Duty of ordinary skill and prudence
• Duty of loyalty
• Conflict rule, profit rule
• Follow terms of trust
• Avoid delegation where possible
• Maintain an even hand as between
beneficiaries
BUT
In business context, need to
delegate, need to treat benes
differently, etc.
 Often trust instrument used to
eliminate or reduce other duties
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them all
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Duty of loyalty particularly sticky
Beneficiaries
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Generally, do not have liability for actions
or omissions of the trustee
Exception: the “bare trust”
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Trustee has no powers, only there as mere
flow-through vehicle
Benes will be joint and severally liable for
actions of trustee
Question: how liable should benes be?
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In corporate law, only as liable as their initial
investment
Proposed solution
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Trust and Beneficiaries Liability Act, 2003
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Makes beneficiaries not liable for actions or
omissions of the trustee
Would at most limit liability to investment in
trust
NB: only applies to “reporting issuers”
NB: most trustees have insurance, and
most are under-insured relative to the
size of money they are managing
Summary
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Issue 1: how liable are trustees and
beneficiaries?
Issue 2: should these entities have the
tax status they have (their major benefit
over other forms of association)?
Issue 3: economically, any advantage
when tax status changes?
Fiduciaries
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Trustees have fiduciary duties to the
beneficiaries: loyalty
Persons who are not trustees may also be
fiduciaries
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Doctors/patient
Lawyer/client
Director/shareholder
Co-venturers (??)
Promoter-investor
Open textured category - some circumstances
When are you a fiduciary?
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Originally: when you hold property for
someone else
Now: categories in previous slide
Open textured category, SCC in the
1990s: when there is a dependency or
inequality of bargaining power or
vulnerability (exposed to disloyal conduct)
Doesn’t this include everyone?
What are duties?
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Same as those of trustees but
effectively most focus on
Profit rule -- cannot profit from things
that you only encountered as a result
of your status as a fiduciary
 Conflict rule -- cannot put yourself in a
position of conflict of interest and if you
do, you must act in the other person’s
interest, not your own
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What is breach?
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Can’t purchase property of principle (negotiate with self)
Can’t sell own property to trust
Can’t compete with trust
Can’t profit from appropriating a corporate opportunity
Can’t exploit confidential information and make a profit
Can’t speculate with principles’ property
Profiteering (earn profit from otherwise legit transaction or
earn profit from illegit transaction)
sexual assault
Failure to follow instructions (Guerin)
Negotiate over child custody (Frame)
What is remedy?
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Accounting of profits
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Constructive trust
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Generally: disgorge profits
When appropriate, moral quality of
breach, problems of valuation
Equitable compensation
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But few know what this means
Questions?
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Next week:
No lecture Dec. 2 (deemed Monday)
 Hand papers into department Dec. 5,
get stamped, no stamp=presumed late
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NO January 6 lecture, first class
2004 is January 13
 Best of the season
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