Understanding Contract Law: Mistakes, Misrepresentation, and More

Posted on Aug 20, 2024 in Philosophy and ethics

Contract Law: Mistakes, Misrepresentation, Undue Influence, and Duress

Legal Mistakes

A legal mistake is a mistaken belief about a factual situation, not the law itself. There are two types of legal mistakes:

• Unilateral Mistake: One party is mistaken about the facts.
• Common/Mutual Mistake: Both parties are mistaken about the facts.

Only certain kinds of mistakes will make a contract VOID or VOIDABLE by equitable relief of the courts.

Meaning of a Mistake

A mistake in law is an error with respect to:

• Terms of the contract
• Subject matter of the contract
• Identities of the parties
• Nature of a signed document

Void: A contract never comes into existence & no rights or title passes to anyone.

Voidable: A contract exists until set aside by a court; rights may pass to 3rd parties before it is set aside.

Equitable Relief: A discretionary remedy first developed by the court of equity to undo an injustice.

Rescind: Set aside, undo or revoke a contract & return the parties to as near as possible to their original position.

Set Aside: Rescind, undo or revoke a contract & return the parties as nearly as possible to their original position.

Rescission: An equitable remedy that rescinds/undoes a contract putting both parties in their original situation.

In situations where a mistake is found the contract is said to be VOID or VOIDABLE. The contract may still be rescinded & title and/or possession will return to the seller.

The difference between void & voidable contracts is important if goods have been conveyed to an innocent 3rd party for value (who paid) for the goods prior to the contract being set aside.

Equity determines that the ITPV can usually keep the goods even though the original contract is rescinded.

Whether any given contract is void/voidable depends on 3 things:

1. The type of mistake (meaning of the words, subject matter & its existence or value, error in recording, identity of the parties, nature of the signed document)
2. The reasonableness of the behaviour
3. The understanding of the parties

Words Used Inadvertently

Mistakes about terms of the contract may arise because:

1. One party may inadvertently use the wrong words in stating the terms (unilateral mistake).
2. Relief is granted if the reasonable person would have recognized that a mistake was made (price absurdly low or unrelated to the range of prices in negotiation).

Errors in Recording an Agreement

Sometimes a contract contains an error but one party does not wish to be released from the obligation/ instead wants the corrected deal enforced/ it is not easy to seek rectification & Courts will not correct an error in judgment or lack of due diligence/ parties must be in COMPLETE agreement = the situation is just an error in writing down the agreement/

Courts will also grant relief (rectify a contract) if 5 conditions exist:

1. Court is satisfied there was a complete oral agreement between the parties.
2. Parties did not engage in further negotiations to amend the contract.
3. The mistake in the written document may have, but does not have to have, occurred from fraud.
4. When the written document was signed the defendant knew/should have known of the mistake but plaintiff did not.
5. Any further attempt to enforce the inaccurate written document would be equivalent to fraud.

Misunderstanding About the Meaning of Words

Both parties may put forward certain words, deliberately, but have different interpretations of an ambiguous term/= mutual mistake so usually contract is void/court will apply the most reasonable interpretation in light of all the circumstances based on subject matter of the contract & intentions of the parties.

Mistakes About the Existence of the Subject Matter of a Contract

A party may make a mistake about the very existence of the subject matter of the contract (did not know the goods in the hold of ship destroyed at sea, perishable goods sold prior to delivery)/if the subject of the contract was destroyed prior to contract formation, the contract is void/court will remedy situation about buyer paying for goods not delivered & seller being liable for breach of non-delivery.

Mistake About the Value of the Subject Matter

The subject matter of the contract still exists but the parties may have radically different ideas about its qualities or quantity affecting its value/eg: a party may make a mistake about the value of goods in the contract: paying too much & other party receives a windfall, wide price fluctuation, quantity or quality does not equal value expected/ court will determine if key characteristics of the subject matter accurately reflect its $ value/ if so, then relief may be granted by finding the contract VOIDABLE.

TEST: Mutual intention of the parties, reasonableness of the parties expectations & if it would be unfair or unconscionable not to grant relief.

TEST: Rescission may also be available if 3 things are present:

1. Seller made a Misrepresentation.
2. Discovery of which was impossible.
3. Both parties believed the same mistaken characteristics.

Delay works against relief/often involves fraud (innocent party is deliberately tricked into believing the party is someone they are not)/where party assumes an identity: contract = void/if parties deal in person then the contract=voidable.

Mistake About Nature of a Signed Document

Defense of Non Est Factum(not my doing)/when one party may have been illiterate & relied upon a literate party to describe the nature of a document/if misrepresentation occurred could rely upon the doctrine of non est factum.

Contract vs Tort

A court may rescind a contract for ANY material Misrepresentation.

Misrepresentation: A false statement of fact which induces the other party to enter into contract/if made fraudulently or negligently = a tort/if made innocently, must notify other party of the error ASAP.

Statement of opinion or silence is not Misrepresentation.

Types of Misrepresentation:

1. Innocent: Person making statement honestly believed it to be true.
2. Fraudulent: An innocent Misrepresentation becomes fraudulent if not corrected when discovered.
3. Negligent: Person making the statement was careless in not ascertaining the truth.

Remedies for Misrepresentation: When the party relied upon Misrepresentation learns of the truth they must perform rescission.

Remedy is indemnity/compensation: $ award given as a supplement to rescission for loss sustained in performing a contract.

Misrepresentation by Silence or Omission

Conduct/silence may also be misrepresentation(as in torts)/will be VOIDABLE if discovered/if there is a duty not met due to silence or omission then misrepresentation exists/

Duty of utmost good faith: Duty of disclosure owed when a special relationship of trust exists between the parties.

That duty almost always exists in:

• Continuing business relationships
• Partnerships
• Directors & officers toward their corporation
• Contracts of insurance
• Contracts involving sale of securities
• Contracts involving sale of goods
• Contracts with consumers

Rescission is not available where the contract is affirmed & where bona fide 3rd parties would be prejudiced.

Remedy is rescission and/or damages.

Signed Documents & Misrepresentation by Omission

Legal presumption=signing document indicates acceptance of terms/if the contract requires utmost good faith due to the type of relationship between the parties, then there is positive obligation to disclose material information.

Types of Contracts Requiring Disclosure

Contracts of utmost good faith require disclosure of all pertinent information/partnership agreements/contracts of insurance/contracts involving sale of securities/contracts involving sale of goods/contracts with consumers/

Undue Influence

Domination of one party over mind of another to such a degree as to deprive weaker party of ability to make independent decisions/undermines presumed freedom of contract/contract will be voidable if victim acts promptly-delay will hinder court’s assistance/when parties stand in special relationship to one another, trust is involved (lawyer/client)/importance of independent legal advice received by weaker party will rebut the presumption.

Unconscionable Contracts

Contracts with unequal bargaining power between parties powerful party gets an extremely advantageous deal/example: loan transactions.

Duress

Actual or threatened violence or imprisonment as a means of coercing a party to enter into a contract.

Threat of violence renders contract VOIDABLE.

Includes coercion:improperly forced payment under protest.

STMLR

Ensure that all information relied upon by a business is accurate.

Before agreeing to sell or purchase, carefully investigate & research claims.

Ensure terms are as expected.

Retain all emails or pre-arrangement documentation until contract is fully performed as may be necessary to resolve a dispute over contract terms.

Use standard form contracts.

Exemption & entirety clauses should be included(thus excluding any outside terms, conditions, etc).

Note any express warranties.

Parties in special relationships or with power imbalances should seek independent legal advice during negotiations.

Pressure tactics or threats are not acceptable.

Discharge of Contracts

Methods of Discharge

When a contract comes to an end (discharged), neither party has further obligations under it.

A contract may be terminated in 4 ways:

1. DISCHARGE BY PERFORMANCE: Both parties perform their contractual obligations.
2. DISCHARGE BY AGREEMENT: Parties agree to end the contract.
3. DISCHARGE BY FRUSTRATION: External events make performance impossible.
4. DISCHARGE BY OPERATION OF LAW: The law deems the contract discharged.

Discharge by Performance

Bilateral contract: 3 stages:

• Neither party has performed.
• Then one performs.
• Then the other does.
• Contract discharged.

Tender of Performance: One party may attempt to perform but the other party might refuse to accept the performance.

An attempt to perform by one party is called “tender of performance”.

Tender of performance may be accepted/rejected by the other party.

Discharge by Agreement

Waiver: A waiver is a voluntary agreement to end the contract between the parties themselves & call off the deal.

Substituted Agreement: Sometimes performance becomes too difficult & one party may offer the other a $ payment or substitute performance to be released from further obligations. If agreed=substituted agreement.

Material alteration of terms: Parties want to create new contract with new terms.

Accord & Satisfaction: A compromise between parties to substitute new contractual obligations & release the party from the existing one.

Novation: Original parties mutually agree to terminate contract & create new one.

Contract Provides for its Own Dissolution: If the other party agrees, parties can include a term in the contract stating what would happen if an event occurs.

3 common types of terms for own discharge:

1. Condition precedent
2. Condition subsequent
3. Option to terminate

Condition Precedent: A future event that must happen before the parties are obligated to perform the new contract.

Condition Subsequent: A future event that, if it happens, brings the promisor’s liability to an end.

Option to Terminate: Contract may include a term giving one party or both, the choice to bring the contract to an end before full performance, usually by notice.

Discharge by Frustration

Doctrine of Frustration: Impossible to foresee all future events & address them as conditions to a contract; too costly, uncertain.

Frustration: External, unforeseen events, beyond the control of the parties, make performance impossible or completely unlike what was intended.

Self-Induced Frustration: A party willfully disables itself from performing a contract in order to claim that the contract has been frustrated = breach of contract not frustration.

Discharge by Operation of Law

The law deems that a contract is discharged once certain obligations have been completed.

A bankrupt debtor may be discharged from contractual liabilities after bankruptcy process completed if can prove that bankruptcy was caused by misfortune & not by misconduct.

Existing debts by contract may be discharged by the federal BANKRUPTCY & INSOLVENCY ACT.

Effect of Statute Barred Contracts

Applies to creditors seeking repayment of debt.

Process delayed too long = statute barred by THE LIMITATIONS ACT.

STMLR

Prepare well written contracts which give parties maximum control over how/when contracts are discharged.

Identify specific circumstances in the business that might warrant non-performance & include them as conditions subsequent to the agreement.

Identify any situations that could give rise to conditions precedent.

Option to terminate: Include this term, with written notice, in the contract if there is any lingering uncertainty about whether to contemplate a certain contract.

Breach of Contract

Implications of Breach

Any breach of a term of a contract entitles the non-breaching party to claim damages.

Only serious breaches (essential term breach) may DISCHARGE a contract & release the non-breaching party from further performance.

Minor Breach: A breach of a non-essential term of a contract or of an essential term in a minor respect.

Major Breach: Breach of the whole contract or essential term so that purpose of the contract is defeated.

Breach May Occur in 3 Ways By:

1. Expressly repudiating (rejecting) its obligations.
2. By acting in a way that makes performance of the promise impossible.
3. By failing to or falling short in performance of promise.

Express Repudiation

One of the contracting parties advises (before or during) the other that it does not intend to perform as promised.

One Party Renders Performance Impossible

A deliberate or negligent act by the promisor destroys its ability to fulfill the contractual promises (self-induced frustration).

Failure of Performance

Types of Failure: Failure of performance becomes apparent at the time set for that performance to occur.

Doctrine of Substantial Performance: A promisor is entitled to enforce a contract when it is substantially performed even though its performance does not comply in some minor way with the contract.

Mistakes in Performance

May arise upon overpayment (one party over performs an existing obligation by paying more $ than owed/ May be done in a mistaken belief (insurance company pays out a claim in error for risk not covered by the policy or someone pays the wrong person.

Exemption Clauses

Their purpose is to protect business parties from potential liability.

Exemption clauses are included in contracts to exempt or limit liability even in the case of breach.

Unconscionable Clauses

If significant imbalance in bargaining power exists between the parties the stronger party may extract an agreement by the weaker party to unconscionable terms:terms agreed to by parties of unequal bargaining power that give an unfair advantage to the powerful party over the weaker party.

Types of Remedies

Damages/ equitable remedies (specific performance, rescission, & injunction)/ quantum meruit.

Damages

Damages are awarded to put victim in same economic position as if the contract has been completed.

Prerequisites for an Award of Damages

Loss must result from the breach & be within foreseeable limits of what the parties would have expected as a consequence of non-performance.

Mitigation of Damages

Principle: A party that has suffered losses must do what it can to keep losses as low as reasonably possible.

Liquidated Damages

When forming a contract the parties may agree on the amount of damages to be awarded for any type of damage should in event of a breach (“liquidated damages”).

Nominal Damages

Sometimes court will award nominal damages to acknowledge a breach of contract where there was no real loss suffered by the non-breaching party.

Expectation Damages

Typical remedy for breach of contract.

Consequential Damages

Are secondary losses.

General Damages

An estimated amount that the court may award over & above specific losses for harm.

Definition: Non-monetary harm arising from the breach.

Reliance Damages

Definition: Costs of expenditures & wasted effort reasonably made in preparation for performance.

Punitive Damages

Punishment is not the purpose of contract damages.

Challenges in Measuring Damages

Mental Anguish: In tort cases, court recognizes pain & suffering, nervous shock, humiliation, mental anguish as harm for which they grant general damages.

Equitable Remedies

Where damages are inadequate, an equitable remedy may be ordered such as: Specific Performance/ Injunction/ Rescission/ Quantum meruit.

Specific Performance

Makes parties fulfill the contractual obligation.

Injunction

Court order restraining a party from acting in a particular manner.

Rescission

Returns parties parties to their original positions as nearly as possible before the contract took place.

Quantum Meruit

Claim arises when a valuable benefit is given at the request of a promisee.

Definition: Fair amount a person deserves to be paid for benefit conferred (as much as is deserved).

STMLR

Take steps in advance to reduce costs & losses in contract associated with breach of contract.

Determine the potential risks likely to make performance difficult for the business or customer.

Quantify the value of those risks.

Insurance & Guarantee

Best way of purchasing protection against a possible loss & transferring risk to another party.

Insured enters into a contract with an insurer to be compensated for a specified loss, in return for payment of insurance premiums.

2 types of risk:

• Property & Assets Damaged
• Risk of being held liable for loss/injury to persons on their premises

4 essential terms in contract of insurance are important to determine:

• Nature of risk covered (cause of loss)
• $ amount for which the cause of loss is insured (extent of damages)
• Duration of the protection (term)
• Amount of the premiums(cost of insurance contract to the insured)

2 types of risk to insure against:

• PERSONAL: Covers risk to life/health.
• PROPERTY: Insures against damage to property & equipment on premises.

Regulation: Each province has statutes which regulate the practice of insurance within its jurisdiction.

Purpose of the legislation: Protection of public, requiring responsible behaviour of the insurance companies & others in the business.

Superintendants of insurance: The government agency which oversees the operations & financial stability of licensed insurers, especially regarding terms in policies & the scope & limits of liability offered by companies.

Compulsory registration: Federal, foreign insurance companies must register with the Superintendant of Insurance pursuant to the Insurance Companies Act.

2 types of business insurance:

• Loss or damage to one’s own property or assets.
• Liability of others.

Property Loss/Damage

Damaged to buildings & contents (inventory, fixtures, equipment) due to a fire or storm/loss due to theft/loss or damage to vehicles used in business.

Comprehensive General Insurance

Rather than issue a variety of policies for various specific risk to a business, use CGI instead.

One policy covers all.

Covers both property loss/damage & liability to others in one policy.

Principle: Courts will not enforce a policy when a claim arises out of criminal or deliberate wrongful act of the insured.

Insurable Interest:

Definition: Genuine risk of loss that may be suffered from damage to the thing insured.

TEST: An interest is found if the insured benefits from the property’s existence & is prejudiced by the property’s destruction.

Renewal

Expectation of renewal in most cases.

Terms of the Contract

Insurance policy = standard form contract.

Good Faith, Fairness & Disclosure(Insured)

Has duty of utmost good faith & an insurer may deny a claim because of UGF.

Good Faith, Fairness & Disclosure(Insurer)

Duty of Good Faith owed by insurer as well.

Subrogation

Definition: Where one person becomes entitled to the rights & claims of another.

Principle: When an insurer has fully compensated an insured for all losses, then insurer is entitled to step into the shoes of the insured & sue the person liable for the loss.

Recovery

In many types of policies, property is insured for a specific $ amount.

Principle: Insurer may not recover more than the amount of the actual loss.

Nature of Guarantee

Definition: A promise to perform the obligation of another person if that person defaults.

3 Characteristics of a Guarantee:

• Guarantor makes the promise to the creditor, not the principal debtor.
• Obligation arises only on default of primary debtor (contingent liability).
• Obligation arises immediately upon default of primary debtor.

2 types of guarantees:

• Limited guarantees (limited to specific transaction).
• Continuing guarantees (covers a series of transactions between creditor & principal debtor).

Discharge of a Guarantee

4 ways:

• Ends if creditor breaches terms of contract & breach materially affects risk (failure to notify).
• Ends if contract between creditor & debtor is varied without guarantor’s consent.
• Ends if creditor acts in breach of contract where that breach materially affects the risk assumed by the guarantor.
• Liability is reduced if creditor impairs value of security given by principal debtor.

Rights of Guarantor on Default

May defend an action by the creditor using same defenses as open to principal debtor.

Requirement of Writing

Contract of guarantee MUST BE IN WRITING & signed by debtor (Statute of Frauds).

STMLR

Insurance contracts are valuable risk management tools because they transfer risk.

Must be compliant with legislation.

Scope of coverage is most important term of an insurance contract so pay careful attention to what is being insured, for what $ amount, and exclusion clauses.

Make sure to make FULL DISCLOSURE at time of entering into contract as coverage could be denied or limited.

Pay careful attention to riders (additional provisions attached to standard policy of insurance) as they may limit coverage.

Consider taking out a comprehensive insurance policy to eliminate gaps in coverage amount separate policies.

Carefully monitor renewal dates to ensure policy does not lapse.

Report any material change in circumstances (risk) immediately to avoid denial of coverage.

Businesses: prepare under seal.

Guarantees: also important business contracts to reduce chance of bad debts in accounts receivable.

Businesses should prepare guarantees under seal.

Contract of Employment

Traditionally based on common law of master & servant.

Definition: The contractual relationship between an employer “master” & an employee “servant.

Individual contract of employment is still important & most common form of employment relationship.

Supplemented by:

• STATUTES passed to regulate employment relationships (minimum wage, safe working conditions, etc).
• TRADE UNIONS & COLLECTIVE AGREEMENTS (labour law or the law governing collective bargaining between employers/trade unions/their members).

3 Areas to Consider:

• Employer/employee contract compared with agency.
• Employer/employee contract compared with independent contract.
• Employment relationship at common law.

Compared with Agency

E/E established by contract, giving employer the authority to direct & control work of the employee.

Compared with Independent Contract

An independent contract (IC) undertakes to do a specific task for a fee (build a house).

Does not create an E/E relationship.

CHARACTERISTICS OF IC

• Hired to complete a task or deliver a result for a fee.
• Owns the tools necessary to do the work.
• Controls own hours of work & time of work.
• Controls how the work is done.
• No tax pension, benefits, government deductions.
• Invoice for work done & charges GST/PST.
• Pays own expenses.
• Assumes the risk for profit/loss.

Employee Relationship at Common Law

Characteristics:

• Employers liability to 3rd persons.
• Notice required to terminate the relationship.
• Limited reasons for an employer to be able to terminate the relationship without notice.
• Assessment of damages for wrongful dismissal.

2 Types of Liability of Employer to 3rd Persons:

• Contract-employer retains liability for work performed by employees & for breach of contract for improper performance.
• Tort-employer is vicariously liable for employees torts committed during the course of employment, even if the employer is blameless.

Termination of Employee Contracts

1. Implied Term of Reasonable Notice: Common law implies a notice requirement into employment contracts & the employer must tell an employee in advance when the contract will end & give reasonable notice.

2. Length of Reasonable Notice: Without an express term about termination in a contract of employment: the common law rule is that reasonable notice shall be given.

Reasonable Notice:

Definition: The acceptable length of notice of termination considering the nature of the contract, intentions of the parties, circumstances of employment & characteristics of the employee.

Indefinite Hiring:

Definition: A contract of employment for an undetermined length of time, with no expectation of termination or described end date.

REASONABLE NOTICE FACTORS

• Length of employment
• Character of employment
• Age of employee
• Education or training of employee
• Experience of employee
• Availability of similar employment in industry (market conditions)
• Other individual factors which vary with each case

Payment in Lieu of Notice (PILN): If an employer wants to dismiss an employee immediately it may satisfy its obligation to give reasonable notice by paying an employee for a period of time = to length of reasonable notice required.

Employee Must Give Notice

An employee voluntarily leaving has a contractual obligation to give the employer the same amount of notice as he would be entitled to receive for dismissal.

Contractual Basis

The employer need not give notice if it can show an employee was dismissal for cause:

Definition: Dismissal without notice or further obligation by the employer when employee’s conduct amounts to breach of contract.

CONDUCT CREATING CAUSE:

• Misconduct
• Disobedience
• Incompetence
• Permanent illness

Misconduct: May be a crime associated with employment (eg: embezzlement).

Disobedience: Willful disobedience of a reasonable & lawful order from an employer is grounds for immediate dismissal without notice.

Incompetence: Degree of skill an employer demands depends partly on the employees representations at the time of hiring & what is ordinarily expected of employees of that category & pay scale.

Illness: Permanent disability or constantly recurring illness entitles an employer to consider the employment contract at an end, regardless of any term therein about notice.

Failure to Warn

Because only the most serious of events listed allows an employer to dismiss an employee without notice, the employees conduct must be considered in context & fair warning that such offending conduct is not acceptable must be given, prior to termination.

Wrongful Dismissal

Definition: If the employer does not follow the rules for cause or reasonable notice then employee has a cause of action where notice was insufficient or cause was not established.

DAMAGES: TEST: Employee must show they were fired without reasonable notice.

Mitigation:

Principle: A party injured by a breach of contract is required to mitigate loss.

Reinstatement: Form of specific performance by which the court orders the employer to return the employee to their job.

Checklist of Remedies available for wrongful dismissal actions: damages & reinstatement:

• PLIN
• Damages for mental anguish or pain & suffering
• Special damages associated with the cost of mitigation
• Punitive damages from an employer acting in bad faith
• Employees must mitigate
• Reinstatement

Employee Welfare Legislation

Employee welfare legislation was reaction of unfair & harmful working conditions.

Employee Welfare Legislation governs:

• Human rights
• Pay equity
• Employment equity
• General working conditions
• Employment insurance
• Workers compensation

Employee Rights

Applies to private & public sector employer.

Pay Equity

Legislation is directed to eliminating gender discrimination in remuneration because of systemic wage disparity.

2 ways to address wage gap between men & women:

1. Equal pay for equal work.
2. Equal pay for work of equal value.

Employment Equity

New employment rights strive to make workplace representative of diversity in society.

Mandatory Retirement & Charter

Mandatory Retirement was accepted for decades as a desirable social institution but later as increasing good health & longer life expectancy has become norm, persons reaching age 65 did not want to be forced to retire.

Jurisdiction

Provincial HR codes & federal Human Rights Act apply to all employment contracts within their jurisdiction, both PUBLIC & PRIVATE SECTOR.

Regulation of Working Conditions

Each province has enacted statutes prohibiting child labour, regulating hours of work of young persons, providing for occupational H&S, using inspectors, minimum wage rates, pay for OT, annual vacations with pay.

Labour Standards Act/Trade Union Act/Occupational Health & Safety Act/Pension Benefits Act/Workers Compensation Act/Assignment of Wages Act/Minimum Wage Regulations Act

Employment Insurance

EI Act is federal legislation providing EI fund to provide benefits for unemployed persons.

Workers Compensation

At common law, employers were liable in damages for an injury sustained by an employee at work but it was very difficult for injured workers to succeed against individual employers.

Occupational Health

Goal is to prevent workplace injury & promote safe workplaces. Important public policy issue. Reduces injury & costs to employer/society.

OH&S Act enacted in each province.

Businesses are required to establish an in-house OH&S committee to identify, investigate, & correct dangers in the workplace.

Collective Bargaining

Definition: Process of establishing terms of employment through negotiations between a business & a bargaining agent for its employees.

Bargaining agent: A union having exclusive rights to bargain with the employer on behalf of a bargaining unit (eg: a specified group of employees eligible to join the union).

Collective Agreement (CA): When employer & union reach agreement as to working conditions = terms form a contract called Collective Agreement (CA).

Labour Disputes

4 TYPES OF DISPUTES:

• Jurisdictional-between unions for right to represent group of employees.
• Recognition-when employer refuses to recognize the union.
• Interest-about terms of the CA.
• Rights-about interpretation of terms in the collective agreement.

Legislative Regulation of Dispute Resolution

:strikes & lockouts are restricted to interest disputes (over terms of CA)#only after a genuine attempt to reach agreement by bargaining is legislation usually enacted#includes conciliation procedures w/help of negotiator#pickets must be peaceful & only for purpose of obtaining/communicating information (employers often attempt to obtain an injunction to stop picketing)#Implications of CA for Employee;parties to the CA are the employer & the union#employee cannot bargain individually w/employer#unions have provided workers w/a bargaining power they do not have individually#but individual employee preferences are less important than the collective goals of the union#closed shop unions require all employees to join the union so the union has dominant role in bargaining#requires payment of union dues even without union membership#trade unions are recognized as legal entities before Labour Relations Boards in order to bind them to the Board’s ruling#unions do not have the separate legal identity of corporations but the law may move in that direction#whether a union can be sued for tort depends on provincial legislation#In SK, every trade union is deemed to be a person, & may sue or be sued & prosecute or be prosecuted under its own name (Trade Union Act)#STMLR:WHEN DEALING W/INDIVIDUAL EMPLOYEES: Initially hire employees on fixed term contracts that naturally come to an end#Replace implied terms for reasonable notice of termination in employment of indefinite length w/express contractual terms designating the amount of notice that will serve to terminate the agreement#create detailed job descriptions & codes of conduct describing employee responsibilities; share them w/prospective employees as part of the employment contract#Create, publish & follow a protocol for progressive employee discipline#Document infractions & responses#Follow consistent warning & discipline processes that allow employees to respond to allegations#Offer incompetent employees training or education opportunities#Dismiss employees privately at the end of the day & in the most sensitive, fair & respectful manner possible#WHEN DEALING W/INDEPENDENT CONTRACTORS:Respect the characteristics of an independent contractorship to avoid confusing the relationship for 1 of employment#Require independent contractors to carry their own liability insurance & obtain a promise to indemnify the biz if it is held liable for substandard work or negligence of the independent contractor#Insure exemption clauses in contracts w/customers extend protection to independent contractors completing work under it#UNIONIZED WORKFORCE:When dealing w/a unionized workplace obtain specialized legal advice to guide management through the processes#Especially important if interest-based or jurisdictional based disputes arises#For rights-based disputes: the grievance process of arbitration should be followed# Parties should commence negotiations well in advance of expiration of the collective agreement##LANDLORD & TENANT##Tenancy:defn:interest in land for a definite period (term) under a lease (both the interest & the agreement between LL & T creating the leasehold interest)#leasehold interest is created when a lessor grants to a tenant (lessee) exclusive possession of land for a fixed term#landlord divides interest in the land between himself & tenant;gives tenant an interest in land for a limited time; landlord retains the reversion#leases create an estate in land & must be strictly adhered to in law w/certain rights & duties for both LL & T, without which no estate in land is created#3 ESSENTIAL RULES FOR CREATION OF LEASEHOLD:1. The tenant must have the right of exclusive possession-as distinct from a contractual licensee 2. The tenancy must be for a fixed or ascertinable time-lease for the duration of the war is void as the time is not ascertainable 3. Lease must be in writing.#Consequences can be serious for the tenant 1. May be evicted by the owner at once 2. Has no right himself to evict strangers 3. in the case of residential tenancies, not covered by protective legislation#rules for LL & T relationships apply from the common law, property law, statues passed by gov’t (Landlord Tenant Act)#Residential Tenancies:separate class of tenancies#Residential Tenancies Act#tenants are given special protection in order to recognize the special importance of basic shelter for individuals who lease property#Exclusive Possession is the difference between estates in land & lesser interests in land;gives a person control over the land as opposed to merely right to use land in common w/others (licensee)#a licensee enters onto the land w/the owners permission, so not a trespasser, but has no right to exclude others or to object to activity of others on the land#tenant has right to exclusive possession of the land#thus have more rights than a licensee#tenant has right to exclude others from the land, including LL (except if LL has specific purpose (repair, view state of property))#T may also have lesser rights eg)acquire an easement to adjoining property during tenancy# biz’es should not grant 3rd persons any right to use land or have access to it#DEFINITE OR ASCERTAINBLE PERIOD:lease must begin & end on a fixed or ascertainable date otherwise VOID#Lease w/term of an uncertain period is VOID & no leasehold interest comes into existence#lease can be for any length#if an indefinite term is include in a lease (for as long as the tenant holds a Tim Hortons franchise); recity by adding conditions subsequent or options to terminate clauses (bring to an end at an earlier date or upon certain event)#4 CLASSES OF TENANCIES: Term Certain/Periodic Tenancy/Tenancy at Will/Tenancy at Sufferance#TERM CERTAIN:expires on a fixed date#no further action by LL or T required#tenant who does not vacate is considered to be overholding & is liable for payment of rent & may be evicted#if landlord allows overholding & accepts further rent without protest then new tenancy may be formed#PERIODIC TENANCY:periodic tenancy renews itself automatically on the last day of the term for a future term of the same duration#can be brought to an end by either landlord or tenant serving notice#also comes into existence after tenant remains in possession after tenancy for term certain has expired & pays further rent to the landlord#commonly year to year#TENANCY AT WILL:It is NOT a true leasehold interest because it does not last for a definite period#T does NOT have any right to exclude the LL & remain on the premises#T is merely there at LL’s will#LL may demand possession at any time without notice but T would have reasonable time to gather up possessions & leave#T may also vacate at will w/no obligations#TENANCY AT SUFFERANCE:It is also NOT a true tenancy#Likely an overholding tenant who has entered into possession rightfully under a lease but now stays in possession wrongfully after the lease has expired# Because tenant came into possession legally he is not considered a trespasser unless the landlord orders him to leave & he does not#Has no estate in land, is not there by agreement: his occupation of the land is merely tolerated by the landlord until put out of possession#COVENANTS: To pay rent specified during the term/Placing restrictions on assignment & subletting Placing restrictions on the use of the premises/Regarding fitness for occupancy/Responsibilities for repairs/To give quiet enjoyment/Must carry insurance/Provision of services & payment of taxes#TO PAY RENT:The covenant to pay rent is the consideration for receiving the leasehold interest (a contract)#The promise to pay rent is unconditional & must be performed despise misconduct of the landlord or other acts including premises being destroyed (unless a specific term to the contrary is in the lease)#Only an act of the landlord amounting to eviction discharges the tenant from paying further rent#Doctrine of Frustration can apply in certain circumstances in commercial leases#Terms of the covenant to pay rent are binding on both LL & T#eg)during term of the lease the LL cannot increase the rent unless express provisions have been made (offset increased property taxes or higher utilities, specified as a clause in the lease)#If the LL wishes to increase the rent she cannot do so until the term expires, after which she may bargain for an increase in any subsequent lease#ASSIGNMENT:Defn:T can transfer of the whole of the remainder of the T’s term to the assignee & as long as assignee fulfills T’s covenants, T has no further right or interest in the lease#T may assign the lease (business becomes so successful must move to larger premises or sell the biz as a going concern including leased premises) but remains responsible for performance of the lease (Assignment does not terminate lease)#Lease usually requires LL’s permission for assignments (but consider new uses)#Permission of LL should not be unreasonably withheld#Subleases transfer part of the term of the tenancy#Should be a term of the T’s assignment that assignee carries out T’s covenants#Expressly reserve the right to assign for safest course of action for both LL & T#SUBLETTING:Subleases differ from assignment of a lease because a sublease is a transfer of only PART of the T’s term to the subT#The T becomes the LL of the subT#Sublease may differ from the main lease in (amount of rent, any covenants given by either original party, extent of premises to be sublet (only a portion of the premises leased to the T))#SubT is liable to LL for all covenants of the main lease#RESTRICTION ON THE USE OF PREMISES:LL: concerned w/the proposed use of the premises. Require a covenant in the lease restricting use of premises to particular activities (NB: also enforceable against Assignees & Subtenants) (implied usage in “T-like manner”)#T: may ask LL give covenant to not rent adjoining premises to competing biz (“exclusive use clause”) but if LL does so innocently the T has remedy against LL (not adjoining T) in DAMAGES#In absence of express covenant, then an implied covenant for tenant to treat premises in “tenant like manner”, eg)to use only for purposes for which it is reasonably intended#cannot turn a cold storage plant into a glue factory or restaurant into a hotel#May prevent the tenant from carrying on activities for which premises were not intended or z1d or cause excessive wear & tear on the premises#FITNESS FOR OCCUPANCY:No covenant of fitness for occupancy is implied by a lessor at common law#Tenant takes the premises as he finds them, at his own risk, & is responsible for investigating them#May obtain an express covenant from the landlord concerning fitness for occupancy for a particular use as long as disclosed to the lessor (like sale of goods)#Landlord is not liable to tenant’s customers, family, etc. for unsafe condition of premises unless failure to repair (= occupier’s liability)#REPAIRS:LL must repair any structural defects to property which develop, especially if failure to do so would lead to causing T to vacate or breach quiet enjoyment (but not at time of making the lease)#Also responsible for maintenance of common areas in large buildings#T is not liable for repairs unless 3 conditions: There is an express covenant T will repair/T causes excessive wear & tear/T is responsible for waste#QUIET ENJOYMENT:LL covenants to give “quiet enjoyment” & must not interfere w/T’s possession & use#This covenant has 2 aspects: An assurance that LL has good title at time of lease/that LL will not allow interference w/T’s enjoyment of the property during term of lease#Breach of the covenant of quiet enjoyment no longer requires physical interference w/premises#can be noise, fumes, vibration#REMEDY: Court may reduce rent for period of interference#INSURANCE:Neither LL or T is required to insure premises for the benefit of each other, unless an express covenant to do so#In most cases: LL does insure premises to protect her investment, but if property is a building or group of buildings leased to T may require T to take full responsibility for insurance of property#In a building being rented by many T’s: it is a complex process to draft a lease w/express covenants for insurance of each-so require each to carry own insurance#PROVISION OF SERVICES & PAYING TAXES:If a tenancy involves only a portion of a building = customary for LL to pay utilities, but if for whole building the T is usually responsible#Property taxes often paid by LL when T leases only a portion of the building but if for whole building either party may cover taxes, adjusting the rent accordingly (“additional rent”)#EXAMINE COST formula carefully if a T as often $/ sq. ft#In the absence of an alternative arrangement LL is responsible for taxes#REMEDIES OF THE LL FOR BREACH OF COVENANTS: Damages & Recovery of Rent-The law is uncertain as to obligation to mitigate/Right of re-entry (Eviction)-LL may evict for non-payment of rent/Distress-LL may seize assets if rent unpaid-May not seize after eviction/Injunction-To prevent prohibited use#DAMAGES & RECOVERY OF RENT:If a T abandons the premises & fails to pay rent the LL has a problem: must notify the T that T is in breach & will be held liable for any loss suffered by LL for remainder of the tenancy even if a new T is found at lower rent#LL may now mitigate losses without losing rights against the defaulting T, per SCC which held that LL has NO duty to mitigate if choses not to assume control of premises (not same in residential tenancies)#EVICTION: Sometimes called LL’s “right of re-entry”#Defn: Evicting the T for failure to pay rent or breach of another major covenant#It is a term implied by statute if not expressly stated in the lease: Provincial legislation dictates procedure for eviction#Lease may provide that LL can evict the T for breach of any of other covenants: amounts to “forfeiture” (to lose to the LL the balance of the term of a lease)#Court is often reluctant to allow eviction as it amounts to “forfeiture” except upon breach of 3 major covenants: payment of rent/use of property/assignment of the lease#Court may grant relief against forfeiture under principles of equity or statute & as long as tenant corrects the breach = court will usually restrain against eviction & declare lease valid under its original terms#DISTRESS:defn:right of the LL to seize assets of the T found on the premises & sell them to realize arreras of rent#LL has a power of distress for rent 1 day after rent is due & demand for payment is made#usually bailiff or sheriff oversees procedure#may follow the goods if T has removed them to avoid distraint & seize them, but not from innocent purchaser for value#LL must pay off any installment sales contract for equip#LL cannot exercise power of distress & simultaneously the right to evict#right to distrain is limited to situations where the relationship of the LL/T still exists#eg)LL evicts the lease is terminated, no relationship exists#Certain personal property is exempt from seizure: necessary household furniture/limited supply of food&fuel/mechanics tools#if LL takes 3rd party goods by mistake(customers/consignors) then must be released w/proof of title#INJUNCTION:If a T uses premises in a manner in breach of covenant restricting use=LL may obtain injunction ordering T to cease prohibited use#May be obtained against certain types of use even if not expressly prohibited in the lease: if inconsistent w/general design & ordinary use to which property would be put#house as a medical clinic#LL has right to re-enter property, to evict the T as well as seek injunction=so choose the remedy based on circumstances #BANKRUPTCY OF THE TENANT:Bankruptcy & Insolvency Act: LL has priority over other creditors in T’s bankruptcy for 3 months of rent arrears but for more than that = ranks as a general creditor (encourage patience to resolve)#Any term that automatically terminates a lease upon bankruptcy of a T is VOID (to preserve the asset for use by the trustee in bankruptcy who can repudiate a lease without further liability for T)#Inability to pay rent may be temporary & T may provide suitable insolvency plan#REMEDIES OF THE T FOR BREACH OF COVENANT:Damages-For breaches of covenants by LL/Injunction-To restrain a continuing breach of the covenant of quiet enjoyment/Termination of the lease-If breach of covenant of quiet enjoyment has made premises unfit for normal use#DAMAGES:T may recover damages from LL for breach of LL’s covenants#eg)LL may have infringed T’s rights(wrongful eviction & breached quiet enjoyment;distrained too many goods to cover arrears or enters premises illegally to distrain = liable for damages for conversion & trespass)#LL’s failure of express covenant to keep premises in good repair = breach of quiet enjoyment & covenant to repair: DAMAGES#INJUNCTION:Ts may also obtain an injunction to restrain a LL from a continuing breach of covenant of quiet enjoyment#eg)for continuing nuisance such a loud noise or vibration or fumes escaping from LL’s premises or another T in same biz (but only if other T was aware of term)#Court may NOT grant an injunction if to do so was futile(premises eventually destroyed by LL’s actions): T vacates & sues for damages#TERMINATION OF LEASE:If LL’s continued breach of covenant of quiet enjoyment has made premises unfit for T’s normal use & occupation = T may terminate the lease & vacate the premises as well as other remedies#Vacating ends any further liability of T to the LL (as long as LL’s breach makes entire premises unfit for T’s use)#If LL interferes w/only PART of premises or if interference is only a nuisance or inconvenience rather than actions amounting to total eviction = T must pay continue to pay rent: cannot terminate lease#REMEDIES: action for damages for injury suffered & an injunction to restrain further breach#Tenancies may be terminated in 4 ways:Surrender-At end of lease, by agreement or by abandonment/Forfeiture-By eviction/By notice to quit-To end a periodic tenancy/Renewal-Renewing the lease w/new terms#SURRENDER:When a lease is up for renewal & T does not renew = the T “surrenders” the premises to the LL when he vacates#Can also take place during lease by express agreement LL & T. T may pay LL a sum of m1y to be released from obligations to pay further rent or LL may bargain w/T to surrender premises for remainder of the term(needs vacant possession to sell or to make renovations)#FORFEITURE:If T breaches certain covenants (e.g. fails to pay rent) then LL can evict#That imposes a forfeiture of the lease & LL/T relationship ends. T has no further obligations to the LL under the lease but may still be liable for other damages as a result of the breach, prior to forfeiture#If LL attempts to impose forfeiture on T by improperly evicting = T can consider lease at an end & the LL/T relationship is over. T may still recover DAMAGES for LL’s breach of covenants#TERMINATION BY NOTICE TO QUIT:A periodic tenancy renews itself automatically unless LL or T serves “notice to quit”#Defn: notice of an intention to bring tenancy to an end. Also called “notice of intention to vacate” if T serves it#In weekly, monthly, quarterly tenancies = 1 clear period of notice required. Common law says 6 mths notice to terminate yearly tenancy in all commercial leases in provinces including Sask#All commercial leases have their own notice clause#T REMAINING IN POSSESSION AFTER EXPIRATION OF THE TERM:If T remains in possession after expiry of lease = he becomes T “at sufferance” & may be evicted at any time on demand#But if LL accepts further rent it creates a periodic tenancy w/all terms of original lease except those inconsistent w/a periodic tenancy (ie LL will redecorate every 3 years in 12 year term) in same periods as original lease (monthly, yearly)#PARTIES MAY SET THEIR OWN TERMS FOR NOTICE#The above notices to quit apply in absence of express terms in the lease#Parties to a lease may choose their own notice period which suits them w/respect to length of notice or remaining in possession after notice to quit#But remaining in possession can lead to added PENALTIES in addition to DAMAGES & EVICTION so do this cautiously#RENEWAL:A lease for a fixed term often provides for renewal at the option of the T#T’s should seek this option to reduce risk of being tied to a long term lease if biz is unprofitable or having to vacate if given a short lease & biz is successful. T must give notice to renew or not#Option to renew lessens risk. LLs want to grant option as long as rent can increase to offset inflation, increased property taxes#FIXTURES:Defn: A fixture is anything that is fixed to the land & forms part of the land#To determine whether an object is or has become a fixture, we need to ask: ( 3 part TEST):Has the object been fastened to the building w/the intention that it become a fixture?/What use is to be made of it, & how securely & permanently is it to be attached?/How much damage will be caused to the building by its removal?Fixtures belong to the LL & a T cannot remove them#But T may attach objects to the premises for his own benefit without any agreement w/LL (changing chattels into fixtures)#Issue: Can a T later remove them or do they stay w/premises? If so LL may reap unjust benefit. Determine when objects become fixtures & if they are the types of fixtures removable by T#DETERMINING WHETHER AN OBJECT IS A FIXTURE:TEST:Objects not bolted or anchored are not usually fixtures. Objects affixed in any way are presumed to be fixtures but may be rebutted by asking what a reasonable person would intend when attaching such objects?#4 questions to ask:Has the object been fastened to the building w/intention of it becoming a fixture?/What use is to be made of it?/How securely & permanently is it attached?/How much damage will its removal cause to the building?#When objects are NOT fixtures = can be removed by the T at any time#If T forgets to remove them from premises when lease expires they remain the property of the T & may be claimed afterwards#Except if objects are classified as “T’s fixtures” or “trade fixtures”: If left behind they become LL’s property & T may not claim them afterwards#Tenant still has right of removal if he installed 2 types of fixtures:Attached for convenience of tenant or better enjoyment of the object (ornamental)/Are a “trade fixture”(object attached to premises for purpose of carrying on trade or business)#Must not cause permanent structural damage to the building by removal & tenant repairs any resulting damage but if T leaves behind = become LL’s property & may not be removed#the best way is to make certain that a T can remove specific fixtures or particular objects that might clearly be considered fixtures is to make a prior agreement as to what are deemed to be the T’s property & can be removed upon termination of the lease to lessen disputes#ORAL LEASES:In most jurisdictions a lease of 3 years or less (“short term lease”) need not be in writing#Leases of longer than 3 years are enforceable only if in writing (per SoF)#Doctrine of part performance (per SoF) may apply if a tenant is already in possession & has paid rent (even if an oral lease or partly oral lease) for longer than 5 years#Landlords may seek specific performance (equitable remedy) to hold tenant bound to long term lease if tenant later wishes to vacate premises#RELATIONSHIP BETWEEN TENANT & PURCHASER OF LANDLORD’S INTEREST:When a landlord sells land which is subject to a lease she parts w/both the reversion & the benefits of the tenant’s covenants to new purchaser#The purchaser then acquires the whole interest in land subject to the outstanding lease & is bound by rights & duties of the former landlord#Issue: what is role of purchaser when no privity of contract between herself & tenant? = “Privity of Estate” is formed because a lease also creates an estate in land as well as being a contract#PRIVITY OF CONTRACT w/FORMER LL:The creation of privity of estate w/new LL does NOT end privity of contract w/former LL#While a LL may sell her reversion she remains liable on her covenants to the T (in particular quiet enjoyment)#If the new LL interferes w/that original covenant the T may sue the ORIGINAL LL in contract for DAMAGES#LEASEBACKS:Defn:a financial arrangement enabling a biz to buy a building & sell it to a financial institution that in turn gives a long-term lease of the property back to the business#Has 3 main advantages for the lessee business:The biz does not have to go through more expensive & complicated procedure of issuing securities in the capital market to finance expansion/Leaseback may be more advantageous than buying property & mortgaging it because mortgagee will not generally provide full value of the project as the leaseback does, leaving biz to raise the balance/May be tax advantages for the business#During lease (usually 20-25 years) the lessee biz acts as owner of the building, paying all repairs, mtce, insurance, taxes#Many benefits to lessor financial institution: regular rental revenue from the property, reversionary interest, possession of entire property at end of lease, all improvements made by the T add value, land may have increased in value over time, easier to evict lessee biz if they are in financial trouble than if mortgagor/ mortgagee, can restrict lessee biz from future borrowing if it impairs ability to pay the rent#RESIDENTIAL TENANCIES:Legislation protects residential tenants# Residential Tenancies Act#LL:Are restricted in demanding security deposits/Must maintain premises in reasonable repair/Distress of tenant’s goods is forbidden/ Must mitigate losses caused by tenant’s breaches/Eviction is difficult even for non-payment of rent/Must respect rent controls & amount of rent/Special tribunals to deal w/disputes#STMLR#COMMERCIAL TENANCIES:Interests of LLs & Ts may conflict so priority is given based on wording of covenants in the lease, timing of notice & registration of the lease at land titles & personal property systems#Ts must spell out ownership of goods, trade fixtures, leasehold improvements & options to renew or terminate as well as right to assign any unexpired term of the lease so as to have maximum flexibility for expansion, relocation, stability#TENANT:A T CANNOT withhold rent for LL’s breaches so it is very important to designate specific incidents that suspend the T’s obligation to pay rent (damage to or destruction of premises) in the lease# If a multi-unit location T should consider 3 things:“Additional rent” for share of maintenance & operation of entire development is often complicated formula so pay strict attention to save $/Presence of competing biz should be restricted by exclusivity clause preventing LL from renting to competitor/Register the lease at the LTO#LANDLORD:2 most important concerns are T paying rent & care of the premises:In event of T’s bankruptcy: trustee takes over dealing w/unexpired term of the lease & distraint of goods as any clause in the lease purporting to end the lease due to bankruptcy is VOID#But other options to terminate, such as T ceasing to carry on biz at the premises, are enforceable: may give LL opportunity to end lease prior to trustee assuming control#Absconding tenant: consider carefully whether to terminate the tenancy or not because remedies vary. Seek legal advice#Care of premises: impose precise notice obligations on the tenant to advise of deterioration of the premises at the earliest indication#CREDITORS RIGHTS:Creditors of LL & T must be aware that their right to seize T’s assets or LL’s land may be displaced by rights under the lease#LL’s right to distrain may take priority#T’s goods may have become attached to LL’s land as fixtures, not seizable by creditors#Creditors should reserve title to T’s goods until full purchase price is paid so as to keep their priority & must register them in Personal Property Registry#MORTGAGES:Mortgagees of the LL may be subordinate to the interests of a commercial tenancy shorter than 3 years even if not registered on title; 3 years or more is a registerable interest & mortgagee is bound#Taking an assignment of rents on the mortgaged property in all cases of mortgaging commercial property will ensure that rents can be applied to delinquent mortgage payments of the LL#Notice of assignment of rents should be registered on the land title so new Ts have notice##NATURE OF A CORP & FORMATION##A corporation is a separate legal “person” in law#Legal Person:an entity recognized at law as having its own legal rights, duties & obligations#Corporation:a legal person formed by incorporation according to prescribed legal procedure#Has rights & duties under the law but cannot insist on those rights or carry out its duties except through human agents#Canadian biz Corporations Act/Saskatchewan biz Corporations Act/Income Tax Act#CHARACTERISTICS OF CORPORATIONS:There are several characteristics of corporations:Liability/Transfer of Ownership/Management/Duty of Good Faith/Continuity/Taxation#LIABILITY:A corporation is liable for its own debts#1 of the main advantages of incorporation is limited liability#Exception: small corporation often required to provide personal guarantees of its directors or mortgage their own property as collateral security to obtain operating credit#shareholder may sever connections w/the corporation simply by transferring shares to another person#Partnership: a retiring partner cannot just leave the partnership = must “bargain” for release w/partners & creditors & may even be liable for debts incurred after retirement unless given notice to persons who regularly deal w/the firm & per requirements under the Partnership Act#MANAGEMENT:A corporation separates ownership & management: a primary advantage of a corporation#Delegated to a board of directors#Major decisions of a corporation are referred to shareholders#DUTY OF GOOD FAITH:A shareholder does NOT owe a duty of good faith to the corporation (whereas partners in a partnership owe each other & the firm a duty of good faith or fiduciary duty)#A shareholder does NOT owe a non-competition duty to a corporation in which s/he owns shares (but partners have a legal duty not to compete w/the firm without consent of all partners): deals w/the corp “as if a stranger” to it#CONTINUITY:Corporation: has continuous existence & exists independently of its shareholders & directors#a person’s shares can be transferred by gift, sale, in a will to 1’s heirs or to creditors who seize them for sale, all of which has no effect on the continued existence of the corporation#Partnership: unless specific provisions to the contrary in the agreement, dissolves upon the death or bankruptcy of a partner#TAXATION:A corporation is a taxable entity (but a partnership is not)#Income of the corporation is first taxed in the corporation & again in the hands of the shareholders when a dividend is declared#CAPACITY:The corporation has the capacity to act independently (ultra vires doctrine abolished) & thus has all the powers, rights, duties of a legal person#Must act through its agents: Must verify if agent has authority to act on behalf of corporation in contracting#Instances where the courts will disregard the separate existence of a corporation & “lift the veil” of incorporation to impose liability on those persons that control it#3 CONDITIONS MUST BE MET (TEST):The individual must control the corporation/That control must have been exercised to commit fraud, a wrong, breach of duty/The misconduct must be the cause of the plaintiff’s injury#ARTICLES OF INCORPORATION:Corporation is formed by filing Articles of Incorporation in prescribed form, paying a fee (“the charter” or “constitution” of the corporation):Corporate name/Place of registered office/Classes & any maximum number of shares/Any rights & restrictions attached to different classes/Any restrictions on transfer of shares/Number of directors/Any restrictions on the nature of the business#BY-LAWS:Operating rules of day to day activities of the corporation are called By-Laws#Not required but are normal & convenient#OPERATING RULES are usually passed at the first meeting of the shareholders: quite long & detailed, setting out such matters as:election of directors/terms of office/place & notice of meetings/quorum necessary for directors/categories of executive officers/provisions for allotment of shares/declaration of dividends/procedures for the annual general meeting (AGM)/procedure for other shareholder meetings#CORPORATE NAME:Registration of the corporate name is closely regulated & must be approved by the Corporations Branch of the government. Do name & trademark searches first or use a numbered company#Name can be refused if within prohibited categories: falsely suggest an affiliation w/government or professional bodies, scandalous or obscene, or likely to be confused w/name of another corporation#TYPES OF biz CORPORATIONS:Public & private corporations/Widely & closely held corporations/Professional corporations#PUBLIC CORPORATIONS: corporation that issues its securities to the public;also called “issuing corporation”, “reporting issuers” & “publicly traded corporation”#PRIVATE CORPORATIONS:Main use is to incorporate small & medium sized biz enterprises where number of participants is small#CORPORATE GROUPS#The largest businesses in Canada frequently comprise a group of corporations, 1 of which is publicly traded, & number of private subsidiaries, often wholly owned by the parent company#PROFESSIONAL CORPORATIONS a special type of biz corporation that may be formed by members of a profession (“PC”)#Professional Corporations Act#All members of the corporation must be member of the profession. Each member remains responsible for his own negligence or misconduct#Main advantage is NOT to obtain limited liability but allows professionals to enjoy tax advantages not available to sole proprietors & partnerships#EQUITY & DEBT:Corporations raise capital 2 ways:By issuing shares (“equity”, subscription agreement)/By borrowing m1y (“debt”, issuing bonds)/M1y obtained by selling shares is called equity capital/M1y obtained by borrowing is called debt capital#Authorized Capital: maximum number (or value) of shares that a corporation is permitted by its charter to issue#Issued Capital: shares issued by a corporation#Paid-up Capital: shares issued & fully paid for#Stated Capital Account: amount received by a corporation for the issue of its shares#Share: members proportionate interest in the capital of a corporation#SHARE CAPITAL:3 ways to become a shareholder: 1 of original applicants for incorporation; purchase & transfer#Par Value: a nominal value attached to a share at the time of issue (“nominal value”)#Preferred Shares: share w/preferential right to dividends and/or redeemable on dissolution of corporation for a fixed price#COMMON SHAREHOLDERS#True equity holder of the corporation#Carries risk of loss along w/chance of gain/Member of ,and owner of an interest in, the corporation/Not creditors/Receive dividends only when issued#PREFERRED SHAREHOLDERS#Entitled to a fixed divided before any dividend is paid to common shareholders/Entitled to be paid a fixed redemption price for their shares upon dissolution of the corporation/Preferred shareholder is also an owner of the equity in the corporation#BONDS:Provide fixed & guaranteed return/Full redemption at maturity/Bond holder is a creditor of the corporation entitled to payment in priority before general creditors & shareholders/Means of borrowing sums for the corporation/Interest paid on the bond is a debt of the corporation & must be paid, regardless of profitability of corporation/Interest payments are deducted before taxable income is calculated#RIGHTS OF SECURITY HOLDERS:4 types of security holders w/diff rights:Bondholders/Common Shareholders/Preferred Shareholders/Class Rights#BONDHOLDERS: Do not usually have direct voice in management#But bondholders have indirect management role by virtue of restrictive clauses written into bond indentures which may restrict long term borrowing, amount of dividend paid & even salaries paid to officers#COMMON SHAREHOLDERS:In theory have a strong voice in management of the corporation as they elect board of directors & approve major changes in corporate activities#PREFERRED SHAREHOLDERS:An intermediate category of security holders/Entitled to a fixed dividend before any dividend paid to common shareholders/Often no right to vote unless payment of dividends to them is in arrears (in this way more like creditors than investors)#CLASS RIGHTS:If a corporation issues more than 1 type of share (e.g. both common & preferred) = precise rights of each type of shareholder must be set out in the constitution of the corporation#CHECKLIST: Priority of Payment on Liquidation of a Corporation#Upon liquidation of a corporation its assets must be distributed in the following order:Secured creditors(Bondholders)/Unsecured creditors/Preferred shareholders/Common shareholders#NEGOTIABILITY#Bonds & shares are a form of personal property & are thus capable of being owned & transferred#RESTRICTIONS ON SHARE TRANSFER:Public corporations: shares freely transferrable/If they are not: will not be listed on stock exchange/Private corporations: restrict transfer of shares#STMLR#Planning before incorporation is important to save time & m1y#First decision is whether to incorporate under federal or provincial jurisdiction, considering future plans of the corporation, cost, inter-provincial or international activity#Careful consideration should be given to the share structure of the corporation, anticipating short-term & long-term needs of the company#Ownership can be divided among classes of shares#Use preferred shares to raise capital; common shares to give the power to vote#Class rights differentiate between financing & control among shareholders & bondholders#Remember to issue odd numbers of shares so that majority votes can be obtained#Research the company name before incorporating to ensure that the name is available to trademark & is not used by another company#Consider using a numbered company: may be convenient#Also consider the corporation’s intellectual property issues & inventory corporate IP in all forms#1 corporation can operate several businesses under different biz names as long as all are properly registered#If “going public” is expected after incorporating as a private corporation,ensure incorporating documents & by-laws comply w/higher standards of corporate governance#Corporations are legal persons so can own shares in other corporations: consider this carefully by using public & private forms#Operate high-risk activities in separate corporations to not threaten existence of the entire business#Assets of 1 corporation, generally, are not available to satisfy debts of the others#All forms of biz entities can be used together to meet specific needs of the business##CORPORATE GOVERNANCE##CBCA & SBCA (provincial statutes) distinguish between 2 aspects of corporate activities which state that the directors shall “manage or supervise the management of:The biz of the corporation/The affairs of the corporation#Purpose: to meet a corporation’s internal objectives & external responsibilities#The rules for corporate governance are found in the Articles of Incorporation & the By-laws (the legal documents which create the corporation & are filed w/the provincial or fed. govt)#Affairs:the internal arrangements among those responsible for running the corporation-the directors & officers – & its main beneficiaries, the shareholders#Business:the external relations between a corporation & those who deal w/it as a biz enterprise – as well as govt regulators & society as a whole#Liability may arise from a breach of the rules of corporate governance#Breach of these rules gives rise to CIVIL, REGULATORY or even CRIMINAL LIABILITY or a combination of all 3 forms of liability#risk management plans vital#Publicly Traded Corps issue shares to the public#AKA public corporations, widely held corporations, reporting issuers, distributing corporations & issuing corporations#Now publicly traded corps MUST meet CBCA standards, provincial biz corporation standards & provincial securities legislation#Corporate Governance pertains to independence of decision makers, transparency, disclosure, accountability, organizational checks & balances, as follows:Majority of shareholders should be independent/CEO should not hold position of chair of the board/Corp should establish separate, independent committees of the board to address executive compensation & nomination of board members/Corporation should adopt & publish a “code of ethics”/Board should perform regular self-assessments#CORPORATE RESPONSIBILITY:Independence – decision-makers should be free of conflicts/Transparency – decisions should be made through an open process/Disclosure – information should be available to the public/Accountability – decision-makers should be responsible for their conduct/Checks & balances – internal structures should bring irregularities to light#3 elements ALL corporations MUST HAVE regardless & are important LEGAL distinctions:Shareholders/Board of Directors/Officers#Board of directors: governing body of a corporation: responsible for the management of its biz & affairs. Officer are appointed by the Directors. Board of Directors appointed by shareholders at 1st meeting#Audit committee mandatory(reports to BoD)#Compensation & Nomination committees optional#Power originates at the Annual General Meeting of the shareholders where they elect Directors to manage the corporation. The Directors then appoint or hire a CEO: highest ranking employee in charge of day to day running of the corporation#DIRECTORS:corporation must have >=1 directors#Public corporation MUST HAVE 3 directors, 1 of whom cannot be an officer or employee of the corporation#Decisions by majority#CHECKLIST: Powers of Directors per CBCA:Issue shares of the corporation/Declare dividends to the shareholders/Adopt by-laws governing day to day running of the corp/Call meetings of shareholders/Delegate other responsibilities to officers & appoint officers#Shareholders dissatisfied w/current directors may call a special meeting to vote on removal of directors before expiration of their term: simple majority is sufficient for removal of any director#OFFICERS:some1 appointed by the directors w/functions similar to a president, vice president, secretary, treasurer#Responsible for the day to day “hands on” management of the corporation (exercise great deal of power in the corporation: subject to the same duties as Ds)#Directors & Officers of a Corporation Owe a Duty To:The corporation (best interests of the corporation, long-term interests of the corporation, not merely present interests of shareholders)/Act h1stly & in good faith (fiduciary duty)/Do not owe a duty to individual shareholders/Must comply w/the Act, regulations, articles, by-laws & unanimous shareholder agreements/Apart from compliance w/statutes, no duty is owed to the public at large#FIDUCIARY DUTIES:Directors owe duty to act “h1stly” & “in good faith” w/a view to the “best interests of the corporation”/Owed to the corporation (People v. Wise)/Include disclosure of any interest in contracts made by the corporation/Forbid any conflicts of interest/Forbid any interception of corporate opportunity/Forbid competition w/the corporation/Forbid directors from closing eyes to mistakes or misconduct#Consequences include accounting for profits & damages#DUTIES OF CARE & SKILL:The duties of directors include exercising care of reasonably prudent person (See: People v. Wise)#HELD: SCC held that there was no fiduciary duty owed to the creditors or other stakeholders because “At all times directors & officers owe their fiduciary duty only to the corporation. The interests of the corporation are not to be confused w/the interests of creditors or those of any other stakeholder”#Also held that duty of skill & care was owed by directors (objective standard) & met in this case because Wise brothers acted prudently & on a reasonably informed basis . Remedy to creditor defendants denied#PRINCIPLE OF LAW: There is a distinction in law between fiduciary duty & duty of skill & care owed by directors. Duty of skill & care does extend to other stakeholders, including shareholders, creditors & employees but fiduciary duty does not extend to them#Directors & officers are personally liable for breach of duty#4 DEFENCES & RM STRATEGIES:DUE DILIGENCE DEFENCE: (“reasonable diligence”) by establishing that the required degree of care was taken, directors & officers can defend themselves against claims of breach of the articles, by-laws, & the Act/GOOD FAITH RELIANCE: good faith reliance on audited financial statements or expert reports is a defence to breach of fiduciary duty or duty of skill & care. A good risk management strategy is to obtain expert reports PRIOR to key decisions/CORPORATE INDEMNITY: by agreement w/the corporation can reimburse a director or officer for any costs associated w/liability for breach of duty provided that the said director acted h1stly, reasonably, & in good faith. A good risk management strategy depending on financial health of the corporation/DIRECTORS & OFFICERS LIABILITY INSURANCE: policies have many exclusions, including bad faith & fraud & are very expensive but should be put in place n1theless#Business Judgment Rule-Courts defer to the biz decisions of directors & officers provided the process had appropriate degree of prudence & diligence & give benefit of the doubt to them#Courts recognize they are not biz experts & even sound decisions may ultimately be unsuccessful#STRICT LIABILITY-Directors may also be subject to strict liability where no breach of duty needs to be established#directors liable to their corporations when they vote at meetings of the board on specified matters causing financial losses to the corporation#eg)improper redemption of shares or payment of dividends in circumstances leaving corporation unable to meet its liabilities#If corporation becomes insolvent: Directors are personally liable to all employees for unpaid wages for the time they were directors, up to 6 mths wages#If corporation becomes insolvent: Directors are personally liable to all employees for unpaid wages for the time they were directors, up to 6 mths wages#May also be liable for failure to comply w/other statutes#NB: even volunteer directors of non-profit corps have been held liable under this provision#There are 5 main types of potential conflicts of interest that Ds may have w/the corporation:Contracts w/the Corporation/Interception of Corp Opportunities/ Corporate Information/Competing w/the Corporation/Related Party Trxn#CONTRACTS w/THE CORPORATION-1 of the most important fiduciary duties is for a director to disclose any interest in contracts made w/the corporation (per CBCA) at a directors’ meeting#ex)A director negotiates a sale of her own property to the corporation or purchases a property from the corporation#INTERCEPTION OF CORPORATE OPPORTUNITY-Cannot purchase the property herself if she had a chance of first refusal: to do so is to intercept the opportunity of the corporation & is improper#This is a breach of duty & the property is deemed to be held for the corporation as are any profits made from it#CORPORATE INFORMATION:If information comes to a director in her role as a director then she has a duty to disclose this to the corporation & not act upon it personally if it involves a biz opportunity or profitable venture#COMPETING w/THE CORPORATION:A director may NOT carry on a biz competing w/that of her corporation#EXCEPT: w/the permission of the directors#If she does, the corporation is entitled to claim all profits made by the director & to obtain an injunction prohibiting the director from future competition#RELATED PARTY TRANSACTIONS:Potential conflict of interest arises when large businesses operate through a group of related corporations which deal w/each other on a regular basis & frequently share the same directors#INSIDER TRADING: use of confidential information when trading the corporation’s securities#Legislation prohibits insider trading: imposes strict disclosure requirements whenever “insiders” trade own corporation’s securities#3 types of liability: civil, regulatory & criminal#CHECKLIST:Director’s Personal Liability:Civil Liability to Corporation: damages, accounting for amounts paid, rescission of contract, constructive trust of property, accounting of profits, injunction to restrain breach/Civil Liability to Others: damages for losses/Regulatory & Criminal Liability: fines & imprisonment (Criminal Code of Canada)#ROLE OF SHAREHOLDERS:Shareholders play little or no role in management#right to vote at meetings#Once shareholders elect a BoD: the SHs have no further power to participate in management, even if dissatisfied w/directors’ management decisions:EXCEPT: can dismiss directors & appoint others by requisitioning a meeting to elect a new board if sufficient % of shares held by those shareholders#PRIVATE CORP SHAREHOLDERS:different problems than in public corporations (they can sell shares easily) because there is no easy way to sell their shares#Minority shareholders may face problems if dissatisfied w/management: “frozen out” or “locked in”#PRIVATE CORPORATIONS SHAREHOLDER:Minority shareholder (dissenting) may be deprived of salary earning job, directorship or dividends because:Majority shareholders may fire him from his job in the corporation or refuse to renew employment/May remove him from board of directors or elect some1 in his place at the next election/May increase salaries to themselves so that the corporation earns no apparent profit & thus issue no dividends to shareholders#RIGHTS ATTACHED TO SHARES:The rights of shareholders derived from 2 sources:The rights attached to their shares from articles of incorporation/Any additional rights conferred on them by legislation#The rights of shareholders generally include:The right to vote at meetings (proxy possible)/The right to receive dividends declared by directors/The right to receive any remaining property upon dissolution of the corporation after debts paid#MEETINGS & VOTING:AGM is when shareholders can voice objections#May attend the meetings, question the directors & criticize the management of the corporation#Collective power of shareholders is exercised by voting on resolutions#Types of resolutions to be passed/defeated:Alterations to articles of incorporation/Fundamental changes such as amalgamation or sale of all or substantially all the corporate property/Amendments made by directors to the by-laws/Election of auditor/Election or removal of directors#Common shares = right to vote; Preferred shares = usually vote only in special circumstances#All corporations allow a shareholder to nominate a “proxy”, i.e. fill in a form to appoint some1 else#FINANCIAL RIGHTS:Shareholders expect to receive a return on their investment in 2 ways:Earnings distributed regularly by dividends/Growth realized by selling shares or on dissolution of the corporation which have increased in value due to capital appreciation of the corporate assets or profits retained in the corporation#RIGHTS TO INFORMATION:Directors must present financial statements to the shareholders prior to the annual general meeting#A corporation must maintain certain “documents of record” at its head office, which may be inspected by any shareholder (except minutes of directors meetings): minutes of shareholders meetings, share register w/all transfers, corporate charter, register of directors#DUTIES OF SHAREHOLDERS:Shareholders have no positive duty to act for either the welfare of the corporation or the other shareholders#No obligation to attend meetings or return proxy#EXCEPTION: Controlling shareholder has the power to call general meetings, dismiss or appoint directors & determine corporate policy#Has different duty if he is also a director: Duty to act h1sty & in good faith in best interests of corp but when voting as a shareholder = votes his own interests#MAJORITY RULE:A controlling group of shareholders could ensure that the affairs of the corporation were managed entirely for their benefit (b/c of ability to vote on important matters)#Now legislation allows certain remedies:Appraisal Remedy/Derivative Action/Winding Up/Oppression Remedy# APPRAISAL REMEDY: regarding “fundamental changes” to corporation, where MS can elect to have shares bought out at fair price. Mostly used in private corps w/no ready public market for the shares. Complicated technical process. Better option is to use Oppression Remedy#DERIVATIVE ACTION: Shareholders obtain leave of court to bring an action against director(s) on behalf of the corporation when corp has suffered “an injury” e.g. directors making secret profit for themselves by exploiting a corporate opportunity. Establish that directors refuse to bring the action themselves, acting in good faith & in interests of the corporation. See OPP_R#WINDING UP: in a partnership a minority partner can force dissolution of partnership. Not so in corporations in the absence of separate shareholder agreement. But court can make “winding up” order where “just & equitable”. Seldom used b/c drastic but more so in small private corps in deadlock when relationships broken down or where “partner” is been frozen out. Threat may suffice#OPPRESSION REMEDY: statutory proceeding allowing individual shareholders to seek personal remedy if they have been unfairly treated. Most often used#Broadest & most flexible Minority Shareholder remedy: courts can make any order which is “just & appropriate” (buy out MS at fair price)#Can be brought by “a complainant” which is any person the court approves w/legitimate interests, including creditors. Used if MS frozen out, deadlock or breakdown in relations shareholders & directors#Not necessary to establish wrongdoing: just that their interests or reasonable expectations have been treated “unfairly” or “oppressively” disregarded by the corp or its directors#TEST in which the complainant must 1) prove expectations about how interests would be managed are reasonable showing:General commercial behaviour/Nature of the corporation/Relationship between the complainant & defendant/Past practice/Representations & agreements/Conflicting interests of other shareholders/Evasive steps the complainant could have taken 2)If the complainant’s expectations are reasonable, then they must show that the conduct in question “oppressively or unfairly disregards or prejudices their interests”, focusing on unfair conduct & prejudicial practices of the directors, officers#The paramount consideration of the courts is the best interests of the corporation#SHAREHOLDER AGREEMENTS:May be used to anticipate & avoid problems of the MS#Could include:Right to employment w/the corporation/Right to participate in management/Right to fair price for shares#UNANIMOUS SA#Used to govern relationships among shareholders of closely held corporations (modifies common law)#STMLR#SHAREHOLDERS of private corporations can protect themselves from abuse of majority shareholders & unfair behaviour of the corporation & its management through use of USAs#USAs will preserve the shareholders’ % interests in the company, maintain decision making power as part of management & create liquidity through a pre-arranged share sale formula#NOT available for public shareholders: they have statutory remedies for minority interests#Legal Risks of Directors & Officers:They risk personal liability if they fail to comply w/statutory & corporation specific governance rules#They should take certain steps to avoid liability:Ensure the corporation maintains directors liability insurance/Familiarize 1self w/duties of a director & operation of the business/Participate in continuing education/Develop a code of conduct relating to ethics & conflicts of interest/Design corporate governance structures that insure independence & transparency, including independent directors, audit committees, nominating committees & compensation committees (especially if the private corporation intends to go public eventually)/Follow the processes in place for proper decisions making: read materials in advance, attend & participate in meetings, investigate: to allow biz judgment rule of defence for complaints