A Comprehensive Guide to Corporate and Business Law in Canada

Posted on Aug 20, 2024 in Philosophy and ethics

Contract Law

Setting Aside a Contract

A contract may be set aside due to mistake, misrepresentation, undue influence, or duress. A legal mistake is a mistaken belief about a factual situation, not the law itself.

• 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, and no rights or title pass to anyone.

Voidable: A contract exists until set aside by a court; rights may pass to third 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 and return the parties to as near as possible to their original position.

Set aside: Rescind, undo, or revoke a contract and 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 The contract may still be rescinded, and title and/or possession will return to the seller.

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

Equity determines that the innocent third party for value (ITPV) can usually keep the goods even though the original contract is rescinded.

Whether any given contract is void/voidable depends on three things: 1. The type of mistake (meaning of the words, subject matter and 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 the terms of the contract may arise because:

• One party may inadvertently use the wrong words in stating the terms (unilateral mistake).
• Relief is granted if a 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, and 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 five conditions exist:

The court is satisfied there was a complete oral agreement between the parties.The parties did not engage in further negotiations to amend the contract.The mistake in the written document may have, but does not have to have, occurred from fraud.When the written document was signed, the defendant knew/should have known of the mistake, but the plaintiff did not.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, the contract is void. The court will apply the most reasonable interpretation in light of all the circumstances based on the subject matter of the contract and the 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 the ship were destroyed@sea, perishable goods sold prior to delivery). If the subject of the contract was destroyed prior to contract formation, the contract is void. The court will remedy the situation about the buyer paying for goods not delivered and the 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. For example, a party may make a mistake about the value of goods in the contract: paying too much & the other party receives a windfall, wide price fluctuation, quantity or quality does not equal value expected. The 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 and if it would be unfair or unconscionable not to grant relief.

TEST: Rescission may also be available if three things are present: 1. The seller made a misrepresentation. 2. The discovery of which was impossible. 3. Both parties believed the same mistaken characteristics. Delay works against relief. Often involves fraud (the innocent party is deliberately tricked into believing the party is someone they are not). Where the party assumes an identity: the contract = void. If parties deal in person, then the contract = voidable.

Mistake about the Nature of a Signed Document

Defence of Non Est Factum (not my doing). When one party may have been illiterate and relied upon a literate party to describe the nature of a document. If misrepresentation occurred, they 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 a contract. If made fraudulently or negligently = a tort.

If made innocently, must notify the other party of the error ASAP.

A statement of opinion or silence is not misrepresentation.

Types of Misrepresentation

1. Innocent: The person making the statement honestly believed it to be true.
2. Fraudulent: An innocent misrepresentation becomes fraudulent if not corrected when discovered.
3. Negligent: The 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. The 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 and officers toward their corporation
• Contracts of insurance
• Contracts involving the sale of securities
• Contracts involving the sale of goods
• Contracts with consumers

Rescission is not available where the contract is affirmed and where bona fide third parties would be prejudiced. The remedy is rescission and/or damages.

Signed Documents and Misrepresentation by Omission

Legal presumption = signing a document indicates acceptance of terms. If the contract requires utmost good faith due to the type of relationship between the parties, then there is a 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 the sale of securities
• Contracts involving the sale of goods
• Contracts with consumers

Undue Influence

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

Unconscionable Contracts

Contracts with unequal bargaining power between parties, the 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. The threat of violence renders the 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 and research claims.
• Ensure terms are as expected.
• Retain all emails or pre-arrangement documentation until the contract is fully performed as may be necessary to resolve a dispute over contract terms.
• Use standard form contracts.
• Exemption and 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 four ways:

1. Discharge by performance
2. Discharge by agreement
3. Discharge by frustration
4. Discharge by operation of law

Discharge by Performance

Both parties perform their contractual obligations. Bilateral contract: three 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 performanc”. Tender of performance may be accepted/rejected by the other party. For example, if a seller of goods delivers the intended goods to the buyer, who refuses to accept them, the seller is not obligated to re-deliver and may immediately sue for breach of contract.

Discharge by Agreement

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

NOTE: Since neither party can impose a waiver on the other, a party who fails to perform without securing a waiver commits a breach of contract.

Two situations in which a waiver may occur:

1. If neither party has performed its part, they can agree to call off the deal. There is automatic consideration because each party still has outstanding rights & obligations, and a promise by each party to waive is sufficient consideration to make an agreement to end the agreement.
2. If only one party has fully performed its part, the first party receives no consideration for giving a waiver of the other party’s duty to perform. Can be actionable in the breach. The promise should be under seal.

Substituted Agreement: Sometimes, performance becomes too difficult, and 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 a new contract with new terms. The old contract is discharged. This is different than accord and satisfaction.

A compromise between parties to substitute new contractual obligations and release the party from the existing one. Parties often agree to an out-of-court settlement (court costs high, outcome a risk, liability difficult to prove, etc.). A&S substitutes a new contract and discharges the existing contract without full performance.

Novation: Another method of discharge which occurs when the original parties to a contract agree to terminate it and create a new contract in place of the original. A new contract is formed and must be with the mutual consent of all parties. Two types of important changes trigger novation: 1) Change of Material Terms 2) Change of Parties. Two types of NOVATION: 1) change to material terms. Terms which go to the heart of the contract. Subject matter; price; etc. 2) change in parties. One party wants out, and the remaining party(s) allows another party to replace the existing party. The original contract is discharged and replaced with a new one. Must be evidence of intention and agreement to abandon the original contract. Can be by conduct of the parties without an express agreement. Must show that the new party has assumed all the liabilities of the other party and has acted on that contract. Novation involving creditors: good business practice to obtain express consent of creditors (e.g., in the sale of a business) and verify the names of all creditors and $ owed.

Contract Provides for its Own Dissolution: Before agreeing to a contract, one party may be worried about a possible future event affecting its willingness or ability to perform. If the other party agrees, parties can include a term in the contract stating what would happen if this event occurs. A contract may include three common types of terms for its 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 (not just time passing). If the CONDITION IS NOT MET & AND IS NOT WAIVED, the promised performance need not be given. May be included as a term of a written contract. Gives the parties only one REASON for non-performance of the contract: thus, parties are not discharged UNLESS/UNTIL that condition precedent becomes impossible to fulfill.

Condition Subsequent: A future event that, if it happens, brings the promisor’s liability to an end. Liability begins when the contract is formed, but one of the parties has reserved the right for”an ou” before the contract ends, in specific certain circumstances. For example, a baseball ticket has a clause that if the game is rained out by a certain inning, the fan will get a new ticket. Another clause may also limit liability for the same situation. Can be difficult to tell between precedent and subsequent. Consider the nature of the act, whether its occurrence triggers liability or ends it, and the order in which events must happen. Getting an engineer report before work can begin.

Option to Terminate: A contract may include a term giving one party, or could be both, the choice to bring the contract to an end before full performance, usually by giving notice. This discharges the agreement because it was agreed upon when drawing up the contract. The tenant giving the landlord notice to end a lease.

Discharge by Frustration

Doctrine of Frustration: Impossible to foresee all future events and address them as conditions to a contract; too costly, uncertain. Courts discharge parties for failure to perform their contracts in many circumstances (frustration): external, unforeseen events, beyond the contract of the parties, make performance impossible or completely unlike what was intended. The frustrating event must be outside the control of the parties and not a flimsy excuse. NOTE: Any expenses incurred to fulfill a contract is NOT a frustrating act.

Self-Induced Frustration: A party willfully disables itself from performing a contract to claim that the contract has been frustrated. It is really a breach of contract and NOT frustration. Distinguish between”rea” frustration and”self-induce” frustration; not every degree of fault or irresponsibility will bar a party from claiming that the contract has been frustrated. EXAMPLE: Cannot sell a vehicle promised to someone else before the buyer picks it up; or deliberately damage a ship laden with goods to avoid selling them at a set price.

Effect of Frustration: Courts have been harsh in dealing with frustration. Held that the contract is terminated at the moment of the frustrating event and that future obligations also had to be paid. But, work can be done over a period of time, but payment may be only upon completion. What if frustration occurs during that process? Common law: let the loss fall where it lies is the rule. The court will enforce the contract up to the moment of discharge. Obligations due before the frustrating event remain; obligations arising after the frustrating event are discharged. FIBROSA CASE: The buyer gave $ deposit for equipment, but WWII began and could not get equipment. $ returned. The seller said he also incurred costs in preparing for the sale. The court held, no relief for expenses incurred. The court held that Fibrosa was entitled to a return of the payment under the doctrine of frustration. Where the plaintiff received no benefit under the contract, there was a failure of consideration.

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 the process of bankruptcy has been completed if he can assert that the bankruptcy was caused by misfortune and not by misconduct. Thus, existing contracts (debts by contract) may be discharged by the federal Bankruptcy and Insolvency Act.

Effect of Statute Barred Contracts: Applies to creditors seeking repayment of debt. If the process is delayed too long, the remedy of court action may be”statute-barre” (i.e., rather than completely discharged, it is banished from the courts) by The Limitations Act of each province. The deadline by which an action can be commended runs out, according to limitation periods set out in the above statute or other statutes with specific limitation periods. PUBLIC POLICY: Must be a definite end to the opportunity to sue. NOTE: A creditor’s rights may be rehabilitated and made enforceable so may not be permanently discharged.

STMLR

• Prepare well-written contracts which give parties maximum contract over how/when contracts are discharged.
• Identify specific circumstances in the business that might warrant non-performance and include them as conditions subsequent to the agreement.
• Identify any situations that could give rise to conditions precedent (i.e., what might happen before the business is interested in the deal).
• 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.
• If the deal requires one party to expend time, effort, $ in preparation for performance = call for a deposit and partial payment to be made.
• Make sure the contract addresses the return or forfeiture of the deposit if the performance is not completed as expected.
• As frustration is only available in unanticipated or unforeseeable events, and the rules are arbitrary, ensure the contract itself deals with all possible obstacles.
• Spend some time imagining situations that might occur and include customized frustration clauses in the contract, particular to the industry or business (e.g., standard form real estate contracts specify what happens to the agreement for sale if the house burns down) to enable frustration if necessary.
• Maintain insurance policies until the deal closes.
• If a dispute develops, PUT IN WRITING, UNDER SEAL, any settlement agreement/waiver/release to avoid agreements around lack of consideration.

Breach of Contract

Implications of Breach

Any breach of a term of a contract entitles the non-breaching party to claim damages. However, usually, only serious breaches may DISCHARGE a contract and release the non-breaching party from further performance of it. I.e., it must be so significant that it undermines the whole contract or a fundamental term of the contract (defeats the contract) and further performance is pointless. NOTE: A breach does not automatically discharge a contract. The non-breaching party makes the choice to treat the contract as discharged. Must communicate that to the breaching party. Disagreements may arise over the importance of the breach and whether a contract should be discharged.

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 of the contract or of an essential term so that the purpose of the contract is defeated.

HOWEVER, the non-breaching party (innocent party) can lose its option in two ways, as follows:

1. If the innocent party chooses to proceed with the contract and accepts benefits under it, despite the breach; and
2. The innocent party may have received benefits despite the breach and not learned of the breach until their performance was completed.

Terms of the contract:

• Conditions are essential terms.
• Warranties are minor terms.

The contract is discharged only if:

• The entire contract is breached.
• An essential term of the contract is breached.
• The party that suffers breach elects to treat the contract as discharged.

BREACH MAY OCCUR IN 3 WAYS BY:

1. Expressly repudiating (rejecting) its obligations.
2. By acting in a way that makes the performance of the promise impossible.
3. By failing to perform at all or tendering an actual performance that falls short of its promise.

Express Repudiation

One of the contracting parties advises the other that it does not intend to perform as promised. I.e., there is a stated intention not to perform. It may be for the whole contract or a fundamental part. The non-breaching party (promisee) is entitled to do three things:

1. Treat the contract as at an end.
2. Find someone else to perform it (novation).
3. Sue for damages sustained.

One Party Renders Performance Impossible

A deliberate or negligent act by the promisor destroys its ability to fulfill the contractual promises (not an involuntary response to forces beyond its control). A promisor may not have said so in words but has implied as much by conduct. That is a breach of contract and is also a repudiation of the contract. It is a form of self-induced frustration. It is the same as express repudiation: conduct rendering performance impossible may occur either before or during performance.

Failure of Performance

Types of Failure: Failure of performance becomes apparent at the time set for that performance to occur. The degree/extent of the failure may vary and affects remedies which are available: Total Failure/Gross inadequate performance/Very minor/Satisfactory performance of all but one of the terms of the contract, or only part of a main term. ISSUE: Often, the innocent party faces a dilemma: should the inadequate performance of the other party trigger her decision to excuse that party from all further performance, or must they still perform? If she is really concerned about defective continuing performance, she should seek legal advice before claiming to be discharged of her own obligations. Otherwise, she risks being held liable for wrongful repudiation if the court finds that the other party was only in minor default. I.e., the delivery of goods by installment should still continue despite a one-time problem.

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. The contract is not breached where there is substantial performance. The contract may be enforced in spite of a breach of warranty, and if they injured party proceeds with the contract in spite of a breach of a condition, he or she may sue for damages ONLY. NOTE: Important difference between warranties and conditions. Mistakes in Performance: 1. May arise upon overpayment (one party over performs an existing obligation by paying more $ than owed. May be done in a mistaken belief (the insurance company pays out a claim in error for risk not covered by the policy or someone pays the wrong person. Remedy: Where there has been unjust enrichment (an unfair benefit), the recipient must repay the money (restitution). The mistaken party remains obligated to perform to the correct party even if they honestly believed the benefit should have been given to that party. Principle:”performance to the wrong person is no performance at al”.

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 a breach. They allocate risk so the parties know who should insure against what, allows a complete defence against liability and gives the ability to recover legal costs. It is important that notice of the clause must be given to the other party. Works well in agreements between parties with equal knowledge and bargaining power. E.g.) one party may be willing to assume a risk in return for a benefit, such as a lower price, knowing they already have adequate blanket business insurance coverage in place. Principle: Exemption clauses are”strictly construed against its drafte”. E.g.) ok when both parties are equal, if there are unequal parties, the court will redress this advantage in unfair cases.

Unconscionable Clauses

If a 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. Courts may carefully scrutinize them and refuse to enforce them if the injured party can point to a paramount reason as a contract to public policy.

Types of Remedies

Damages/equitable remedies (specific performance, rescission, and injunction)/quantum meruit. Damages are awarded to put the victim in the same economic position as if the contract has been completed. Intended as compensation for the loss suffered by the injured party when the other party fails to perform. Not intended as punishment. Damages are said to be morally neutral. BUT courts are beginning to award damages for non-economic injury such as mental distress and to punish bad faith or malicious behaviour (punitive).

Prerequisites for an Award of Damages

• Loss must result from the breach and be within foreseeable limits of what the parties would have expected as a consequence of non-performance.
• Unusual losses are not compensated for by damages.
• Actual and supposed knowledge of the parties at the time the contract was performed, not when it was breached.

Damages: Mitigation of Damages

Principle: A party that has suffered losses must do what it can to keep losses as low as reasonably possible. Recovery is only for losses resulting from the breach which could not be avoided by acting reasonably. Victims of a breach must take reasonable steps to mitigate the loss. Businesses selling perishable goods cannot let them spoil but should resell them at the best price at the first opportunity to recover some of the $.

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 the event of a breach “liquidated damage”). These are a pre-determined amount of $. Must be a genuine estimate of expected loss (not a penalty amount). PURPOSE: Provides some degree of economic certainty. NOT A PENALTY CLAUSE: a term specifying an exorbitant amount of breach of contract intended to frighten a party into performance.

Nominal Damages

Sometimes, the court will award nominal damages to acknowledge a breach of contract where there was no real loss suffered by the non-breaching party. Very low amount to signal a principle. E.g.) the award of $1 acknowledges the validity of the plaintiff’s claim where a question of principle is at stake but does not award any more damages. Should not be used to encourage litigation because the plaintiff still has legal costs.

Expectation Damages

Typical remedy for breach of contract. E.g.) value of the expected benefit of the performance. Damages are based on LOSS OF ACTUAL PROFIT. E.g.) the seller fails to deliver on time. If the buyer can obtain goods elsewhere, the damages will be for any additional price the buyer had to pay to obtain the same goods, over the original contract price. However, if the buyer obtains the goods at a lower price => no damages. Different than damages in tort, which are damages for actual harm or loss suffered. May include lost opportunity cost. E.g.) what a party has given up in not being able to make a similar contract with someone else because they contracted with the first party who then breached.

Consequential Damages

Are secondary losses. E.g.) one stage removed from the immediate effects of the breach. Can also be serious and reasonably foreseeable at the time of the contract. A defendant will be liable for loss that follows naturally from the breach. E.g.) the seller fails to deliver goods that the buyer was to use as components to build another product for resale. Damages arising from the breach of the subsequent sale contracts are consequential damages. The seller is thus liable for lost profits of the buyer.

General Damages

An estimated amount that the court may award over and above specific losses for harm. Definition: Non-monetary harm arising from the breach. Loss that cannot be calculated in precise monetary terms but will compensate the aggrieved party. E.g.) the surgeon performed plastic surgery on an entertainer but disfigured her. General damages, over and above out-of-pocket costs for medical and hospital expenses: pain and suffering, mental distress, loss of professional morale.

Reliance Damages

Definition: Costs of expenditures and wasted effort reasonably made in preparation for performance. Alternative to expectation damages. An injured party may claim for wasted time, effort, and expenses preparing for performance – putting the injured party back in its pre-contract position. May yield more $ than expectation damages if mitigation efforts have been successful. E.g.) the consultant spends two months preparing for performing a contract, and then the client cancels. The consultant may have lost new clients in the meantime, as well as spending time, effort and $ preparing for this contract. While she may get another client soon, she has still wasted resources on a cancelled contract. She is entitled to reliance damages, reasonably made, in preparation for her performance of the first contract.

Punitive Damages

Punishment is not the purpose of contract damages. In rare circumstances, courts may award punitive damages for malicious or bad faith behaviour of the breach party in breaching a contract. E.g.) Whitten case where the insurance company had been”high handed, malicious, arbitrary or highly reprehensible misconduc”.

Challenges in Measuring Damages

Mental Anguish: In tort cases, the court recognizes pain and suffering, nervous shock, humiliation, mental anguish as harm for which they grant general damages. In contract cases, courts are beginning to allow compensation for mental distress in cases of WRONGFUL DISMISSAL: (Wallace damages for the terrible manner of termination; egregious conduct)/FAILED VACATION PLANS. Difficult to measure in monetary terms and have been small and only in exceptional cases.

Equitable Remedies

Where damages are inadequate, an equitable remedy may be ordered such as: Specific Performance/Injunction/Rescission/Quantum meruit. Equitable remedies will be denied if: the plaintiff does not have clean hands (acted in bad faith or caused their own misfortune/delayed unreasonably in bringing the action/innocent third party would be affected/consideration was nominal or only under seal/equitable remedy could not be ordered against the plaintiff.

Specific Performance: Makes parties fulfill the contractual obligation. Will not be ordered if court supervision would be required. Usually only for contracts for the sale of land. May be awarded for contracts for unique goods. The innocent party very much wants the specific goods in question, and nothing else is comparable.

Injunction: Court order restraining a party from acting in a particular manner. Prohibits a party from committing a breach by having a negative covenant (promise not to do something). The court may grant an interlocutory injunction as a temporary restraining order to prevent the harm from occurring pending formal resolution of the matter at trial.

Rescission: Returns parties to their original positions as nearly as possible before the contract took place. The contract is set aside (rescinded). NOT the usual remedy for a breach; the usual approach is to return the parties to the position they should be in if the contract was performed. However, it may be a better remedy for some transactions (e.g., return defective goods to the store for a refund rather than suing for the cost to repair). The plaintiff may elect rescission, provided the outcome is feasible to accomplish.

Quantum meruit: The claim arises when a valuable benefit is given at the request of a promisee. Can also be for a serious breach when the non-breaching party has partially performed obligations. Definition: Fair amount a person deserves to be paid for benefit conferred (as much as is deserved). E.g.) construction contracts when a breach occurs after work begun but prior to completion: FMV of work already done is requested based on the value of the benefit conferred, not based on the cost of doing work.

STMLR

• Take steps in advance to reduce costs and losses in a contract associated with a breach of contract.
• Determine the potential risks likely to make performance difficult for the business or customer.
• Quantify the value of those risks.
• Business should adopt these strategies: the party may obtain insurance against risk and raise its price accordingly/business may self-insure (e.g., charge a higher fee and build up a reserve fund to pay any claim that arises from later harm to a customer.
• For recurring transactions, the business should develop a standard form contract that addresses these types of risks from the business’ perspective.
• Include an exemption clause in the contract excluding itself from liability for the risk and transferring the risk of harm to its customer.
• Parties should identify essential terms of the contract, a breach of which will trigger their discharge from the contract, to avoid arguments about the seriousness of the risk.
• The business should collect financial information about their customers by pre-contract credit applications, including banking, employment and asset information to make enforcing judgment easier.
• The business should keep detailed records of expenses incurred in preparation for, or in relation upon a contract, as well as mitigation expenses.
• If a business is unable to perform as promised, notify the other party asap to allow the non-breaching party to take immediate steps to mitigate any loss that the breach may cause.
• This minimizes unnecessary reliance and consequential damages which may be awarded to the breaching party.

Insurance and Guarantee

##best way of purchasing protection against a possible loss and transferring risk to another party#insured enteres 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#life insurance/medical insurance/AD&D insurance/workers comp# PROPERTY:insures against damage to property and 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 and others in the biz#superintendants of insurance:the govt agency which oversees the operations and financial stability of licensed insurers, especially regarding terms in policies and the scope and limits of liability offered by companies#compulsory registration:federal, foreign insurance companies must register with the Superintendant of Insurance persuant to the Insurance Companies Act#2 types of biz insurance:Loss or damage to 1’s own property or assest/liability of others#Property Loss/Damage:damaged to bldgs and contents (inventory, fixtures, equipment) due to a fire or storm/loss due to theft/loss or damage to vehicles used in biz#biz interruption (loss of profits due to biz closure or work stoppage)/credit insurance (bad debt losses)/fidelity insurance(loss by theft or fraud of employees)/key person life insurance (loss due to death or injury of important biz personnel)#Biz may be liable to others (customers/distributors/suppliers/general public)#should have public liability insurance for:liability for negligent acts and omissions (torts)/for defective products/for dangerous state of premise (occupiers liability)/for breach of prof duty of care (prof liability)#for 3rd party (motor vehicle)#Comprehensive General Insurance:rather than issue a variety of policies for various specific risk to a biz, use CGI instead#1 policy coves all#covers both property loss/damage and liability to others in 1 policy#may be more costly#Principle:courts will not enforce a policy when a claim arises out of criminal or deliberate wrongful act of the insured#2 reasons:contrary to public policy to allow an insured to profit from his own crime/contract to the purpose of insurance which is to allow insured to benefit from a loss he caused#Insurable Interest:defn:genuine risk of loss that may be suffered from damage to the thing insured#contract of insurance transfers the risk of loss from the insured to the insurer#who has insurable interest is not purely ownership of the insurable matter#TEST:an interest is found if the insured benefits from the property’s existence and is prejudiced by the property’s destruction#proposal prepared by insurance agent is invitation to treat and not an offer#the offer to purchase coverage is made by the person seeking insurance by signing the application form#acceptance of life insurance occurs when policy is delivered by the company & first premium paid by the insurer ($ paid is condition precedent to delivery)#RENEWAL:expectation of renewal in most cases#unless there is evidence of an agreement between company & insured, or can be inferred from past dealings = no contract formed unless/until insured communicates acceptance in a reasonable period of time#Terms of the Contract:insurance policy = standard form contract#unilaterally prepared in advance#courts will subject such contracts to strict interpretation#construe word for word most strongly against insurer (contract proferentem applies)#any limitation clauses must be stated in clearest and most unambiguous terms#Good Faith, Fairness and Disclosure(Insured):has duty of utmost good faith and an insurer may deny a claim because of UGF#must notify insurer of material changes to the risk and within the control or knowledge of the insured (except for life insurance policies)#Insurer has 2 options: Cancel the insurance and return the unused premiums/inform insured insurance will continue but with higher premiums#must respond promptly#GF,F,D(Insurer):DoGF owed by insurer as well#applies both to making the contract and its performance#insurer must deal with claims fairly in the way it investigates a loss and places a value on a claim in the way it defends the lawsuit# cannot take advantage of its power over a vulnerable insured#Subrogation:defn:where 1 person becomes entitled to the rights and 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 and sue the person liable for the loss#insured cannot recover twice for same loss#right of subrogation cannot place the insurer in a better position than the insured#Recovery:in many types of policies, property is insured for a specific $ amount#insurer liability is generally limited to that amount#Principle: insurer may not recover more than the amount of the actual loss#eg)biz insures whse for $300K but FMV is $275K. Lower amount is max that can be claimed#Nature of Guarantee:defn:a promise to perform the obligation of another person if that person defaults#creditor may need assurance that a party will perform its obligations#creditor may be satisifed if 3rd party promises to perform the obligation of the debtor if the debtor defaults#debtor: principal debtor#debt: principal or primary debt#guarantor=surety#promise is guarantee or contract of suretyship#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#NOTE:customarythat the creditor always makes demand on the guarantor before suing -if principle debtor has defaulted, the creditor can sue guarantor and/or principal debtor#3 common biz situations in which guarantee arises#prospective creditor may refuse to advance $, G&S only on debtor’s promise to pay/Creditor may start an additional action against a debtor for overdue debt unless additional security is offered/ prospective assignee of rights may only do so if receiving a guarantee#2 types of guarantees:Limited guarantees(limited to specific trxn)/continuing guarantees(covers a series of trxn between creditor and principla debtor where debtor is continually liable for the debt, for specific time period, and/or to a certain amount of m1y. death ends liability#contract will determine extent of liability)#Discharge of a Guarantee:4 ways:ends if creditor breaches terms of contract and breach materially affects risk (failure to notify)/ends if contract between creditor and debitor 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#eg)only partially discharged because does not materially affect the guarantor’s risk under the original contract#Rights of Guarantor on Default:may defend an action by the credtior using same defences as open to principal debtor#eg)any Misrep to the principal debtor by the creditor can be relied upon by the guarantor#if principal contract is VOID#eg)prohibited loan to a company) then guarantee is also VOID#Subrogation also applies to a guarantee#guarantor who pays off creditor becomes subrogated to the rights of the creditor against the debtor and debtors assets#may claim against principal debtor by stepping into creditors shoes#may take action against the debtor even before the creditor does(sees debtor failing financially)#Requirement of Writing:contract of guarantee MUST BE IN WRITING and signed by debtor(Statute of Frauds)#most guarantees are in writing regardless of whether writing is required in law. Important to ensure that you have a copy#STMLR:Insurance contracts are valuable risk mgmt tools because they transfer risk#must be complaint with legislation#scope of coverage ismost important term of an insurance contract so pay careful attention to what is being insured, for what $ amt, andexclusion 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 lapese#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 accts rec#biz’es should prepare guarantees under seal#since a guarantor has right of subrogation, any dealings with the primary debotr, or the security, should be undertaken with the complete knowledge and agreement of the guarantor##CONTRACT OF EMPLOYMENT##traditionally based on common law of master and servant#defn:the contractual relationship between an employer “master” and an employee “servant#individual contract of employment is still important and most common form of employment relationship#supplemented by: STATUTES passed to regulate employment relationships (min wage, safe working conditions, etc)/ TRADE UNIONS AND COLLECTIVE AGREEMENTS (labour law or the law governing collective barganing between employers/trade unions/their members)#3 Areas to Consider employer/employee contract compared with agency/ employer/employee contract compared with independent contract/ employement relationship at common law#COMPARED W/AGENCY e/e established by contract, giving employer the authority to direct and control work of the employee#employees can act as agents and enter into 3rd party contracts on behalf of employer#person can be employee AND/OR agent#main duties of person might be to enter into 3rd party contracts on employer behalf#other employees may have no reason to act as an agent#an agency agreement with a principal may be indefinite and an agent may have no recourse if terminated by the principal#by contract, an employee often has a right of action for damages for wrongful dismissal if terminated by an employer#both principals and employers may be liable in TORT for acts of agents & employees but the principles of vicarious liability differ for princiapls and employers#COMPARED W/INDEPENDENT CONTRACTan independent contract (IC) undertakes to do a specific task for a fee (build a house)#does not create an e/e relationship#contractor is not subject to the supervisor of the person who hires#job is to produce a specified result but the means used are their own choice and profit/loss and liability are theirs al1#sometimes difficult to distinguish between employee and IC#CHARACTERISTICS OF IChired to completed a task or deliver a result for a fee/owns the tools necessary to do the work/controls own hours of work and time of work/controls how the work is d1/no tax pension, benefits, gov’t deductions/invoice for work d1 and 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 PersonsContract-employer retains liability for work performed by employees and for breach of contract for improper performance/ Tort-employer is vicariously liable for employees torts comitted 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 and the employer must tell an employee in advance when the contract will end and give reasonable notice#if employee is fixed term, then no notice of termination required by either party as relationship comes to pre-arranged end#most are indefinite term which mean no expectation of termination of a specified end date#2. Length of Reasonable Notice-without an express term about termination in a contract of employement: the common law rule is that reasonable notice shall be given#min notice: if weekly employment, 1 week; if monthly = 1 month but indefinite employment differs#min length is established by statute (The Labour Standards Act)#Reasonable Notice:defn:the acceptable length of notice of termination considering the nature of the contract, intentions of the parties, circumstances of employment and characterstics of the employee#IndefiniteHiring:defn: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#NOTE:an employer can terminate an employee; it must merely comply with reasonable notice/ PILN requirements appropriate to the circumstances#EMPLOYEE MUST GIVE NOTICEan 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#employer may sue for damages equal to the loss caused by the breach of contract#most employers do not insist on anything more than 2 weeks#employee may leave without notice in dangerous conditions which are not rectified#CONTRACTUAL BASISthe employer need not give notice if it can show an employee was dismissal for cause:defn:dismissal without notice or further obligation by the employer when employee’s condut amounts to breach of contract#CONDUCT CREATING CAUSE: Misconduct/ disobedience/ incompetence/ permanent illness#Misconduct: may be a crime assoc with employement (eg: embezzlement)#conviction for a crime is grounds for immediate dismissal (stealing/fraud)#can be related to conduct outside employement (grossly immoral conduct that might bring the employer into public disrepute, disturb the morale of other employees, cause direct financial loss, lack of integrity where employer no longer trusts employee#may also be a code of conduct violation#Disobedience:willful disobedience of a reasonable and lawful order from an employer is grounds for immediate dismissal without notice#what constitutes disobedience depends on employees job description and the chain of command in the organization#may include indirect disobedience such as acting in a disloyal manner contrary to what is expected#Incompetence: degree of skill an employer demands depends partly on the employees representations at the time of hiring and what is ordinarily expected of employees of that category and pay scale#longer an employee stays with a company, the more difficult it is for employer to justify dismissal without notice based on incompetence, since the employer must take steps to remedy with training and continuing education. If that fails, DWN applies#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#employment contract is discharged by frustration and not by breach, therefore damages are not awarded to the employer#however, Human Rights legislation imposes a positive duty on an employer to accommodate an employee’s disability#FAILURE TO WARNbecause only the most serious of events listed allows an employer to dismiss an employee without notice, the employees conduct must be considered in context and fair warning that such offending conduct is not acceptable must be given, prior to termination#law is changing to consider that an employee has an “interest” in their job so failure to warn may negate an employers ability to DWN and employer must give fair hearing#Adverse economic conditions does not excuse an employer from its implied obligation to give reasonable notice of termination to employees#an employer can ask an employee to expressly agree to be dismissed without notice in adverse economic conditions#there may be a right to notice mandated by statute which will prevail over an employement contract#layoffs may be the better solution#WRONGFUL DISMISSAL:defn: 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#employee sues for breach of the employment contract & entitled to damages and/or reinstatement#damages are increased by bad faith dismissal (wallace damages)#employee is required to mitigate their loss#DAMAGES:TEST:Employee must show they were fired without reasonable notice#employer will defind saying dismissal was for cause or that reasonable notice was given#damages are assessed by the court on a contract damages basis#eg)to put employee in the position they would have been in, had reasonable notice been given, plus $ for out of pocket expenses, cost of retraining, relocation, but may also give tort damages for mental distress#Mitigation:Principle:a party injured by a breach of contract is required to mitigate loss#eg)find another job#employer may then be able to reduce employee’s claim for damages by showing that insufficient effort was made by employee to find reasonably comparable work elsewhere but not an underpaid job or below qualifications and experience#Reinstatement:form of specific performance by which the court orders the employer to return the employee to their job#very common remedy under collective agreements#also available to non-union employees within the federal labour code#potentially available if a human rights violation occurs# Checklist of Remedies available for wrongful dismissal actions: damages & reinstatement: PLIN/ damages for mental anguish or pain and 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 was reaction of unfair and harmful working conditions#reform statutes considered min age of workers, max hours of work, etc#unions and collective agreements have removed disparity in bargaining power between e/e in many workplaces#Employee Welfare Legislation governs:Human rights/ pay equity/ employment equity/ general working conditions/ employment insurance/ workers comp#Employee rights:applies to private and public sector employer#Charter prevents discriminiation on 14 grounds and provides rights to freedom of conscience, expression, association, freedom from arbitrary detention and right to elections#prohibitied grounds: religion/creed/marital status/family status/sex/sexual orientation/disability/age/colour/ancestry/nationality/place of originl/race or perceived race/receipt of public assistance#PAY EQUITY:legislation is directed to eliminating gender discrimination in remuneration because of systemic wage disparity#2 ways to address wage gap between men and women 1) equal pay for equal work 2) equal pay for work of equal value#value here must be more than the current MV of work because women are traditionally hired for lower wages than men receive:effort and training must be considered#EMPLOYMENT EQUITY:new employment rights strive to make workplace representative of diversity in society#Employment Equity Act-requiring all employers over 100 employees in connection to a federal work/undertaking/biz to conduct a workforce analysis to obtain information about personal characteristics of their current employees to determine underrepresentation of designated group: women, visible minorities, FN people and persons with disabilities#Only ontario has such legislation#Mandatory Retirement and Charter:MR was accepted for decades as a desirable social instutition but later as increasing good health and longer life expectancy has become norm, persons reaching age 65 did not want to be forced to retire#employers want to revitalize the workforce and may want older workers to retire#Jurisdiction: provincial HR codes and federal Human Rights Act apply to all employment contracts within their jurisdiction, both PUBLIC AND PRIVATE SECTOR#s.15 of charter applies to all employment contracts made in public sector#does not bind private sector (including universities)#Regulation of Working Conditions:each prov has enacted statutes prohibiting child labour, regulating hours of work of young persons, providing for occupational H&S, using inspectors, min wage rates, pay for OT, annual vacations with pay#Labour Standards Act/Trade Union Act/Occupational Health and Safety Act/Pension Benefits Act/Workers Compensation Act/Assignment of Wages Act/Min Wage Regulations Act#EMPLOYMENT INSURANCE:EI Act is federal legislation providing EI fund to provide benefits for unemployed persons#both e/e contribute to the plan#unemployed person can collect benefits as long as they have worked the minimum time required by the program and are actively looking for work#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#statutory reform:statutes setting out workers’ compensation are now in place in every province providing a compensation fund of benefits for injured works in select industries, decisions of WCB officials can be appealed to a quasi-judicial tribunal#OCCUPATIONAL HEALTH:goal is to prevent workplace injury and promote safe workplaces. important public policy issue. reduces injury and costs to employer/society#OH&S Act enacted in each province#biz’es are req’d to establish an in-house OH&S committee to identify, investigate, and correct dangers in the workplace#gov’t inspections are carried out to ensure compliance#COLLECTIVE BARGAINING:defn:process of establishing terms of employment through negotiations between a biz and a bargaining agent for its employees#employees have right to become certified to have a particular union become the exclusive barganing agent for the 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)#bargaining agent can then conduct negotiations with the employer as a single representative of the employees#when employer and union reach agreement as to working conditions = terms form a contract called Collective Agreement (CA)#usually defines which employees are covered by CA, an acknowledgement of which union represents them, steps to settle grievances/disputes, seniority, wage rates, hours of work, vacation periods, benefits, layoffs and dismissal procedure, discipline, notice period, duration of the CA, means by which it may be renewed or amended, etc#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 and 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 with help of negotiator#pickets must be peaceful and 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 and the union#employee cannot bargain individually with employer#unions have provided workers with 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, and may sue or be sued and 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 with express contractual terms designating the amount of notice that will serve to terminate the agreement#create detailed job descriptions and codes of conduct describing employee responsibilities; share them with prospective employees as part of the employment contract#Create, publish and follow a protocol for progressive employee discipline#Document infractions and responses#Follow consistent warning and 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 and in the most sensitive, fair and 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 and obtain a promise to indemnify the business if it is held liable for substandard work or negligence of the independent contractor#Insure exemption clauses in contracts with customers extend protection to independent contractors completing work under it#UNIONIZED WORKFORCE:When dealing with 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 AND TENANT##Tenancy:defn:interest in land for a definite period (term) under a lease (both the interest and the agreement between LL and 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 and tenant;gives tenant an interest in land for a limited time; landlord retains the reversion#leases create an estate in land and must be strictly adhered to in law with certain rights and duties for both LL and 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 and 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 and lesser interests in land;gives a person control over the land as opposed to merely right to use land in common with others (licensee)#a licensee enters onto the land with 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 and end on a fixed or ascertainable date otherwise VOID#Lease with term of an uncertain period is VOID and 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 and is liable for payment of rent and may be evicted#if landlord allows overholding and 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 and 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 and 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 and leave#T may also vacate at will with 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 and 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 and 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 and 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 and 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 and 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 and 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 business 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 and 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 with the proposed use of the premises. Require a covenant in the lease restricting use of premises to particular activities (NB: also enforceable against Assignees and Subtenants) (implied usage in “T-like manner”)#T: may ask LL give covenant to not rent adjoining premises to competing business (“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 and 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, and 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 and tear/T is responsible for waste#QUIET ENJOYMENT:LL covenants to give “quiet enjoyment” and must not interfere with T’s possession and use#This covenant has 2 aspects: An assurance that LL has good title at time of lease/that LL will not allow interference with T’s enjoyment of the property during term of lease#Breach of the covenant of quiet enjoyment no longer requires physical interference with 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 with express covenants for insurance of each-so require each to carry own insurance#PROVISION OF SERVICES AND 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 and 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 AND RECOVERY OF RENT:If a T abandons the premises and fails to pay rent the LL has a problem: must notify the T that T is in breach and 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 and as long as tenant corrects the breach = court will usually restrain against eviction and declare lease valid under its original terms#DISTRESS:defn:right of the LL to seize assets of the T found on the premises and sell them to realize arreras of rent#LL has a power of distress for rent 1 day after rent is due and demand for payment is made#usually bailiff or sheriff oversees procedure#may follow the goods if T has removed them to avoid distraint and 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 AND 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 with 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 with general design and 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 and 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 and 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 and breached quiet enjoyment;distrained too many goods to cover arrears or enters premises illegally to distrain = liable for damages for conversion and trespass)#LL’s failure of express covenant to keep premises in good repair = breach of quiet enjoyment and 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 business (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 and 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 and occupation = T may terminate the lease and 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 with 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 and 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 with new terms#SURRENDER:When a lease is up for renewal and 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 and T. T may pay LL a sum of m1y to be released from obligations to pay further rent or LL may bargain with 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 and 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 and 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” and may be evicted at any time on demand#But if LL accepts further rent it creates a periodic tenancy with all terms of original lease except those inconsistent with 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 with 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 and 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 business is unprofitable or having to vacate if given a short lease and business 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 and 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 with the intention that it become a fixture?/What use is to be made of it, and how securely and permanently is it to be attached?/How much damage will be caused to the building by its removal?Fixtures belong to the LL and a T cannot remove them#But T may attach objects to the premises for his own benefit without any agreement with LL (changing chattels into fixtures)#Issue: Can a T later remove them or do they stay with premises? If so LL may reap unjust benefit. Determine when objects become fixtures and 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 with intention of it becoming a fixture?/What use is to be made of it?/How securely and 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 and may be claimed afterwards#Except if objects are classified as “T’s fixtures” or “trade fixtures”: If left behind they become LL’s property and 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 and tenant repairs any resulting damage but if T leaves behind = become LL’s property and 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 and 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 and 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 AND PURCHASER OF LANDLORD’S INTEREST:When a landlord sells land which is subject to a lease she parts with both the reversion and the benefits of the tenant’s covenants to new purchaser#The purchaser then acquires the whole interest in land subject to the outstanding lease and is bound by rights and duties of the former landlord#Issue: what is role of purchaser when no privity of contract between herself and tenant? = “Privity of Estate” is formed because a lease also creates an estate in land as well as being a contract#PRIVITY OF CONTRACT WITH FORMER LL:The creation of privity of estate with new LL does NOT end privity of contract with 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 with that original covenant the T may sue the ORIGINAL LL in contract for DAMAGES#LEASEBACKS:Defn:a financial arrangement enabling a business to buy a building and 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 business does not have to go through more expensive and complicated procedure of issuing securities in the capital market to finance expansion/Leaseback may be more advantageous than buying property and mortgaging it because mortgagee will not generally provide full value of the project as the leaseback does, leaving business to raise the balance/May be tax advantages for the business#During lease (usually 20-25 years) the lessee business 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 business if they are in financial trouble than if mortgagor/ mortgagee, can restrict lessee business 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 and amount of rent/Special tribunals to deal with disputes#STMLR#COMMERCIAL TENANCIES:Interests of LLs and Ts may conflict so priority is given based on wording of covenants in the lease, timing of notice and registration of the lease at land titles and personal property systems#Ts must spell out ownership of goods, trade fixtures, leasehold improvements and 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 and operation of entire development is often complicated formula so pay strict attention to save $/Presence of competing business 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 and care of the premises:In event of T’s bankruptcy: trustee takes over dealing with unexpired term of the lease and 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 business 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 and 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 and 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 and 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 AND FORMATION##A corporation is a separate legal “person” in law#Legal Person:an entity recognized at law as having its own legal rights, duties and obligations#Corporation:a legal person formed by incorporation according to prescribed legal procedure#Has rights and duties under the law but cannot insist on those rights or carry out its duties except through human agents#Canadian Business Corporations Act/Saskatchewan Business 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 with the corporation simply by transferring shares to another person#Partnership: a retiring partner cannot just leave the partnership = must “bargain” for release with partners and creditors and may even be liable for debts incurred after retirement unless given notice to persons who regularly deal with the firm and per requirements under the Partnership Act#MANAGEMENT:A corporation separates ownership and 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 and 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 with the firm without consent of all partners): deals with the corp “as if a stranger” to it#CONTINUITY:Corporation: has continuous existence and exists independently of its shareholders and 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 and 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) and 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 and “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 and any maximum number of shares/Any rights and 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 and convenient#OPERATING RULES are usually passed at the first meeting of the shareholders: quite long and detailed, setting out such matters as:election of directors/terms of office/place and 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 and must be approved by the Corporations Branch of the government. Do name and trademark searches first or use a numbered company#Name can be refused if within prohibited categories: falsely suggest an affiliation with government or professional bodies, scandalous or obscene, or likely to be confused with name of another corporation#TYPES OF BUSINESS CORPORATIONS:Public and private corporations/Widely and closely held corporations/Professional corporations#PUBLIC CORPORATIONS: corporation that issues its securities to the public;also called “issuing corporation”, “reporting issuers” and “publicly traded corporation”#PRIVATE CORPORATIONS:Main use is to incorporate small and medium sized business 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, and number of private subsidiaries, often wholly owned by the parent company#PROFESSIONAL CORPORATIONS a special type of business 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 and partnerships#EQUITY AND 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 and 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 and transfer#Par Value: a nominal value attached to a share at the time of issue (“nominal value”)#Preferred Shares: share with 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 with 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 and guaranteed return/Full redemption at maturity/Bond holder is a creditor of the corporation entitled to payment in priority before general creditors and shareholders/Means of borrowing sums for the corporation/Interest paid on the bond is a debt of the corporation and 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 with 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 and even salaries paid to officers#COMMON SHAREHOLDERS:In theory have a strong voice in management of the corporation as they elect board of directors and 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 and 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 and shares are a form of personal property and are thus capable of being owned and 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 and 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 and 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 and control among shareholders and 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 and is not used by another company#Consider using a numbered company: may be convenient#Also consider the corporation’s intellectual property issues and inventory corporate IP in all forms#1 corporation can operate several businesses under different business names as long as all are properly registered#If “going public” is expected after incorporating as a private corporation,ensure incorporating documents and by-laws comply with higher standards of corporate governance#Corporations are legal persons so can own shares in other corporations: consider this carefully by using public and 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 business entities can be used together to meet specific needs of the business##CORPORATE GOVERNANCE##CBCA and SBCA (provincial statutes) distinguish between 2 aspects of corporate activities which state that the directors shall “manage or supervise the management of:The business of the corporation/The affairs of the corporation#Purpose: to meet a corporation’s internal objectives and external responsibilities#The rules for corporate governance are found in the Articles of Incorporation and the By-laws (the legal documents which create the corporation and are filed with the provincial or fed. govt)#Affairs:the internal arrangements among those responsible for running the corporation-the directors and officers – and its main beneficiaries, the shareholders#Business:the external relations between a corporation and those who deal with it as a business enterprise – as well as govt regulators and 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 and issuing corporations#Now publicly traded corps MUST meet CBCA standards, provincial business corporation standards AND provincial securities legislation#Corporate Governance pertains to independence of decision makers, transparency, disclosure, accountability, organizational checks and 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 and nomination of board members/Corporation should adopt and 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 and 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 business and 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 and appoint officers#Shareholders dissatisfied with 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 with 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 and 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 and in good faith (fiduciary duty)/Do not owe a duty to individual shareholders/Must comply with the Act, regulations, articles, by-laws and unanimous shareholder agreements/Apart from compliance with statutes, no duty is owed to the public at large#FIDUCIARY DUTIES:Directors owe duty to act “h1stly” and “in good faith” with 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 with the corporation/Forbid directors from closing eyes to mistakes or misconduct#Consequences include accounting for profits and damages#DUTIES OF CARE AND 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 and officers owe their fiduciary duty only to the corporation. The interests of the corporation are not to be confused with the interests of creditors or those of any other stakeholder”#Also held that duty of skill and care was owed by directors (objective standard) and met in this case because Wise brothers acted prudently and on a reasonably informed basis . Remedy to creditor defendants denied#PRINCIPLE OF LAW: There is a distinction in law between fiduciary duty and duty of skill and care owed by directors. Duty of skill and care does extend to other stakeholders, including shareholders, creditors and employees but fiduciary duty does not extend to them#Directors and officers are personally liable for breach of duty#4 DEFENCES AND RM STRATEGIES:DUE DILIGENCE DEFENCE: (“reasonable diligence”) by establishing that the required degree of care was taken, directors and officers can defend themselves against claims of breach of the articles, by-laws, and 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 and care. A good risk management strategy is to obtain expert reports PRIOR to key decisions/CORPORATE INDEMNITY: by agreement with the corporation can reimburse a director or officer for any costs associated with liability for breach of duty provided that the said director acted h1stly, reasonably, and in good faith. A good risk management strategy depending on financial health of the corporation/DIRECTORS AND OFFICERS LIABILITY INSURANCE: policies have many exclusions, including bad faith and fraud and are very expensive but should be put in place n1theless#Business Judgment Rule-Courts defer to the business decisions of directors and officers provided the process had appropriate degree of prudence and diligence and give benefit of the doubt to them#Courts recognize they are not business experts and 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 with 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 with the corporation:Contracts with the Corporation/Interception of Corp Opportunities/ Corporate Information/Competing with the Corporation/Related Party Trxn#CONTRACTS WITH THE CORPORATION-1 of the most important fiduciary duties is for a director to disclose any interest in contracts made with 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 and is improper#This is a breach of duty and 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 and not act upon it personally if it involves a business opportunity or profitable venture#COMPETING WITH THE CORPORATION:A director may NOT carry on a business competing with that of her corporation#EXCEPT: with the permission of the directors#If she does, the corporation is entitled to claim all profits made by the director and 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 with each other on a regular basis and 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 and 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 and Criminal Liability: fines and 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 with directors’ management decisions:EXCEPT: can dismiss directors and 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 with 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 and 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 AND VOTING:AGM is when shareholders can voice objections#May attend the meetings, question the directors and 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 with 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 and 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 with 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 and 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 and 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 and most flexible Minority Shareholder remedy: courts can make any order which is “just and appropriate” (buy out MS at fair price)#Can be brought by “a complainant” which is any person the court approves with 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 and defendant/Past practice/Representations and 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 and 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 and avoid problems of the MS#Could include:Right to employment with 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 and unfair behaviour of the corporation and its management through use of USAs#USAs will preserve the shareholders’ % interests in the company, maintain decision making power as part of management and 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 and Officers:They risk personal liability if they fail to comply with statutory and corporation specific governance rules#They should take certain steps to avoid liability:Ensure the corporation maintains directors liability insurance/Familiarize 1self with duties of a director and operation of the business/Participate in continuing education/Develop a code of conduct relating to ethics and conflicts of interest/Design corporate governance structures that insure independence and transparency, including independent directors, audit committees, nominating committees and 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 and participate in meetings, investigate: to allow business judgment rule of defence for complaints