AFM 231 - Lecture 12-22 (for Exam review)

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University of Waterloo
Accounting & Financial Management
AFM 231
Sally Gunz

AFM 231 – Business Law Lecture 12: Other Torts Occupier’s Liability  For the purposes of this class (using the ‘keep it simple’philosophy), just assume that for all persons coming onto property other than trespassers, the law if basically the same as negligence.  Note how transitory a relationship may be and yet still lead to someone being defined as an occupier (e.g. elevator repair company).  Trespassers:  Who are they?  Either people who are there unlawfully  Or people who are there lawfully but who don’t leave when requested to do so  You can’t do something to hurt them  Do you still owe a duty of care? Yes:  No intentional harm and no ‘reckless disregard’.  Children: duty is higher (e.g. if you know kids break into your property, simply putting a sign up about a danger may well be insufficient.)  What do you do e.g. discovering a burglar? Nuisance  Important tort  Indirect tort: you do something on your property that substantially interferes with your neighbour’s right to enjoy her/his property  Indirect harm to someone else. Something on my property that hurts other’s properties  Tension: some very legitimate uses may be harmful (e.g. noisy factory). Important role of legislation to strike a balance  Further, some rights at common law not protected e.g. view, light  Ie – living close to crack house  Allowing something on their property that indirectly affects your property Trespass  Direct tort – directly on someone’s land, for example, without any legal right  Being on property without consent  Coming onto a property and not leaving when asked to leave  Not often used in a commercial context, but in practice, when it is, the injunction is an important remedy – you need someone to stop doing X or claiming a right to do. Business – Customer Torts  Re false imprisonment: have you worked in a store?  The rules for handling possible shop-lifters are long established, however frustrating it can be for store keepers who can’t necessarily attract the prompt services of the police  Reasons:  This is in practice balancing rights – rights to property vs. rights to liberty and reputation and the latter prevails  From a public policy perspective, the right to ‘arrest’is better left to those trained to make the assessment (police) Assault and Battery • Check definitions in text Passing Off Defamation  In practice: this is an important though not very common tort  See distinction between libel and slander  It is an important way of defending your business/product  Requirements: identity in addition to using trademarks  Must have been uttered to more than one person  Free ride on other’s reputation  Must harm another’s reputation  Saving time consumption  Statement is not true  Check the elements you must prove p. 281  Defence:  Question: look at the store shelf and see how similar some  Most common is truth store ‘own label’products are to brand name products. Why is  Or another key element is not proven the brand name company not stopping them?  See discussion of privilege and fair comment  Do you think the decision the Mama Panda Restaurant case Interference with contractual relations was fair?  Not a frequently used tort but it is important to remember that  Note the risks with internet discussion it exists.  Leads to Perrenoud vs. eHealth Ontario  One recent Supreme Court of Canada case: simply providing a hyperlink to another site that is defamatory alone is not defamation – would need to say something in addition Product Defamation or Injurious Falsehood  This can be particularly problematic in cases of comparative advertising.  Again, defence is truth. Can you prove that? See the Mead Johnson Canada case p. 286. In Practice  Understanding the definitions/legal basis for each major tort is essential to a good risk management strategy  Learning both how to predict negative events and prevent them and establishing a solid protocol for when the inevitable tort claim does occur are essential AFM 231 – Business Law Lecture 13: Insurance Scope:  Insurance contracts are unique and they are governed by statute law.  There are unique concepts to insurance law that are important you understand – these make insurance work.  It is useful for you to learn the different types of insurance contracts a business might routinely enter into (buy) – see Insurance Products section. Basic Concepts  In Class 3 we discussed risk management.  Insurance was relevant in two respects: a. It is part of the way a business will transfer risk to another entity. b. Almost always, some of the risk is retained because the business will elect to have a deductible.  It is almost always possible to get insurance coverage. But sometimes it is simply not worth it; e.g.: a. The cost exceeds any possible future pay out. b. Or the risk is deemed too infinitesimal.  That is why entities sometimes ‘self insure’. Insurance is a regulated industry  The insurance industry in Ontario (and any other province) is regulated by its own act: InsuranceAct R.S.O. 1990, CHAPTER I.8  The act licences insurance companies, brokers etc.  Establishes clear rules by which all participants can operate. Why?At its most basic, because if Insurance Co. X is taking my money over perhaps 40 years, it is critical that when it comes time to pay out, that it has the money to do so.  In this respect, not dissimilar to the banking industry which also is regulated by its ownAct (although that is federal) Terminology  Policy: the name for the contract  Insurer: the company giving coverage  Insured: the person/party covered  Premium: what you pay (consideration) for the coverage  The loss: is the event that is being insured or covered (eg fire, life, negligence, etc.)  Deductible: the amount of the loss the insured pays (e.g. the first $2000 on a car insurance policy). The contract of “utmost good faith”  (This relates to the ‘duty to disclose’pp. 709-711)  What is the implication of the insurance contract being a contract of utmost good faith?  It means that you must respond honestly and fully to any question asked that relates to the risk.  What happens if you don’t? You may find you are not covered i.e. the insurer may deny paying out on your subsequent claim as per the Lau case.  Why is this duty imposed?  Because you are being asked things often you only know (or it would be very cost-inefficient to expect the insurer to find out).  The essence of the contract is the insurer’s ability to assess risk.  Note: this is an on-going obligation. What does this mean?  If something changes that is relevant to the risk, you must advise the insurer (or your broker) e.g. building is occupied, or you take up smoking and this is a non-smoking policy.  Marche v. Halifax Insurance p. 710-11 (tricky case) Further concepts: Insurable interest  I must benefit in some way from the item/event that is being insured (or be potentially harmed) e.g:  I am insuring against bad weather for a particular event I am running and subsequent losses.  I am insuring against an employee harming a customer in some manner.  With life insurance, the business is insuring e.g. against a director, officer, or shareholder dying.  Why is this a requirement? To discourage deliberate harm plus insurance is not equivalent to gambling (I am insuring against X public figure dying). Concepts: Indemnity  Insurance is a contract of indemnity i.e. the insurer covers the loss but no more.  Why? Because the insured should not profit from the event.  What is a co-insurance clause? See p.p. 711-12. Easiest to understand in terms of the problem it seeks to avoid: see next slide  Ie - Even though my factory is valued at $2 m. I know that it is very unlikely the loss from a fire will be 100 percent of that sum.And it is much cheaper to pay for insurance for only $1 m. If the loss is $1 m I would recover the full amount with only partial coverage.  Aco-insurance clause states that the insurer will only pay a proportion of the loss – see e.g. Figure 28.2  Not dissimilar to the deductible.  Obviously all these clauses can be negotiated when coverage is being sought. Subrogation  Means the insurance company, once it has paid out, it can ‘step into my shoes’and claim compensation from whomever caused the harm.  Note: very important that the insured must do nothing to harm this right e.g. you don’t say “sorry, it was all my fault”. Further concepts  Who decides whether e.g. a car is a write off or not? Or a factory should be repaired or torn down and rebuilt? The insurer. Very frustrating for people. Only way around (assuming you can’t negotiate) is not to claim on the insurance.  If you caused the harm: no coverage (forfeiture rule). The Policy  Classic e.g. of a standard form contract – lengthy and very technical.  Remember the requirements at common law to give notice when there are special provisions (e.g. major but not expected exclusions that might be unique to this contract).  See e.g. of ‘grow ops’p. 713 – where the application of an exclusion clause might once have been rare but no longer is (illegal activity)  “Rider” – an additional term from the outset (e.g. adding coverage for vehicles stored in building).  “Endorsement” – simply a change to the policy.  Types:  Expect you to read the different types on p.p. 714-723.  Will review two things:  No fault insurance in Ontario – because it affects us all  Errors and omissions insurance including for directors/officers of not for profits. No fault insurance Ontario  Instead of suing the other party to the accident, you make a claim on your own policy.  The payment will be made irrespective of proving fault i.e. no need to actually prove negligence, just causality.  Trade-off: more certainty of recovery (and reduced overall litigation costs to the system) but generally lower awards than in a pure ‘fault’or negligence system.  When you buy insurance, you choose the amount of coverage – for both pecuniary and general damages. Errors and Omissions  See explanation on pp 720-21 for directors and officers liability (an officer might be e.g. CEO, CFO).  Clearly others (e.g. shareholders) might sue for bad decisions – or errors and omissions.  Usually the corporation agrees to indemnify these persons but if that coverage does not apply, if it is not adequate, if the company is bankrupt (you will be an unsecured creditor), then this might not be adequate.  Even with coverage, note the difficulty with timing – how you may be liable even after you leave your position for events while you were a director.  Really important to consider your liability if you are a director of a not-for profit.  Insurance is not particularly expensive.  Risk to an individual may be costly (NFP may have little money).  Remember you may be responsible for the actions of a wide range of people including volunteers etc.  Make sure you have adequate coverage – E&O insurance and all other types. Further Issues  When dealing with insurance issues:  What is the role that an insurance agent plays relative that of an insurance broker?  To whom (what) is the agent responsible?  To whom is the broker responsible? Note:  The need to select carefully.  Also the potential liability of the broker is negligent.  Recognize for whom the adjustor works (who is the adjustor?).  Understand your coverage.  Recognize that when your situation changes your insurance needs may change  You are dealing with a contract  If an insurer takes a non-coverage position (i.e. it refuses to pay out) you may have to sue them in contract (breach).  Remember the Whiten v. Pilot Insurance case? AFM 231 – Business Law Lecture 14:Agency What isAgency?  Agency relationships arise because of the need of a business (or individual) to operate using the services of others.  It occurs at two levels:  We will see later on that formal business entities (e.g. corporations) have to use humans to do their business i.e. they have to use agents.  Many others (e.g. Sonny Chu p. 297) have to use an agent because they can’t be in two places at once or can’t do all the work themselves. TheAgency relationship  Why don’t we focus on the relationship between theAgent and the  The agency relationship arises when one person (the Agent) is Third Party? engaged by another (the Principal) to interact with others (Third What is the difference between an agent and an employee? Parties) and is authorised to alter the other’s (Principal’s) legal  Similarity: in both cases the agent and the employee are obligations. authorised to do something on behalf of the principal/employer.  e.g.A(agent) is engaged by P (principal) to enter into a  In fact, some employees can also be agents, some are not – it contract on P’s behalf with TP (third party). totally depends on the nature of the relationship  e.g. (from p. 297) Dong Lee is engaged by Sonny Chu  Ie - My business employs a number of people: to operate in China on Sonny Chu’s behalf and  In the sales department, 3 people have split authority for potentially to enter into contracts with Chinese tailors different parts of Ontario. They are authorised to make and fabric suppliers. sales up to $10,000 of our software product in their  Ie - On p. 298 see e.g. respective territories.  Sports agent  In the R&D department, 5 people have the responsibility  Insurance agent for designing new products for the business.  Travel agent  All 8 people are employees of my business and the  Entertainment booking agent principles of employment law that we will look at on  Stockbroker Thursday apply.  Key: who/what is the Principal? Look at each of the  However, the 3 sales employees are also agents of my above?Ask yourself: agent for whom/what? Who is P business of a specific type. They are authorised to: and who is TP?  Sell specific product  In a specific area  In practice: there is a range of ‘authorisations’an agent can be given e.g. on p. 306 you will have read that real  Up to a specific value estate agents seldom have authority to buy and sell land  The 3 sales employees are governed both by for a principal (client). employment law and agency law. Employment law for things like wages, conditions, dismissal. Agency, The Two key relationships inAgency law relating to the specific actions for which they have been  The relationship between the Principal and theAgent engaged.  The relationship between the Principal and the Third Party  Because as long as the agency relationship operates as it should (according to agency law) then this relationship disappears – there is no on-going legal relationship between Aand TP.  Think of Aas the ‘facilitator’– s/he only brings about the relationship between P and TP. P and TP are the ones e.g. entering into an agreement (changing their positions). know what it is. How is the agency relationship (P & A) created?  Ideally and most often: by express agreement i.e. P appoints Ato By express agreement do X.  This is straight contract law.  See explanation on p. 300 both as straight agency relationships  However, remember that the agent is potentially being given very and as part of an employment relationship. large responsibilities (see box p. 311 “Rogue Agents”)  By estoppel: P allows TP to believe X is an agent. This is  Ensure terms are specific and exactly what you need as Prinicipal. important you understand.  By ratification: it is created ‘after the event’. Not so common. Just By Estoppel  This arises from the concept of ‘authority’that you can see explained p.p. 300-302.  If the original Principal/Agent agreement is created well (clearly), the authority should be clearly described in the contract. So, e.g.  Sonny (P) gives Dong (A) authority to enter into contracts with TPs for up to $25,000.  When Dong enters into a contract for $100,000 this is outside the express authority.  Provided theAis acting within the apparent authority and the TP is doing whatever a prudent TP should do, then an agency relationship between P andAis said to exist ‘by estoppel’i.e. the P is ‘estopped’from denying the agency relationship exists and is bound by it.  This usually happens when:  Aexceeds actual authority (e.g. Dong).  The agency relationship is over but the TP has no reason to believe that it is (Rockland case p. 305).  In practice: See p. 304: we are in the territory of 2 unhappy ‘people’– P and TP.  The law favours the one that did all that they might reasonably be expected to do to protect themselves. So:  Maybe TP checked with P a week before and has no reason to believe anything has changed.  If there is a restriction to the authority, what has the P done to advise TPs? E.g. is it printed on the contract?  When the P ended the agency arrangement, did it do as much as is reasonably possible to advise potential TPs of this change?  Doiron v. Devon Capital and Rockland Industries p. 303 and 305. Apparent (ostensible) authority  The key question: what is a reasonable TP acting prudently By ratification entitled to presume is the authority of theAgent?  This addresses the following problem: I know you are very  If the P (orA) has told the TP the correct authority, that is what the interested in acquiring X. I come across X but am not able to contact you. I offer on your behalf to acquire X. As soon as I can TP should assume is the authority.  If no one has told the TP what it is, then the TP must consider the get hold of you I tell you. circumstances carefully.  Provided you as potentialA have advised the potential TP of this, you may ‘ratify’this agency created arrangement, after the event. Responsibilities of P, Aand TP  The easy situation is that of the TP: in the usual setting, the TP simply performs the arrangement as they would if they were dealing directly with P.  P generally must complete the arrangement thatAhas entered into on its behalf (e.g. if a contract, P is bound).  IfAis responsible for a tort while performing its duties as agent, P is also responsible (vicarious liability – same as employer/employee). Responsibilities of P andAto each other  Both P andAowe responsibilities to each other that are described as ‘fiduciary’. We are going to study these in Class 16.  For now, let’s simply understand that these are special duties of care imposed by equity law because this is a relationship that requires great trust. Summary of duties  Usually done explicitly.  Why is this a relationship requiring real trust?: Figure 13.4 p 314  Because Ahas the potential to commit P to arrangements.  You are responsible for understanding:  Because Amust have trust that P will step in as if it had  1, 2 and 3 made the arrangement itself.  4 is complicated (the undisclosed principal etc). This is  The Principal: not so common and I don’t expect you to understand it.  Will do what it is obliged to do in the arrangement with Power ofAttorney the TP.  See p. 302  Will assist theAgent as is appropriate.  Make sure you understand how extensive the scope may be –  Will pay theAgent if that is agreed. never provide a power of attorney without real care and understanding.  Will compensate Agent for reasonable expenses.  TheAgent:  If the power can be limited, then limit it.  Essentially the Agent must always act in the best  Note that now many powers of attorney (in personal matters) may interests of the Principal. be ‘continuing’. Do understand the potential for abuse within families. Ensure you establish appropriate controls/oversight Ending an agency arrangement  Alternatively, when the original contract says it is over (e.g. the task is done) or a reasonable time has passed.  However, also remember, that you as P must ensure TPs know if you are terminating an agent. Remember agency by estoppel. Return to Business Law in Practice Example  Is Sonny bound by the expensive fabric contract Dong entered into with the Chinese supplier?  What might Sonny have done to prevent this outcome? Agency by Estoppel  Step 1: there is no express agreement today giving the Agent the right to do what they are purporting to do:  e.g. giving Dong Lee the right to buy at $100,000  or e.g. Sonny Chu fired Dong Lee last week.  Step 2: Dong Lee enters into agreement supposedly on Sonny Chu’s behalf with Chinese Supplier (CS) to buy fabric at $100,000.  Step 3: Is Sonny Chu bound by contract to CS as Principal because of agency by estoppel (is this an agency relationship created by estoppel)?  Is Sonny Chu hound by agency by estoppel?  Sonny Chu is bound (i.e. the agency relationship is created by estoppel) if the following applies:  If he allowed in some way, CS to believe that Dong Lee had the authority as agent to enter into this agreement on his behalf? e.g. perhaps Dong Lee had entered into prior agreements with CS on Sonny’s behalf and Sonny had paid, or he gave Dong Lee cards that introduced him to third parties as his agent, etc.  And did CS behalf reasonably i.e. do everything he might reasonably be expected to do to check this out e.g. in the past did he contact Sonny to confirm; is Dong Lee acting in any way out of the ordinary for that kind of business (e.g. the normal type of arrangement, size of order, etc). What is the effect of estoppel?  If agency by estoppel exists, Sonny is prevented (estopped or stopped) from denying that an agency agreement exists and he is therefore responsible as principal to CS who is the third party.  Yes, if Dong Lee has acted inappropriately, Sonny can take action against Dong Lee for violating the agency agreement.  But, so far as CS is concerned, he must accept the fabric and pay $100,000. AFM 231 – Business Law Lecture 15: Employment Employment vs. labour law proportion of private workers are unionised.  Employment law refers to the laws (many common law) that apply in general to the employment relationship.  One reason employees don’t see the need for unions today is  The term ‘labour law’typically refers to a unionised environment. because we now have relatively strong labour protection and  Stats in Canada show that the majority of public sector workplace safety rules and even minimum wages (sometime read employees are unionised and a relatively small Upton Sinclair, The Jungle (and many others), to see what an unregulated environment was like). Employee vs. Independent Contractor  Distinction: relate to the ability of the person to do the job.  Employee works for the employer/business.  Why do we need to know the distinction?  Independent Contractor works for themselves and hires  From a very practical perspective, if a person is your out their services to the business. employee you must make all the mandatory payments etc. (also have all other legal duties as employer). Key elements of hiring  From the perspective set out in the text: because you  See text for outline of protocols you should implement. might be responsible for their actions (vicarious  What may you ask and what must you not ask? liability). See the Dupois example p. 501 and the  Generally: you may only ask questions that directly Canadian Tire case p. 503.  You must not take any action, or have any practices that Statute laws that apply to employment relations discriminate between job candidates on ‘prohibited’ - In addition to the provisions that any contract of employment grounds. See p. 506. should include (Figure 20.2) there is a range of legislation that applies to the employment relationship. Examples of bona fide occupational requirement  If you are hiring for a call centre that takes calls from X country - See pp. 515-521 : Workplaces can be dangerous: Total fatalities in with Y language, you may ask about fluency in that language. Or the Canadian workplace: 2011: 919; 2010: 1,014; 2009: 939; it may require knowledge of the culture or geography of a 2008: 1,035 particular country. But, you may not require the person to have a - 3 most dangerous sectors: construction, manufacturing, particular ethnic background or actually come from that country. transportation/storage.  Systemic discrimination: e.g. Meiorin Case (508) or pilots in the - Workplace safety legislation – governs the operation of the past. The latter had to be a certain height etc. Typically excluded workplace. women. - Workers compensation – provides for injured workers, - Employment standards – governs conditions of employment e.g. Duty to accommodate hours including overtime (see CIBC case – classes now certified),  This can arise at hiring. It more commonly arises once the person minimum wage, vacations, termination, etc. is on the job. - Preventing harassment, discrimination, pay inequity, privacy.  The person because, e.g., of illness or long term disability, is not Workplace bullying and violence able to perform the tasks completely.  This is where the expression ‘undue hardship for the employer’  2010, amendments to the Ontario Health and Safety Act. comes in.  Address ‘workplace violence’. Extends to any persons with whom the  Hard balancing act. However, for an employer as large as the employee may come in contact.  Positive obligation on the employer to engage in risk assessment and University, for example, the expectations are reasonably high that take reasonable steps to avoid risk of harm. it should accommodate by finding alternative ways for the person to work. Termination of employment  See p. 509 for factors that impact these decisions.  Monitoring: if it is reasonable to avoid e.g. theft – see Eastmond case Can you test, monitor, and access – ie: email p. 523.  Basic principle: are any of these actions essential to maintaining a  What about email and internet use?: monitoring to ensure I am doing ‘safe’workplace. the job (e.g. playing solitaire all day).  Drug/alcohol testing:  R. v. Cole, 2012 SCC 53.  Preventatively: if it is necessary because the risk is great.  If it is assumed you will use your work provided technology for work  Accommodation: as a condition of a return to work for the and personal use (and it is exclusively in your possession), then generally the employer has no right to access your personal materials illness of drug or alcohol addiction (and ability to do job was previously impaired). (unless you leave them e.g. in an immediately visible location when you give a technician the machine to fix).  Critical thing for the manager, document, document, document.  If there are reasonable grounds to assume a criminal act, the police  Only for really serious events is prior notice not required. should get a warrant. Dismissal without just cause  Contrast US and Canada: US has employment at will – literally means  Here the employer has an obligation to give notice or pay reasonable an employer may terminate employment at any time, with or without compensation in lieu of notice. grounds.  In Canada, the contract of employment may be ended: Constructive Dismissal  when the contract comes to an end;  The behaviour of the employer is equivalent to dismissing the  when there is ‘just cause’; employee.  when the employer terminates without cause.  For example, they assign them to completely inappropriate work.  through ‘constructive dismissal’. Consequence of improper termination Dismissal for Just Cause  Equivalent to breach of contract – damages.  Clearly bad behaviour – see pp. 235-9  Both statutory damages and common law.  And remember the duty to mitigate. AFM 231 – Business Law Lecture 16: Fiduciary Duties If yes to any of these (and many others)  Or, if you intend to interact with any of the above.  Then, you had better ensure you understand what fiduciary responsibility means and how it works. What is a fiduciary relationship?  Relationship that exists because the law of equity says it does.  Why does the law impose this relationship in particular circumstances? Because the relationships require trust – beyond that of a normal contract.  Critical thing to understand: once the relationship is said to be fiduciary, the obligations are imposed and you cannot avoid (contract out of) them.  Let’s look at examples.  The current test of whether/not there is a fiduciary relationship: are there “elements of trust and confidence and reliance on skill and knowledge and advice” (Hodgkinson and Simms 1994)  Typically fiduciary relationships are either business or personal (e.g. teacher, trustee, parent). Here we focus on the business. Fiduciary Duties: • P565 or 309 • For example: o Avoid conflicts of interest – literally avoid o Do not use the relationship for personal profit (ie secret commission) that profit belongs to the beneficiary o Follow all of the beneficiary’s instructions o Disclose all relevant information to the beneficiary o Act honestly, in good faith, and with due care o Keep beneficiary’s information confidential o The two principal problems: normally not allowed. Where it is, why would you go along with it (ie - real estate agent acting for both parties) Fiduciary vs. Contract relationships in business  When is an employee in a fiduciary relationship?  If they are an agent of the business  If they are a director or officer of the business  Otherwise, generally they will be an employee  An employee may be a fiduciary for some aspects of their work and not others – e.g. if a senior IT employee is also expected to seek out major sales from time to time.  Businesses may enter into partnerships and they enter joint ventures. Partnerships impose fiduciary duties. Joint ventures are solely contractual arrangements. Important  Think of these duties as the closest thing to the law imposing ethical responsibilities.  We are looking often at relatively ‘high level’contexts. Yet before very long these duties will be imposed on you.  Let’s start by acknowledging what might make us not do what seems fairly obviously the right thing. In a corporate setting  Beginning point: the corporation needs humans to take actions on its behalf.  Officers (e.g. CEO, CFO) and Directors are those humans – as well as all the other agents such as sales staff – who act as its agent.  The fiduciary duties that Officers and Directors owe the corporation are the equivalent of those the agent owes. They just operate in the specialised context of the corporation. Consider duties in practice  What follows are examples of how fiduciary duties might arise in practice in the business context. Example 1  The Board ofABC approves a multi-million dollar contract with Supplier Z. Director S participated in the Board vote. S is also a 10 percent shareholder of Supplier Z.  If we assume X is in a fiduciary relationship withABC (which s/he is) what duty mightABC argue has been broken?  Is there any way this ‘deal’could be signed without S violating her/his fiduciary duty? Example 2  X is a director of CompanyABC. Developer Y gives a presentation to the Board ofABC, asking whetherABC wishes to acquire property from Y. The board unanimously rejects the offer. 6 months later, the Chair of the Board hears that X has bought a half interest in the property from Y and the two are developing it.  If we assume X is in a fiduciary relationship withABC (which s/he is) what duty mightABC argue has been broken?  Note: what might be ‘fuzzy’about this fact situation? Example 3  Client (C) of Lawyer (L) has money to invest. L suggests to C to invest in real estate and connects C with another client of L looking for $600,000 second mortgage financing in BC at 18%. L does not disclose that her brother had a minor interest in the client. The BC real estate market collapses and the client defaults leaving C with minimal chance of recovering their investment. Does C have any recourse?  Does L owe C a fiduciary duty? Compare this with Hodgkinson vs. Simms p. 565. Example 3  Ais an actuary hired by MNM Corp. to evaluate its defined benefit pension fund. MNM is anxious to have the interest rate used for the calculation to be 8 percent, a rate about two percentage points higher thanA believes should be the sum. The CEO of MNM suggests toAthat she will also ensure that all the routine pension management work will be moved toA once the interest rate issue is resolved.  DoesAowe the fund beneficiaries a fiduciary responsibility? What duty might be broken? What should we learn from these examples  We must first look at the relationship: is it one where there are “elements of trust and confidence and reliance on skill and knowledge and advice” (Hodgkinson and Simms 1994).  In fact the categories of fiduciary relationships are expanding: Example 2 mirrors Lac Minerals p. 459. Lac Materials  Lac Minerals and Corona  Corona, a junior mining co., disclosed confidential geological findings to Lac  Lac was a financing company that would help Corona purchase key property  Negotiations failed and Lac used the information to purchase adjoining property  SCC concluded a fiduciary duty was owed even in absence of explicit confidentiality instructions  Even the court decided for Corona on a different basis, the test the court stated for fiduciary relationship in this case has been applied to new contexts. Further Practical Example  Professionals generally owe their clients/patients a fiduciary duty.  Law Society of Upper Canada Rules of Professional Conduct – search on ‘fiduciary’  Institute of Chartered Accountants of Ontario Rules of Professional Conduct – whole section explaining the fiduciary  Physicians and Surgeons of Ontario, Principles of Practice and Duties of Physicians: “Physicians have a fiduciary duty to their patients—because the balance of knowledge and information favours the physician, patients are reliant on their physicians and may be vulnerable. The patient must always be confident that the physician has put the needs of the patient first. This principle should inform all aspects of the physician’s practice.” What are the remedies for breach of fiduciary duty?  Generally compensation: put the person owed the duty in the position they would have been had the breach not occurred.  Punitive damages more likely than in tort.  Potential for an injunction. Professional duties  Make sure that you review the examples of fiduciary duties outlined in professional codes of ethics. Remember, professionals are usually in a fiduciary relationship with their clients.  The significance of Hodgkinson v. Simms p. 565 –when a professional is offering a service that would not normally create a fiduciary relationship (in that case, investment advice), they must ensure the client understands fully in what capacity they are acting (fiduciary or non-fiduciary).  If the professional does not make it clear that they are not acting in their fiduciary role (e.g. as lawyer or as accountant) and the client is entitled to think it is in a fiduciary capacity, then those fiduciary duties will apply. Very similar principles to agency by estoppel.  This is the significance of the language “elements of trust and confidence and reliance on skill and knowledge and advice” in Hodgkinson v. Simms. If these qualities exist, it will be deemed to be a fiduciary relationship. Example  Client (C) of Lawyer (L) has money to invest. L suggests to C to invest in real estate and connects C with another client of L looking for $600,000 second mortgage financing in BC at 18% interest. L does not disclose that her brother had a minor interest in the client. The BC real estate market collapses and the client defaults leaving C with minimal chance of recovering their investment. Does C have any recourse?  Does L owe C a fiduciary duty? Compare this with Hodgkinson vs. Simms p. 565.  Is L acting as the lawyer that C depends on or is L clearly just ‘suggesting’something as an investment advisor might? Example  Ais an actuary hired by MNM Corp. to evaluate its defined benefit pension fund. MNM is anxious to have the interest rate used for the calculation to be 8 percent, a rate about two percentage points higher than what Abelieves should be the sum. The CEO of MNM suggests toA that she will also ensure that all the routine pension management work will be moved toA once the interest rate issue is resolved.  DoesAowe the fund beneficiaries a fiduciary responsibility? What duty might be broken? Think conflict of interest, taking personal profit, acting in good faith. What we learned from these examples  We must first look at the relationship: is it one where there are “elements of trust and confidence and reliance on skill and knowledge and advice” (Hodgkinson and Simms 1994)? If it is, then it likely will be a fiduciary relationship.  In fact the categories of fiduciary relationships are expanding: Example 2 mirrors Lac Minerals p. 459. AFM 231 – Business Law Lecture 17: Organizing the business and corporate governance LAC Minerals  LAC Minerals v. Corona (p. 459)  Corona, a junior mining company, disclosed confidential geological findings to Lac during early negotiations for a joint venture.  Negotiations failed.  LAC used the confidential information to purchase adjoining property.  Corona argued that LAC violated its fiduciary duty and ‘stole’an opportunity that belonged to Corona.  SCC concluded a fiduciary duty was owed even in absence of explicit confidentiality instructions – reasonable expectation of confidence. Shift to how business are organized  Business Law in practice e.g. p. 322: this is a completely realistic example  Not all of you are going to have a daddy who can put up $100,000. But you may well have a family member or friend who will lend you some money.  The critical thing to learn from Chpt. 14 is the risk exposure you and anyone associated with your business faces. Key thing from a practical perspective  The vast majority of new businesses start as sole proprietorships.  Many others are partnerships.  Why? It is cheap and easy.  From a purely practical (not legal) perspective, it may make little difference to you, which form you adopt. Why? Further practical considerations  Assume you, like Adam, have little money.  If your business venture requires money, who is going to provide you with it?  What will a lender require?  Whatever type of business form you have, the lender will want the most security possible and they also may impose high rates of interest. Assume the lender is also in business – it must do the most it can to minimise its risk.  All lenders fully understand that the majority of new businesses fail. What is a sole proprietorship  It is just you – you and the business are the same thing.  You get all the benefits.  You carry all the risk.  IfAdam owns almost nothing, the worst that can happen to him is he will go formally bankrupt and he will probably lose his one asset, his car. Partnership  Is you and at least one more person.  It is governed by the Partnership Act (provincial)  Critical quality: unless you have a Partnership Agreement changing this – everything is equally split. See p.p. 325-328. Do you want this?  Even if you have a PartnershipAgreement changing this assumption of equality, it only is relevant as between you and your partners.  What does this mean? Critical quality of a partnership  Every partner is an agent for the other partners and the partnership.  They can therefore bind the other partners and the partnership.  They are also individually and collectively responsible for all liabilities.  AND, partnership, just like agency, can be created by estoppel. Watch out Dad and Diane – you may be Adam’s partner, whether or not you intend to be. IsAdam in a partnership with Dad and Diane?  Are they “carrying on a business in common with a view to profit” (definition in Partnership Act).  Would a reasonable third party (being sensible and careful) think Dad and Diane are partners of Adam?  It all depends on how they allow Adam to present themselves in dealings with Third Parties. Dad better not get too involved in business decisions. Diane – watch out what you mean by ‘devot[ing] some of [your] time’, etc.  Remember, if Dad and Diane are the only ones with money, third parties owed money will be looking to them very closely. Critical to understand about partnerships  You cannot alter by contract your obligations to third parties i.e. it doesn’t matter if you and your father have agreed that he will only pay up to $100,000. If third parties are entitled to assume Dad is a partner, he might have to pay the full amount of the debt.  Make sure you understand ‘joint liability’p. 326 and ‘joint and several liability’p. 332 (for tort). The corporation  This is the business form of choice for many businesses.  What is it? It is a unique legal ‘person’created under either Federal or Provincial legislation.  What does this mean?: it means that at law, the corporation (company) is a separate legal entity from those who might ‘own’it i.e. the shareholders.  IfAdam sets up IK Enterprises Incorporated, any debts that IK incurs belong only to IK. Likewise, any profits belong to IK and IK, through its Directors and Officers, decides how they should be distributed.  Corporations will be incorporated (created) federally or provincially. What makes you decide which?  There are distinct roles in a corporation: a. The Board of Directors – those elected by the shareholders to assume the fiduciary responsibility of making decisions in the best interests of the corporation. b. Shareholders – those who have an equity interest (a share) in the corporation and who elect the Board. c. Creditors – those who lend to the corporation d. Management/officers – those appointed by the Board to run the corporation on a day to day basis.  In a small corporation (e.g. IK Incorp.) the same people might fill all these roles. So, Adam must incorporate?  Wait….remember the discussion about ‘what will lenders require’?  If I am going to lend IK incorp. $10,000, I am going to ask for solid security. I could ask for a lien onAdam’s car (after checking no one else has any claim on it). I probably will ask for a guarantee from Dad, assuming I have checked out Dad and he has the assets.  Therefore it is important to understand that the corporation is not the automatic panacea that it might appear to be. Understanding the corporation (what makes it work)  Salomon v. Salomon 1897 p. 355.  The key to understanding what is meant by the term ‘limited liability’company (corporation) is understanding this case.  The importance of the case: it accepted the language of the BritishAct that created general companies for the first time at its face – specifically, that the corporation and its ‘owners’are separate at law.  This provision exists in all Canadian corporation legislation. Sole prop. Partnership Corporation Created By Owner Agreement or Conduct Registration Duration Life of Ownder Agreement or death Continuous until windup Liabillity Unlimited Joint and several Limited Taxation Personal Personal Corporate and Personal Transfer Assets only Interest andAssets Equity andAssests Management Owner managed Owner managed Representative Management Other forms of business  Read about them p.p. 340-6  But generally these are simply more specialised forms of a contract.  Some, e.g. the franchise, have specialised legislation because of problems with fraud or misrepresentation.  Remember however: no business form (legal structure) will automatically make a business successful. Only a good business idea and good management will do that. The business form may assist management but not make a bad idea good. AFM 231 – Business Law Lecture 18: Corporate Governance What is governance? Example  Here, simply how the corporation is run. Who has what power,
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