Chapter 16: Law of Sole Proprietorship and Partnership
Sole Proprietorship: A business where the sole owner is responsible for the management and
the debts of the business.
Partnership: A legal relationship between two or more persons for the purpose of carrying on
business with a view to profit.
• A partnership is different from co-ownership of property.
• With more owners to share the risk of borrowing, banks are more willing to extend credit
to a partnership.
Nature of a Partnership:
• Founded on mutual trust
• Partner agent of other partners and the partnership
• Partners share in partnership property is always personality (personal
not real property)
• Subject to Partnership Act
• Arises in several ways
• Freely alienable without consent of other co-owner
• Not an agent of other co-owners
• Co-owners can own any type of property
• Dissolved through disposition of property
• Persons who form a partnership are collectively called the firm and business is
carried on in the firm name
• Joint and several liability: Partners individually and as a collective group
have liability for a debt of the partnership
o Partners are agents for each other and for the partnership
o Liable for tort of partner if committed in course of partnership business
o Joint and several liability for business wrongs i.e. misappropriation, negligence,
CHECK LIST: OF ISSUES FOR A PARTNERSHIP AGREEMENT:
1 1. Statement of purpose: to ensure a common focus.
2. Amount of capital contributions: a clear statement of expectation and record of
what each partner has invested or will invest in the partnership.
3. Allocation of profit and loss: will it be equal or unequal, in proportion to
investment, or otherwise?
4. Responsibilities and authority of partners: who will do what in the daily operation
of the enterprise?
5. Signing authority over accounts and assets: one, two or all partners to sign?
6. Growth in number of partners: on what grounds would new partners be added (if
7. Reduction in number of partners: how would a departing partner’s share be
evaluated, and what mechanism would govern his or her buy-out by other partners?
8. Dispute resolution: how will difficult decisions be made? Is there a provision for
arbitration or buy-out?
Partnerships retain the same liability any form of business would have with its employees.
Partnership Act: Provides a number of rules that, in absence of any express or implied
agreement to the contrary, determine the partner’s interest with respect to each other. The rules;
as they appear in the Ontario statue provide as follows:
• Equal share in capital and profits
• Indemnity by the firm for personal payments and personal liabilities
• Interest paid on excess capital contributions (5% per annum)
• Interest accrued is not before profits
• Every partner may take part in management
• No new partners without consent of others
• No major changes to the partnership with the consent of all partners.
• No automatic right to remuneration
Dissolution: Subject to any term set in the agreement, the death or insolvency of a partner, or a
breach of a partnership trust.
• If one partner is to be insolvent, the remaining partners would be obliged to satisfy the
remaining demands of the creditors, not in proportion to the amount they share in profits,
but proportion to their capital accounts at the time of dissolution. (This acts as the best
indication of each partners sustainability to loss).
Limited Partnership: Containing a partner who may not actively participate in the management
of the firm, but has limited liability.
• Every limited partnership must have one à General Partner: A full partner with
unlimited liability for the debts of the partnership. Limited Liability Partnership (LLP): A partnership where individual partners are liable for the
general debts of the partnership and for personal negligence, but not liable for the negligence of
• Suited to professional practices such as law and accounting.
Joint Venture: A business relationship not necessarily a partnership and can include an
individual and a corporation or virtually any joint venture between any business entities.
Registration: In some provinces partnership cannot defend or institute legal proceedings if it is
Chapter 17: Corporation Law
Corporation: A type of legal entity created by the state.
Nature of a Corporation:
• A corporation is separate and distinct from its shareholders. And its acts not through them
but through its authorized agents.
• A properly authorized agent may bind the corporation with third parties.
• The shareholders of a corporation possess limited liability for the debts of the
corporation, and the creditors may look only to the assets of the corporation to satisfy
• Shareholder: A person who holds a share interest in a corporation; a part owner
• Director: Under corporation law, a person elected by the shareholders to manage its
• Officer: A person elected or appointed by the directors to fill a particular office
(president, secretary, etc.)
• Shareholders elect directors and directors appoint officers
• Directors can be officers.
The Incorporation Process:
5. Share capital (restrictions)
• Public or private
6. Internal documents
3 Shareholder’s Agreement: An agreement between shareholders of a private corporation
concerning management and/or future reorganization of the corporation such as a buy-out of
interests. Protects minority shareholders and sets ground rules.
1.) Shareholder and corporation
2.) Shareholder and other shareholders
3.) Shareholders who act as directors
CHECKLIST: OF ISSUES ARISING IN SHAREHOLDER’S AGREEMENTS
4.) Parties and number/class of shares subscribed and paid.
5.) Business objects of the corporation.
6.) Restrictions on powers of directors.
7.) Special rules on number. Nomination, election or vacancies of directors.
8.) Required notice of meetings, their place, quorum and voting powers.
9.) Special powers of shareholders for special (critical) decisions.
10.)Appointment and remuneration of officers.
11.)Plans and budgets.
12.)Appointment of bankers and auditors.
13.)Recordkeeping, access and shareholder rights to information.
14.)Policies regarding future financing needs. Policy on shareholder loans.
15.)Dividend payment/retained earnings policies.
16.)Requirements of confidentiality and non-competition.
17.)Terms of employment (and termination) for executives.
18.)Dispute resolution mechanism (arbitration, mediation).
• Share: The ownership of a fractional equity interest in a corporation.
o Can be fixed or par-value
o Common or preferred
o All corporations must have some voting common shares.
• Floating Charge: A debt security issued by a corporation in which assets of the
corporation, such as stock-in-trade, are pledged as security. Until such time as default
occurs, the corporation is free to dispose of the assets
o Not a share but a debt
o Attaches to assets in general
• Debenture: A debt security issued by a corporation that may or may not have specific assets of the corporation pledged as security for payment
o Priority rights determined by Bankruptcy Act and Personal Property Security Acts
(Gov’t to general creditor).
Responsibility of a Director:
• Ownership is separate from management
• Must have at least one director
• Directors responsible for corporation’s operations
o Right to declare dividends
• Balance needs of shareholder protection and freedom to manage in corporate
• Fiduciary Responsibility: A relationship of utmost good faith in which a
person, in dealing with properly, must act in the for whom he or she acts,
rather than in his or her own personal interest. Restrains the director from:
o Engage in activity that might permit the director to profit at the
o Be in a conflict of interest:
May profit if disclosure to, and with approval from, the Board
Must abstain from voting on such matters as a director but may vote as a
Doctrine of corporate opportunity: The use of corporate information
for a personal benefit to the determent of the corporation. If director takes
an opportunity belonging to the corporation they have breached their
fiduciary duty. Examples: dealing in land or shares to detriment of
Personal Liability of Directors:
• General Rule: The directors may be held liable for any loss occasioned by the
corporation itself, if the directors commit the corporation the corporation itself, if the
directors commit the corporation to act that is clearly ultra vires (beyond the powers),
regarding the corporation’s object clause or contrary to its bylaws.
• May be held liable for the payment of unpaid employee wages.
Defence of Due Diligence: The obligation on the directors of a corporation to ensure that
effective systems are in place to comply with legislation, and to monitor the systems to ensure
5 • Directors must exercise the care, diligence, and skill that a reasonably prudent person
would do in similar circumstances.
• Standard of Care: Varies depending on the circumstances.
• Outside Director: Not an officer or employee of the corporation.
• Business Judgment Rule: The reluctance of the court to interfere with decisions of the
o Bad business decisions do not necessarily create
o Recent legislation - Sarbanes-Oxley Act (U.S.A.): A
U.S. statue that imposes extensive duties on
corporations to ensure accuracy of financial and
securities information provided to the public.
• Several Rights
o Right to information
o Right to elect directors
o Right to approve actions of directors
o Right to vote
• Done at annual general meetings
o Auditor’s duty is to the shareholders not the directors
• Majority Rule: Shareholder meetings decide matters by a majority
o Where the act objected to is ultra vires
o The act personally affects the rights of minority shareholders
o Corporation fails to comply with procedural rules
o Act constitutes a fraud on minority shareholders
• Minority Shareholders right to Oppression:
o Shareholders may seek relief if directors or corporation act in a way that
oppresses, unfairly prejudices, or unfairly disregards their interests
o A broad standard protecting reasonable expectations of shareholders
• Corporations have perpetual existence
• Inability of a corporation to make a profit
o Corporation is solvent and may wind up its business
o Apply for dissolution
o Corporate winding up proceedings
o Corporation ceases to exist when process completed o Procedure dictated by statute
Purchase & Sale of a Corporation:
• Share Sale: Buyer buys the shares of the corporation
o Take the good with the bad
• Asset Sale: Buyer buys certain assets of the corporation
o Can buy the good and need not purchase the undesired
o Tax implications for each type of sale
o General rule seller likes to sell shares and buyer likes to buy assets
CHECKLIST: OF CONCERNS IN A SHARE PURCHASE
1.) Understanding the corporate structure:
• Review of all corporate documentation and records.
• List and records of corporate securities outstanding.
• Searches of public record registries.
2.) Understanding the corporation’s assets:
• Real and personal property.
• Intellectual and intangible property.
• Associated public searches (where possible) confirming all of above.
3.) Understanding the corporation’s liabilities:
• Employees – current contracts and pension obligations.
• Physical assets – encumbrances (see also asset purchase considerations
• Financial – indebtedness and taxation.
• Regulatory – licences and compliance in good standing.
• Environmental – possible contingent liabilities.
• Product – dangerous goods.
• Litigation – now or pending.
• Associated public or private searches, or private assurances, confirming all
of the above.
CHECKLIST: OF CONCERNS IN AN ASSET PURCHASE
1.) Vendor has a title to the assets.
2.) Reasonable valuation of assets has been made.
3.) Disclosure of any liabilities attached to the assets (debts, liens, mortgages, charges)
has been made.
4.) Vendor authority to sell, notice to any third parties has or will be given (tenancies,
debts or rights to be assigned).
7 5.) Physical condition and location of the assets.
6.) Intangible assets (goodwill, intellectual property) are properly protected and
7.) Government consent is either obtained or unnecessary.
FACTORS RELEVANT TO CHOOSING THE CORPORATE FORM:
Factor Sole Agency Partnership Corporation
Difficulty in Easy, little Agreement Agreement and Significant, can
establishment beyond registration
Cost Low Virtually none Medium High
Maintenance Low Virtually None Medium High
Ability to None beyond Essentially none Joint resources of Highest,
generate capital owner’s capital partners in including share
and credit capital and offering.
Difficulty in Easiest; owner Monitoring Significant Highest
Liability of Near absolute Essentially Shared Little or none
Transfer of Sale of assets Assignment of More complex Easiest, by sale
ownership only, with contract of shares
Term of Maximum term Term of agency Not beyond Unlimited
operation governed by life contract death or
of owner bankruptcy of
Dissolution Easy Termination More complex Most complex,
can be costly, often
Sale of a Business:
• A contractual clause limiting future behavior
• Prima facie void as a restraint of trade
• Allowed if the restriction is reasonable as to:
2. Business restricted
3. Geographical area • I.e. the need of a medical centre within a community.
• Treated differently than the sale of a business
• Serious consequences if someone not able to earn a living
• Not enforceable unless serious injury to an employer can be clearly
• Bargaining position at time contract entered into (employee seldom in a strong
bargaining position) is considered.
Chapter 15: Law of Agency
Principal: A person on whose behalf an agent acts.
Agent: A person appointed to act for another, usually in contract matters.
• Arises by express agreement, conduct, or necessity
• Involves 3 parties: principal, agent, third party
• Legal principles and conditions under which an agent can bind a principal to
• Governed by tort law, contract law, and equity
• Agent is one who is empowered on behalf of another
• Acts of agents bind principals if done within scope of power
• Can act for more than one principal at the same time (insurance agents)
• The agent drops from the agreement when the transaction is completed
transferring rights to the principal.
o Expressed: can be established by express agreement, either written or oral
o Conduct: agency inferred from the actions of the principal
o As a principal it is best to put in writing what the agent is suppose to and limited
9 Express Agreement: An agency relationship established by an oral or written agreement.
• Governed by contract law
o Contractual rules must be followed
Statute of Frauds if the relationship cannot be completed within a year.
Duties set forth in agreement (advantage to a written agreement)
Contract one is between agent and principal
Contract two is between principal and third party (although negotiated by
Duties of the Parties:
• Good Faith:
o Both parties must act in good faith
Agent must act in the best interests of the principal, not themselves
o Principal’s Duties
Pay for services by agent
Indemnify agent for reasonable expenses
• Agent’s Duties:
o Obey lawful instructions of principal
o Keep information confidential
o Inform principal
o Maintain standards required to perform
o Not delegate duties without permission of principal
o Keep accounts when required
o No secret commissions
Agency by conduct or Estoppel: An agency relationship inferred from the actions which
convey impression that one is an agent for another or has conferred authority to act on one’s
• Actual: where expressly given
• Apparent authority: The ability of an agent to bind a principal where the principal has
not notified third parties of the restricted or terminated authority of the agent.
• Ability of an agent to bind a principal where the principal has not notified third parties of
the restrictions or terminated authority of the agent.
Ratification: When principal wishes to take advantage of a contract negotiated by their agent
when their agent did not have the authority to negotiate.
• If done properly binds principal to contract with third party • May ratify if principal was identified in agreement as principal
• Subject matter of contract is something principal is capable of
• Must be made within a reasonable time after agent enters into contract
• Must be for the whole agreement
• If benefits accepted under the contract then the principal has ratified
• Must repudiate a contract made by an agent without authority promptly
or will be bound by the contract
• Silence by principal is not acceptance
• Ratification is as of date contract was made by agent
Third Parties and the Agency Relationship:
• Agent should indicate only acting as agent
• Agent signs on behalf of principal in principal’s name (only principal is liable
under the contract, not the agent)
• If principal wishes not to have identity revealed agent can:
o Enter in agent’s own name; or
o Enter as agent for unnamed principal
Undisclosed Agency: Agent fails to disclose they are acting as an agent = Agent may be liable
• Agent can also enforce contract against third party
Fictitious Agency: Agent contracts on behalf of a fictitious or non-existent principal
• If intention by agent was to deceive will be liable for fraud
(remedy of deceit)
Undisclosed Principal: Agent fails to disclose identity of principal but describes self as agent =
• Agent fails to disclose acting as an agent = Agent and/or principal is liable
• Shall the principal replace the agent in an undisclosed principal; he withholds
any defense the third part has against the agents, i.e. debt.
When no agent or principal is indicated, if the principal should come forward and reveal
their identity the third party may sue for breach of warranty of authority. Though can
only sue either the principal OR the agent BUT not both – though an exception is made
under seal where the agent would be the only one able o enforce the agreement, hence the
only one liable under it.
11 Liability of Principal and Agent to Third Parties in Tort:
• Rule: Principal may be held liable for tort committed by agent if committed in ordinary
course of carrying out agency agreement
o Often based on fraudulent misrepresentation
• If committed outside scope of agent’s employment only agent liable
• Express contract: usually provides for termination
o Usually must give notice
o Fixed or implied
• Task is completed
• Incapacity of principal or agent
• Bankruptcy of principal
• Must inform third parties of termination
CHECKLIST: FOR AGENCY
1.) Does a non-fictitious apparent principal exist?
• If yes, is there any issue of an incapable principal?
2.) If capacity is not an issue, then is there at least one of:
a) Express agreement with agent?
b) Agency by conduct or estoppels?
c) Agency by necessity or operation of law?
3.) Has the fact of agency been disclosed to the third party contractor?
• If yes, and the contract is within the scope of the agent’s apparent authority, the
principal will be bound.
Chapter 21: The Law of Bailment
Bailment: The transfer of a chattel by the owner to another for some purpose, with the chattel to
be later returned or dealt with in accordance with the owner’s instructions.
Bailor: The owner of a chattel who delivers possession of the chattel to another in a bailment.
Bailee: The person who takes possession of a chattel in a bailment. Nature of Bailment:
• Delivery of goods by the bailor
• Possession of the good by bailee for a specific purpose
• Return of the goods to the bailor at a later time, or the disposition of the goods
according to the bailor’s wishes
Sub-bailment: Bailee becomes the sub-bailor, and someone else becomes sub-bailee
• Requires permission of bailor
• Allowed under a common custom or practice of a trade
• Delivery must take place before the bailor-bailee relationship comes into existence.
Delivery can be apparent
• Possession: Requirement of delivery of possession, including constructive possession
o Title retained with bailor (bailee receives possession only)
o Bailee Rights
Right to institute legal proceedings for:
– Interference with property; or
– Wrongful injury to the goods
• Return of Goods: Must return goods or dispose of goods according to bailor’s
• Same goods must be returned
Exception: fungible goods – must return same quantity and same quality i.e. gas.
• Liability for Loss or Damage
o Standard of Care:
Different standards for each of the forms of bailment
Bailee’s liability varies from one type of bailment to another
• General Liability - Bailee liable for:
o Failure to return goods
o Returning goods damaged or destroyed
Exception: reasonable wear and tear
o Onus shifts to bailee to prove standard of care not breached
Reason: Bailee has knowledge of event, not bailor
• Exculpatory Clauses (Exclusion clauses): A clause in a contract that limits or exempts
a party from any liability for damage to the goods
• Bailee’s attempt to limit their liability by inserting exculpatory clauses in their contracts
(often standard form)
13 • Enforceability depends on:
o Careful drafting
o Whether clause brought to the attention of bailor
o Reasonableness (is it a clear abuse of freedom of contract?)
Bailment for reward: Storage of Goods
• Warehouse Storage
o Bailee must take reasonable care of the goods while in their
o Standard is that of a skilled storekeeper
o Protect goods from foreseeable risk
o If special type of storage and hold one out as having such
special facilities standard raised accordingly
o Liability is not absolute, only liable if failure to meet standard
o Bailee liable vicariously for negligence of its employees
o Bailee for reward is not an insurer and not responsible as a
general rule for acts of third parties
Liens: With respect to goods, it is the right to retain the goods until payment is made
• Common law right of bailee for storage to retain the goods until charges are
• Statutory Liens
o Most provinces have legislation that provides for various
o Right to retain and later right to sell the goods
o Legislation sets out procedures for notice and sale
Pledge: The transfer of securities by a debtor to a creditor as security for the payment of debt. In
essences giving the property is a bailment. The creditor as bailee is responsible for the property
which must be returned upon the payment of the debt.
Pawn: Transfer of possession (but not ownership) of chattels by a debtor to a creditor who is