Ten Common Legal Mistakes Businesses Make

10 Common Legal Mistakes Businesses Make and How to Avoid Them Douglas H. Hancock Daigle & Hancock Professional Corporation 51 Village Centre Place Mississauga, ON L4Z 1V9 www.daiglehancock.com January 19, 2011

The Raymond Soroka Breakfast Series

Mistake #1: Unsecured Advances
Shareholder Loan
Shareholder
Obtain Security
(Borrower pledges certain loan money collateral to Creditor, which Creditor can call on if Borrower defaults)
Operating Corporation

Unsecured Advances
Holding Company
Security Loan Money
back

Dividend
Operating Company

Unsecured Advances
Why is an unsecured advance a problem?
BANKRUPTCY!!!!!
Unsecured Creditor = No Preference
Case Law
Re Royal City Chrysler, (1998) CanLII 1337 (ON C.A.)
Holding: Court of Appeals upheld the decision that the conveyance was fraudulent and void as a preference under section 95 of the BIA

Unsecured Advances
How does one protect themselves?
Proper Documents
Loan Agreement
Promissory Note
General Security Agreement
Registration of Documents
PPSA Registration
Pledge

Mistake #2: Failing to Charge Interest
Essential Elements of a Loan
Principal Amount
Interest Rate
Terms of Repayment
Security for Loan

Failing to Charge Interest
Federal Interest Act
“ whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.”
So….

Failing to Charge Interest
Examples:
“2.00 per cent payable monthly”
WRONG
“24.00 per cent payable per annum”
CORRECT
No Agreement = No Chargeable Interest
CORRECT

Mistake #3: Contracting with the Unknown
Consumer Credit Application
Name / Address
Employment History
Sources of Income
Bank References
Credit Cards
Bankruptcy
Signature Lines

Contracting With the Unknown
Credit Evaluation
Factors
Credit worthiness
Size of debt burden ( “safe ratio of debt to capital”)
Loan size
Frequency of borrowing
Length of commitment
Social and community considerations

Contracting with the Unknown
Credit Approval
Develop credit policies that are consistent with the overall goal of business
Factors
Costs
Working Capital
Know the Borrower

Mistake #4: The Danger of Standard Form Contracts
General Provisions
Date
Parties to the contract
Background
Terms
Signature Lines
Provisions to Be Careful Of
Exclusion Clause
Default and Cure Provisions
Exemption (“As-Is”) Clause
Governing Law

The Danger of the Standard Form Contracts
What are the dangers?
There is no true meeting of the minds as required by law
Parties are not treated fairly or equitably
Laws of another jurisdiction apply
Parties attorn to laws of another jurisdiction

The Danger of the Standard Form Contracts
Example of Standard Form Contract – Online Agreements
Browse Wrap Agreements
What is the Danger?
There is no evidence to show that the User agreed to the terms

The Danger of Standard Form Contracts
Case Law
Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299 (Ontario Superior Court)
Holding: Post on website was reasonable notice…Online agreement was binding on the Plaintiff even if they did not press any button to agree
What do we get out of the holding?
For a browse wrap agreement to be binding, there must be reasonable expectation that the User of the site would see the notice (website tells them to look for it or it clearly displayed) and some kind of physical action (download or access the site).

Mistake #5: Absence of Written Agreement
Why a have a written contract?
Enforceability
Clear Understanding

Absence of Written Agreement
When is a written contract required?
Any contract which cannot be fully performed within one year based on its own terms
Narrow interpretation
Examples
A jeweler agrees to deliver one piece of custom designed jewelry to a customer each year for a period of five years.
A jeweler agrees to deliver five pieces of custom designed jewelry to a customer within a period of five years.
Contract is not required to be reduced to writing

Absence of Written Agreement
Real Property
Statute of Frauds
Exception: Leases less than three years
Assignment
Statute of Frauds
“ All grants and assigns of a trust or confidence shall be in writing signed by the party granting or assigning the same, or by his or her last Will or devise, or else are void and of no effect.” R.S.O. 1990, Chapter S.19, Section 11

Mistake #6: Firing Employees
An employee can be fired for just cause or for no cause, as long as the employee is provided notice or pay in lieu of notice

Firing Employees
Just Cause
Dishonesty
Criminal activity
Insubordination/disobedience
Disrupt corporate culture
Drunkenness/drug abuse
Repeated absence/lateness
Incompetence/carelessness
Long-term physical/mental illness
Conflict of interest with employer
Not Just Cause
Personality conflict
Employee files complaint with government
Short term illness, pregnancy, childbirth, parental leave
Attempts to Unionize
Financial problems
Reorganization / restructuring of business
Ontario – refusal to work retail on Sunday

Firing Employees
You’re Fired!
Proving Just Cause
Factors Courts will look for:
Whether an Employee’s misconduct may be proven; and
Whether the nature and degree of the misconduct is sufficient to dismiss the employee without notice?
Did Employee’s misconduct cause a breakdown in the employment relationship; how senior is the employee; did employer give warning before termination
Yes to both  Just Cause
No to either  Employer obligated to give reasonable notice or pay in lieu of notice

Firing Employees
Case Law
Leitner v. Wyeth Canada , (2010) ONSC 579 (CanLII)
Holding: Mr.Leitner’s actions were reckless, not fraudulent and that he had been wrongfully dismissed.
Kontopidis v. Coventry Lane Automobiles, Ltd. , (2004) C.C.E.L. (3d) 131
Holding: Absenteeism and Subordination found to be just cause

Firing Employees
Constructive Dismissal
Supreme Court Definition: “Where an employer unilaterally makes a fundamental or substantial change to an employee’s contract of employment – a change that violates the contract’s terms – the employer is committing a fundamental breach of the contract that results in its termination and entitles the employee to consider himself or herself constructively dismissed.” Farber v. Royal Trust Co. , 1997 1 S.C.R. 846

Firing Employees
Examples of Fundamental Changes
Substantial pay reduction
Reduction in hours
Change in duties / responsibilities
Require employee to relocate to another city (not part of the employment contract)
Employer says either quit or you are fired
Long-term employee put on probation without good reason
Fails to promote employee as promised

Firing Employees
Ontario Human Rights Code, R.S.O. 1990, c.H.19, s.5(1)
“ Every person has a right to equal treatment with respect to employment without discrimination because of race, ancestry, place of origin, color, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offenses, marital status, same-sex partnership status, family status or disability.”

Firing Employees
Human Rights Tribunal Ontario
File application with the HRTO
HRTO will send Respondent a copy of the application
Respondent must use HRTO response form (Form 2) to respond to allegations
HRTO hold a hearing
May require a Case Assessment Direction
Additional information found on www.hrto.ca

Mistake #7: Independent Contractors
What is an Independent Contractor?
Independent Contractor: one who works for employer under a Contract for Services
Not subject to Employment Standards Legislation
Favored by employers because of limited legal rights conferred on the Independent Contractor
Employee: one who works for employer under a Contract of Services

Independent Contractors
Why is the distinction between an IC and an employee important?
Source Deduction
Assessment by Revenue Canada

Factors
Right to set own hours of work including vacation
Uses own tools, equipment and often premises
Cannot be restricted by the employer from providing services to other
Subject to own control over how services are to be performed

Case Law
Global Courier & Messenger Services Ltd. v. Brar , 2006 CanLII 1043 (ON LRB)
Holding: Brar was an employee despite finding:
Brar provided all necessary tools
Brar set own work schedule
Brar responsible for all expenses
Pay was based on commission equal to 60% of the fee charged to customer
Supreme Court said that the question is to be taken from the perspective of the worker.
Performance of his work was under the substantial control by Global and the opportunity for profit was constrained as a result

Mistake #8: Incorporating too Soon
The ability to offset other incomes
Revenue Canada expects new business to operate at a loss for 2 years
Same analysis if existing business is starting a new division

Mistake #9: Non-Competition Agreement
What is a Non-Competition Agreement?
An agreement by the employee not to directly compete with the employer after termination of his employment
Common Terms
Specific time-frame to refrain
Certain geographic area

Non-Competition Agreement
Dangers of Overreaching
Enforceability
Court are reluctant to enforce non-competition agreements
If restrictions are reasonable between parties and in the public, then will be enforced
Supreme Court held that reasonableness is determined, in each case, by “…an overall assessment of the clause, the agreement within which it is found, and all of the surrounding circumstances.”
Three Main Factors:
Time
Activity Prohibited
Territory (geography or other)

Non-Competition Agreement
Case Law
Lyons v. Multari
Holding: Non-Competition Clause is unenforceable
Elsley Test ( Elsley v. J.G. Collins Insurance Agencies Ltd ., (1978) 2 S.C.R. 916)
Whether employer has proprietary interest entitled to protection;
Whether temporal or spatial features of the clause are too broad; and
Whether the covenant is unenforceable as being against competition generally.

Mistake #10: Consulting a Lawyer too Late
Why Hire a Lawyer?
Be proactive rather than reactive
Opportunity to be value added
When to Hire a Lawyer?
From the beginning
How to Hire a Lawyer
Recommendations, Research, Interview

Thank You Comments? Questions?

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Ten Common Legal Mistakes Businesses Make

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