1. 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
When a principal of a corporation lends money to the corporation, the lender should always take security. Shareholder becomes a Creditor of the corporation.
When the corporation files for bankruptcy, the unsecured advance makes turns the Shareholder into an Unsecured Creditor – the claim has no preference Royal City – Facts: Mahon was appointed GM of Royal City, but with the stipulation they lend RC $180,000. They did and took as security a GSA covering RC’s inventory and proceeds. Mahon ranked third in priority (RBC and Chrysler Credit were ahead). The company was losing money from the end of 1989 to 1991. On Aug 6, 1991, RC paid to Mahon $182,243. Trustee brought action to find the payment as fraudulent preference b/c the payment was made within three months of bankruptcy and at the time of payment RC was clearly insolvent. Mahon Argument: A payment made by debtor to a secured creditor cannot be fraudulent under the BIA. Reasoning: a payment by a debtor to a secured creditor is protected and is not to be construed as fraudulent preference where the payment does not exceed the value of the security. The security at the time of the payment to Mahon was worthless.
A promissory note is not the same thing as a Loan Agreement – the Promissory Note is only evidence of the debt. Registering the document is important because of timing – who has priority, and also because if the documents are not registered then the Bankruptcy Trustee may be able to recover any preferential payments made to the lender. Payments made within one year of bankruptcy would be considered a fraudulent preference under the Bankruptcy and Insolvency Act.
Interest rate is the fee charged by the lender for the use of the money borrowed, over the life of the loan.
The first example is incorrect because the terms of the interest rate to be paid is incorrect. The interest rate to be charged must be stated in ANNUAL terms. If the agreement contains the terms in daily, weekly, monthly, quarterly, or semi-annually, then there must be a second statement stating in annual terms. If this condition is not met, then the interest rate to be charged can only be 5%. The last example means that if there is no Agreement, then the Lender cannot charge interest until the Lender sues the Borrower and the Court awards interests.
Credit Worthiness – B’s ability and willingness to pay. The higher the credit rating, the stronger the credit worthiness. Size of Debt Burden – is the B’s earning power greater than the payment schedule Loan Size – large loans are given more weight. Does the Borrower have the capacity to ingest a large sum of money. Frequency of Borrowing – frequent Borrower given more weight Length of Commitment – Lender accepts additional risks as the time length increases, but Lender will also charge a higher interest rate for this risk. Social & Community Considerations – Lender will take on a higher risk for a social good resulting from use of the loan.
Costs – what are the costs involved in granting credit and what will be the impact on the cash flow Working Capital – will the company be able to maintain enough working capital to pay operating expenses while carrying receivables. Know the Borrower – are there any liens, claims, or pending actions.
Standard form contracts are used daily as a means to simplify routine transactions.
Browse Wrap Agreements are also known as the “Term of Use” Agreement. They differ from Click Wrap Agreements because in the Click Wrap Agreement the User is required to click on the “I agree” button before they can proceed. Browse Wrap Agreements do NOT have such a button. Evidence – the only evidence to show User agreed to the terms is the actual act of browsing the website
Kanitz v. Rogers – Facts: K signed agreement with Rogers where a term of the agreement stated that Rogers can amend the agreement any time and any amendment would be posted on the Roger’s website. Roger amended the agreement that all disputes were to be resolved by arbitration to forestall a lawsuit by K. Argument: K brought action under the Class Proceedings Act – they were not given reasonable notice of change. Side Note on Case: The ruling regarding arbitration was overruled by Section 7(2) of the Consumer Protection Act – a consumer cannot be required to resolve disputes by arbitration. Enforceability – The party must post a notice of terms that the User implicitly accepts. The notice must be posted before the User begins to browse.
A contract is enforceable only if it is proven. The problem with oral agreements is that details can be forgotten, therefore the best practice is to have written agreements. A written agreement will provide a clear understanding and function as a safeguard against subsequent misunderstanding.
Narrow Interpretation – if there is any possibility that the contract can be performed within one year, then the contract is not required to be in writing. The key is that it is the possibility that the contract can be performed within one year, not that it is actually performed within one year that determines whether the contract has to be in writing. Example 1 – The terms of the agreement clearly indicate that the agreement cannot be completed within one year. Example 2 – There is the possibility that the jeweler can deliver all five pieces to the customer within one year of the agreement. The jeweler does not have to deliver all five pieces within one year, but the possibility exists which takes the contract out of the statute of frauds.
It is a good idea to consult with a lawyer in employment law prior to firing an employee. Just cause permits an employer to fire an employee on the spot – there is no requirement for notice or pay in lieu of notice.
Dishonesty, which includes theft and embezzlement from the company, and criminal activity of a serious nature are examples of just causes where an employee can be fired for on the first instance. One just cause which employers need to be wary of is firing an employee for drunkenness or drug abuse. Before an employee can be fired for drug abuse or alcohol abuse, according the Human Rights Legislation, an employer must first warn the employee and provide accommodations, such as counseling. The remaining examples of just cause require the employer to first provide a warning to the employee and an opportunity to improve before the employee can be fired.
Unfortunately, Just Cause does not make firing an employee as easy as it seems. One of the most difficult steps in firing an employee is proving just cause. As mentioned before, an employer must first provide a warning to the employee and a reasonable opportunity to improve. If there has been no improvement or change demonstrated after a prolonged period and repeated warnings, then you may fire the employee for just cause. In some circumstances there may a need for the employer to take reasonable disciplinary steps short of termination before terminating an employee for just cause.
Leitner – Facts: L worked for Wyeth Canada, pharmaceutical company, for over 8.5 years with an unblemished record. Random audit found L’s reported expenses contained wrongful submissions and submissions of personal expenses for reimbursement. Reps of Wyeth confronted L and he admitted to disliking completing expense reports and did not do them on a regular basis, would use other receipts on hand when he could not find the receipts and remember times/places expenses incurred. Wyeth dismissed L for just cause. Reasoning: Test for just cause not met. The inconsistencies had been given disproportionate weight when compared to his unblemished services. Wyeth should have spoken to L regarding the seriousness of the actions and future incidents would not be tolerated. Kontopidis – Facts: K was hired in the body shop of Coventry Lane Jaguar dealership. K would be absent from the body shop claiming that the absence was work-related. The employer became concerned over the absences and wrote a letter to K requiring him to provide written notices to the secretary treasury and to advise the general manager prior to leaving the premises. On April 5, there was a meeting where K was informed of the same stuff that was in the letter. On April 11, K left the premises at 11AM and did not return to the premises. He did not inform the GM that he was leaving and did not provide a reason for not returning to work. The next day, K was informed that he was terminated for failure to comply with the directions provided. Reasoning: The court held that an employer is entitled to require full attendance and impose reasonable conditions to ensure full attendance. It is not for the employee or the court to consider the wisdom of the procedures implemented by the employer.
Employer does not directly dismiss employee, but the employer changes the job so completely that the employment contract is effectively at end. The significance of constructive dismissal is that it is the same as if the employer wrongfully dismissed the employee. Therefore, the employee is entitled to the same notice period or pay in lieu of notice.
These examples of fundamental changes may be classified as constructive dismissal. The burden is on the employee to prove constructive dismissal by showing that the employer made a fundamental change and that the fundamental change was made unilaterally.
The employment contract cannot contract out the employment standards found in the Human Rights Code. The Code provides for resolution of a Human Rights violation before the Ontario Human Rights Tribunal. The action must be commenced within six months of the offending actions.
Respondents response – the Respondent has 35 days to complete and return the form to the HRTO. If the parties decide they do not want to participate in mediation, then the dispute will be scheduled for a hearing. Mediation is an option before a hearing is held. Case Assessment Direction: what documents need to be given to the other side and filed with the HRTO prior to the hearing; which witnesses and documents the parties should bring to the hearing; whether issues raised by the parties will be dealt with as preliminary matters, and in which order
Independent contractors have different obligations from employees – they have no general duty to provide an employer with services since they are engaged for specific services.
An employer is required to handle all EI and CPP matters for employees, but the same requirement is not present for Independent Contractors. The problem arises when an IC applies for EI benefits at the end of their employment. An IC will normally describe themselves as an employee and the burden falls on the employer to prove that the individual was hired as an IC, not an employee. The legal assumption is that the individual was hired as an employee. This then leads to the employer being assessed by Revenue Canada for amounts owing under EI and CPP legislations. This can only be challenged in tax court.
There is no conclusive test applied by the courts to determine if an individual is an IC or employee. In 671122 Ontario Ltd v. Sagaz Industries Canada Inc. (2001) S.C.C. 59, the court said that the central question is whether the person who has been engaged to perform the services is performing them as a person in business or on his own account. These are factors to be used in determining the answer to the question. Intention of the parties is not a factor.
Court will usually resolve ambiguities of whether the individual is an IC or an employee in favor of employee. The courts require clear evidence that the individual is an IC to find in favor of independent contractor.
A sole proprietor may generate losses and have other income. The other income can be offset against the losses generate. If the sole proprietor incorporates, then the losses will go to the corporation and the sole proprietor will not be able to offset his other income.
The non-competition agreement, or covenant not to compete, can be a provision in the employment contract or can be a separate agreement. It is normally used to prohibit the employee from making use of proprietary information to lure customers away and damage former employer. The time frame is normally 1 to 2 years and can go up to 5 year.
Context is the key in finding reasonableness of the restrictions imposed in the non-competition agreement.
The Ontario Court of Appeals stated that an employer has an uphill battle in enforcing a non-competition clause in an employment contract. The trial court upheld the non-competition clause and found that the employer did have a proprietary interest in the dentist who referred patients to his specialized oral surgery practice, the restrictive covenant was not overly broad and did not restrict competition generally. The court of appeals also found that the employer had a proprietary interest in their client base; and the restrictive covenant was not overly broad nor did it restrict competition generally. However, the court held the non-competition clause is unenforceable because the employer could have relied on the non-solicitation clause, which is less broad and dangerous. The court applied the Elsley Test
Even if you don’t think you need a lawyer, it’s best to have one from the very beginning because everyone else has one! The advantage of having a lawyer from the beginning is that they guide you through the minefields rather than saving you from an exploding minefield. When you are hiring a lawyer, remember not all lawyers are created equal, so you need to find a lawyer with expertise in the area you are need assistance. Normally, a lawyer with general corporate-commercial experience will be a good one to start with. Get about 2 – 3 recommendations from friends in the same area, then investigate the lawyers to have information about them when you meet with them and interview them before you make your decision.