BUSINESS LAW FINAL EXAM NOTES

SUBJECT 4: Contracts

Definition of Contract: It is important that a contract be enforceable by law. The purpose of a contract would
otherwise be of no use.
• A contract is a voluntary exchange of promises, creating obligations which, if defaulted on, can be
enforced and remedied by the courts
o Primary concern of the courts is to enforce the reasonable expectations of the parties
• CCQ 1378: “A contract is an agreement of wills by which one or several persons obligate themselves to
one or several other persons to perform a prestation.”
o CCQ 1373: “Prestation” = “doing or not doing something”

Conditions of a Valid Contract

Common Law
• Consensus (offer and acceptance) (ch.5)
• Legality
• Formalities (if required)
• Consideration(ch.6)
Civil Law (CCQ 1385)
• Consents (offer and acceptance) (1386-1387) same as consensus in common law
• Willingness to be bound (1388)
• Capacity
• (Cause) (reason and legality) (1410-1411)
• (Object) (legality of prestation) (1413 and 1373 par. 2)
• Formalities (if required) (1414-1415)

 Consensus: to establish, to determine whether there is a valid offer to enter into a contract and a valid
acceptance of that offer.
 1 addition criteria in common law; consideration:
 Intention: willingness to be bound. If a guy in a sports bar says “If that player scores a home run I’m
giving you $1 mln” and it happens, then there is an offer, there is acceptance…but it lack willingness
to be bound (also known as “mere puff”).
o The requirement of an intention to contract has been important in interpreting the legal effect of
advertisments. Ex: Carlil v. The Carbolic Smoke Ball Company. Pepsi Points for a jet.
Seriousness of intention for the Pepsi Point litigation was assessed based upon the objective
standard of what a reasonable person would believe.
 Even if a valid offer as been made and there is consideration, there is no contract in law unless both
parties intended to create a legally enforceable agreement. Courts presume in favour of an intention to
contract where parties have signed a commercial document.
 The seriousness of intention is also important (case with Pepsi points and the Harrier jet); would a
reasonable person believe that the other party had such intentions?
 Capacity: if a person does not have capacity, a contract may not be binding. Factors affecting capacity:
age, a person of unsound mind, incapacitated through alcohol or drugs (treat the case the same way as
if it were a minor). Problem; additional burden of proof to show that at the time he entered into a
contract he was incapacitated and that the other party was aware of his condition. A minor may enter
into a contract for supply of necessaries (essential goods and services). He may “back-out” of any
contract for non necessaries (cannot do this if he is the seller of the goods). A minor who has benefited
from a contract for non-necessaries will not be able to recover money already paid, though he will be
able to repudiate his remaining liability. A person of unsound mind or incapacitated (drugs or alcohol), is
protected by law the same way a minor is.
 Legality: a court will not enforce an illegal contract (ex: contracts with surrogate mothers)
  Formalities (for most contracts, formalities are not required): which means that a verbal contract; an e-
mail; can still be a valid contract. The importance of formalities is in the situation where there would be
a dispute over a verbal/no written contract (prove terms of contracts is going to be difficult)
 Consideration is the price for which the promise of the other is bought. An accepted offer will not be
recognized as an enforceable contract unless it has consideration. In essence, the accepted offer must
form a bargain – where each party pays a price or gives value for the promise obtained from the other
party.
o In a unilateral contract, the price paid for the offeror’s promise is the act done by the offeree.
o In a bilateral contract, the price paid for each party’s promise is the promise of the other.
o The price is called consideration.
 Gratuitous promises: (donation of ppty like a house; always better to sell house for $1 because in
common law it is always possible to challenge a “donation”).
o Gratuitous promise: a promise made in the absence of a bargain. The law deos nothing to
rpevent performance of a gratuitous promise.
 If the content of a contract is illegal, it cannot be enforced; ex max interest that can be charged is 60%,
if contract specifies more than this it is not legal thus void. An agreement can be made legal by statute;
arbitration agreements

Offer: a description of a promise one party is willing to make, subject to the agreement of the other party.
• CCQ 1388 - 1392
• A tentative promise which includes the terms
o CCQ 1388: “all the essential elements”
• Contract is created when the offer is accepted
o CCQ 1387
• Can have an expiry date or not

Termination of an Offer
An offer may end by (for civil law, see CCQ 1392):
• Revocation
o Common law: can be revoked at any time before acceptance
o Civil law = (1390 par. 2, 1391) it is not possible to revoke an offer prior to the expiry of the term.
If no term is attached, the offer can be revoked at any time (like in common law)
• Lapse
o Expiry date or reasonable time (if no specified term)
o a reasonable time is determined by observing industry standards and other factors. It depends
of the circumstances.
o an offer has lapsed:
 when the offeree fails to accept within a time spcified in the offer
 when the offeree fails to accept within a reasonable time, if the offer has not specified
any time limit
 when either of the parties dies or becomes insane prior to acceptance
• Rejection
Counter-offer: Until an offer by one side is accepted without alteration, modification, or condition by the
other, there is no contract. The making of a counter offer is a rejection of the earlier offer and brings it to
an end. If the offeror in turn rejects the counter offer, the original offer does not revive.
• Death or bankruptcy of the offeror
If any of these occurs, the offer cannot be accepted (i.e. since the offer has “lapsed”, any “acceptance”
is in fact a “new offer”)

Option: a contract to keep an offer open. This can happen in the following way:
- the offer itself may specify that it is irrevocable
- a subsequent contract called an option may be made to keep the offer open (the option contract asks
the offeror to keep the offer open for a specified time period; and to not make contracts with other
parties; offeree must pay a sum of money)
Acceptance of an Offer
• CCQ 1393-1394
o Must be unconditional
• Otherwise = counter offer
• Acceptance must be communicated to the offeror
o May be by words or actions
o Silence is not consent without a pre-existing agreement
 BUT: there can be exceptions

Silence:
- If for 10 years you placed an order on Monday and received the delivery by Wednesday, and then one
day the supplier decides not to ship based on the argument that no explicit contract was signed…it
would be difficult for the supplier to prove that no contract was in effect.
- A contract can be much like a tennis game where an offeree makes an offer, which is then countered by
the other party (at this point there is no contract because there is no agreement). The other party then
becomes the offeree by making a counter offer; if the first party accepts we have a contract.
- Silence: can be a sufficient mode of acceptance only if the parties have habitually used this method to
communicate acceptance in the past. If an offeror says that if the offeree does not reply to his offer, in
10 days for example, there will be no contract; because an offeror cannot insist on silence as a mode of
acceptance.
- 1394. Silence does not imply acceptance of an offer, subject only to the will of the parties, the law or
special circumstances, such as usage or a prior business relationship
- 1393. Acceptance which does not correspond substantially to the offer or which is received by the
offeror after the offer has lapsed does not constitute acceptance. It may, however, constitute a new
offer.

Bilateral Contracts
• Acceptance is by a promise
o E.g. Promise of work to be done in exchange for the promise of payment
• BOTH parties have legal obligations
• CCQ 1380, para. 1
• Postal rule: acceptance by mail is communicated when it is dropped in the mail (not when received).
For any other modes of acceptance, the offeror is not bound until the acceptance reaches him (must
also reach him before the offer lapses). Postal rule applies unless stated in contract otherwise.
• Revocation by post is effective only when the notice is received by offeree.
• 1380. A contract is synallagmatic, or bilateral, when the parties obligate themselves reciprocally, each
to the other, so that the obligation of one party is correlative to the obligation of the other. When one
party obligates himself to the other without any obligation on the part of the latter, the contract is
unilateral.

Unilateral Contracts
• Acceptance is made by performance of a specified act
o Reward situations
o Offer cannot be revoked after good faith performance has begun
• Here: good faith applies in common law
• Only one party (the offeror) has legal obligations
• CCQ 1380, para. 2
• In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward
contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is
obliged to pay the reward to B if B finds the dog. In this example, the finding of the dog is a condition
precedent to A's obligation to pay.

Defects of Consents
Civil Law:
• CCQ 1399. “Consent may be given only in a free and enlightened manner. It may be vitiated by error,
fear or lesion.”
Common Law:
• Mistake
• Misrepresentation
• Duress
• Unconscionability
• Undue influence

Error / Mistake – Civil Law

• CCQ 1400. “Error vitiates consent of the parties or of one of them where it relates to the nature of the
contract, the object of the prestation or anything that was essential in determining that consent. An
inexcusable error does not constitute a defect of consent.”
• Broad doctrine of error: CCQ 1401. “Error on the part of one party induced by fraud committed by the
other party or with his knowledge vitiates consent whenever, but for that error, the party would not have
contracted, or would have contracted on different terms. Fraud may result from silence or
concealment.”
• Includes innocent misrepresentation

Error / Mistake – Common Law (Ch.8)

• A mistake, in law, is not an error in judgment but an error with respect to either:
o The terms of the contract
 Possible to recover
 Reasonable person standard: was there clearly a mistake on the terms?
o Assumptions regarding the facts leading to the formation of the contract
 Cannot recover
• Exception: Frustration

Error in terms of contract: example you buy whiskey and its supposed to be aged whiskey but in fact you
realise its not; this is a case of an error in the terms of contract (contract may be set aside because of this)
Only certain kinds of legal mistakes will make a contract void or voidable and thereby qualify for equitable
relief. The party asking to set a contract aside must be able to return whatever benefit they received.
If court finds that there has been a mistake, the contract may be declared either void or voidable.

Error / Mistake in Performance is NOT a defect of consent

E.g. overpayment
• Remedy:
o Where there has been unjust enrichment, the recipient must repay the money
• E.g. CCQ 1493

Misrepresentation – Common Law

• A false statement of fact which induces the other party to enter into contract
• ***Silence is not misrepresentation (in common law)
o Contrarily to the case in Civil law: see 1401 CCQ on fraud [included in the broad doctrine of
error]
• A statement of opinion is not misrepresentation (unless expert opinion); a false assertion is a
misrepresentation only if it is made as a statement of fact [ex: this is the best car in the world (opinion)
vs. this car can do 1000 km per liter (statement of fact)].
• The misrepresentation must be material
• Reliance is necessary
• In situations where there is misrepresentation or mistake, courts may decide to release parties from
contractual obligations and try to return them to their pre-contract position.
 • If a misrepresentation is made fraudulently or negligently, it can result to a tort. If a person makes an
innocent misrepresentation, no tort is commited.
• In contract, any material misrepresentation (innocent, negligent or fraudulent) give rise to the right to
rescind (set aside) a contract. If in addition the maker of the misrepresentation acted negligently or
fraudulently, the court may grant damages to the wrongdoer.
• When a party learns that it was the victim of a misrepresentation, it must act promptly, if too much time
is taken, the injured party may not rescind the contract.

Types of Misrepresentation
• Innocent
o Person making statement honestly believed it to be true
• Fraudulent
o An innocent misrepresentation becomes fraudulent if not corrected when discovered
• Negligent
o Person making statement was careless in not ascertaining the truth

Fear / Duress (p.197)

Civil Law:
• Fear can vitiate consent
• CCQ 1402-1404
Common Law:
• Duress: actual or threatened violence or imprisonment as a means of coercing a party to enter into a
contract. Effect is similar to that of undue influence: contract is voidable at the option of the victim
o Threat of violence renders a contract voidable

Lesion / Unconscionability
LESION, contracts. In the civil law this term is used to signify the injury suffered, in consequence of inequality
of situation, by one who does not receive a full equivalent for what he gives in a commutative contract.
Civil Law:
• Lesion (CCQ 1405-1406)
• Does not vitiate consent
o Some exceptions
 Minors
 Consumer Protection Act
Common Law:
• Unconscionability:
o Extreme inequality of bargaining power renders a contract voidable

Undue Influence – Common Law

Undue influence: the domination of one party over the mind of another to such a degree as to deprive the
weaker party of the will to make an independent decision.
Undue inlfuence often arises when the parties stand in a special relationship (doctor, lawyer, parent/child). A
party must prove the court that domination was probable (easier when a special relationship existed). Once
this is done, the burden of proof shifts in the hand of the dominant party to prove that undue influence was not
exerted by him (this is very hard)
To counter risk of undue influence, creditors often suggest to their clients to get legal advice so they are aware
of the risks.
Contract will be voidable at the option of the victim

Presumed in:
• Family relationships
• Relationships where one party possesses special skill or knowledge
• Presumption may be rebutted
o Independent legal advice will rebut the presumption
The Interpretation of Express Terms
Express terms: Provision in a contract that is clearly, directly, and unmistakably communicated in written or
spoken words. See also implied term.
• Most contractual disputes are ones of interpretation
• The parties have different interpretations of ambiguous terms (or, sometimes, even unambiguous
terms)
• Frigaliment Importing Co. v. B.N.S. International Sales Corp.,190 F.Supp. 116 (S.D.N.Y. 1960)
o “The issue is, what is chicken?” Plaintiff says 'chicken' means a young chicken, suitable for
broiling and frying. Defendant says 'chicken' means any bird of that genus that meets contract
specifications on weight and quality, including what it calls 'stewing chicken' and plaintiff
pejoratively terms 'fowl'. Dictionaries give both meanings, as well as some others not relevant
here.”
• Rules of interpretation require either (2 approaches):
o The strict or plain meaning approach (or “literal”)
o The liberal approach (or “intention”)
o Rather than choosing between them, a court will apply both approaches and choose the best
meaning for the circumstances. In other words, the court must decide, in the circumstances of
each case, how far it should look beyond the words used to explain their meanings. Court might
also ask the opinion of expert witness in the field to interpret the meaning of a word

Rules of interpretation – CCQ

• 1425. The common intention of the parties rather than adherence to the literal meaning of the words
shall be sought in interpreting a contract.
• 1426. In interpreting a contract, the nature of the contract, the circumstances in which it was formed,
the interpretation which has already been given to it by the parties or which it may have received, and
usage, are all taken into account. [All these factors shall be looked at collectively when interpreting a
contract]
• 1427. Each clause of a contract is interpreted in light of the others so that each is given the meaning
derived from the contract as a whole.
• 1428. A clause is given a meaning that gives it some effect rather than one that gives it no effect.
• 1429. Words susceptible of two meanings shall be given the meaning that best conforms to the
subject matter of the contract.
• 1430. A clause intended to eliminate doubt as to the application of the contract to a specific situation
does not restrict the scope of a contract otherwise expressed in general terms.
• 1431. The clauses of a contract cover only what it appears that the parties intended to include, however
general the terms used.
• 1432. In case of doubt, a contract is interpreted in favour of the person who contracted the obligation
and against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or
the consumer. The party that has the obligations has the benefit of the doubt.

Factors for interpreting a clause in a contract

How to determine intention of the parties?
• Words of the clause
• Other clauses in the contract
• Nature of contract
• Surrounding circumstances at the time of signing the contract
• Industry practice (“usage”) / Commercial efficacy
• Subsequent conduct of the parties
• Rules of interpretation

Some specific rules of interpretation

• Specific overrides general (for the specific situation only)
 • Contract does not speak for nothing (a clause is given a meaning that gives it some effect rather than
one that gives no effect)
• Words susceptible of two meanings is given a meaning that best conforms to the subject matter of
contract

Implied Terms as a Method of Interpretation

• The court may imply a necessary term which was omitted by the parties
• Sources of implied terms:
o Statute
o Custom of the trade (past business practice)
o Reasonable expectations of the parties (at the time of formation of the contract)
o Civil law (and some common law contracts): the court will make it an implied term that the
parties act in good faith
So as noted before, one method of interpreting meanings is by considering the most reasonable interpretation
of express terms. Another approach is to consider whether the intention of the parties can be achieved only by
admitting the existence of an implied term (a term not expressly included by the parties in their agreement).

• 1434. A contract validly formed binds the parties who have entered into it not only as to what they have
expressed in it but also as to what is incident to it according to its nature and in conformity with usage,
equity or law.

Conflicting Evidence
• Civil law: “Commencement of proof”: 2863
o You cannot contradict the terms of an agreement in civil law unless you have commencement of
proof, which may only be in writing (e.g. emails). Verbal testimony does not work to claim that
agreement contradicts the contract’s terms.
• Common law: “Parol evidence rule”
o Prevents a party to a written contract from presenting extrinsic evidence that discloses an
ambiguity and clarifies it or adds o the written terms of the contract that appears to be whole.
o The rule applies to parol evidence, as well as other extrinsic evidence (such as written
correspondence that does not form a separate contract) regarding a contract.
o If a contract is in writing and final to at least one term (integrated), parol or extrinsic evidence
will generally be excluded.
 E.g. Carl agrees in writing to sell Betty a car for $1,000, but later, Betty argues that Carl
earlier told her that she would only need to pay Carl $800. The parol evidence rule would
generally prevent Betty from testifying to this alleged conversation because the
testimony ($800) would directly contradict the written contract's terms ($1,000).
o However, there are number of exceptions to this general rule, including for partially integrated
contracts, agreements with separate consideration, to resolve ambiguities, or to establish
contract defenses.
o BUT: testimonies are possible with respect to “context”, especially when a clause is ambiguous
as per its text
• In the case of external evidence, a judge must rule on the basis of credibility
• Burden of proof might eventually play a role

Good Faith
• CCQ 1375. The parties shall conduct themselves in good faith both at the time the obligation is created
and at the time it is performed or extinguished.
• CCQ 6. Every person is bound to exercise his civil rights in good faith.
• CCQ 7. No right may be exercised with the intent of injuring another or in an excessive and
unreasonable manner which is contrary to the requirements of good faith.
o See Houle v. National Bank of Canada
Consumer or Adhesion Contracts
• 1436. In a consumer contract or a contract of adhesion, a clause which is illegible or
incomprehensible to a reasonable person is null if the consumer or the adhering party suffers injury
therefrom, unless the other party proves that an adequate explanation of the nature and scope of the
clause was given to the consumer or adhering party.
• 1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising
from it may be reduced.
o An abusive clause is a clause which is excessively and unreasonably detrimental to the
consumer or the adhering party and is therefore not in good faith; in particular, a clause which
so departs from the fundamental obligations arising from the rules normally governing the
contract that it changes the nature of the contract is an abusive clause.

How a Breach Occurs

• Breach may occur by:
o Express repudiation: happens when one of the contracting parties advises the other that it does
not intend to perform as it promised. The promisee can sue for whatever damages it sustains.
Before substituting a new party to proceed with performance, it is prudent for the promisee to
inform the repudiating party that it is treating the contract as immediately terminated and is
reserving its rights to sue for damages for breach.
o By acts that make performance impossible: a wilful or negligent act by the promisor that
destroys its ability to fulfil its contractual promises amounts to breach of contract – this does not
include an act that is an involuntary response to forces beyond its control. (Ex: promising to sell
car to A and then selling it to B who offered a better price; A can sue)
o By failure to perform
• CCQ 1594, 1597

Remedies – Common Law

• Damages: A loss resulting from a breach must be within the foreseeable limits of what the parties would
have expected as a likely consequence of a failure to perform (compensation for damages will be
based on this)
o Expectation damages: = expected gross profit of the contract – injury’s party’s costs of
performing
o Consequential damages: secondary losses incurred by the non-breaching party that were
foreseeable at the time of contracting (seller is liable for any loss incurred in the stage of resale
due to its own breach of contract)
o General damages: non-monetary harm arising from the breach
o Reliance damages: alternative to expectation damages, place the injured party into the position
it would have been in if the contract had been properly performed, an injured party may claim
reliance damages, which compensate the injured party for wasted time, effort and expenses
reasonably made to prepare for performance.
• Equitable remedies: special non-monetary remedies given only when damages alone will not
adequately compensate for a loss
o Specific performance: is an order requiring a defendant to do a specified act, most often to
complete a transaction.
Injunction is a court order restraining a party from acting in a particular manner; in relation to
contract, it prohibits a party from committing a breach. For the remedy to be available, the
courts require the contract to contain a negative covenant (a promise not to do something) – the
covenant need not be stated expressly as a prohibition but may simply be a logical
consequence of an express promise. Ex: an express promise by a tenant to use leased
premises for office space would likely be construed to contain an implied promise not to use
them for a nightclub.
 Injunction will be the “procedural” mean
o Rescission: setting aside or rescinding a contract in order to retore the parties as nearly as
possible to their pre-contract positions. If it is not possible to return to near pre-contract position,
 te court will not order rescission. (ex: people elect rescission whenever they decide to return
defective goods to the store instead of suing for repair or replacement)
o Quantum meruit: such claims arise when valuable benefit is conferred at the request of a
promisee. Definition: the fair amount a person deserves to be paid for benefit conferred). Such
circumstances are common in construction contracts when breach occurs after commencement
of the work but prior to completion (ask court to assess FMV of the work already done and
receive compensation on a quantum meruit basis).
• Plaintiff’s demand and judge’s discretion

Remedies – Civil Law

Resolution = as if contract had not existed
Resiliation = terminated as of today
Performance by equivalence = damages; this is the preferred method in Quebec
• CCQ 1590
o Specific performance:
 CCQ 1601
 By way of injunction
o Resolution/resiliation:
 CCQ 1604
o Performance by equivalence (“damages”):
 CCQ 1607

The Purpose of an Award of Damages

Similar to restitutio in integrum = put back the person in the same position they were in had the fault no
occurred.
If there would have been no breach means that contract would have been completed and performed –
damages will included all profits that were expected from that contract and will not be realized because of the
breach by other party.
 Compensation objective, not punishment.
• To put victim in economic position as if contract had been completed
• Compensation not punishment
o History: breach of contract used to be a crime
• Civil law: “performance by equivalence”

Amount of damages
• CCQ 1607, 1611, 1613
• Damage must flow naturally from the breach (causation)
o Unusual losses are not compensated
• Only losses which could be anticipated at time of contract are compensated
o “Foreseen or foreseeable”
Rule of 1613 is one particularity of contractual matters (unlike extra-contractual matters) – debtor is liable only
for damages that were foreseen/foreseeable at the time obligation was contracted.
1607. The creditor is entitled to damages for bodily, moral or material injury which is an immediate and
direct consequence of the debtor's default.
1611. The damages due to the creditor compensate for the amount of the loss he has sustained and
the profit of which he has been deprived.
Future injury which is certain and able to be assessed is taken into account in awarding damages.
1613. In contractual matters, the debtor is liable only for damages that were foreseen or foreseeable at
the time the obligation was contracted, where the failure to perform the obligation does not proceed
from intentional or gross fault on his part; even then, the damages include only what is an immediate
and direct consequence of the nonperformance.

Mitigation of Damages
• CCQ 1474
 • Plaintiff must keep losses as low as possible
• Recovery only for losses resulting from the breach that could not be avoided by acting reasonably

SUBJECT 5: Agency, Employment and Lease Contracts

The Nature of Agency

• Agent acts to bring principal (Principal: the person on whose behalf the agent acts) and third party into
contract
• Dependent agent acts for single principal
• Independent agents carry on an independent business and act for a number of principals

Creation of Agency Relationship

• Agency may notably be created by:
o Express agreement
o Ratification: situation where the principal and agent relationship does not exist at the beginning,
but the agent enters into an agreement with a 3rd party (negotiations), and this agreement is
being ratified by the principal. Ratification is a principal's approval of an act of its agent where
the agent lacked authority to legally bind the principal
o Necessity: situation where a person (aged/disabilities) has a tutor appointed to enter into
contracts on their behalf; tutor acts as agent for the principal.

Duties of an Agent to the Principal

• Duty to comply with contract i.e. follow instructions of agency agreement
• Duty of care – act with competence/skill (be diligent in keeping her principal informed about all
important developments affecting their relationship)
• Duty of personal performance – the implied term is that the agent will personally perform the obligations
under the agency agreement – if the agent has the intention to delegate some of their responsibilities,
they have to provide for it in the agency agreement (this is due to the high degree of confidence
required in such relationships)
• Duty of good faith/fiduciary duty – requires an agent be loyal, act in the best interest of the principal,
and keep the principal fully informed. Agent cannot place themselves into position of conflict of interest
(i.e. be buyer and seller at the same time) – cannot learn of opportunity while acting as agent to
principal, not mention to principal and do the transaction for yourself (accounting for funds) – no secret
commissions allowed (ex: negotiate for agreement and negotiate something favorable for the other
party because you convinced the principal who you represent in order to get some commission on the
side)
o Fiduciary duty includes
 Avoiding conflicts of interest
 Accounting for funds
 No secret commissions

Duties of the Principal to the Agent

• Duty to reimburse the agent for reasonable expenses
• Duty to remunerate the agent
Authority of the Agent (Determined by agency agreement)
• Actual authority
o Express or implied
• Apparent authority:
o Contract is valid and enforceable, even when agent had no actual authority to enter into it – if
she had the apparent authority to do so (3rd party believed he had the authority). The authority
that a 3rd party is entitled to assume that the agent possesses (unless 3rd party knows agent
doesn’t have authority, he can claim there is apparent authority).
o If there is apparent authority, then the agreement with the principal remains binding (principal
cannot say they are not bind by contract because the agent did not have some expressed
authority) – principal could sue the agent for going beyond their authority (as long as it was
apparent authority) – check with industry practice – would a reasonable 3rd person have thought
that the agent had this authority?
o Holding out: 3rd party interprets behavior as reasonable interpretation of the agent having
authority (behavior may be by words or conduct, ex: principal honored similar contracts made in
the past) ex: agent had business card with principal’s number… so they are deemed to have
apparent authority
Ratification
If there is ratification by the principle, then we don’t care anymore if agent had authority or not. The ratification
basically ratifies what was done by the agent (after the fact) and nobody can any longer say that there was a
breach (because whatever conduct has occurred has been ratified). – ratification must be for the entire
contract (i.e. all the clauses)
Cannot ratify a contract made for him if at the time the contract was made, he would not have been able to
enter into the contract himself. Principal cannot ratify when the rights of an outsider are affected. Cannot ratify
if at the time the agent made the contract, the agent failed to name the intended principal
• Subsequent adoption by the principal of a contract
• Ratification must be of the entire contract
• May only ratify a contract which the principal could have made at the time

Rights and Liabilities of Principal and Agent

Potential liability on the contract includes:
• The principal alone is liable on the contract
o When there is actual or apparent authority, only principal will be liable on the main agreement –
3rd party thinks that the agent is acting on behalf of principal; then the only recourse of the 3rd
party will be against the principal and only the principal is bound by the agreement.
• The agent alone is liable on the contract
o If agent was not presenting himself as an agent but rather acts as if he was the real contracting
party, and the 3rd party thinks he is negotiating with the party himself and not an agent acting on
behalf of him, then the agent will be bound.
• Either the principal or agent or both are liable
o Where the agent did not specify his status, but was in fact acting on behalf of an undisclosed
principal (3rd party finds out during litigation or finds out about existence of principal before
getting a judgement)
o An undisclosed principal may enforce contracts made on his behalf: principal must show that
contract was made with his authority (if agent has no authority, undisclosed principal cannot
ratify).
o If agent was acting within her apparent authority, 3rd party may sue the principal as well as the
agent for the tot of deceit.
• No contract
o If the “agent” acts like if he is an agent but he has NO authority (neither actual nor apparent),
there is no contract, no binding agreement if a reasonable person in the position of the 3rd party
should have known that this person did not have authority to act on behalf of the company.
There can still be recourse because there is fault being committed by the “deemed” agent.
 o Person purporting to be an agent but without any authority may be sued for breach of warranty
of authority(by 3rd party)
• If agent is guilty of fraudulent misrepresentation in making contract, even though principal did not
authorize it, 3rd party may rescind the contract, just as if the principal had made the misrepresentation
himself.
• Principal is liable for torts of agents acting within actual and apparent authority
o = “Vicarious liability”

Terminating an Agency Relationship

• Upon the expiry of the time specified or the completion of the particular project for which the agency
was created
• Upon notice by the agent or principal
• Upon the death or insanity of either principal or agent, or the bankruptcy of the principal
• Upon frustration of the contract (event that makes performance of the agency agreement impossible.
Ex: hire an agent to sell house and your house burns down)

Employment and Labour Law: Developments

- In common law: traditionally based on common law of master and servant (the contractual relationship
between an employer and an employee)
- Supplemented now by
o Statutes that have been passed to regulate employment relationships
o The emergence of trade unions and collective agreements

Contracts: in order to be valid, a person entering into a contract must have capacity; in the case of an
employee-employer relation, it would entail the employee not having authority.
- Indoor management rule: refers to a situation where an employee acts as if he has authority towards 3rd
party and enters into agreements on behalf of the employer. This agreement will be binding to the
employer in the course of business for a corporation.

Employment law  non-unionized environment

- each employee/individual has an individual contract with employer – what governs the rights/obligations
of the parties towards each other, employee can act as employer’s agent
- Agreement can be document/not documented (for smaller organizations)
- Important distinction: there are a lot of rules of public order – generally referred to as the “minimum
labor standards”  minimum wage
o Agreement will not be enforceable if public order is not followed, even by the consent of the
parties
o Exception: independent contractor (this is not employee)
- As an employee, worker may have action for wrongful dismissal (by contrast, an agent under indefinite
agreement may have no recourse against principal that terminates the agreement without notice)

Employer’s Liability towards Third Parties

• Contract (vicarious liability)
o Employer retains liability for contract entered by its employees in the course of their duties
• Tort
o Employer is vicariously liable for torts committed in the course of their duties (Ex: an employee
gets mad, during his duty, pushes a customer who falls and injures himself. Is the unauthorized
and wrongful act of the employee connected with the authorized act as to be a mode of doing
it….or is an independent act)

Termination of Employment
- With Notice
o No notice required if employee is under fixed term contract.
o Minimum notice period ranges between 2-8 weeks, depending on years of service
 o Employees (QC) in addition to a notice, if one believes he is not terminated for cause and that
you are wrongfully dismissed, you can ask to be re-integrated.
o Pay in lieu of notice: give an amount of money instead of pre-notice (8 weeks of salary instead
of 8 weeks of notice). In a human resource perspective, this is better because employees
knowing that they are being terminated may be less motivated, transfer information to
competitor.
- Dismissal for Good and Sufficient cause
o It is the employer’s burden to show that there’s valid cause for termination
o Disobedience is broad enough to include situations where the employee does not directly
disobey but acts in a manner inconsistent with the usual loyalty expected of that kind of
employee.
o Notice is not required for dismissal with cause
o Conduct that creates cause includes:
• Misconduct
• Disobedience
• Incompetence (difficult to justify the more an employee has been employed)
• Permanent illness
- Wrongful Dismissal
o If an employee quits, employee is not entitled to compensation. If employer purposely makes
employee life miserable by assigning shitty jobs, in this case, if employee decides to quit, he
would be entitled for constructive dismissal (employer acted in such a way that he made you
quit). Employee injured by breach of contract is expected to act reasonably in order to mitigate
his losses  find another job
o Action arises where notice was insufficient or cause not established
o Damages determined by calculating reasonable notice (return damaged party to position it
would have been in if the contract had been completed)
o Damages are increased by bad faith dismissal (use hard ball tactics, humiliation)
o Employee is entitled to be “reinstated” (a form of specific performance)
o If reinstated is not possible, employee is required to mitigate her loss

Labor Law  unionized environment

- Collective Bargaining (unionized environment)
o One single agreement that governs relationship between all the employees and the employer
o An employer cannot negotiate individually with an employee member of a union
• The process of negotiating a contract between an employer and a bargaining agent for its employees
(the union) is very regulated.
o Employer may voluntarily recognize union
o Or union may apply for certification
o Each bargaining unit negotiates separately, union bargains for the employees instead of them
doing it individually and directly with the employer
 Usually cannot do anything while the bargaining agreement is in place, renegotiation
only opens when it expires.
Legislative regulation
- Unionized environment can have strikes or lockouts. These are restricted rights to interest dispotes,
only after a genuine attempt to reach agreement.
o Conciliation process required to bringing parties together and forming a resolution to avoid
strike/lockout.
o Picketing should be peachful, cannot interfere with business of employer
o There cannot be strikes before the expiration of a collective bargaining
o Scab, a strikebreaker, a person who works despite strike action or against the will of other
employees (cannot hire replacement workers during a strike) – a replacement worker.
 Forbidden in quebec.
 - In the case of the Journal de Montreal lockout, which lasted more than 2 years, free-lance journalists
were hired to write for the newspaper. The law states that the employer cannot hire replacement
workers to work in the premises. JDM paid journalists which worked from their own private offices.
- Also see s. 96 LSA for liability of successor employer…the case where a S/H would create a new entity,
transfer all assets to new entity (leaving original company an empty shell) and offer some striking
workers to come work for him (the employees don’t have a bargaining agreement with this new entity)
• Certification not invalidated by sale of undertaking
o Labour Code (Quebec) s.45
o Also see s. 96 LSA for liability of successor employer

Implications for the Individual Employee

• Employee cannot bargain individually with employer
• Rand formula requires payment of union dues even without union membership
o If one does not want to pay union dues because he does not want to be associated with the
union must still pay his dues (according to rand) because he is benefiting from the bargaining of
the union so he should pay.

Leases
• In common law: distinction between real estate leases and chattel leases
o Chattel = personal property as opposed to “real” property (i.e. real estate); in civil law = movable
assets (ex. of “chattel”: equipment, motor vehicles, etc.) (not land)
• In civil law: distinction between “leasing” (CCQ 1842-1850) and “lease” (CCQ 1851-2000; including
special rules for the leases of dwellings)
o “Leasing” in civil law is usually referred as “finance leases” in common law

The Nature of a Lease

- 2 types of chattel leases:
In an operating lease, since there is no intention to transfer ownership, the term tends to be relatively short.
Long term leases in which payments add up to the value of the property are more likely to be purchase
leases. Ownership is intended to change hands at the end of the lease term.
Finance lease: the supplier of the goods sells them to the financer, who in turn leases them to the lessee. The
financer is technically the owner of the goods, even though he never had possession of the goods.
In common law, finance lease must be registered to the PPSA in order to be valid (same regulations as
mortgage)

Common Terms in Leases

Most chattel leases will contain the following terms:
• Duration
• Rent: payments of rent, usually payable in advance. (in lease-to-own, rent is computed with reference
to the normal selling price of the asset, with an additional interest element; in operating lease rentals
takes more account of the probable depreciation of the asset over the period of the lease.
• Insurance and other costs: in short-term operating leases, the lessor normally insures the leased asset
and bears the cost of maintenance and repairs. In longer leases, and especially in purchase leases, the
lessee is usually required to covenant to keep the asset insured, to maintain it properly, and to pay cost
of maintenance and repairs.
o Responsibility of the parties
• Early termination and minimum payment: for new assets, the decrease in its value from depreciation is
often greater than the amount of rent payable in the early part of the lease term. Thus lessor will
usually impose a minimum rental payment to offset this loss in value in the situation where there is
early termination (penalty).
• For purchase or finance leases of chattels:
o Purchase option (bargain or not): FMV vs LTB (lease to buy): in FMV lease, the purchase option
corresponds to an estimate of the value of the asset at the end of the lease term. In LTB leases,
the price is nominal (ex: $1). Difference will be reflected in rental payments.
Implied Terms: Warranty of Quiet Enjoyment
• Lessee has the right to enjoy possession and use of the leased property without interference from
lessor
• An assurance against the lessor’s defective legal title
• Covenant that will not allow interference with enjoyment
• No physical interference
• In civil law: CCQ 1851, 1854

Warranty of fitness: the lessor impliedly warrants that leased equipment is reasonably fit for the purpose for
which it was leased.
Lessee is under a standard of care to take care of the equipment leased to him as is prudent and usual in the
industry for those who own the equipment

Implied Terms: Warranty of fitness for purpose

A landlord may be liable to repair structural defects that develop, particularly if failure to repair amounts to an
indirect eviction of the tenant and consequently a breach of the covenant for quiet enjoyment (leaky roof). In
the absence of an agreement on who pays taxes, it will be the landlord`s duty by default (costs will be included
in rent)
• Lessor must repair any structural defects
• Lessor also responsible for maintenance of common areas in large buildings
• Tenant is not liable for repairs unless
o An express covenant
o Tenant causes excessive wear
o Is responsible for waste (damages to the premises that reduces its value
• In civil law: CCQ 1854, 1863, 1864-1869
• In commercial leases (as opposed to residential/consumer leases): unless otherwise specified
Rights of the Parties
• Lessor
o Right to whole of rent even if item is returned early
• Lessee
o Damages if wrongfully dispossessed
o Damages for losses because of defect
o Finance leases (“leasing” in CCQ) usually exclude implied warranties by lessor
o Other rights provided for in the lease (e.g. exclusivity in commercial centers, etc.)
Lessor: right to sue for rent that is due and unpaid, and the right to retake possession of the leased
property at the end of the lease. Can also sue if there is a breach by the lessee of her duty to take
proper care of the leased property (action for damages)
If leased premise is destroyed, in the absence of specific terms in the contract, the tenant is still laible
for the rent (he purchased a leasehold interest consisting of a certain geographically defined area, and
must pay for it). In some circumstance, the doctrine of frustration may apply (Frustration in English
law is an English contract law doctrine, which acts as a device to set aside contracts where an
unforeseen event either renders contractual obligations impossible, or radically changes the party's
principal purpose for entering into the contract.)
Landlord can obtain injunction. If the tenant Is using the premises in a manner that would breach a
covenant (if an injuction is granted, it means the landlord could also re-enter the property and evict the
tenant).
Assignment and subletting
- Subletting: the original lease still in place, not impacted. Original lessee has same obligation towards
lessor. If lessee fails to pay, lessor has recourse against original lessee.
- Assignment: no creation of new level of contractual relationship. The same agreement that will be
assigned to an assignee (original lessee will be the assignor). Original lease continues to be in place
with same terms – but with different party who now has a direct obligation to the lessor.
o Common law: although new contractual relationship is created, the assignor is never released
and is still liable towards the lessor. He will be out of the relationship until a default by assignee
 takes place, assignor will then have recourse against the assignee, but will never be completely
released from the situation.
o Civil law: general rule is that when reassignment occurs, the original lessee/assignor no longer
has any obligations under the lease, he is completely out of the picture.
• Lessee may assign lease
o Common law: remains responsible for performance, unless otherwise specified
o Civil law: does not remain responsible, unless otherwise specified
• Normally a lease will require the lessor’s permission for assignments (clause)
o Distinction in Quebec between commercial and residential leases
• Such permission not to be unreasonably withheld
• Subleases transfer part of the term of the lease
• Civil law: CCQ 1870-1876

Important distinciton civil law vs common law

Civil law, orginal lesse, the lessor, no longer has
A landlord cannot arbitrarily decide not to consent to an assignment (unfarily) that would not be harmful
to her. Cannot refuse that to a tenant. (this is usually implied by statutes, if not, must be included in the
contract of lease).
Assignment vs. Subletting:
The third-party assignee becomes the "tenant" under the lease, taking over all of the leased premises,
substituting for the old tenant. The new tenant pays the rent required under the lease directly to the
landlord and is treated as the tenant under the lease for all purposes.
The catch is that the assignor tenant, unless released from liability by the landlord, remains liable for
the obligations under the lease if the new tenant defaults. The old tenant can be sued by the landlord
for back rent and other obligations imposed by the lease if the new tenant fails to pay or perform as
required by the lease.
A sublease is a new lease agreement between the tenant as sublessor and a third party as sublessee
for all or a portion of the leased premises. The original lease between the tenant and the landlord
remains in place, unaffected by the sublease. This means that the tenant remains liable for monthly
rent under the original lease, while collecting rent from the subtenant under the sublease, which may be
more, less or the same as the rent due under the main lease.
In all circumstances, the tenant as the party in exclusive possession of the property, bears any
responsibility that arises from injuries caused to a person in the leased premises.

Leasebacks
Ex: company obtains short-term loan to construct a building. When building is complete, the business sells it to
the finance company and pays off its bank loan. The finance company then leases the building back to the
business. The business acts as owner of the property paying for all repairs maintenance and insurance.
Usually for companies financially healthy

• A method of financing (i.e. only for finance leases)

• Business buys property, sells to financial institution and receives a long-term lease
• The property, plus any improvements, reverts to the financial institution at the end of the lease
• Alternatively, and usually, the lessee may have option to purchase at the end of the lease

Residential Leases / Leases of dwellings

• Legislation protects residential tenants
• Landlords:
o Are restricted in demanding security deposits (max equivalent of 1 month rent)
o Must maintain premises in reasonable repair
o No right of distress: the right of the landlord to seize assets of the tenant found on the premises
and sell them to realize arrears of rent (for commercial distress works)
o Must mitigate losses
o Eviction is difficult (even for non payment of rent)
 o Must respect rent controls
o Special tribunals to deal with disputes
 Landlord cannot increase the rent unless express provision has been made until the end of the term
 If landlord claims for damages because tenant terminated the agreement, he must do wtv reasonable to
mitigate the damages
 Right of re-entry (landlord): a landlord`s remedy of evicting the tenant for failure to pay rent or breach
of another major covenant (must follow procedures specified by law before doing so)
 Landlord has priority over other creditors in situations of bankruptcy of tenant for up to 3 months of rent.
 Tenant could also obtain an injunction if landlord breaches covenant of quiet enjoyment; covenant of
not allowing a competitor of the tenant to be in same building. Tenant may terminate lease if breach of
quiet enjoyment has made premises unfit for tenant`s norma use
 In commercial lease, breach by landlord of a covenant does not release tenant from his liability to pay
rent. For residential lease, breach frees the other party from her obligations.
 Doctrine of frustration applies for residential leases

SUBJECT 6: Creditors’ Rights Guarantee agreements/Secured transactions/ Hypothecs

Some Methods of Securing Credit

• Guarantee agreements: suretyship under civil code
o Particularity = guarantor undertakes to perform obligations that are not his personal obligations.
You guarantee to perform obligations of someone else.
• Security on the debtor’s assets (mortgages, hypothecs)
• Leases (financing leases)
• Conditional Sales: do a sales which is conditional on payments by instalments being made in the
future. The sale is agreed to but the transfer of title to the buyer is delayed until the buyer completes
the scheduled instalment payments. In the meantime, the buyer has possession. 2 main security
functions: gives the secured party (vendor) a right to take the goods if the debtor defaults and it gives
the secured party priority in the goods over the interest of 3rd parties, especially other creditors.
• Consignments

Guarantee/Suretyship Agreements
• The promise to perform the obligation of another if that person defaults
o Typically, shareholder (guarantor) and the corporation have agreement with bank – guarantee
agreement will exist between bank (creditor) and holder. Corporation is obligated to pay its
obligation, the guarantor only steps in if there is a default by the main/principal debtor
(corporation). Without default, guarantor has no active role.
• Characteristic of guarantee agreement:
o Has to be expressed, no presumption of one.
o Always in reference to the main agreement/debt – it cannot provide for additional obligations of
the guarantor or more onerous conditions of the guarantor. Guarantor’s only there if default
happens.
o Obligation won’t be triggered unless default happens.
o May generally be solidary (civil) – “joint and several” in common. It means that advantage for
creditor that once there is default, he has two debtors, because main debtor and guarantor are
solidarily liable – creditor can go after either or both.
 When it’s not solidary, it means the creditor must first go after the principal debtor,
exercise all of its recourses against him, and only once all of these recourses have been
 exercised (to the extent that there is still a shortfall), the bank may then go after
guarantor.
 In practice, guarantee agreements are solidary. However, banks are not in the business
of going after people’s personal assets – they generally don’t start their realization by
going after the guarantor, even though by law they can. Because:
• Reputational risk
• May lose business
• Guarantor is often an important player in the corporation, often has best
knowledge about the business – one of the reasons why banks have
shareholders sign guarantee agreement is to make sure that they have
incentives aligned with those of bank – by having personal guarantee, it creates
the incentive (or personal assets are at stake). Guarantor knows best to sell
inventory and get cash to repay bank, but if they go to liquidate assets to repay,
market value will drop. Also collecting receivables is a challenge for the bank –
clients will find excuses to avoid paying. If the guarantor goes after them, he
already knows the job/clients. Don’t want receivables to be sold to a collection
company at huge discounts. This ensures that bank maximizes on its realization.

Types of Guarantees
• Limited guarantees: a guarantor will guarantee a purchaser for only a single purchase agreement. This
would be complicated in the case of a line of credit where a guarantor would need to be found every
time one would make a new purchase
o Limited to a specific transaction
• Continuing guarantees
o Covers a series of transactions (ex: guarantee company x transaction with supplier y up to
$5000)
o Contract will determine extent of liability (amount or period of time guarantor will guarantee the
debtor)

Breach and Discharge of a Guarantee

• Liability of guarantor ends if creditor breaches terms of contract and breach materially affects risk of
debtor/guarantor
• Liability ends if contract between creditor and debtor is varied without guarantor’s consent (Ex: loan
agreement to pay prime + 2% of interest…later next year interest changes to prime + 6%, guarantor
will not be liable because the terms have been changed without his consent.)
• Liability is reduced if creditor impairs value of security given by principal debtor

Rights of Guarantor on Default

• Guarantor has same defences as principal debtor
o If contract is void, guarantee will also be nullified
• Subrogation: pay the bank, the bank is then out of the picture. The guarantor then gets the rights of the
creditor towards the debtor. A guarantor who pays off the creditor becomes subrogated to the rights of
the creditor against the debtor and the debtor’s assets. She may also sue the debtor for the amount
she has paid the creditor and for any expenses incurred because of the debtor’s default. A guarantor
can choose to become subrogated as soon as the debt falls due (need not to wait for creditor to make
demand).
o After having paid creditor, guarantor may claim against principal debtor

“Secured Debt”: The Meaning of Security

• Gives rights directly over the assets as opposed to the rights to go after person.
o If asset changes hands/sold, still have rights to the asset itself.
• Security is given by a borrower to the lender to ensure loan repayment
• Collateral security gives lender right to take possession of and sell specified assets of the debtor to
satisfy the debt
 • The security is a “real right” over the debtor’s asset
o Contrast with “personal right” Real rights are often described as absolute rights and as such can
be enforced against anyone. Personal rights on the other hand, can only be enforced against
the other party to your contract.
Hypothec
2 categories of hypothec: on movable ppty, and immovable ppty (immobilier)
• S. 2660 CCQ
o A hypothec is a real right on a movable or immovable property made liable for the performance
of an obligation. It confers on the creditor the right to follow the property into whosever hands it
may be, to take possession of it or to take it in payment, or to sell it or cause it to be sold and, in
that case, to have a preference upon the proceeds of the sale ranking as determined in this
Code
• CCQ 2693-2695
o An immovable hypothec is, on pain of absolute nullity, granted by notarial act en minute
[in Quebec only]
o is valid only so far as the constituting act specifically designates the hypothecated property
• Common law equivalent: real estate mortgage
o No notary in common law

Chattel Mortgages/Movable Hypothec

Works well for certain assets (ex: cars which can be traced be serial #, assets that can be specifically
identified), but with inventory, it is more complicated
Chattel mortgage: mortgage of personal property. Ex: sale of office building with furniture + equipment. Vendor
may take real estate mortgage and a chattel mortgage. This will avoid problem of whether certain equipment is
a fixture (part of land, building  real estate mortgage includes fixtures) or not since we have a mortgage on
everything essentially
A floating charge adds those remaining corporate assets not already mortgaged or pledged to the security.
• May include after-acquired (“future”) property; i.e. “floating charge”(property acquired by the debtor after
the debt has been incurred). Or ex: goods in production and growing crops.

• CCQ 2696-2714
• May be created with (rare) or without delivery of the movable good hypothecated

Mortgage/Hypothec –Rights of Creditor

Disadvantage of taking in payment: the bank now has more assets on its balance sheet (ex: having Canadian
tire inventory on the B/S). Taking in payment means extinguishing the debt. If you have a guarantor, you can
no longer go after him because you have taken in payment.
A mortgage must be registered in the appropriate registry or land titles system. The priority of the mortgage
interest is determined by order of registration. Thus, if a mortgagee (a lender who accepts an interest in land
as security for a loan) fails to register its mortgage, a subsequent mortgagee will have priority over him.
• The remedies of the mortgagee (secured creditor) upon default by the mortgagor (debtor) are:
o Taking in possession of the charged property to administer it
o Taking in payment
o Sale by the creditor
o Sale under judicial authority
 Most common recourse commercially

Mortgage/Hypothec – Rights of debtor upon default

• Upon default, the mortgagor (debtor) may:
o repay the mortgage loan together with interest and all expenses and obtain a re-conveyance of
the land
• The debtor is entitled to a prior notice: This time period is to allow the debtor to think about a solution to
repay his debt. Restructure his debt
o In Quebec: 20 days for movable hypothec and 60 days for immovable hypothec
Registration of Security Interests - functioning
• Common law provinces:
o PPSA: Personal Property Security Act
• Quebec:
o RPMRR (Quebec): Registry of personal movable and real rights (for “movables”)
o For “immovables”: Land registry + special requirements (notarized acts)
• The effective protection of security interests depends on a system that warns 3rd parties to the
existence of security interests in personal property
o “Publicizes” the creditors’ rights
• PPSA/RDPRM creates computerized registration system that achieves this purpose
• Formality to make the security “enforceable”/”opposable”
Registration of Security Interests – goals
• Secured creditors: registered under the PPSA/RDPRM
• Warns prospective creditors that asset will not be available to satisfy debts
o Also warns prospective purchasers of the secured assets (also: protection under the Sale of
Goods Act)
• Establishes ranking of creditors
• Unsecured existing creditors remain unprotected

Security for Bank Loans

A business might use a self-liquidating loan to purchase extra inventory in anticipation of the holiday shopping
season. The revenue generated from selling that inventory would be used to repay the loan.
This is an additional guarantee on top of what is provided by legislation. Also provides priority on that security.
• Section 427 of the Bank Act empowers Canadian banks to make self-liquidating loans to the following
categories of borrowers:
o Wholesale purchasers, retail purchasers, shippers or dealers of agricultural products, forest,
quarry and mine, sea, lakes and rivers, wares and merchandise
o Manufacturers and aquaculturalists
o Farmers and fishermen
• The security taken varies from product to product

Conditional Sale / Instalment Sale

Ex: Brault & Martineau “buy now pay in 70 payments”. Buyer gets ownership at the end of the series of
instalments. If buyer goes bankrupt, it cannot be used as collateral toward the creditors of this debtor (buyer).
Must also be registered to ppsa rdpmr to be valid/ enforceable
To exercise his creditor’s right (get back his assets): Must Send 20 day prior notice
Creditor will then be able to have recourses similar to that available for hypothecs
• A conditional sale (or instalment sale in Quebec) is one in which the transfer of title to the buyer is
conditional upon the buyer’s completion of a series of payments
• Common law: Although the buyer has possession of the goods, the seller retains title to the goods as
security for full payment
• Upon full payment, title passes to the buyer
• Civil law: the seller retains property until full payment
• Like a security/hypothec:
o must be registered to be valid against third parties
o If full payment is not made, the seller may take a recourse against the goods

Consignment
• An arrangement under which items are delivered by a consignor to a consignee to be resold or used
and paid for by the consignee
• Consignor keeps property rights until the (re)sale transaction occur
SUBJECT 7: Canadian Insolvency Law

Introduction
• There are between 125,000 and 160,000 insolvency proceedings in Canada each year
• The vast majority, in number, of insolvency proceedings relate to individuals (more than 95%)
• Proposals and arrangements make up 15-20% of all insolvency proceedings of businesses

Bankruptcy and Insolvency Act [It’s a federal legislation (section 91 of the act]
Objectives:
• Establishes a uniform practice in bankruptcy proceedings across Canada
• Attempts to provide for an equitable distribution of the debtor’s assets among various creditors
– Equitable distribution: not necessarily equal distribution (important nuance – not all creditors will
be treated the same; there are special categories that have a special status)
• Provides a framework for preserving and reorganizing the debtor’s business by working out an
arrangement with creditors
– Legislator favours restructuring of an insolvent entity that is viable, rather than a restructuration.
Allows for the company to not be liquidate (maintain employment, business relationships, in the
best interest of the community in which it operates but not to be done at any cost but the system
is there to facilitate restructuring
• Provides for the release of the honest but unfortunate debtor

Application of the Act

• The Act applies to bankrupts and insolvent persons
• Definitions: s. 2 BIA
• A bankrupt is a person
– who has made an assignment or
– against whom a bankruptcy order has been made
• An insolvent person is one
– whose liabilities to creditors total at least $1,000 and
– who is either unable to meet his obligations as they become due or has debts which exceed the
realizable value of assets
– Liquidity test: not being able to pay liabilities as they come (not able to pay monthly expenses)
– Balance sheet test: the realizable value of assets is less than total liabilities
– To be insolvent does not mean you’re bankrupt. May be insolvent on paper – but there may still
be expectation of future profit. As long as you have ways to finance your ongoing obligations,
then you will not have to go through insolvency proceedings.

Insolvency: The Alternatives

• Restructuring: Proposal/Arrangement
– A restructuring of the debtor’s operations
– The debtor keeps possession of its assets during the restructuring process
• Bankruptcy
– A liquidation of the debtor’s assets
– The debtor’s assets vest in the trustee, who takes possession of them for the benefit of the
creditors

Restructuring: 2 “options”
• (BIA)Notice of intention to file a proposal and proposal under the Bankruptcy and Insolvency Act
o Available to any debtor
• (CCAA) Arrangement under the Companies’ Creditors Arrangement Act (known as the CCAA or C-36)
o Available only to companies having debts of more than $5 million
Summary overview of Restructuring Process
- Step 1 – Day 0/1
o BIA – file the NOI with licensed trustee to the bankruptcy
  Admit that you’re insolvent
 Nothing else besides the NOI – list of creditors, list of assets showing the insolvent
status
 Process will start at the end of the NOI
o CCAA – Begins with a court order (initial order). The court renders the initial order under CCAA.
 Debtor files a motion with the court: I am insolvent, here is why. I am a viable company
and this is why I need to restructure
 When a company is here, rarely refused (restructuring > bankruptcy) and courts will give
a chance
o The first step, under the BIA or CCAA is valid for 30 day. During this time, initial order/NOI
comes with an automatic STAY of proceedings.
 All proceedings against the debtor are frozen
 All that are owed money are stay
 Cannot take proceedings/cannot seize assets/cannot exercise hypothecary/cannot get
lease assets back/cannot eject tenant from premises
 Done to allow restructuring to come to an arrangement
o This period may be extended upon request of the company at the court.
 BIA extension maximum 45 days
 CCAA has no maximum/generally courts will be reluctant to granting days for more than
60/90 days
 Extension request must be made at the court with sufficient reasons and proof to
support your need of extension
- Step 2 – Proposal (BIA)/plan of arrangement (CCAA)
o Proposal/plan of arrangement to be filed with the creditors, for them to compromise their debt
(pre-filing debt outstanding at day 0). Few restriction on what it should include, really up to the
company to find a way that’s appealing to the creditors and have them vote in favour for them to
accept to compromise their debt.
o Basket proposal. To offer to all creditors a basket. (i.e. 1M of debt, offer to pay $100k that will
serve to pay all the pre-filing creditors and to receive $0.1 on the dollar, then ask them to vote
on proposal)
o Creditors meeting will be held. Vote takes place.
 For proposal/arrangement to be passed, must be voted by 50% in number of the
creditors which must represent > 2/3 of the outstanding debt in value.
 One way to achieve this is to propose that first portion of debt be paid in full (i.e. first
$500 owed, meaning that creditors that should be repaid $500 and less, will vote in
favor)  works to get 50% in number, but not 2/3 in value without the support of your
biggest creditor
o After the creditors vote, if creditors vote NOT in favor of restructuring
 Deemed bankruptcy under BIA
 Under CCAA, if creditors go against the arrangement, no deemed bankruptcy – no stay
in proceedings, meaning creditors may take proceedings but the company is not
bankrupted just yet.
o If the creditors vote in favor, Court will then review and approve proposal
o For BIA, restructuring must be done within the first 6 months. More complex restructuring will
take longer.
Stay of Proceedings
• Applies automatically in bankruptcies, proposals and arrangements
• Preserves the debtor’s business by preventing any action to collect money, seize assets, terminate
contracts, etc.
• Day 0 is important, it segregates between what is pre filing and post filing. Pre filing need not be paid.
Post filing must be paid by debtor
• Post filing, creditors are not obliged to grant credit to the insolvent company
• If company does not meet post-filing obligations, entitled to go to court and lift the stay, court may put
end to the filing and proceed with bankruptcy
Operation of business during restructuring process
• Proposal
– operations are conducted by the debtor, under the supervision of the trustee
– proposal affects “pre-filing” claims only
– DIP financing may be obtained to ensure liquidity during the restructuring process
• a special form of financing provided for companies in financial distress or under
bankruptcy process. This debt is considered senior to all other debt, equity, and any
other securities issued by a company.
– If proposal is not accepted, “post-filing” claims are unsecured in bankruptcy
• Arrangement
– operations are conducted by the debtor, under the supervision of the monitor
– arrangement affects “pre-filing” claims only
– DIP financing may be obtained to ensure liquidity during the restructuring process
• a special form of financing provided for companies in financial distress or under
bankruptcy process. This debt is considered senior to all other debt, equity, and any
other securities issued by a company.
– if arrangement is not accepted, “post-filing” claims are unsecured
Obligation to provide services
• An arrangement or proposal might require a supplier to continue providing services to the debtor
• Even if contract stated termination if solvent, it may not be invoked after the company has initiated the
insolvency procedure
• The supplier is entitled to require immediate payment for those services, also not forced by law to grant
credit
Lease Payments
• Lease payments owed by the client prior to the beginning of the reorganization process are “frozen”
(i.e. because of the STAY of proceedings)
• Lease payments coming due after the process begins must be paid by the client or trustee
Effects on Contracts: Disclaimer/Resiliation of Contracts
• Basic Rule: A debtor in a proposal or arrangement can usually keep the contracts it wishes to perform
and disclaim/resiliate the other ones
• The co-contractant will have the right to file a “Restructuring Claim” to be treated just like all the pre-
filing complaints
• Co-contractant can oppose the disclaimer/resiliation if it causes financial hardship, but it is a steep hill
• Usual boilerplate clauses that bankruptcy constitutes a default under the contract are unenforceable
under proposals or arrangements
• Contract clauses may not be used to modify the scheme of distribution in bankruptcy
Effects on Contracts: Assignment of Contracts
• In a restructuring process, debtor may ask an order forcing the assignment of its contracts to third
parties
• This is especially useful in situations where debtor sells its assets as part of the restructuring process
• For the assignment to be allowed by the Court, all the monetary defaults must be remedied (including
“pre-filing” claims)
• Trustee may also ask for the assignment of the bankrupt’s contracts

Bankruptcy: main characteristics

• Bankruptcy provides for:
– the orderly liquidation of the debtor’s assets by the trustee
– distribution of the proceeds to the creditors
• Bankruptcy may be triggered three ways:
– voluntarily (assignment by the debtor)
• “Walk in” bankruptcy
– forced (petition by a creditor)
• “Being pushed in” bankruptcy
– deemed (failed proposal)
• “Fall in” bankruptcy
Summary overview of bankruptcy process
• Debtor files assignment / Creditor files petition and obtains Court order Forced
• Automatic stay starts from the day of court order/assignment
– All seizures that have been started will stop – not a system of first-come first-serve
– All creditors treated equitably
– Trustee to the bankruptcy will handle the realization of assets and redistribution of proceeds
• Creditors are advised of the bankruptcy within 5 days and the 1st meeting of creditors is scheduled
(within 21 days of the bankruptcy)
– To be entitled to vote and participate, must file a proof of claim.
– The trustee chosen for the first 21 day period has to be confirmed by the creditors at the first
meeting (sometimes creditors reassign the trustee chosen by debtor at the meeting)
– Inspectors are appointed: will give instructions/directions to the trustee who performs day to day
activities, similar to the management with the BOD of a company
• Eligible creditors recover their property
• Trustee takes possession of assets and liquidates them: Once the trustee takes possession of a
bankrupt’s property, the trustee’s duty is to apply the property in payments of the lawful claims against
the bankrupt estate (some ppty is exempt from seizure: RRSP). Now the trustee must satisfy the
creditor’s claims by selling the property and distributing the proceeds among creditors. Trustee must
take notice of PRIORITY OF CLAIMS.
• In the case of an individual: bankrupt is eventually discharged
• Trustee is discharged (there is no overall maximum time limit)
• Usually the entire process takes no more than 6 months – 3 years as the norm but may be longer

Operation of business in bankruptcy

• Business can be operated by the Trustee
– Rare in practice
– In situations where it is advantageous to continue the business in an interim period (WIP
inventory), you need only a certain portion of work left to continue the operation, trustee may
continue the WIP and convert it into finished goods before liquidating it.
• Trustee is personally liable for debts incurred during his administration. He has possession of the
assets during the process.

Scheme of Distribution
1. Crown Claims
• The government has first priority for unpaid deductions at source
o “Deemed Trust”
• Other government claims (e.g. sales taxes, income taxes, etc.) are (theoretically) unsecured
o Special case of sales taxes

2. WEPP Claims
• Unpaid salaries and vacations, up to a maximum of $2,000 per employee, benefit from a
« superpriority » on the debtor’s current assets
• The WEPP is a government program which indemnifies employees in case of bankruptcy, and is then
subrogated in the employees’ claims
• The WEPP may pay up to around $3,200 per employee but its “superpriority” is limited to a maximum of
$2,000 per employee – the balance is an unsecured claim (and potentially a claim against the
company’s directors)
• Any amount not received by a secured creditor “because of the WEPP” becomes a preferred claim
Does not include severance. $2000 per employee over a period of 6 months
Excess amount will be a regular unsecured claim

3. Pension Claims
• If the bankrupt is an employer who participates in a prescribed pension plan for the benefit of its
employees, some of the sums owed in relation to the pension plan benefit from a “superpriority”,
namely:
 o all amounts deducted from the employees’ remuneration for payment to the pension fund;
o an amount equal to the “normal cost” and the amount required to be paid under pension laws for
“defined contributions” plan.
• The “superpriority” is not to secure the pension actuarial deficit
• The “superpriority” is over all the assets of the bankrupt

4. Secured Claims
• Secured claims include hypothecs (in Quebec) and liens, long-term leases (only in common law),
conditional or instalment sale contracts, rights of retention and real rights created by law (e.g. municipal
and school board taxes in Quebec)
• Security must be found valid by the trustee
• Security secures specific obligations
• Property subject to security is withdrawn from the debtor’s assets
• Property subject to security must be valued
5. Preferred Claims
• Are paid before ordinary unsecured claims
• Include administrative expenses, levy payable to superintendent, employee claims for salary and
vacations not paid by the superpriority on the current assets, sums not received by the secured
creditors “because of” the superpriority for WEPP claims and pension claims
• Includes fees of the trustee

6. Unsecured Claims
• Trade debt
• Contractual damage claims
• Secured loans and reserve of property not duly registered
• After WEPP claims, Crown claims, pension claims (as the case may be), secured claims and preferred
claims, there is rarely much left for unsecured creditors
7. Shareholders
• Shareholders have “equity claims”
– Equity claims include indemnity claims of auditors and underwriters
• Equity claims cannot be paid unless all other claims are paid in full
• In practice, shareholders receive nothing
• Shareholders have no interest in a restructuring process, and a restructuring alternative may be to
reorganize the share capital of the debtor
8. Set-Off of Claims
• Arises when both parties owe each other money
• Set-off is essentially a cancelling out of debt
• Debts must be mutual, liquid and exigible
– mutual: parties owe the money to each other
– liquid: the amounts can be determined
– exigible: the amounts are due and payable (usually not an issue in bankruptcy)
– (note that rules are different for equitable set-off)

Preferential treatment of creditors

• A trustee, or a creditor if the trustee refuses to do so (under certain conditions), may challenge dealings
with the debtor :
– within a period of three-months prior to the filing of bankruptcy or the proposal
– the period is one year for a debtor’s dealings with related parties
– for the dealings at arm’s length, the dealing must have been made “with a view to give a
preference” to one creditor over another creditor”
– for dealings not at arm’s length, the dealing must “have had the effect of giving a preference to
one creditor over another creditor”
Possible to “attack” certain transactions done in the past 3 months by the debtor
If trustee identifies payments made by “preference” by debtor to related parties or to other suppliers, trustee
may do a recourse. Debtor is not permitted to unfairly favour certain creditors over others.
Preferences: the defences
• The payment to the creditor was made in the ordinary course of business
• The transaction was entered into to permit the debtor to remain in business
• The creditor refused to provide goods or services vital to the debtor’s operations unless its account was
paid

Transactions at undervalue (“TUVs”)

• A trustee (or a creditor if the trustee refuses to do so and under certain conditions) may ask that a
“transfer at undervalue” be declared void as against the trustee, or that the party having benefited from
the transfer pay to the estate the difference between the value of the consideration received by the
debtor and the value of the consideration given by the debtor
• For TUVs at arm’s length, the transfer must have occurred in the period of one year before the
bankruptcy and the debtor must have been insolvent (or rendered insolvent) and must have had the
intent to defraud other creditors
Transfer of assets bellow FMV or even free
Trustee can recover transfer of assets at undervalue for up to 5 years for related parties and 1 year for
unrelated parties.
• For TUVs with parties not at arm’s length, within the year preceding the bankruptcy there is no
additional criteria to establish
• For TUVs with parties at arm’s length within the five (5) years preceding the bankruptcy (except the last
one), the debtor must have been insolvent (or rendered insolvent) or must have had the intent to
defraud other creditors

Claims for Property

• Leased Property
o In bankruptcy, a lessor may retake possession of leased property if the trustee consents or if
there is a termination clause in case of bankruptcy in the lease
o Leases of more than one year must be registered
o A prior notice must be sent to the trustee
o Under a proposal or arrangement, the property may not be reclaimed if they pay “going forward”
o For real estate leases, the trustee will be liable for occupation rent while he is on the premises
• Unpaid Goods
o A seller may recover goods received by the debtor in the thirty days prior to the notice
 They must be in the possession of the purchaser, identifiable and in the same state as
when they were delivered
o Notice must be sent within 15 days following the bankruptcy
o Under a proposal or arrangement, the property may not be reclaimed

Interim Receivers / Receivers

• Are licensed trustees and considered officers of the court
• Are appointed on application by secured creditors or the debtor:
– Interim Receivers are appointed for an “interim” period (e.g. before the expiry of a notice to
exercise security or before a bankruptcy order)
• Protect the debtor’s estate and the interests of the creditors

Interim Receivers / Receivers

• Powers are determined by the court order appointing them:
– Interim receivers have more limited powers (mainly conservatory)
– Receivers have broader powers (e.g. may be authorized to conduct a sales process and to sell
the debtor’s assets and obtain “vesting orders”)
• Receivers must notify all known creditors of their appointment and must report on the receivership
process

Operation of business where there is an Interim Receiver or a Receiver

• Interim Receiver or Receiver is appointed by court order
• Order will indicate its rights and obligations for debts incurred by, or services rendered to, the debtor
SUBJECT 8: Securities

Canadian Securities Legislation

• Remember: Consitution Act 1867 (s. 91, 92)
o Each law subject falls under federal or provincial jurisdiction
• Securities Law = PROVINCIAL jurisdiction
o Confirmed by Supreme Court decision rendered in December 2011 (Reference Re: Securities
Act)
o Thus: 13 securities commissions in Canada; 13 different securities law statutes

Solutions for more uniformity and to facilitate dealings with regulators

- “Passport” system:
o As a reporting entity in canada, you only need to deal with one “lead” regulator (where your
head office is located). This simplifies the IPO process for a public company so that it doesn’t
have to worry about complying with the 13 security regulators.
- “National Instruments” on many topics
– Included in provincial securities regulations
– Classified by numbers (easy to follow)
– Also: “National Policies”
– All regulators meet and propose national instruments on selected topics (Ex: national
instrument for disclosure on SEDAR)

Protection of Investors
• Securities legislation
– To prevent and punish fraudulent practices
– To ensure proper functioning of the capital markets
• Enforced through
– Licensing requirements for brokers, insurers
– Requirements of prospectuses for issuance of securities
• Broad definition of “securities”

Disclosure Obligations
• Disclosure:
 Documents: SEDAR
 Insider info: SEDI
• All insiders need to report their transactions on SEDI (ex: CEO with stock option). The
rule of thumb is that when a shareholder owns more than 10% of a company he should
be considered an insider.
 Disclosure is required during take-over attempts
• IPOs
• Take-Over Bids
• “On-going” disclosure once company is public
 National Instrument 51-102 since 2003
 2 types of disclosure obligations:
• PERIODIC REPORTING: financial statements, MD&A, annual information form
• “EVENT REPORTING”

Periodic Reporting
• Financial Statements
– Annual: audited, comparative, approved by BOD, accompanied by MD&A
• Must include statement of comprehensive income, statement of changes in equity and
statement of cash flows, statement of financial position and notes [plus: opening IFRS
statement of financial position]
 – Interim: unaudited, comparative, approved by BOD, accompanied by MD&A
• Must include must include statement of comprehensive income, statement of changes in
equity and statement of cash flows (three-month period and year-to-date), statement of
financial position (end of quarter and end of preceding year) and notes
• MD&A: a narrative explanation, through the eyes of management, of how your company performed
during the period covered by the F/S, and of your company’s financial conditions and future prospects.
MD&A complements and supplements your F/S, but does not form part of your F/S.
– Guidelines:
• Report bad news as well as good news
• Help investors “understand” the F/S
• Discuss material information which may not be reflected in F/S (e.g. contingent liabilities,
defaults under debt, off-B/S financing, other contractual obligations)
• Discuss trends and risks (past and future), the “quality” of earnings and cash flows; i.e. is
past performance indicative of the future?
– What is “material”?
• “Would a reasonable investor’s decision whether or not to buy, sell or hold securities in
your company likely be influenced or changed if the information in question was omitted
or misstated? If so, the information is likely material.”
• Note: different from the definition of “material change”
• AIF: annual information form
– In US, referred as a “10-K”
– In fact, ‘update’ of the prospectus
• “An AIF is a disclosure document intended to provide material information about your
company and its business at a point in time in the context of its historical and possible
future development. Your AIF describes your company, its operations and prospects,
risks and other external factors that impact your company specifically.”
– Same definition of “materiality” as for MD&A
– Disclosure of “material contracts”:
• Particulars of every contract, other than a contract entered into in the ordinary course of
business
• Time period requirements: (after year end)
– Annual F/S, MD&A, AIF: 90 days
• 120 days for Venture Issuers
– Interim F/S: 45 days
• 60 days for Venture Issuers

“Event Reporting”
• Continuous disclosure (in addition of periodic disclosure), triggered by events rather than time
• Events require disclosure when there is a material change affecting the company
– Definition of “material change”:
• (a) a change in the business, operations or capital of the reporting issuer that would
reasonably be expected to have a significant effect on the market price OR value of any
of the securities of the reporting issuer; or
• (b) a decision to implement a change referred in (a) made by the BoD or by senior
management of the reporting issuer who believe that confirmation of the decision by the
BoD is probable.
• Distinguish from material fact (whish is disclosed on AIF, MD&A…anything that can have
an impact on share price and investor decision). Material change is not as broad.
– Must immediately issue and file a news release
– As soon as practicable (and max. 10 days), must file a form 51-102F3 Material Change Report

Insider Trading/Tipping - 1
• Legislation prohibits use of confidential information when trading the corporation’s securities
• Insider trading in shares of private corporations creates liability to other party for losses and to
corporation for any benefit or advantage acquired. Consequences include fines and/or imprisonment.
• Cannot trade while in possession of material information that hasn’t been disclosed to the public
• Must disclose all trades on SEDI
• Insider trading offence (s. 76(1) OSA):
– “No person or company in a special relationship with a reporting issuer shall purchase or sell
securities of the reporting issuer with the knowledge of a material fact or material change with
respect to the reporting issuer that has not been generally disclosed”
– Also: prohibition of short sale (CBCA 130)
• Tipping (s. 76(2) OSA):
– “No reporting issuer and no person or company in a special relationship with a reporting issuer
shall inform, other than in the necessary course of business, another person or company of a
material fact or material change with respect to the reporting issuer before the material fact or
material change has been generally disclosed”
– Tipping does not require that one profit from giving “tips” to someone else about an issuing
company. The simple act of communicating insider info to this person is considered tipping.
• “Person or company in a special relationship”:
– Quite broad
– Includes insiders, affiliates and associates of reporting issuer:
• I.e. related companies, family members
– Includes person or co. that learns of a material fact/change – and knows or ought to reasonably
have known that the other person of co. is a person or co. in a special relationship…
• Potential sanctions:
– Imprisonment: up to 5 years less a day
– Fine: up to greater of:
• $5M; and
• 3 times the profit made or loss avoided
• Discussion on Rankin