I read an article that appeared in last week’s Your Business magazine in the Globe and Mail.  It is entitled “There Must be 50 Reasons to Leave Your Partner”.  Although the reference is to “partner”, it is not solely to a partnership in the purely legal sense, but, rather, a partnership in the generic sense – that is, whether the “partners” actually have a formal partnership, are in a joint venture or are shareholders in a corporation or some other arrangement.

The article talks about what happens when the two or more partners decide to go their separate ways and what to do about their business.

I have to admit, though, that there’s something about the lawyer they’ve quoted.  I agree with absolutely everything he said.  I hear he’s pretty good looking too … at least in his own mind

CALC

It’s coming on tax time again.  How many of you are having chills at just the thought?  Me too.  The difference, though, is that I know two things.  The first is that when it comes to the finer nuances of tax issues, I leave this to my accountant to advise upon.  The second is that many of my clients, despite my suggestions otherwise, tend to try to save money and not use accountants – at least for the first year or two and then they realize the cost-benefit relationship of having the accountant help you.  However, I realize that for that one or two years people will still try to go it alone.  If you are one of these brave soles, then I should try to help in at least a little way.

The Canada Revenue Agency has a guide for small businesses and their tax issues.  It can be found here.  It gives some advice on income tax, GST and HST issues, payroll taxes, etc.  Hopefully it is of some use to you.

CALC

I spent my lunch hour today with my colleague John Moore giving a seminar to small business owners on contract law and litigation issues relating to contracts.  One of the issues that arose related to governing law and attornment provisions.

Governing law provisions state what law is to apply to the contract.  For example, if a person in Ontario does a deal with a person in New York and they subsequently get into a dispute, is the contract subject to the laws of Ontario or New York?  There are a whole set of complex rules to determine this, but to avoid having to wade through these rules, it is much easier to simply say in the contract that the law of X will apply (whichever jurisdiction is X – and, in my example, X does not have to be the laws of either Ontario or New York if the parties want something different).  Meanwhile, attornment clauses provide for which courts have jurisdiction.  So the parties could say that all disputes will be determined by the courts in Ontario (or wherever the parties might agree).

In the context of this discussion a series of questions were raised about whether this really means anything.  For example, who cares if the law governing the contract is that of Ontario or that of Quebec.  It’s all the same thing anyways, isn’t it?  No it’s not.  It can be very close but in some instances there can be significant differences between the Common Law as exists in 9 of the 10 Canadian provinces and 49 of the 50 U.S. States and the Civil Law province (Quebec) or State (Louisiana).  In this case, “Civil Law” refers to those jurisdictions that take their laws from the French Napoleonic Code (aka Civil Code).  Let me give you two simple examples.

First, the common law has three basic requirements for a valid contract: there must be an offer made, that offer must be accepted and there must be “consideration” flowing from one party to another.  What is required for there to be “consideration”?  Something of value.  How much value?  Not much at all.  This has resulted in what is known as the “peppercorn theory”.  If, for example, I agreed to provide you with one year’s legal services in exchange for a single peppercorn, that is one heck of a bad deal on my part.  BUT, no matter how little the value of the peppercorn that’s enough as SOME value has been given for my year’s worth of services.  The common law courts require that there be some consideration, but they won’t look into its adequacy.  (Now, there are a whole host of exceptions to this general rule, but for the moment just run with it as being applicable.)  Consideration is a key element to having a binding contract.  So, if A says to B, “You’ll paint my house” and B says “Okay, I agree to paint your house”, under the common law there is no contract because no consideration flows from A to B in exchange for B agreeing to paint the house.  HOWEVER, under the Civil Law consideration is NOT a requirement.  Thus, using this example, by simply consenting to the obligation put forward by A, B has made a binding contract.  Long story short, if you are dealing with a business or customer in Quebec or other Civil Law jurisdiction, what you may have thought was not a binding obligation or a binding contract based on, for example, Ontario law could very well turn out to be  a binding contract under Quebec law.

The second example arises from Article 1375 of the Quebec Civil Code, which states:  “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.”  Good faith performance of contracts is not a foreign concept to the Common Law.  However, despite several attempts to introduce the requirement of “good faith bargaining” leading up to the creation of the contract, the Common Law courts have gone to great pains to avoid finding that there is such an obligation.  As a result, unless you have made misrepresentations that  induced the contract, you can drive as hard a bargain as you wish.  That’s not the case in Quebec thanks to Article 1375.  Thus, an Ontario business looking to negotiate a deal with a Quebec business may find itself on the wrong end of a lawsuit if the Quebec business ultimately feels that the Ontario business took unfair advantage during the negotiations.

So, when you are negotiating a deal with a customer or supplier that is based in Quebec (or in Europe or other French colonies), there could be very significant differences as to whether the governing law for the contract is that of, say, Ontario or that of the other province or country.  Yes, in many ways the laws are the same, but where they differ the differences can be quite significant.

Something to think about.

CALC

I was reading a promotional discussion that talked about the advantages for business owners to operate their businesses through “offshore companies”.  First and foremost a little clarification.  By “offshore”, we’re really talking about foreign companies or, more specifically, non-Canadian or American companies – hence, outside of Canada’s shores or “offshore”.  The particular discussion I was reading related to setting up companies in the United Arab Emirates but many of these companies relate to Caribbean or European companies – usually in small countries or principalities (for those who want to set up businesses in, say, Lichtenstein).

The thing I smiled the most about when it came to this particular discussion was the title that suggested that it was better to be safe than sorry and the connotation was that you were safer with an offshore company and sorry if you stayed with your plain-old Canadian company.  The discussion also touted the benefits that, in this example, the UAE companies didn’t have to pay Canadian taxes but only UAE taxes, you didn’t have to be a resident of the UAE, the company could have non-UAE bank accounts, etc.  These types of claims are made for the other offshore companies as well.

The first problem with offshore companies is that they involve a huge leap of faith.  Since you are not in the UAE (or Bermuda or Lichtenstein, etc.), there is always the possibility that someone unscrupulous could take over control of your company.  Will it happen every time?  No.  But then again, you have better control of the situation with a Canadian company than with an offshore company.

The second problem is that before you ever get involved in any of these companies you should get specialized taxation advice.  And, even then, you are probably best off to get two tax opinions.  Why is that?  Because it is not uncommon for the promoter to send you to a tax specialist who may not be completely independent.  Unfortunately, some of my clients have learned this the hard way.  This is not to say that the tax expert is somehow “in cahoots” with the promoter, but it is possible that the tax expert may not give enough emphasis to the downside risks that a truly independent expert may put on the situation.

A third problem, which is related to the second problem, is that these promoters may only be focusing on part of the issue.  For example, in this particular discussion, the person was promoting the fact that there was a tax treaty with the UAE that prevented double-taxation.  Fair enough, but this may not be the entire picture.  For example, if the UAE doesn’t tax on dividends at all, then it’s not an issue of double-taxation.  Rather, you still might have to pay Canadian tax with the result that you are still paying the same tax you would have had to pay if you had gone with a Canadian company.  Or, let’s suppose that the UAE tax rate is 30% while the Canadian rate is 35%.  You may not have to pay 65%, but you may still be required to pay 30% to UAE and 5% to Canada – again, no real net savings – and at the cost of the loss of some control over your company.

A fourth issue is to remind you that even if you have an “offshore company”, if you are intending to do business in Ontario, you will still have to register your company as an “extra-provincial corporation”.  The result is that you now have to not only submit whatever corporate forms or returns are required by the offshore country but also whatever Ontario requires.  Is this extra work offset by the potential savings of being offshore?  Maybe.  Maybe not.  But you should take this factor also into consideration.

Finally, a warning of how things could go very wrong.  One of my old clients invested in offshore corporations and sent money to what proved to be fraudsters.  They made off with $20 Million.  The problem was that my client’s money was tied up in U.S. stocks that had been earned through stock options.  The shares were in the client’s name and could not be moved to someone else without incurring huge tax consequences.  However, the client wanted to keep these shares for the benefit of the client’s heirs – which resulted in a further problem because the U.S. had huge estate taxes that would give money to the U.S. government which was unfair since the client and the client’s relatives all lived in Canada and had never worked in the U.S., all work done for the stock options was done in Canada and the only tie to the U.S. was the fact that the shares were traded on the NYSE.  So, the client implemented a tax structure that would minimize the impact through the use of offshore companies that was legitimate, but because control could be taken by the “foreigners”, that did occur and the client lost $20 Million.  After following the monies from the Caribbean to New York, to Europe and then back down through several Caribbean countries, we eventually found $12 Million and then had a huge fight over that money that cost the client tons of money in legal fees for lawyers in many countries.  In the process, the client’s house was sold, the client suffered financial and emotional strains and whatever benefits might have been gained were completely wiped away and then some.  Moreover, the client still had money to be able to fund the lawyers and the financial experts to follow the money and eventually get part of it back.  You may not be able to afford such a process.

Does this mean that all offshore companies are scams and should be avoided?  No.  But they can be fraught with danger and it’s something you should not go into lightly.

Something to think about.

CALC

I read an interesting article submitted to a LinkedIn group of which I am a member.  The author has suggested that entrepreneurs should think about selling their businesses sooner rather than later.  Of course, for tax reasons, it might have been better for him to suggest this topic a few months ago while people could take advantage in 2009 but so be it.  In any event, some of the reasons given were:

• Many of the baby boomers will be looking at selling their businesses in the next few years as they reach retirement age and there will be a glut of businesses up for sale on the market; and
• There is a whole whack of money sitting on the sidelines right now not being used in the investment market and its ripe for going after before either it is used in the markets again or for investing in the businesses when they are sold by the baby boomers.

I’m not sure that I completely buy the first suggestion.  I’ve read a whole bunch of articles that actually suggest the opposite – namely, that as the baby boomers reach retirement they will quit their desk jobs, take their pensions and go off to run small or micro-businesses to give them something to do all day.  As for the availability of money, I suppose that could be true, but then you read in the papers these days that there isn’t really all that much cash that’s available for small businesses and, so, I don’t think things will be all that different in a couple of years.

So when should you sell your business?  When you can get the most money for it.  Now, you’re probably sitting back going “That’s great, genius, thanks a lot for telling me something I already knew!”  Fair comment – but that’s why I’m the lawyer and not the business consultant.  However, if and when you ever do decide to sell your existing business or buy into a new business, that’s when I can help with the “red tape” involved in the sale or purchase.  As for the timing, speak with the consultant.

Happy New Year!

CALC

Bah Humbug! appears to be the more appropriate response this year.  I haven’t had a rant for a while, so here goes.

In previous years, December was the time when litigators prepared for a long winter’s nap (of at least a few weeks) while corporate lawyers went crazy.  The problem for corporate lawyers was that their clients usually wanted to finalize deals or corporate reorganizations or whatever before the December 31 year end.  So I would watch my colleagues on Bay Street who practice only corporate or commercial law enjoy their summers playing golf with clients and being somewhat slow in terms of productivity only to watch them pay for it dearly when November and December came around and they were in the office 24/7.  As for the litigators or those with a more varied practice, we just kept plugging along at roughly the same pace throughout the entire year.

This year, however, appears to be the exception to the norm.  In the last three days, for example, I have opened five new files and have rushed around like a chicken with my head cut off on a potential injunction matter related to an existing bankruptcy of a major retail chain (I act for one of the suppliers that is trying to avoid being forced to ship merchandise that may well never be paid for).   I will also get to spend part of this weekend drafting three new Statements of Claim for clients who have decided that it’s finally not worth it to negotiate any further with the other side.

I have never seen a busier December – it’s only the 12th! – and people are in a suing mood.  Is it a lack of Christmas spirit?  Is it because there are less Christians per capita than previously or that more of those who say they are Christians have lost the faith so this time of the year doesn’t mean as much as it used to?  Is it that the economy has rebounded enough and quickly enough that people are willing to pay the money to sue?  Is it that more lawyers are taking matters on contingency or on speculation rather than charging hourly rates?  Is it that the economy hasn’t rebounded enough causing people to fight over whatever scraps remain?  Has there been too much cloud in the sky lately causing an early arrival of “seasonal-affective disorder”?  Is it because the Leafs, Raptors, Jays and Argos all have had crappy seasons this year so there are no happy sporting distractions?  Or is it all just one big coincidence?  I expect it’s some of the above and probably other matters that haven’t been mentioned.

Oddly enough, it’s not just me who is busy.  A talk with my friends at other law firms reveals that they’re all going crazy this year too.  But whatever the cause of this increase in litigation, my recommendation is to keep your head down and watch your manners with customers, suppliers and others and hope that you don’t get caught in the wave.

And, so, despite the “Bah Humbug” attitude that seems to be prevailing right now, I’ll take this opportunity (admittedly a little early) to wish you all a Merry Christmas and a Happy New Year!

CALC

There has been a lot of buzz in the Toronto media for the past few days over an offer by Ashley Madison to advertise on Toronto Transit Commission buses or streetcars.  For those who don’t know, Ashley Madison is, for lack of a better expression, a dating service for people who are married who want to cheat on their spouses.  I have to admit that I am not a member of Ashley Madison so I do not know exactly how they work.  However, as a natural-born nightowl, I see their commercials often on late night TV and have always wondered if they are open to a lawsuit.  The claim would be for  inducing breach of contract and the claim would be made by one or both of the spouses who were cheated on.

Now, if nothing else, it would appear that Ashley Madison has a niche market and most small businesses would not have to worry about claims from innocent spouses, but it provides a good excuse for me to explain the law of inducing breach of contract.  As described in a court case earlier this year, to successfully claim for someone inducing breach of a contract the plaintiff must establish:

An example of where this might occur would be where Company A has a long-running supply arrangement with Company B.  Company C comes along, knows of this arrangement, and purposely tries to “undercut” Company A in an attempt to steal away the business of Company B.  As you can see from the requirements, in this example Company C has to not only know of the contract, but it must go to Company B with the intent of causing (and, in fact, causes) Company B to breach its contract with Company A.  Not the easiest thing in the world to prove.  However, in today’s economic climate where more companies are fighting to get smaller shares of existing work, claims for inducing breach of contract may become more common.

So, if you are considering going after new business with a potential customer who has been involved in a long-term supply or other relationship with a competitor, you may want to be more cautious about your sales pitch.  Similarly, if you find that your customer with whom you have long-term contract suddenly decides to go with someone else, you may have a claim not only against the customer for breach of contract, but also against your “replacement” for causing the customer to breach the contract.

Something to think about.  … And if there are any disgruntled spouses with lots of money to spend on litigation who want to take on Ashley Madison (which seems to have lots of money to fight the lawsuit based on what they were offering to the TTC to advertise on the buses), then give me a call as that would be a very interesting case to take – assuming you could prove that your spouse wouldn’t have left you if it hadn’t been for Ashley Madison’s “assistance” (and good luck proving that).

CALC

While it is not “new” news since it has been pending for quite some time now, changes will be implemented to the Ontario courts effective January 1, 2010 that you should know about.

Many of the changes are purely procedural in nature and cover matters such as how long examinations for discovery should last and new considerations by judges on summary judgment motions.  It’s of interest to me but far less thrilling for a small business owner.  That said, there are changes to the monetary jurisdictions that will be of interest.

Perhaps the most important change is the increase to the monetary jurisdiction of the Small Claims Court.  On January 1 it will go from its current $10,000 to $25,000.  In the past, if you were owed, say, $15,000 and wanted to sue to collect payment you had the choice of either suing in the Superior Court under its “simplified procedure” regime or else waiving the $5,000 and suing only for $10,000 in Small Claims Court.  On Jan 1 there will be no choice as you will be heading for Small Claims Court so long as the claim is $25,000 or less.  So, you will now have to make decisions like this for claims of, say, $30,000.

And I will take this opportunity to provide you with a link to the court’s page that provides a whole whack of information on going to Small Claims Court and what to do, when and how.  Even if you decide that you want to have a lawyer (and in Small Claims Court you do not have to have one), it is always best to take a look and get the background information so that you spend less time talking with your lawyer about the basics.

At the present time, lawsuits between $10,001 and $50,000 go to the Superior Court of Justice but are governed by its “simplified procedure”.  As its name implies, this is a regular lawsuit but with less of the normal steps.  Most importantly, up to December 31, 2009, there are no examinations for discovery permitted in simplified procedure cases.  This has had its benefits and problems and the result is that a compromise has been reached in which limited (we’re talking only a few hours) examinations for discovery will now be allowed.  The biggest change, though, is that simplified procedure will govern cases from $25,001 to $100,000 as of January 1.

And then, finally, the full-blown “regular” procedure will now only apply for claims over $100,000.

These changes will be beneficial for small businesses.  Generally, if you have a claim for more than $100,000, we’re probably looking at a problem that has significantly affected the business (and could even threaten its existence).  Fortunately, these types of disputes do not occur frequently.  More commonly are claims under $100,000 and small businesses will benefit from the more streamlined rules found in both Small Claims Court and under the simplified procedure.  As I’ve said before, litigation is often neither cheap nor quick and anything which can reduce costs and time delays is to be welcomed.

CALC

I have a friend, who is also a lawyer, who was about to go into a four week trial that settled at the last moment.  It shouldn’t have been a four week trial.  It probably shouldn’t have even been a four day trial.  What happened was a professional firm got stiffed on its fees.  So it sued for the fees and the defendant did what all financially pressed companies do – it acted like a caged animal and it struck back with a multi-million dollar counterclaim for negligence.  This forced the professional firm’s insurers to get involved and a two day trial gets dragged on into a four week trial.  Ultimately, a small amount was paid to the defendant to avoid the cost of a four week trial but my friend’s client ends up with (a) no payment on the fees that they were stiffed on in the first place; and (b) the joy of having paid legal fees for the past few years.

To give another example, I have a client who was owed money for equipment that was sold but never paid for by the defendant.  The defendant says “we can’t afford to pay in full, so we’ll agree to a settlement for $X per month and as security for payment, this individual will give a guarantee.”  Big surprise, the company doesn’t pay.  So a demand is sent to the individual on his guarantee.  He doesn’t pay.  So the client goes back to the lawsuit and seeks its money.  The individual, again like a wounded animal, lashes out and starts claiming that the settlement was induced by fraud.  Total b.s. but if nothing else it will delay things as my client defends against these allegations.

Another example, a client tried to obtain payment from a customer (who was also somewhat related to the client) and the customer turns around and tries to petition the client into bankruptcy.  The client then proceeds to fight the bankruptcy application and ultimately wins and now has to go against the customer for not only payment but for improperly using the court process.

And the examples can go on and on.  So, let’s have fun mixing metaphors to show they can apply to litigation:

- The best defence is a good offence:  you should be prepared that the other side will try to bring up a counterclaim to distract the court’s attention from the real issue (for which they have no defence);

- Don’t bring a knife to a gun fight: if you think the other side is going to try and bring a counterclaim, see what you can do to stop it before you even sue.  If you think they’re going to complain about the quality of your goods / services, then it would be best to get even an e-mail from them confirming that they have no complaints about that but what they really want is extra time.  That way you have something from them that rebuts whatever excuse they later advance in their defence;

- If you can’t take the heat, stay out of the kitchen: in some respects, this is similar to “don’t take a knife to a gun fight” in that before you start litigation you should be prepared for the other side to hit back hard and to not necessarily act rationally.  To use one of the examples above, you should be prepared for a fight that is really over tens of thousands of dollars to face a counterclaim for millions.  If you can’t take the pressure of such a claim then you should probably try to avoid starting the lawsuit in the first place.  And realize that “heat” can come in many forms: costs in terms of money paid for legal bills, costs in terms of time (for example, while you’re busy dealing with the lawsuit, you’re not out there making money, selling products, selling services, etc.), and costs in terms of stress (either to yourself or to those around you either at work or at home).

The last statistic I heard was that over 95% of all lawsuits settle.  Why?  For many reasons.  But at least some of them are due to one side or the other making the decision that it is just not worth it to fight any further.  Fair enough.  But it’s better to ponder these issues before you sue rather than having to consider them after you have already started the litigation and your options may be more limited.

Something to think about.

CALC

I met with prospective clients recently and their situation was intriguing.  They bought some commercial property that had a number of tenants.  Almost immediately after they closed the deal, they discovered that one of the tenants had left either the day of the closing or the next day.  They then proceeded to sue the tenant for breach of the lease and they relied upon an estoppel certificate purportedly signed by the tenant.  An estoppel certificate is a document which, in effect, says “everything’s fine, I’m a happy tenant and I don’t have any problems with either the lease or the current landlord [that is, the seller]“.

In defence of the lawsuit, the tenant (now defendant) said “I never signed that document, it must be a forgery.”  OK, so their lawyer sued the seller and the lawsuit is now, basically, “we don’t care what happens, one of you has to pay us – either the tenant because the estoppel certificate is valid and therefore the tenant is liable on the lease OR the seller because the estoppel certificate is a forgery and you lied to me to get me to close the deal.”

The problem, though, is that the claim as against the seller is completely dependent upon being able to prove that the estoppel certificate is forged.  The potential clients asked their current lawyer a while back, “so what happens now?”  The answer was basically that they sit back and let the two defendants point fingers at each other and, in essence, “who cares? You’re going to win against someone.”  Completely true.  But the flip-side of this is that they are definitely going to lose against the other party.

It is not uncommon to see “sue ‘em all and let God (or the Judge) sort it out” approaches to litigation.  And I am not saying that this is not a good practice – because sometimes you really just don’t know who is ultimately to blame for whatever happened.  BUT what the potential clients never asked, and their lawyer doesn’t appear to have explained (or explained well enough) is the question: “OK, but what’s my downside?”  If they had asked this, then they would have known that winning against one party means almost automatically losing against the other and you want to ensure that whomever you win against will net enough money to cover whatever you have to pay to the other party for its legal costs.  If you end up having to pay the party you couldn’t prove the case against more than you received from the party you won against, then you’ve lost money on the litigation and it probably wasn’t a worthwhile venture.

The potential clients never asked this question and by the time they came to me the question was raised.  It’s not that it’s too late, but it will certainly give them a different perspective on how to proceed with the litigation.  But this is a question that should be asked by all litigants at the very beginning of any lawsuit.  For example, a lawyer may say to you “I’ll take your case on contingency and I’ll pay all court costs, etc.” and then some will even add “You don’t pay anything until you win”, or “You don’t pay anything unless you win.”  Ask yourself if this is true.  For example, the standard rule is that the loser pays some of the winner’s costs.  If you don’t win and you don’t (or can’t) settle, you could have to pay some of the winner’s legal fees.  When you are told that you don’t have to pay anything – OK, but to whom and for what?  To your lawyer or the courts?  Fine, but what about to the other side?  Is your lawyer going to pay the other side’s legal fees if he/she cannot settle or doesn’t win the case?  If the answer is “no”, then you are the one on the hook for these costs.  Then the next question should be “what is the likelihood that I have to pay the other side?”  Often, the risk is relatively small – for example, the other side may be willing to settle and not seek costs from you.  But, this isn’t always the situation.

Litigation is not a 100% guaranteed endeavour.  Even when it is 100% guaranteed, it’s not quite that simple.  As the other lawyer said to the clients, they are going to win – and I agree with that.  But even with this 100% guarantee, the question still remains of against whom are they going to win.  In asking this question, then, you get to the bigger question of what is the downside of proceeding against both defendants or if a settlement should be made with one side or another.

I’ve said before that litigation is sometimes like gambling and, in that sense, you should always ask yourself “what am I prepared to lose?”  Similarly, asking “what’s my downside?” will allow you to decide how much you are prepared to lose if the litigation doesn’t go your way.

Something to think about.

CALC