In Chinese Astrology, 2011 was the year of the Rabbit.  In my practice, 2011 was the year of the non-payer.  In the 17 years since I first became a lawyer, I have never had to bring more than one motion to be “removed from the record” (that is, approved by the Court to be excused from further acting for a client) in a year – and many years I have not had to bring a motion at all.  Yet, this past year I have had to bring several.  Was I busy last year?  Yes, extremely – and that has continued on to this year as well.  Did all of my clients pay?  Therein lies the rub, because the answer is “no”. 

I have said in the past that the key to good collections is to get deposits or retainers up front and to never extend credit too far.  This is especially true in service industries like law, accounting, consulting, etc.  With that practice, it is still not uncommon, though, to experience a 1 or 2% bad debt level.  But even in 2008 and 2009 I did not experience problems like I did in 2011.  The final numbers aren’t in yet (because it’s too early to talk about collections on December bills for example), but it’s looking like I will have ended the year being stiffed to the tune of about 10% of my invoices.  Thankfully, it’s not all on one or two files, so we’re still talking relatively small numbers.  The problem, though, is that a bunch of small numbers can still easily add up to the equivalent of one large number.

The storm clouds are on the horizon in terms of the economic forecasts for 2012.  I’m not sure that they ever really left the horizon but the issue becomes whether it’s better to keep a tighter rein on your customers’ receivables or to chase after them later to sue for a larger amount.  Alternatively, it might be time to start looking at your contracts with your customers – especially if you are a service-provider.  I have a couple of versions of retainer agreements.  When the economy gets really bad, I have a version that says that if my invoices go unpaid for 2 months or more, then I am fully entitled to stop working and that the client will consent to any motion I bring to get off the record so that I can get out of a bad situation as quickly as possible (although I then have professional responsibilities which always will temper that ability).  What does your contract say?

Something to think about.

CALC

Unfortunately this issue has been coming up a lot lately so it’s time for a quick reminder.  Suppose a business sends goods by shipment (truck, rail, air, bus, etc.), the business pays the shipper and the goods are delivered.  Then someone comes knocking on the door of the sender and asking for payment.  “What?  We’ve already paid for the shipping so go away and have a nice day,” is the response from the sender.  The response is “sorry, you have to pay me.”  And the response is correct.

Normally there is something called “privity of contract”.  Suppose that you agree to pay me $10 to paint your fence.  I then hire a teenager to actually paint the fence and I agree to pay him $5.  The teenager paints the fence and you are happy with the result, so you pay me the $10.  I then don’t pay the teenager.  Normally, the teenager cannot go after you for his $5 because his contract was with me, not with you.  That’s the concept of “privity of contract”.  You and I have privity of contract – that is, we are the parties to a contract – and the teenager and I have privity of contract, but you and the teenager are complete strangers for contract purposes.

The concept of privity of contract can create real problems when it comes to shipping because often the actual truck or vehicle used to physically move the goods is done by a sub-contractor.  When we’re talking $5 and $10 it’s not a big deal, but when we’re talking about thousands of dollars in freight costs – especially for truckers who might not make a lot of money from their loads to begin with – it can be a huge problem when it comes to the shipper getting paid but then not passing on the trucker’s portion.  To the rescue (of the actual carrier, but not of the sender) comes Section 2 of the federal Bills of Lading Act and Section 7 of the Ontario Mercantile Law Amendment Act.  Both of these do away with the concept of privity of contract in shipping cases.

The result is that even if you pay the shipping company, if they turn around and don’t pay the actual carrier (eg. trucker), you could end up paying twice and then having to chase after the shipping company to get a refund on what you had to pay to the carrier.  How can you avoid this?  Make sure that the shipper you use owns the vehicles and doesn’t use sub-contractors.  Will they charge you more than the smaller operations?  Probably.  But the question is one of risk – which will cost you more: paying the higher cost now or potentially having to pay twice later on.

Something to think about.

CALC

The Court of Appeal released a decision yesterday that really doesn’t advance the law related to assignments so much as it serves to reinforce the the prior law is still valid and will be upheld.  Put simply, A and B were friends and work colleagues.  They did work with C.  Subsequently, B left the workplace and started up his own business and tried to do business with C.  A was able to get an injunction to stop B and C doing business for a short period of time – 3 months.  For whatever the stoppage for three months was worth, it clearly displeased B.  Later on, A wanted to buy property and C agreed to loan A over $100,000.  A subsequently defaulted and C agreed to assign the loan debt to B – with the result that B was now in the shoes of the lender and A owed the money to B.  B and C agreed that if A paid the money to B that B and C would then later decide how to split the monies that were recovered.

A complained that the arrangement between B and C was champertous and therefore should not be an enforceable assignment – that is, that A should still have to deal with C, not with B.  Why?  In part, I’m sure, because of the bad blood between A and B.  In part, I would expect, in that A would be concerned that his competitor, B, would now be in a position to potentially run him out of business, etc.

Madam Justice Feldman rejected the argument that this was a champertous situation.  She quoted from a prior decision of the Court of Appeal that nicely summarizes the law of champerty and maintenance:

Although the type of conduct that might constitute champerty and maintenance has evolved over time, the essential thrust of the two concepts has remained the same for at least two centuries. Maintenance is directed against those who, for an improper motive, often described as wanton or officious intermeddling, become involved with disputed (litigation) of others in which the maintainer has no interest whatsoever and where the assistance he or she renders to one or the other parties is without justification or excuse.  Champerty is an egregious form of maintenance in which there is the added element that the maintainer shares in the profits of the litigation.

The law had long held, however, that the mere assignment of a debt (even if it is does for an improper motive) is not, in and of itself, champertous.  In upholding this law, the assignment from C to B was not champertous and therefore was valid.

Similarly, the assignment was valid because there had been compliance with Section 53 of the Conveyancing and Law of Property Act.  That section reads as follows:

53.  (1) Any absolute assignment made on or after the 31st day of December, 1897, by writing under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action of which express notice in writing has  been given to the debtor, trustee or other person from whom the assignor would  have been entitled to receive or claim such debt or chose in action is effectual  in law, subject to all equities that would have been entitled to priority over  the right of the assignee if this section had not been enacted, to pass and  transfer the legal right to such debt or chose in action from the date of such  notice, and all legal and other remedies for the same, and the power to give a  good discharge for the same without the concurrence of the assignor.

Is there anything earth-shattering in this case.  Not really.  However, it does give me a good excuse to set out for you the law of champerty and to advise of Section 53 of the Conveyancing and Law of Property Act.

Let’s talk quickly about champerty and maintenance.  Litigation is not for the faint of heart – or of wallet.  What often happens is that people start the lawsuit expecting it to cost $X and soon realize that it is going to cost more than $X.  So, they start borrowing money from friends, relatives, etc. to help pay for their legal fees.  This is borderline maintenance but usually will not be overly problematic.  What is far more problematic is when Person X says to Person Y – go ahead and sue Person Z and I’ll cover your costs.  If that happens, then Persons X and Y are going to be in trouble.  So, you should watch out when you are asked to give guarantees or agree to cover legal fees for any business associates.

Section 53 of the Act, is also important for you to know about.  Why?  Because it has two aspects.  The first is that any assignment is not effective as against a debtor unless and until notice of the assignment is given.  So, suppose that one of your customers cannot pay you, but he says that he is owed a lot of money by one of his customers and he agrees to assign over to you the accounts receivable so that when that customer pays, the money goes to you.  That could be a very good setup and ensure that you get paid.  However, unless and until the customer is given written notice of this assignment, he has the right to continue to pay your customer directly, instead of paying to you, and you will have no right to complain (especially when, as usually happens, your customer then proceeds to blow the money instead of forwarding it to you).

The other aspect to bear in mind is the fact that Section 53 of the Act preserves the concept that a person takes an assignment “subject to the equities”.  So, in my example immediately above, suppose that the assignment occurs and then you go to your customer’s customer and say “you owe my customer $100,000 and you are now to pay me.”  The customer’s customer has the right (assuming it is a valid claim) to say something like “I admit that I would owe $100,000, except for the fact that the product / services / whatever provided by your customer to us was deficient / non-existent / whatever and so we do not have to pay $100,000 but only $X (being some amount less than $100,00) because of the problems caused by your customer.”  If it is a valid claim, then you will be stuck with this reduction and will not be able to say “that’s between you and our customer, pay us the $100,000 and then any rebate or reduction you will have to take up with our customer.”

So, if you are either giving or taking an assignment of a debt, always bear in mind that you will want to ensure that it is not seen as being a form of maintenance or champerty that will invalidate the assignment and also keep in mind the requirements of Section 53 of the Conveyancing and Law of Property Act to ensure that you can enforce the assignment and also to ensure that either there are no set-offs or reductions that can be applied or that a sufficient discount is given on the price paid for the assignment to take such potential set-offs or reductions into account.

Something to think about.

CALC

Ontario’s franchise legislation is known as the Arthur Wishart Act, 2000.  Among its various provisions is the requirement that franchisees are entitled to get disclosure of certain items such as financial statements or projections, copies of franchise documentation, etc.  This permits franchisees to get an idea of what they are truly getting into.  Or, alternatively, it gives them enough that they can take all of this documentation to their lawyer and their accountant who can then lead them through the mass of paper and explain it all to them.

But when are you entitled to get this disclosure?  The Act has a loophole and it has now become, I would argue, a rather large loophole thanks to a decision today by the Ontario Court of Appeal.  The loophole is found in subsection 5(7).  The requirement for disclosure does not apply if (a) the term of the franchise agreement is for one year or less AND (b) no franchise fee is charged.

In TA & K Enterprises, the plaintiff became a franchisee of Suncor Energy.  It signed a franchise agreement that was for only one year and did not have any franchise fee but, rather, required only payments of royalties.  The franchise agreement expired at the end of the one year and at the end of the year then Suncor would normally negotiate a new franchise agreement or, as happened in this case, Suncor wrote to the franchisee and said that the parties would continue their arrangement through a series of extensions of the franchise agreement on a “month to month” basis.  Thus, if they kept their relationship going for 100 years, it would technically be a one year agreement combined with 99 years worth of monthly extensions.

In the case, the franchisee had the franchise for one year and the agreement expired in accordance with its terms.  It was then extended on the same terms and conditions on a month to month basis for another 9 months.  Meanwhile, two months after the franchise agreement expired, Suncor wrote to the franchisee and gave notice that the monthly extensions would only continue for another 7 months and then the franchise arrangement would be terminated.  Prior to this, however, the franchisee sued and sought class action status on the basis that the agreement should be rescinded because there was no franchise disclosure given.  (Why would they do this?  Ultimately it would still terminate the relationship but then the franchisee would be able to get its franchise royalty payments back and well as other costs.  From the franchisee’s perspective, it would be “I worked hard and paid money to you in terms of royalties to build up your brand and you’ve now pulled the rug out from under me.  That’s fine, but it will now cost you in that you have to reimburse me for what I did for you.”)

Suncor brought a motion for summary judgment on the basis that the term was only for one year and that there were no franchise fees – only royalties.  Suncor won at the Superior Court and the franchisee appealed.  Mr. Justice Goudge in today’s decision on behalf of the Court of Appeal also agreed with Suncor’s position holding that the fact that the franchise agreement was subsequently extended did not mean that this was not a one year agreement and also that royalties are not franchise fees.

Is the decision wrongly decided?  Not at all.  Based on the facts of this case, if I had been the judge I would have come to the same conclusion.  But what it does, though, is recognize a flaw in the legislation, I would suggest.  As Justice Goudge recognized, a primary concern of the exception was that if someone set up a Pizza Pizza franchise booth at The Ex for a few weeks each Summer, it wouldn’t be fair to require Pizza Pizza to prepare a ton of disclosure documents for a relatively short franchise arrangement.  Similarly, it is a little difficult for the franchisee in this case to complain that it did not get the disclosure since it continued on as a franchisee for more than one year and it appears that the main purpose for complaint was the fact that Suncor decided to terminate the arrangement (in other words, it was trying to use the Act to help it get out of what turned out to be a bad deal it had made).

The problem, though, is the recognition that many businesses fail within their first year.  Suppose that I wanted to set up a submarine sandwich franchise through Mr. Wraps Sub Shops.  I enter into the arrangements but I don’t get full or proper disclosure.  I carry on for, say, 9 months and then come to the realization that I have lost a ton of money.  I then find out after my business has failed that, in fact, the franchise never had a hope of succeeding and that I was basically suckered out of my money by the franchisor.  Am I protected by the Act?  Nope.  Not if it was only a one year term on the franchise agreement.  And what franchisor in the future is going to want to put franchise agreements for more than one year?  Probably not many now.  To this, however, we add the fact that the key money maker for franchisors has been the collection of franchise fees.  How do they now get around that?  They just up the amount of the royalties payable or front-end load a higher royalty that is subsequently reduced over time.

Many small business opportunities come through franchising arrangements.  What today’s decision means for you is that you are going to have to either seek a franchise arrangement that exceeds one year or else you are going to have to insist on obtaining full and complete disclosure of the type required under the Act.  Otherwise, the protections afforded under the Act are likely to not be available to you.  Does that mean that you are s.o.l.?  Not necessarily, but without the helpful provisions under the Act, it makes your situation a little harder to handle and makes any litigation a little tougher (but not impossibly so) to win.

Something to think about.

CALC

One of the ways that I can tell how good or bad the economy is going is based on the frequency that I get inquiries from clients about collection agencies – either because they want to use a collection agency or because they are getting called by collection agencies.  Not too surprisingly, I am seeing more matters lately between my clients and collection agencies. 

Now, I have to say up front that I have mixed feelings about collection agencies – just like I have mixed feelings about many other trades: lawyers, dentists, doctors, police officers, real estate agents, etc.  Many are very good and professional in their dealings but there are more than a few “bad apples”.  I average about two or three instances per year where I am required to send a letter to a collection agency to have them tone down or reel in one of their agents.  And I also appreciate that sometimes you have to break a few eggs to make an omelette, but when I have to send the letters that is because things have gone too far and the collection agent has become too aggressive.

In Ontario there is a Collection Agencies Act and, more importantly, there is a regulation under that Act which sets out what collection agents can and cannot do.  That regulation can be found here and, most importantly, you want to look at Sections 20 to 25 which set out the rules more fully.  By summary, though, here are some of the key rules that collection agents should be following (and that if you are the one hiring the agency, you will want them to follow and, if you are getting the calls from the agent, you will want them to follow as well):

1. The collection agency cannot simply call the debtor out of the blue.  A written notice must be sent first and then the collection agency has to wait six days before they can start calling.  That said, if you are the debtor, check your mail because if the letter comes and you decide not to open it, that’s not going to be sufficient – all they have to do is send the notice.

2. If you are the debtor and you dispute that you owe the money AND you suggest that the matter be dealt with in the Courts AND IF you send a letter to this effect by registered mail THEN the collection agency should stop trying to contact you.  Of course, though, this will then mean that the lawsuit is on and you will have to deal with the issue in the Court.  That said, if a collection agency is involved, then chances are likely that you are dealing with a matter under $25,000 so the claim will go to Small Claims Court and you do not have to have a lawyer representing you.

3. With various exceptions, the collection agency should not be speaking with your relatives or employer about your debt and trying to get them to assist in the payment of the debt in some way (either through payments on your behalf or simply to have you contact them - ie. applying pressure on you through your relations and boss).

4. There are certain times when the collection agency is not allowed to call (for example, after 9:00 p.m.) as well as certain days (such as holidays) and any communications should not be threatening or have improper (ie. profane) language used.  In this regard, I’ll take a moment to mention my favourite story regarding an abusive collection agent.  This guy was really bad and I had to send his bosses a very strongly worded cease and desist letter.  The response I got from him was a voice-mail telling me to “F” myself this way and that way but that he wouldn’t be calling my client anymore.  However, after threatening to report me to the Law Society (a threat that either he never fulfilled or, if he did, the Law Society just ignored it and never bothered telling me it was ever made because it would have been a b.s. complaint), he said that he would also be calling “Mr. Gowling” to report about my behaviour.  At the time, I was working at Gowling Lafleur Henderson.  Not only was I not worried about any such complaint to Mr. Gowling because I knew that I had done absolutely nothing wrong, but more importantly, I had to laugh because Gordon Gowling had died many years before that time.  I figured that if the abusive collection agent was truly able to speak with Mr. Gowling about my conduct, I would have bigger problems to deal with than the collection agent and would have to call Ghostbusters!

5. Collection agencies are not allowed to threaten that if the debtor does not pay then there will be a lawsuit unless there will actually be such a lawsuit – in other words, no veiled threats.

6. The collection agency isn’t allowed to mislead the debtor in order to get the debtor to pay.  So, for example, there is a two year limitation period for most lawsuits in Ontario.  It is not uncommon for creditors to wait for most of the two years and then turn the matter over to collections just before it’s too late.  Suppose this happens and the collection agency says that if the debtor doesn’t pay that he/she/it will be sued.  And suppose further that the limitation period has now expired.  And, to round things out, suppose that the collection agent does actually know that the lawsuit would be brought (even though it would die due to the limitation period having expired).  In that instance, the collection agent has mislead the debtor because the lawsuit could not be brought and be valid.

Those are the main points to consider if you are dealing with a collection agent.  For a more fulsome list of the rules, go to the regulation and see for yourself.  And hopefully you will never have to make reference to these rules but if you have to do so, at least you now know that they are there.

Something to think about.

CALC

It’s been pretty crazy for me in court and otherwise the last few weeks.  However, I have just learned that my interview on the Court of Appeal’s decision in Tucows.com has been published in the September 16 issue of The Lawyers Weekly.  You can see the article here.  For other comments on the case, you can also see my August 8 post.

CALC

I was reading a write-up in the latest issue of Law Times that reported a decision of Madam Justice Pepall of the Ontario Superior Court back on August 9. It’s an interesting decision for a couple of reasons – but with a common thread. The gist of the case is that someone decided to write blog posts about a lawyer who didn’t like what was being said about him (exactly what was said isn’t set out in the decision) and he turned around and sued. This decision related to a motion to: (i) approve of service by e-mail; (ii) to grant an injunction to restrain the publication of the blog; and (iii) to force the blogger and others to reveal their identities.

Justice Pepall’s decision can be found here.

Her Honour granted the relief sought and ordered both the injunction and the requirement for the blogger to reveal his/her identity. Central to this latter part of the Order was the fact the Court held that anyone who was publishing defamatory statements on the Internet, with a possible exception for those commenting on political matters, had no reasonable expectation of privacy and thus could be compelled to reveal his/her identity. This also serves as a reminder to everyone to really think about what is being said before it is put into writing – whether in a blog, an e-mail or even just plain old pen and paper. Yesterday’s “flame war” on a forum can be tomorrow’s defamation lawsuit.

The final issue was that of service by e-mail. At the outset I should mention that with a few limited exceptions, the Rules of Civil Procedure haven’t quite made it to the 21st Century yet. Generally speaking, service via e-mail is one of the areas where the Rules haven’t caught up yet – although such service is permitted in some instances when the e-mails are between lawyers. In this case, the blogger had given a Gmail account and the plaintiff had sent the motion materials for the injunction to the blogger via e-mail. The blogger responded by saying that he/she had received the e-mail but didn’t receive the attachments. It was clear, though, that the blogger was trying to be cute. Justice Pepall didn’t buy it and found that the blogger had received sufficient notice of the motion that he/she could have tried to get the attachments if he/she wanted and that therefore the service via e-mail, even though it didn’t meet the full requirements of the Rules, was sufficient to be validated.

The common feature among the decision – sometimes it pays to shut up. If the blogger had kept his/her mouth (keyboard?) shut and not made the defamatory comments, then he/she wouldn’t be stuck in this lawsuit in the first place. Meanwhile, if he/she hadn’t responded to the e-mail serving the motion record then Madam Justice Pepall would have had more concern about granting the Order since she would have been worried that the blogger had no idea that the motion was being heard.

Beyond this, though, one should also give thought to the concept that it pays sometimes to shut up in a slightly different light. In the example of this case it is what the blogger said about the lawyer (that is, another person) that gave rise to legal problems for the blogger. However, in another case one’s own comments could come back to haunt you. As an example, a relative of mine was mentioning to me yesterday the situation of a person who posted to a forum that my relative frequents. This person gave numerous types of personal details about the person’s approach to parenting. One of the forum participants thought that these comments were examples of improper parenting. The person had given sufficient personal information over a series of posts such that the other participant was able to determine who the person was and then make a complaint to the local children’s aid society about the person. The children’s aid society investigated and found nothing improper. However, the reality with children’s aid societies is that if a second complaint is ever made against this person then the automatic presumption is that “where there’s smoke, there’s fire”. (How do I know? I had a similar case where a complaint was made against one of my clients to a children’s aid society that was ultimately dismissed by the CAS but because it had been a second complaint – the first one being an unsupported “anonymous” complaint that had been quickly investigated and determined to be unmeritorious – it was much harder to satisfy the CAS that there wasn’t a problem.) In this case, it was the person’s own posts to the forum that resulted in the person having to deal with the CAS – in other words, this person’s own words came back to haunt him/her.

Something to think about – and seriously consider whether sometimes it just might be better to shut up than to say anything.

CALC

The Ontario Court of Appeal release a decision this past Monday regarding the sale of a business.  In Kapuskasing Plumbing, the vendor and the purchaser were both franchisees of Culligan in different towns.  The purchaser was interested in buying the vendor’s business (and thereby expanding the purchaser’s business and territory).  After discussions, it was ultimately agreed that the business would be purchased for $1.6 Million of which $600,000 would be paid on closing and the remaining $1 Million to be paid over time through a consulting agreement.

While negotiations were ongoing for the purchase and before the agreement of purchase and sale was drafted, the President of the purchaser, Mr. Fortier, went on a walk-about through the vendor’s business with the President of the vendor, Mr. Villeneuve.  At one point, Mr. Fortier asked Mr. Villeneuve how many 18 litre jugs of water the vendor sold in the prior year.  Mr. Villeneuve looked out in the shop floor, counted the number of pallets, multiplied that by 20 working days per month, multiplied that by 12 months and came up with the number of approximately 200,000 as an annual number.  As it turned out, Mr. Villeneuve’s “quick math” was more than double what the actual number was for the prior year.  When the purchaser learned after closing that the actual number was closer to 95,000, it refused to pay any more money on the $1 Million consulting portion of the purchase price.  The vendor sued for what was owed on the consulting portion and the purchaser counterclaimed for damages for misrepresentation on the sales figures.  At trial, the judge found that there had been a misrepresentation and therefore dismissed the vendor’s claim and awarded damages to the purchaser of approximately $70,000.  The vendor appealed and the Court of Appeal granted the appeal.

There are five elements to a claim for misrepresentation: (i) there must be a duty of care owed between the maker and the recipient of the statement; (ii) the statement must be untrue, inaccurate or misleading; (iii) the person who made the statement must have acted negligently; (iv) the recipient must have relied reasonably on the statement; and (v) there must have been some damage resulting from the reliance on the representation.  The vendor agreed that four of the five elements were present for the purchaser, but it disagreed that the purchaser reasonably relied on the misrepresentation about sales volumes.  The vendor showed that in pre-agreement discussions it had been stressed that the payment was to be without regard to sales volumes.  Moreover, the evidence was that the purchaser asked for all of the accounting information - including sales figures – and that it could have been relatively easily figured out if one took the sales and divided by the known sales price per water jug.

Justice Armstrong agreed that there was no reasonable reliance on the statement of 200,000 jugs.  He wrote:

In summary, the case comes down to this: Kapuskasing [the Vendor] refused to enter into a contract that was based on the number of bottles sold in the prior year.  Mr. Fortier accepted that position and asked that he be supplied with documentation from which he could review the sales figures prior to signing the agreement and address any issues with Mr. Villeneuve.  Mr. Fortier received the appropriate documentation and did nothing.  If he had an issue in respect of his ability to calculate unit sales from the information provided, he could have raised it with Mr. Villeneuve or sought the assistance of Mr. Gravel [the purchaser's accountant and controller].  He did neither.

As a result, the Court found that the reliance upon the “quick math” and estimate of 200,000 was unreasonable and therefore there was no actionable misrepresentation.  It further followed that the purchaser had no right to complain or to withhold payment under the consulting agreement.

While this case deals with the negotiations leading up to the signing of an agreement of purchase and sale to sell one’s business, the principle will be the same for any contract.  If you are going to base your transaction upon a statement or an assumption – even if it is a shared assumption – then you had better get it included in writing in your contract.  If you do that, then you can have a claim for breach of warranty of the contract.  However, if you do not, then you cannot simply take any representation at pure face value.  You have to ask for documents to support the assertions made in the statement that you intend to rely upon – which the purchaser did in this case.  But then you have to actually look at what is given to you and ensure that what you have been sent is consistent with what you have been told – that is where the purchaser failed.  The process is called “due diligence” not because it is a simple label for the process.  You actually have to be diligent in your review of the facts or statements that underly your transaction.  Failure to do so can prove to be costly later on.

Something to think about.

CALC

I have a client who operates a repair shop for high end cars.  Unfortunately, he hasn’t been able to find someone who wants to sell me their luxury or sports car for an amount I can afford.  Oh well.  In any event, as with any other business, there are disgruntled customers from time to time.  One of those customers a few years ago decided to go onto various blogs or web forums and wrote “reviews” of my client that certainly skirted the edge of defamation but never quite crossed the line.  Needless to say, the reviews were not favourable to my client.  However, my client did not know about these until a few months ago.  Then he did a Google search on his business and started to realize that when people did searches on his business, these darned “reviews” were coming up and they were high enough in the search rankings that people would see these reviews and that it would (and probably has) hurt my client’s business.

Could I help my client?  Not really.  The reviews were written VERY carefully (I wondered whether they had been vetted by a lawyer).  They did not cross the line of defamation, so my client could not sue for that.  They also did not satisfy all of the elements for other claims such as the tort of interference with economic relations.  After looking at numerous options, it was clear that there were no legal obligations or standards that had been broken and, accordingly, there was nothing that I could do for my client.  The other, practical, reality was that if he proceeded to bring a claim about these “reviews” then this could backfire against him and his business since it would thrust these reviews back into the forefront and might increase their ranking on Google searches.

I was watching the France2 news today (France’s equivalent of the national news) and they had a story about a French company that is a combination of lawyers, marketing people, web specialists, etc. that work as a team to “rehabilitate” your online reputation after your name has been dragged through the mud through blogs, social media sites, etc.  In the example given in the news story, a business executive ran into some legal problems that were resolved but his name was smeared with false information, etc. in various articles or blog postings.  Because the statements were false, the lawyers were able to get those articles / posts pulled and then the marketing people worked on building new “friendly” references to the executive to force the other rankings lower.  This was done for a cost of about 2,000 Euros (about $2,800 at recent exchange rates).  (Somewhat ironically, I then went to check out the French company’s web site but Google Chrome immediately warned me that the site was infected with a virus, so it looks like there were hackers or other malcontents watching the French news tonight.  I don’t think that that was the reaction that the company was hoping for from the news story.)

A Google search for other similar companies showed several in Europe and the U.S. and even one in Toronto.  Is this a definite solution?  Probably not.  If my client’s disgruntled customer was truly someone with little better to do but to take shots at my client’s business, then he could probably counteract the positive web spins put on by the online reputation rehabilitation people.  But with the knowledge that there might not be a complete success, even partial success might be worthwhile if it reduces any loss of business due to the damaging comments made on the web.

I always tell my clients that there are two aspects to every dispute: the legal and the practical.  For my client with the car repair shop, the legal aspect of his problems with his former customer isn’t helpful for him.  It may be that the practical aspect of using a reputation rehabilitation company is worthwhile.

If nothing else, however, my client’s story reiterates what lawyers and others tell small businesses – Google your business on a fairly regular basis.  It is easier to minimize reputational damage on the Internet if it is caught quickly.  If damaging statements are made on the Internet and months or years go by, it could very well be too late.  As a personal practice, I Google my name every week or so because I represent the banks and often have to do litigation against self-represented persons who have no love lost for the Bank and thus, in turn, for me.  Thankfully, nobody has taken any significant shots at my reputation, but that doesn’t mean that it can’t or won’t happen at some point in the future.

Hopefully this is not a problem for your small business.  But if it is, then using one of these companies could well be something to think about.

CALC

I have to smile sometimes when decisions come out that most non-lawyers would say “um, you mean it wasn’t that way before, it seems kind of obvious that it should be the case, doesn’t it.”  But in the wonderful world of law, where it’s often difficult to fit the square pegs created by new technology into the round holes of legal categories, it’s not always so obvious.  Such is the result of a decision released by the Ontario Court of Appeal this past Friday in Tucows.com v. Lojas Renner.  Put briefly, Tucows.com purchased another domain name registration company that had among its list of registered domain names the domain name “renner.com”.  Lojas Renner is a Brazilian company that wanted the registration de-listed (so it could, then, register the name on its behalf).  Renner made a complaint to have the issue of who was entitled to the “renner.com” name determined under the ICANN protocol for such disputes.  In response, Tucows.com brought a lawsuit in Ontario to have the same issued decided and the arbitrator ultimately decided to stop the arbitration proceeding that Renner had started and to let the Ontario courts decide the issue.

Renner then brought a motion to strike the lawsuit in Ontario – with the result, then, that the matter would go back before the arbitrator.  Renner was successful before the motions court but Tucows.com appealed and the Ontario Court of Appeal allowed the appeal, with the result that the lawsuit will continue.  In making its decision, the Court had to determine whether Tucows.com was suing with respect to “personal property in Ontario”.  In other words, (1) is a domain name “personal property” and (2) would it be located in Ontario?

There were not a lot of prior court decisions to guide the Court and it had to return to basic principles.  When one considers a domain name, it is really a combination of a word locator description (the URL) and an IP numerical address.  If the domain name is really just a form of an address, how would that fit into the “old school” thinking about addresses?  For example, my office is at Suite 806, 121 Richmond Street West, Toronto.  Do I have any property rights in that address?  Does my landlord?  In and of itself, the answer is “no”.  On that basis, it would follow that domain names, which are really just a form of address, wouldn’t be considered as property.  However, the Court went on to hold that domain names should be seen as a new form of “intangible property” – like a patent or a copyright (you cannot hold a copyright, it is merely a “bundle of rights” that exists and is recognized as a type of personal property).  Similarly, a domain name consists of more than just an address, per se, because it gives exclusivity to the use of that address.  Again, to use the address example, if I move my office from 121 Richmond Street West to 1 First Canadian Place, I don’t have the ability to say that from that time onwards the physical building will be known as 121 Richmond Street West.  However, if I have the domain name ontariolegal.com and I have it registered with Tucows.com and if someone types in that URL it goes to the servers at Tucows.com and then I leave Tucows.com for whatever reason and renew my registration with GoDaddy.com (or whomever else), then I cansay that from that point in time onwards when you type in “ontariolegal.com” it will go to the servers at GoDaddy.com rather than Tucows.com.  In that sense, then, the Court found that domain names are a “bundle of rights” like other forms of intangible property and not just like the address of old and, accordingly, are a form of personal property.

The second issue was whether the domain name was personal property “in Ontario”.  In this regard, the Court looked at where registrant of the domain name was located, where the registrar of the domain name was located and where the servers for the domain name were physically found and concluded that the domain name was “in Ontario”.

Why does this matter for your small business?  A couple of things immediately jump to mind.  In recent years on a sale of a business one of the items to be included in the purchased assets was the domain name.  But how much does one pay for a domain name?  If it is seen as part of the business’ “goodwill”, then it is seen as something less than an “actual” asset.  It sort of went into the “catch all” category and perhaps would not be separated out as copyrights or trade-marks would be.  However, once you have a Court stating that domain names are now to be classified as separate personal property, more money can be charged for the domain name and it may well become more of a negotiating point on sales of businesses.  To give an example, I have a client who was involved in a therapy clinic.  He sold the clinic in one area but wanted to start up a similar business in another province.  Previously, one wouldn’t care too much about this – even if the same name was being used – because the buyer and seller wouldn’t be anywhere near each other.  But if they both want to use the same domain name, what now?  This will be more of an issue in the future.

A second item that immediately comes to mind is the issue of jurisdiction.  Not necessarily for the purposes of litigation like in this case, but for the purposes of taxation.  Where a company is resident is always a hot topic because companies want to be found to be resident in a location that has a lower tax rate.  Traditional indicators were items such as the location of the head office of the business.  These won’t go away, but will Revenue Canada look at this decision now and say that because a company that has its domain name registered through Tucows.com or some other registrar in Ontario and/or that because the servers where the domain name resolves to are located in Ontario that these are additional factors that can show that the company is resident in Ontario?  That could very well be the case. 

Something to think about.

CALC