I was reading an interesting story this evening in Le Monde’s online edition.  (I apologize in advance as the story has not been picked up by the Canadian or major U.S. press – so far at least – so if you want to go to the story, it is only in French.)

The story speaks of the discovery of a fragment of legal code that is approximately 3,700 years old and refers to “the rules regulating the relations between masters and slaves.” It is believed to have been written approximately 1,000 years before the Bible was written down and is from approximately the same time as the Code of Hammurabi.

Maybe it’s just me, but it seems a bit funny that what was important, or at least important enough to survive 3,700 years, is part of ancient employment law.  All this time and we’re still trying to get rules that will satisfy everyone.  But, if nothing else, at least what we have now is better than what that fragment represents as I’m sure it was something along the lines of “thou shalt not whip thy slave too harshly”.  Now we’re only fighting over less problematic workplace safety issues.

Something to think about.

CALC

I turned around yesterday and realized that the firm has now been around for 4 years.  I’d say that time flies when you’re having fun, but it also flies when you’re busy.  And thankfully I’ve been both – although sometimes more busy than having fun, but I can’t complain.

I also realized that this is my 200th post.  Should I make it interesting?  Worthwhile?  Nah!  I’ll just quietly sing “Happy Birthday to You” to the firm and leave interesting and worthwhile to the next post.

CALC

I’m sure you’ve heard the competing ads on the radio over the past year or so.  The first is from a fairly well-known law firm that says that they have the way to deal with the tax man and that they can use the power of solicitor-client privilege to protect you and that you can’t get this from an accountant.  The second is from an accountant who says “you don’t really think that Revenue Canada is going to put you in jail, so you really don’t need to pay for an expensive lawyer.”  Who’s right?  Both are.

There is a case from many years ago called Tax Time where the Court held that there is no such thing as “accountant-client” privilege.  So, the law firm is correct when they say that if you tell everything to your accountant then Revenue Canada could turn around and haul the accountant in and require him/her to disclose all of your information.  (Whether they would actually go to all this trouble is another question.)  Revenue Canada could not do that if the information is covered by solicitor-client privilege.  However, the flip side is true in that lawyers are expensive – although, I generally find myself envious that I cannot charge the amounts charged by many accountants, so it’s a bit ironic that the accountant is suggesting that the lawyers’ fees are too high.  I can give one example where I was consulted by a potential client who had gone to the other law firm and that firm had asked for a five figure retainer just to review the potential client’s file and determine whether the client had a valid claim.  Not cheap, to say the least.  But in all fairness, it’s not often that you can simply pick up a tax file, leaf through a few pages and be able to give a definitive answer.  It usually involves a lot of time and requires them to go through a lot of documents and if they don’t get the money up front and it turns out that there’s nothing that can be done, you can be guaranteed that the client will turn around and say “oh well, thanks” and then never pay the bill.  So, not cheap, but I sure as heck don’t blame them for asking for the money up front.

Is there an alternative?  It’s possible that there is.  I was introduced to a new web site and service yesterday for Taxpayer Relief Letters.  The program is run by Frank Flynn whom I knew when he was at Revenue Canada before he left years ago.  After several years working in another industry, he has returned to the tax area and has started his new business.  If your business is suffering financially and Revenue Canada is coming after you AND you don’t have an overly-complex matter, it looks like this service might be of interest and assistance to you.  They will take your information and prepare it in a letter or other format that will speak to Revenue Canada in its own language and assist you in making your point for why you shouldn’t pay as much (or any) penalties or interest.  Depending on the nature of your problem and the amount at stake in terms of the penalties and interest you are facing, this could well be a worthwhile alternative.  I would commend you to check out their web site.  If nothing else, it’s nice to have as many options as possible.

Something to think about.

CALC

As you will all know, last week air traffic in Europe was brought to a screeching halt by the eruption of a volcano in Iceland and the huge cloud of ash that it spewed into the atmosphere that covered most of Western Europe.  Not only did this strand hundreds of thousands of international travellers and cost billions of dollars in lost revenues, etc., it also stopped the flow of goods and, in particular, various perishable goods.  To give two examples, I have a client who operates a deli who takes great pride in having prosciutto ham delivered fresh from Italy and I have another client who is a florist who sometimes has special orders for flowers that are not grown in Ontario such as tulips from Holland.  In both instances, they obtain their products from Europe and if they needed any of those products last week, they were not going to get them because of the ash cloud and its resulting air travel disruptions.  So where does that leave them?

There is a common “boilerplate” clause that is often found in contracts and seldom thought about – if at all – by anyone, even the lawyers.  It is known as a “force majeure” clause and usually reads along the following lines:

Neither party is responsible for damages caused by delay or failure to perform undertakings under teh terms of this Agreement when the delay or failure is due to fires, strikes, floods, acts of God or the Queen’s enemies, lawful acts of public authorities, or delays or defaults caused by common carriers, which cannot reasonably be foreseen or provided against.

A few comments about these types of clauses.  The first is what is an “Act of God”?  While there is no all-inclusive list, the general approach is any natural or even supernatural disaster.  The Iceland volcano would clearly fall within this category. 

The second comment is to note the last words of the clause.  For example, if either my deli owner client or my florist client were caught without receiving an order of goods last week, they could rely on the clause.  However, what if they were to order their goods this week?  The volcano has not stopped its eruption, it has simply died down and what is being sent into the atmosphere is now just steam.  If they ordered the goods this week and then just before the orders were shipped by plane the volcano erupted again with more ash and the planes are grounded once more, then it would be difficult for them to say that the problem could not have been foreseen or provided against. 

The third comment is to note that force majeure clauses have been imported from French law and is not a naturally created concept of the English common law of contract.  As a result, you should look at your contracts to see if they include these clauses.  If they do, that’s fine.  If they do not, then the courts will not imply such a contractual term into your contract.

So what if the clause is there and it is applicable – what does this mean for you?  The answer is that it will relieve you from the contractual obligations.  So, if my florist client needed Dutch tulips for a wedding last Saturday and could not get them in time, it could have cancelled the order without having to pay for the flowers that never arrived.  This means that, for the florist, she would want to have such clauses in her contracts.  Similarly, the Dutch flower merchant would want that clause in the contract.  Suppose that my florist client had prepaid for the flowers.  If the merchant could not ship the goods, then the merchant would have to return my florist client’s money.  But the clause would similarly protect the merchant because my client would not be able to sue the merchant for whatever money was lost on her contract with the wedding party because either they cancelled the flower order or they went with other flowers that were less costly (so the florist lost part of her profit).

At the same time, this is another example of when it is helpful to have insurance to cover potential losses due to situations like the Iceland volcano.

Something to think about.

CALC

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

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

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

While I am the first to appreciate that the issues facing small businesses and legal issues are very important, some times it’s necessary to stop and smell the roses … or drink the magic potion … and this is one of those times.

For those of you who are not aware (and I’m sure it’s many of you – because I only learned about it listening to the cultural news on Premiere Chaine (French CBC) on the way home today and it doesn’t seem to have been a blip on the radar screens of the English Canadian media), today is the 50th anniversary of Asterix, that plucky little Gaul whose Roman-bashing exploits have been a hit (pardon the pun) for kids for years.  As a child I enjoyed reading about Asterix’ and Obelix’ adventures in both English and French and it’s obvious that I wasn’t the only one.  Funny, he doesn’t look a day over 30!

For those of you who are interested, the Asterix web site in English is here and the web site in French is here.

Happy birthday to one of my original heros.  Tonight I’ll take a sip of potion and tomorrow I’ll be back on the lookout for more serious issues to put in a post.

CALC

The Supreme Court of Canada released a decision this past Friday in Galambos that covers the area of fiduciary duties.  To put it mildly, the facts of the case are a bit bizarre.  A woman goes to work for a lawyer and his firm as a part-time bookkeeper and she eventually becomes full-time and then the de facto office manager.  The firm starts to have financial difficulties and the woman starts making loans to the firm to keep it afloat and these loans are made voluntarily and often without the knowledge of the lawyer.  Ultimately, the lawyer and his law firm end up owing the woman approximately $200,000.  Not surprisingly, the lawyer goes bankrupt, the law firm goes into receivership and the woman tries to sue to either get some of her money back or else to find a way to get money out of the law firm’s insurers.

At trial, the woman lost on all of her claims.  However, the B.C. Court of Appeal allowed her appeal and found that she should win on the basis that there was an ad hoc fiduciary duty that was owed by the law firm and that was breached.  I should explain for a moment what this is.  There are “traditional” fiduciary relationships – lawyer/client; estate trustee/ beneficiary; director/corporation; etc. - where one would categorize at the outset the relationship as being a fiduciary relationship – that is, one where the fiduciary has agreed to act in the best interests of the other (for example, my job is to act in my clients’ best interests and if that conflicts with mine then that’s my tough luck).  There are others which are not “traditional” but which can arise from the circumstances – the ad hoc fiduciary relationships.  For example, the relationship between a banker and his/her customer is not a fiduciary relationship unless the banker has gone further to provide financial advice in a manner in which the customer has relinquished power to the banker to make the decisions.

In this case, the B.C. Court of Appeal found that there was an ad hoc fiduciary relationship and the lawyer and his law firm appealed to the Supreme Court.  The Supreme Court reversed the Court of Appeal’s decision and has reinstated the trial judge’s decision.  It is of particular interest that Justice Cromwell (writing for a unanimous Court), held:

[75]  The appellants fault the Court of Appeal for holding that fiduciary duties may arise only on the basis of the reasonable expectations of one party.  The appellants say that there must be a mutual understanding that the fiduciary will act only in the interests of the other party.  While I agree with the appellants that the Court of Appeal erred by basing a fiduciary obligation on Ms. Perez’s reasonable expectation, it is not necessary in order to resolve this appeal to go so far as to say that a mutual understanding is necessary in all cases. It is sufficient to say here that what is required in all cases is an undertaking by the fiduciary, express or implied, to act in accordance with the duty of loyalty reposed on him or her.

In this instance, the bookkeeper had simply proceeded to make the loans and there was no corresponding agreement by the lawyer to relinquish his personal interests in favour of the bookkeeper in some way.

This decision is a welcome addition to the growing case law in Canada on fiduciary duties as it helps to provide clarification on when these duties arise.  Why is this important for small businesses?  A couple of reasons.  The first is because claiming breaches of fiduciary duties has become “fashionable”.  Why?  Because if something doesn’t completely “fit” into the normal categories of a negligence claim or a breach of contract claim, then plaintiffs’ counsel would also plead breach of fiduciary duty to see if that claim might “stick” since the elements of that claim is still somewhat fluid.  However, there will now (in most cases, since the Court did not make this an absolute) be a requirement for the courts to find that the alleged fiduciary has done something to indicate an intention to relinquish his/her/its rights and to act in the best interests of the other party.  This will hopefully reduce the number of fiduciary breach claims that you might face.

The second is because, in a case like Galambos, if I have a negligence or breach of contract claim against you and you go bankrupt, I have a simple unsecured claim that will likely get paid little or nothing from the bankrupt estate and that is wiped away when the bankruptcy is discharged.  However, a fraud or “defalcation” which occurs while someone is acting in a fiduciary capacity will survive bankruptcy, so this provides an additional incentive to try and claim that an ad hoc fiduciary relationship existed.  I have a current client against whom such a claim is being made and this client had hoped that bankruptcy would bring an end to being chased by creditors and this hasn’t been the case thus far.

Third, your insurance may cover you for claims of negligence or breach of contract but might not cover you for breaches of fiduciary duty.  Limiting the scope of fiduciary duty claims is thus a benefit in that you can less of a chance of not being covered by your insurance.

The result of this decision is that it will likely curtail the frequency with which breaches of ad hoc fiduciary duties are asserted and that’s not necessarily a bad thing.

CALC

There is an article entitled “Small Business in the Dark About IT Security” by Madhavi Acharya-Tom Yew on page B3 of today’s Toronto Star (in the Business section).  Oddly enough, the article is not available (at least as of noon on Oct 21) on The Star’s website, so I can’t give you a link to it.

To summarize the article, it indicates that small businesses are easy targets for security and privacy breaches.  In particular, security breaches can come from “inside jobs” with current or former employees.  Other points worth noting are:

a) small businesses tend to collect more personal information than is necessary and they keep that information for longer than necessary;

b) small businesses do not think about the information that they are sending out with the recycling.  For example, would you be happier to know that you are doing business with a company that shreds credit card receipts showing your name and credit card number or doing business with one that simply throws those receipts out with the recycling;

c) many small businesses have no, or limited, encryption on their laptop computers or USB key “thumb drives” and if these get lost of stolen then potentially sensitive information – either for the business or for its customers – could wind up in the wrong hands.

The Canadian Institute of Chartered Accountants has a Privacy and Data Security Toolkit that is mentioned in the article.  It can be found here.  Unfortunately, it’s not free, but at $29.95 it won’t break the budget.  You can also give my good friend Fazila Nurani at PrivaTech Consulting a call or check out her website.

It is estimated that the cost of data breach is $202 per lost record.  At first blush, $202 isn’t a ton of money.  But it is if you think about a spreadsheet with hundreds of entries and it’s now $202 per entry.

As I usually note, the old saying that an ounce of prevention is worth more than a pound of cure will apply in this situation.

Something to think about.

CALC.