Archive for May, 2007

Demand Promissory Notes

Wednesday, May 30th, 2007

I had a potential client come to see me the other day about a promissory note.  The gentleman had sold his business and had received the promissory note for a part of the purchase price which remained owing.  The purchaser of the business operated the business for a couple of years and the gentleman waited for the purchaser to make enough money in the business before he requested payment.  When he did request payment, the purchaser suddenly went deaf and didn’t return calls, e-mails, etc. and hadn’t paid on the promissory note.  When the gentleman concluded that he was not going to get paid it was time to sue.  I took one look at the note and had to tell him that he was too late and if he sued his claim would be immediately dismissed.  The problem was that the promissory note was payable “on demand”.

There are two timing possibilities for promissory notes: (1) those payable on a fixed date or with installments on fixed dates; and (2) those that are payable “on demand” – and therefore payment is not required until the person holding the note requests (ie. demands) payment.  In the first instance, it is clear that payment is due on a specific date and if payment is not made on that date then the right to sue arises and the holder of the promissory note has up to two years (in Ontario) to sue for payment.  But what about demand promissory notes?  When does the time start to tick for those notes?

The common misconception is that since demand promissory notes are not payable until a demand for payment is made, the two year limitation period does not start until the day that the demand for payment is made.  As an example, if a demand note is made on January 1, 2003, but demand for payment is not made until January 1, 2008, the two year limitation period should not expire until January 1, 2010 (being two years after the date of the demand for payment).  Unfortunately, that is not how the law operates in this specific area.  In my example, the law takes the position that if the note is made on January 1, 2003, the demand for payment could have been made right away on January 1, 2003 or any day after that.  In the situation where a fixed date is made for payment, the holder of the promissory note has no right to demand payment until the fixed date is reached.  Conversely, though, for demand notes the demand for payment could be made immediately.  The result, therefore, is that the limitation period starts to run immediately. 

While there was some speculation that the changes a few years ago to the

Ontario legislation for limitation periods might have changed this rule or that the transition rules set out in that legislation might have assisted people holding promissory notes, the Court of Appeal has ruled that the old rule remains valid.  You can find that case at:

http://www.ontariocourts.on.ca/decisions/2006/december/C45293.htm

As such, if you have been provided in any commercial transactions with a promissory note that is payable “on demand”, please realize that you have only two years from the day you received the note to sue on it and if you fail to do so, you will not be very pleased.  This is especially important to remember where it is contemplated that payments will be made over time.  For example, it may be agreed that the interest only will be paid periodically (or even on specified dates) but that the principal itself will only be payable on demand.  If that is the case, then it could be that the debtor pays the principal for two years and one day and then refuses to pay anything further and if no claim is made for the principal owing, then it’s too late.

CALC

Is Data Property?

Sunday, May 27th, 2007


It is no accident that modern times are referred to as the “information age”.  But the law is often behind the times and it is interesting to watch how it is slowly starting to become more current.  An example of this is a fairly recent decision of the New York Court of Appeals in Thyroff v. Nationwide Mutual Insurance.  In that case the plaintiff was an insurance agent for Nationwide and had an arrangement by which he leased computer equipment from Nationwide and Nationwide agreed to store his data (both business and personal) on its computer server.  Each day, the plaintiff’s data was uploaded to Nationwide’s computers.  This arrangement could be terminated by Nationwide at will and, as it turned out, it terminated the agreement and the next day denied Mr. Thyroff access to its computer server with the result that he could not access either his business or his personal data.  (I guess Nationwide wasn’t “on his side” in this instance.)  Nationwide did not appear to make any use of the data, but simply denied Mr. Thyroff the ability to make use of the data.  As a result, Mr. Thyroff sued for the tort of conversion.

Conversion is best thought of as the civil remedy for theft since conversion is the taking of someone else’s property and using it for yourself.  However, the courts have had difficulty in the past with accepting that the loss of data gave rise to a claim in conversion since nothing “real” had been taken.  In Thyroff the Court had to decide for the first time whether the law of conversion in

New York should be expanded to include the deprivation of access to one’s intangible data.  The Court agreed that data today is the equivalent of the types of property originally protected by the law of conversion hundreds of years ago.  The Court’s decision can be found at:

http://www.courts.state.ny.us/reporter/3dseries/2007/2007_02442.htm

It seems odd that this issue would not have been decided earlier, but the situation is the same in

Canada.  In fact, it is a bit more muddled in Canada than in the

U.S.
thanks to the Supreme Court of Canada’s 1988 decision in Stewart.  In that case a criminal charge was laid for the “theft” of business information.  The physical documents where the data was located were not taken, but rather the information was copied down and subsequently used.  The Supreme Court came to the conclusion that, for the purposes of criminal law, something physical had to be taken and, as such, the taking of “data” was insufficient to constitute a theft since the original data remained.  The Court went further to suggest, however, that the taking of data might, in certain circumstances, give rise to a civil remedy for conversion or other claims, but the Court failed to provide any substantial guidance in this regard (since the issue wasn’t squarely before it in that case) and the fact data was not “property” for criminal purposes resulted in a mixed message being sent by the high court.  Suprisingly, the issue has received comment in only a few cases since Stewart.  In Ontario it was decided at the trial level that a dentist’s file and customer information were “property” for the purposes of a secured creditor enforcing its security against those documents (provided that patient confidentiality was maintained).  In Alberta it was decided at the trial level a few years ago that seismic data could be the subject of security under the

Alberta
Personal Property Security Act.  In that case, the Supreme Court’s decision in Stewart was acknowledged but considered not to be binding since Stewart dealt only with the issue of data as property in the criminal law context.  The

Alberta
case illustrated, though, how other cases have skirted the issue by claiming that the real issue was whether the data was obtained through a breach of fiduciary duty or breach of a confidentiality obligation and any compensation was being awarded for those breaches, rather than for any recognized proprietary right.

In the “new economy”, as noted by the Court of Appeals in Thyroff, it seems counterintuitive that data is not a form of property.  While the Canadian courts have not yet fully reached this legal conclusion, one can suspect that the Thyroff decision will be referred to as authority to suggest that the Canadian courts should follow its lead.  Until that happens, though, businesses should continue to use non-disclosure agreements or similar documents.  They may wish now to include additional wording to the effect that the parties acknowledge and agree that there exists a proprietary interest in the data beyond any interests covered by the law of trade secrets, confidentiality obligations and fiduciary duties.  If the Canadian courts follow Thyroff, such wording could well lead to additional protective rights for interference with one’s data.

CALC

Personal Joint Bank Accounts

Thursday, May 24th, 2007


While I appreciate that this site is devoted primarily to small business issues, I thought I should mention a recent decision from the Supreme Court of Canada that deals with joint bank accounts since many of you will find yourselves in a situation dealing with such accounts at some point in the future.

In Pecore, a father added his daughter to his bank account and made it a joint bank account.  As is often the case, his intention was to let the right of survivorship apply so that when he died his daughter would be entitled to take the money and it would not fall to be a part of his estate – and thus estate taxes could be avoided.  This is a very common arrangement and when there is no dispute in the family after the person’s death it is an uneventful occurrence.  However, in some cases a dispute will arise. 

In Pecore, the father’s will provided for specific inheritances but was silent as to the joint bank account.  The daughter and her husband (who has since been divorced) were to share equally the balance of the estate.  The husband claimed that since the father had been the one truly in control of the joint bank account and all of the money in the account came from the father, then there was no reason to believe that the father intended to give the account balance to his daughter through the right of survivorship.  The husband relied on the principle known as the “presumption of a resulting trust” which required the daughter to prove that the father actually intended the money as a gift – as opposed to the father merely permitting the account to be joint to let the daughter assist him in the management of the account.  The trial court, Court of Appeal and Supreme Court of Canada all agreed that the daughter provided sufficient evidence to rebut the presumption and to show that the father indeed intended to give the bank account balance as a gift to his daughter.

The Supreme Court’s decision can be found at:

http://scc.lexum.umontreal.ca/en/2007/2007scc17/2007scc17.html

Until this decision, it has been very commonplace for people (lawyers included) to take the position that jointly-held assets with rights of survivorship will automatically and absolutely transfer title to the asset on the death of one of the owners.  While this generally is the case, such transfers are not always immune to challenge.  As a result, to avoid costly litigation in the future, people would be best advised to document in some way the intention of a parent to give any balance in the account as a gift to his/her child who is the joint holder of the bank account.  A small and relatively inexpensive step taken while the parent is alive could easily avoid a lot of legal costs after the parent is dead.

CALC

Changing Human Rights Landscape

Monday, May 21st, 2007

On December 20, 2006 the

Ontario Human Rights Code Amendment Act, 2006 was enacted. The key provisions of that legislation, however, still have yet to be proclaimed in effect. Since I have now received several calls regarding what the changes will engender, I thought it would be best to give a quick summary on the blog.

Perhaps the largest change that will come about is the dramatic reduction in delays in dealing with human rights complaints. Or that’s the hope. The delays have become systematic and the entire process has been bogged down. The current regime generally provided for a complaint to be made, a response made to the complaint, then a mediation would be scheduled. If a settlement could not be reached at the mediation, then an investigation would occur and if there was sufficient reason to proceed to a tribunal hearing, a hearing was held. All along the way, though, there were various procedural steps which could delay matters further. I recently attended a mediation at the Human Rights Commission for a complaint which was, by the time of the mediation, almost two years old. Needless to say, if it is taking years before a mediation is heard, it is taking just as long to deal with investigations and appearances before the Tribunal.

It was this incredible backlog that spurred the government to introduce the new legislation. The changes to the system permit complaints to be made directly to the Tribunal and to allow the Tribunal to handle the matter directly (thereby cutting out the “middlemen” of the mediation and the investigation stages). This is a double-edged sword. On the one hand, businesses will benefit from the fact that they can dispose of unmeritorious claims without having to deal with lengthy delays. On the other hand, though, unmeritorious and “borderline” cases used to be either not presented or abandoned when the complainant realized how long it would take to go through the system. That check on unmeritorious complaints will now be removed, so businesses may face complaints that they would not have otherwise had to deal with under the old system.

Another difficulty that will be seen, at least in the near future, will be an outrageous backlog at the Commission while the transition is made from the old system to the new system. At my last mediation, the mediator (a Commission employee) said that the new regime with its “direct access” model will create problems with the many complaints currently backed up in the system. There will be, in the short term at least, a flood of matters headed to the Human Rights Tribunal. While I understand that the Tribunal is currently looking at appointments of new members, even if there is a large increase to the size of the Tribunal, there will still be at least some short term delays. The amount of the delays, may, however, be lessened, by the direct civil remedies available (and discussed in the final point below).

A second change has been the removal of the compensation cap that used to exist for Tribunal awards. The old Section 41 provided that the Tribunal could award compensation for discrimination but that compensation for mental anguish was capped at $10,000. In reviewing this section, the Tribunal had concluded in several cases that if mental anguish awards were capped at $10,000, then so should awards for any other suffering due to discriminatory practices. As a result, awards by the Tribunal rarely exceeded $10,000. Under the new legislation, the award cap is gone and it will be interesting to see if the Tribunal starts to assert its newfound freedom and businesses may well face significant awards if they run afoul of the Human Rights Code.

A third change is the removal of the right of an appeal from Tribunal decisions. Previously, if either party did not like the outcome of a Tribunal decision, it could appeal to the

Ontario Divisional Court

. Under the new legislation, all Tribunal decisions will be final (unless decisions are found to be “patently unreasonable” – a test which is basically the equivalent of saying that the Tribunal was comprised of complete morons who were drunk and didn’t listen to a word of the evidence (all of which went against the decision made) and anything less than that will not be overruled by a court – Okay, perhaps I’m stretching it a bit, but not much, it’s a really high test to meet). I have serious concerns about this new provision given that the test for overturning a Tribunal’s decision will be so high, but I will wait to see how the Tribunal actually acts before I decry the situation. Of some help, possibly, is the fact that a request can be made to the Tribunal to reconsider its decision.

A fourth change relates to the timing of complaints. Under the old regime, while there was technically no restriction on the amount of time before a complaint could be filed, the Commission generally took the position that complaints had to be filed within six months of the incident (or if a series of incidents since the last incident) that give rise to the complaint. Under the new regime, the legislation expressly permits claims up to one year after the incident (or last incident). But the legislation goes further and permits the Tribunal to receive complaints even later if it finds that there are circumstances which justify the delay and if no prejudice would be suffered by the other party. Thus, the general guideline used previously by the Commission has now been doubled (at the least).

The fifth, and perhaps the most significant, change that I wish to highlight is the new Section 46.1. Previously, a debate raged in the courts over whether claims could be made in civil lawsuits (primarily wrongful dismissal cases) for violations of the Human Rights Code. The prevailing view has been that such claims should be made only in complaints to the Human Rights Commission with the result that often businesses either faced two proceedings (a civil lawsuit and a human rights complaint) or the business was lucky and only faced the civil lawsuit. The new Section 46.1 permits claims for violations of the Code to be asserted in civil lawsuits. Businesses should brace themselves for a wave of human rights claims that will be now asserted in wrongful dismissal claims. This will likely increase the amounts having to be paid in settlements and making the prospects of settling more difficult. For truly meritorious claims, this does not bother me. However, I can easily foresee two problems arising in the future. The first problem is that unmeritorious claims will be asserted and even if they are settled on a nuisance basis (say, for a few thousand dollars), this will result in higher settlement amounts having to be paid by businesses. The second problem is that plaintiffs who previously had borderline or worse claims for wrongful dismissal will now pursue them by adding claims for human rights violations. The result will be that a claim that otherwise would not have been pursued at all will be pursued and, again, settled on at least a nuisance basis. The cost to businesses could prove to be quite large. While I hope that this does not occur, it could quite easily come to pass – especially if the courts decide to grant large awards for human rights violations, in which case everyone will head to court rather than going to the Tribunal, which, in turn, might cause the Tribunal to start granting larger awards for violations to keep in line with what the courts are awarding. We could be at the thin edge of what proves to be a very large wedge.

The key provisions have yet to be proclaimed into force. Given that this legislation proceeded through the legislature very quickly, it has been controversial. With an election scheduled this Fall, I expect that either the government will have the legislation quietly proclaimed into force over the Summer when everyone is too busy thinking about vacations or else they will wait and if they are re-elected, they will have it proclaimed immediately after the election. Conversely, if the Conservatives win the election, it will be interesting to see if they tinker with the legislation or leave it and “blame the Liberals” for any mess created by the legislation. Either way, the landscape for human rights complaints is going to change and it should prove interesting, to say the least.

CALC

Dealing With Creditors

Tuesday, May 15th, 2007


The Toronto Star recently had a special section on Small Business.  In an article on bank loans to small business, I saw with interest the following quote:

“Banks know that every business will have problems – from seasonal slumps to a lack of equity – but entrepreneurs shouldn’t wait until the situation gets desperate before they look for financial help.  ‘Keep us in the loop if you’re having financial difficulties.  We really encourage them to come into the bank and talk to us, up-front.  When you’ve got time, it’s easier to come up with a plan.’”

Sage advice that applies to all creditors – not just the banks.  Sometimes I feel like I’m alone crying in the wilderness, but I will start to cry out again.  Dealing with creditors early in the problem, or even mid-way, is better than waiting until the end.  More importantly, a creditor will take a part-payment anytime.  The key advantages of partial payments are (a) that it shows the creditor that you do truly intend to re-pay the debt and (b) that it gives them a financial advantage.  The first aspect is self-evident, the second not quite so, but here’s why.  Suppose you are in financial trouble and it looks like you are potentially headed to bankruptcy.  If the creditor does not have security for the debt, then he/she/it is likely to get X cents per dollar owed.  As an example, suppose you owe Creditor A $100 and if you go bankrupt then unsecured creditors will get 10 cents on the dollar.  In Creditor A’s position, then, if you go bankrupt then Creditor A will get $10 of the outstanding debt.  Now, let’s suppose that you will owe Creditor A $100, but you pay Creditor A $10.  Even if you subsequently do go bankrupt, then you only owe Creditor A $90.  Creditor A will get 10% of $90, or $9, but when that is added to the $10 received, Creditor A ends up with $19 repaid on the $100 debt.

I had a former client who always intended to pay creditors.  However, the client’s view was that creditors would be paid in full when the funds were available.  So, if Creditor A was owed $100, B was owed $80, C was owed $50, and the client only had $40, nobody got paid.  When the client obtained $50, then C was paid and when funds were available to pay the others, in full, then they would be paid.  If, instead, the client had paid A, B and C even $10 each, and kept $10 for his own expenses, then the client would have still had three grumbling creditors, but at least none of them would be calling in collection agents, suing the client or threatening to petition the client into bankruptcy. 

Dealing with your creditors up-front and making partial payments may well be the difference between easing cash flow difficulties and losing your business.  It’s something you should consider.

CALC

Extra-Provincial Taxation

Friday, May 11th, 2007

The Supreme Court of Canada has just released a decision that will be of interest to people in partnerships with offices in more than one province.  In Dunne v.

Quebec (Deputy Minister of Revenue), Mr. Dunne was a partner at Ernst & Young.  Although he  lived and worked in Ontario, E&Y had offices in

Quebec and did approximately 20% of its business in that province.  When Mr. Dunne retired, he was given a pension by the partnership.  The Quebec taxation officials decided to send a bill to Mr. Dunne for unpaid taxes and Mr. Dunne replied that as he did not live in Quebec and had no other connections with the province, he should not have to pay

Quebec
tax.  The trial court agreed with Mr. Dunne but the Quebec Court of Appeal, and now the Supreme Court, disagreed.  The decision can be found at:

http://scc.lexum.umontreal.ca/en/2007/2007scc19/2007scc19.html

The

Quebec legislation provides that income tax may be levied on any income earned in the province.  (Section 2 of

Ontario
’s Income Tax Act has similar wording.)  The Deputy Minister argued that since Mr. Dunne’s pension was based on an allocation of the partnership’s profits, and since 20% of those profits were earned in Quebec, then 20% of Mr. Dunne’s pension was income earned in Quebec and therefore subject to Quebec income tax.  Justice LeBel, writing for a unanimous court, agreed with that position.

Anyone in a partnership which spans more than one province will have to take notice of this decision.  Tax rates differ between provinces.  The tax rate in Alberta or Ontario is likely to be lower than the tax rate in

Manitoba where an NDP government is in power.  It will be interesting to see, for example, if provincial ministries of revenue suddenly decide to start allocating portions of profits to operations in their provinces and the partners who previously only had to file one tax return suddenly have to file multiple returns for all the provinces where the partnership carries on business.  I do not anticipate that the provinces will take such a position since it would be generally bad for business – but, then again, that wouldn’t be the first time that governments sacrifice business efficiencies for taxation revenues.

That said, the solution may lie in the fact that the Supreme Court was content to base its decision on the fact that the pension was paid out of the profits of the partnership and, it appears, the profits were determined as one large revenue pool.  One way to avoid this result may be to have each province be a separate “profit centre” with compensation for partners based solely on how the partnership profited in that particular province.

CALC

The Difference of a Few Words

Monday, May 7th, 2007

They say that lawyers get paid by the word. While that’s not true, it does provide an example of how important words can be. Another place where wording is important is in legislation. I was reminded of this the other day when I was reviewing a list of cases for which leave to appeal has been sought at the Supreme Court of Canada. On March 8, 2007, an application for leave to appeal was filed by a Ms. Buntain and others against the Marine Drive Golf Club. Given that the case involved one of my biggest passions (after wine, women and song – the latter being expendible and the middle one being restricted to my wife), I decided to review the case.

It turns out that the Marine Drive Golf Club is a private golf club in

British Columbia where they still have restricted 19th holes. There is a separate “women’s only” watering hole and a separate “men’s only” watering hole. It seems that Ms. Buntain and several of her fellow members decided that they no longer liked this arrangement, so they made a complaint to the B.C. Human Rights Commission. The golf club brought an application to the courts for a declaration that the human rights commission had no ability to hear the matter. It seems that the B.C. human rights legislation prohibits discrimination for services, accommodation, etc., etc., but only where such items are “customarily available to the public.” And that’s where the difficulty lay. Marine Drive Golf Club is a private club. So, the club argued, since it did not customarily make its club available to the public, it was not possible for there to be a breach of the human rights statute. The trial court and the B.C. Court of Appeal agreed. You can find the Court of Appeal’s decision here:

 

http://www.canlii.org/en/bc/bcca/doc/2007/2007bcca17/2007bcca17.html


Other jurisdictions, such as

Ontario, do not have similar wording in their human rights legislation. That is why you can have rulings in Ontario that require girls to play on boys’ hockey teams, etc. in

Ontario
. As a result, the Supreme Court’s ultimate decision will not affect the way the case would have been heard in

Ontario
. But it is interesting to see how five seemingly innocuous words can result in a complete change of position from province to another.

CALC

Criminal Rates of Interest

Thursday, May 3rd, 2007


I have written and lectured in the past about criminal rates of interest.  It is an area that people “sort of” know about, but don’t really know enough.

Section 347 of the Criminal Code provides that where an “effective” annual rate of interest is 60% or more, that is against the law.  This was put into law to try and stop “loansharking”.  The problem, though, is that the key word is “effective”.  Suppose someone goes to a bank machine and obtains a cash advance on his/her credit card of $10.00.  Now, let’s suppose that the person gets charged an access or administrative fee of $5.00 for the ability to get the cash advance.   For most people, the $5.00 fee is a bit steep, but then, the person should have taken out more money.  But, at 50%, the rate is not “criminal”.  However, let’s suppose that the money is paid back the very next day.  The result is that the person has paid $5.00 for use of the money for one day.  The result when you take $5.00 and multiply it by 365 to get an annual rate – $1,825 if interest was to accrue at this rate for one year – or WAY more than 60% interest, and therefore a criminal rate.

Now, many people will say, “yes, but how often do people get credit and then pay it back quickly?”  Probably not the majority, but the point is that 20% interest when paid over a short time span could put the small business owner afoul of the law.  It could also potentially put them at risk of a class action lawsuit.  While the courts were not initially receptive to such lawsuits, a very recent decision of the Ontario Court of Appeal will change all of this.  In that case, MBNA Bank has found itself on the wrong end of a decision permitting the certification of a class action for refunds of money based on potentially (but inadvertently) criminal rates of interest.  The decision is found at:

http://www.ontariocourts.on.ca/decisions/2007/may/2007ONCA0334.htm

Small business owners may wish to look carefully at their invoices and determine if their “net 30 days” invoices do not inadvertently run afoul of the Criminal Code.  But, let’s suppose it does.  The courts have offered some relief.  The Supreme Court has rejected the older rule that if the criminal rate existed then the whole contract or invoice must be considered unlawful and cannot be enforced.  Now, while that old rule remains one possibility, it is likely that the contract will simply be “read down” so that it is interpreted as if only a 59% (for example) effective rate of interest applied.  The court’s decision to this effect can be found at:

http://scc.lexum.umontreal.ca/en/2004/2004scc7/2004scc7.html

In any event, it would be better for businesses to review their agreements and invoices now and modify them rather than hoping that they can convince a court to “read down” the agreement or invoice later.  If nothing else, it’s also a cheaper fix than seeking the court’s help.

CALC