Archive for May, 2008

Reducing Legal Fees

Wednesday, May 28th, 2008

I was reading an article today on Canoe’s Money page and it is from Forbes and suggests seven tips for reducing your legal fees.  They are:

1. Come prepared

2. Self-incorporate

3. Start with a standard template

4. Eliminate inefficiencies

5. Talk off the clock

6. Cut a deal – eg. deferred fees; and

7. Cut a worse deal – eg. pay for advice through equity in your business.

Some of these good tips.  Coming prepared to a meeting with your lawyer and knowing what you want to accomplish from the meeting and from the legal work is a very good way to reduce fees.  But not always.  Part of my job is to ensure that you have looked at all of the angles (at least the legal angles) and often there are issues that you have not considered – that’s why you come to me for legal advice.

Eliminating inefficiencies by ensuring that there is one contact person who can “call the shots” is helpful and avoids the need for the lawyer to run around and build a consensus decision.  Again, good advice.

Talking off the clock occurs – I do it quite frequently.  However, please realize that if I did this all the time, I would put myself in the poor house.

Cutting deals for deferred fees or equity in the company has its drawbacks.  The first is that the lawyer has to feel very secure that he/she will ultimately get paid.  Given the failure rate of many small businesses, don’t hold your breath on this option.  As for taking equity in the company, this runs the risk of conflicts of interest arising – is the lawyer giving you good advice for the company or good advice to protect his/her equity investment?

This leaves the two tips with which I really have difficulties.  The first is self-incorporation.  I always have fits when people talk about how cheap it is to incorporate and that you can do it yourself.  My biggest problem with this advice is that it completely ignores that there are two distinct aspects of what is commonly called “incorporation” – there is incorporation itself and organization.  Incorporation is the process by which the company is “born” (for lack of a better phrase).  Organization is the process by which the company is given the power to do things – open a bank account, determine who are shareholders, determine who are directors, who can sign what documents, etc., etc.  I had clients who came to me last year and asked how much to incorporate – I explained the incorporation and organization processes and my standard fee.  They decided to do it themselves.  They did an OK job on the incorporation (not fantastic, but far from terrible).  The problem arose, however, when they had to do their taxes this year and the accountant asked them a whole bunch of questions – questions which could only be answered through the organization process.  To make matters worse, they had made certain government filings which did not reflect an efficient organization for the company.  The result was that I had to go back, organize the company as it was reflected in the government filings to keep things consistent, then clean up the mess.  The end result was that the organization and clean up were more than my original quote.

The other tip is “start with a standard template”.  There is absolutely no question – lawyers have standard templates (or precedents) that they use all the time.  However, one of the first things they teach you in law school is that if you slavishly follow any template or precedent, you are bound to screw up.  Take a rollover agreement I was doing the other day.  Part of the agreement required a simple promissory note for the value of the accounts receivable – but the agreement called for no interest.  All of the precedents I had in my precedent library on my computer system and in my precedent books all had interest accruing.  I ultimately had to modify the best precedent to suit my client’s needs since the templates didn’t cut the mustard.  Conversely, I recently saw a client who had drafted its own “simple” promissory note when what was needed is known as a “grid note”.  The client had taken a prior promissory note that had been used in an earlier deal – ie. they started with a standard template.  The problem was, though, that they started with the wrong template and did not know better.  The result is litigation between my client and the maker of the note as to what are the obligations.  By trying to reduce legal fees and using the wrong template, the client now has headaches and increased legal fees from litigation.  In both my situation and the client’s situation, the starting with a standard template was of little assistance, at best.

As the article mentions, be careful because sometimes you get what you pay for.

CALC

Psychological Damages – Sanity at the Supreme Court

Thursday, May 22nd, 2008

The Supreme Court of Canada released this morning its decision in Mustapha.  You may recall that my Post #75 from March 20 discussed this case at the time it was being argued.  Mr. Mustapha found a fly in the bottle of water supplied to him by Culligan of Canada.  Mr. Mustapha claimed that he developed phobia, anxiety and depression as a result of seeing the fly in the water bottle.

At trial, Mr. Mustapha won judgment for just over $300,000.  This was overturned by the Ontario Court of Appeal.  The Supreme Court, in a 9 to 0 decision, agreed with the Court of Appeal, but for different reasons than the Court of Appeal.  The Supreme Court chose to base its decision on the fact that Mr. Mustapha’s damages were too remote.

The Supreme Court found that Culligan owed a duty to Mr. Mustapha, that it breached its duty and that Mr. Mustapha suffered damages.  It further found that, as a matter of fact, the failure of Culligan caused Mr. Mustapha’s psychological damages.  However, the final issue for the court was whether, as a matter of law, the damages were caused by Culligan’s failure to properly filter its water.  The key question for the court was whether the damages were “reasonably foreseeable”.  This is an objective test.  As quoted by the Chief Justice in the decision:  “The law expects reasonable fortitude and robustness of its citizens and will not impose liability for the exceptional frailty of certain individuals.”  She also wrote: “To put it another way, unusual or extreme reactions to events caused by negligence are imaginable but not reasonably foreseeable.”

So, the Supreme Court has upheld the concept that not just any damage which occurs will result in a successful lawsuit.  The result for your business is that if a reasonable person, looking at the situation objectively, would expect that a certain damage might occur from your acts or omissions (or those of your employees), then your business will likely be found liable.  However, it should be noted that the Court did provide a very important caveat:  if you know that your customer or client has a particular sensitivity and you fail to accommodate that sensitivity, then you could be found liable.  As an example, suppose that Mr. Mustapha had complained to Culligan on several occasions that he was seeing what appeared to be dead flies in his water bottles (whether he saw them or not).  In that instance, Culligan would have been put on notice to ensure that it did not send any bottles to Mr. Mustapha with dead flies (or other “debris”) in them.  Since that was not the case here, the Court held that Culligan was not liable – but if it had been the case, then the decision may have been very different.

As a result, if you are put on notice of potential issues with your clients, you should do your utmost to ensure that you can accommodate those issues.

CALC

Auditors for Small Business

Tuesday, May 20th, 2008

I was talking with one of my clients over the weekend and she asked me about the role of auditors and whether her small business needed one.  I will pass on to you the same information I gave to her.

The general rule is that all corporations must have an auditor.  This general rule is set out in Section 149 of the Ontario Business Corporations Act and in Section 162 of the Canada Business Corporations Act.  However, this general rule has a very large exception.  If the company is not an “offering corporation” AND if all of the shareholders consent in writing to dispensing with an auditor, then an auditor is not required.  (An “offering corporation” is one which is or has been listed on a public stock exchange or is one that is trying to sell its shares to the public and for which a prospectus must be registered with the appropriate securities commission – in other words, not usually a small business.)  As a practical matter, since all shareholders must consent in writing, you are usually dealing with a small number of shareholders since the more people you have, the less likely they are to agree on anything (let alone an issue such as a financial watchdog).

For those who want to see things in “official writing”, the exception is provided in Section 148 of the Ontario Act and Section 163 of the Canada Act.  It should be noted, however, that the exception only applies for one year, so the corporations have to obtain a new consent for each financial year.

Okay, so this begs the question of why would one not want to have an auditor?  The simple answer: cost.  The difference between an “accountant” and an “auditor” is that it is the same person doing the same basic job – but an audit requires far more work.  For example, most companies have their accountant prepare the corporate financial statements for each year.  If an auditor is not required, then the accountant will prepare “unaudited financial statements” and these will have a notice to the reader that the accountant has essentially compiled the information provided by the company’s management but has not verified any of the information – in other words “management said X and we have taken their word for it.”  An audit, on the other hand, does require verification.  So, for example, suppose the corporate accounting records show an annual expense for vehicles of $12,345.67.  Unaudited financial statements would simply record this number and that would be it.  For audited financial statements, though, the accountant would have to go through the various receipts and documents (at least on a spot-check basis) to ensure that the number is accurate.

An audit takes longer to do and if something is missed, then the auditor could be liable for failing to do his/her job properly.  With the increase in time comes increased cost.  With the increased risk of liability, the same occurs.  The end result – it takes longer to perform and audit and the cost is substantial compared to an accountant compiling financial statements.  Since this cost can be prohibitive for small businesses, the provincial and federal legislation recognizes this fact and have created the exception.

CALC

Annual Corporate Resolutions / Meetings

Monday, May 19th, 2008

It’s Sunday evening of a long weekend.  Since I’m not up at a relative’s cottage this time around (it’s been raining most of the time so far, so not worth while going up and getting “cabin fever”), it’s the perfect time for me to come into the office and get caught up on some administrative matters.  One of those matters is the annual corporate resolutions for my management company.

Tax time is over and for the many companies that have their fiscal year-ends the same as the calendar year end, with the filing of your tax returns you have also received your 2007 annual financial statements.  Those statements have to be approved by the Board of Directors and also by the shareholders. 

It’s also time to:

- appoint or re-appoint auditors (or accountants), and if your small business is like many and you only have an accountant and not an auditor, then it’s also time to sign the annual waiver dispensing with the need for an auditor;

- re-elect directors and, if necessary, to re-appoint officers;

- have the shareholders, if they deem it appropriate, approve any actions taken by the company in the prior year; and

- take care of any special matters that require (or should have) either Board or shareholder approval.

These are annual matters and should be attended to each year.  That said, if I had a dime for every corporate client I have had who has not attended to this each year I would be able to purchase dinner at a fancy restaurant (come on, it’s only a dime per client, so I can’t realistically say something like “I could take a trip” or “I’d be a very wealthy man”, etc.).

To be perfectly honest, I have only one client right now who is diligent enough to contact me each year about his annual corporate resolutions.  I used to send out reminder notices, e-mails, etc. but nobody ever bothered doing anything about them, so I eventually gave up being the lone voice crying out in the wilderness.  So, what happens instead?  I usually get calls from my clients in a mass panic a few days before they are getting audited for something.  It might be a tax audit.  It might be that they have a professional corporation and their governing authority is coming in to look over their books.  It might be something else.  But the end result is that they call me up and ask for the corporate resolutions to be done for the past X number of years (sometimes we’re talking decades’ worth) and that they all have to be done immediately. 

The funny thing is, getting your corporate resolutions updated is kind of like going to the dentist.  If you do it regularly, it might cost you a bit of money (I usually charge approximately $200 plus GST for simple updating resolutions).  But if you leave it and then have to do everything all at once, it’s like missing your teeth cleanings and then finding out that you have to get fillings drilled in – the combination of the regular teeth cleanings usually ends up cheaper than getting the fillings drilled.  Add in the usual rush factor, and the cost is even more.

Then again, perhaps I’m still just the lone voice crying out in the wilderness.  I hope not.

CALC

Free Ads on Craigslist May Not Really Be “Free”

Monday, May 12th, 2008

An article in today’s National Post section on small business deals with the rising issue of “flagging” and ads on Craigslist.  The advantage of Craigslist is that small businesses can post free advertising for their products and services.  The disadvantage, according to the article, is that Person B can use software to “flag” Person A’s ad as being improper.  The software pretends to be Person B and many other fake identities – all of whom send in complaints to Craigslist about Person A’s ad with the result that Craigslist, on receiving all of these “complaints”, pulls the ad.  At the same time, there is nothing to stop Person B from posting an “ad” on Craigslist that writes disparaging remarks about your business.  Think of it as “flag and slag”.  When Person B is a competitor of Person A, this can create all sorts of problems.  In one of the examples given in the article, the small business owner spent $11,000 to fight his competitor’s practices.

Could this happen in Canada?  Sure.  Can you do something about it?  Again, sure.  Defamation claims can be made for damage caused to you business when another business writes improper disparaging remarks about your business.  As well, depending on the circumstances, a claim for tortious interference with economic relations might arise.  However, just using the example of the business set out in the article – which is easier, spending $11,000 in legal fees to fight or spending $4,000 or less on a web site designer and search engine optimization person to make your company visible and taking out an ad in the online yellow pages (or a similar service)? 

In the end, the dollar you save today on free ads may cost you more than a dollar in lost work or legal fees tomorrow.

CALC

Maintaining Objectivity

Monday, May 12th, 2008

This week’s National Post section on Small Business has an article that deals with a new franchise business that will try and take a run at changing the divorce system.  While I wish the business well (because if it works it looks like it would be very beneficial to the franchisees and to society as a whole), I’m not holding my breath.

In medievil times a saying was that a person “suffered from the humours”.  Today we might call it bi-polar disorder or something similar, but in divorce circumstances you have something like this.  Two people are wildly in love and, then, when they are no longer in love, at least one (often both) of them are wildly in hate – if I can use that expression.  To use my brother as an example, he has gone through a very messy divorce.  His ex-wife was the one who “done him wrong” and yet when she called it quits, she swore that she would either get his money or else put him into bankruptcy trying.  Since he didn’t have a ton of money, she almost put him into bankruptcy with all of her games and tactics.

The article talks about involving mediation to a great extent and focusing on “individual plans both spouses agree upon”.  Good luck.  This requires both sides to be looking at matters objectively – and in the highly charged circumstances of a divorce, that’s not likely to happen.  When do people become more “reasonable”?  When they are beaten down in one area that compensates for the hightened feelings in another area.  In my brother’s case, it was when my former sister-in-law was cut off of legal aid and suddenly couldn’t pull the tricks she had done in the past without it costing her money.  Then she became reasonable.  My brother, who had acted reasonably throughout, eventually achieved a result that was appropriate.

The same thing applies to businesses.  “Corporate divorces” happen all the time.  Sometimes two business partners are as close, or even closer, than married partners.  And if the business falters or fails the splitting of the two partners can be just as acrimonious as a divorce following years of marriage.  The key in both cases, though, is to maintain an objective view.  If both sides can look at the situation objectively, and at least appreciate what the other side’s interests and positions are, then a resolution can be easily worked out.  Corporate divorces (shareholder disputes, appraisal or oppression remedy cases, etc.) often suffer from the same fate as spousal divorces – it is only when both sides start to feel the financial pain of prolonged litigation that they are willing to be more reasonable in terms of settlement.

Similarly, in many commercial disputes the issue is whether Person A did what he/she was supposed to or if Person B is entitled to request certain items, etc., etc.  The key question that is often not asked is: is this dispute worth all the time, trouble and effort?  If you can look at the issue objectively and the answer is “no”, then it’s not worth your while suing or prolonging the lawsuit.

Objectivity.  It’s wonderful in theory, but difficult in practice.  If the practice of objectivity was easy, there would be far less litigators out there.

CALC

Chasing Foreign Contracts

Monday, May 12th, 2008

The Toronto Star has reported today that Ontario’s Ministry of Small Business and Entrepreneurship is making preparations to announce a new program that would help to pay for up to half of a small or medium enterprise’s costs to attend foreign trade shows and trade missions.  This would improve SMEs’ ability to compete with the larger companies in seeking work from outside of the North American market.

A formal announcement of the program and its terms and conditions is expected, according to the article, within a month or so.  If you are interested, you should check on the Ministry’s web site.  Near the bottom of the home page is a section for news and announcements, so you can expect to see an information link at that location when the program is formally announced.  The web site is at:

http://www.sbe.gov.on.ca/ontcan/sbe/en/home_en.jsp

CALC

Cybersquatters on Canadian Domain Names

Thursday, May 8th, 2008

I recently had a file where my corporate client had spent a lot of money to build up a domain name and web publication services.  Let’s say it was Bobcycle.com (it wasn’t).  Unlike many companies, my client went so far as to have Bobcycle.com registered as a trade-mark in both Canada and the United States.  Another person came along and decided to create Bobscycle.com – the only difference being the addition of the letter “s” to the name.  The person was located in a smaller city in Ontario, close to Toronto, but it appeared to be that the person wanted to try and glean away some work from my corporate client by anyone who accidentally mis-spelt the domain name.

The first thing that I did was to perform a WHOIS search.  That search permitted me to know who the person was and to send right away a “cease and desist” letter.  In addition, if gave me other information that permitted further searches to be conducted which made it pretty clear that this person was trying to ride my corporate client’s coattails.  When the person realized that my client was on to him, he immediately agreed to abandon the use of the domain Bobscycle.com rather than face expensive litigation that he would lose.

Now, in my recent case the domain names were both top-level domains (or TLDs) – ie. .com.  If, however, they had been .ca domains AND if this situation were to occur after June 10, 2008, the costs to my client would be more expensive.  Why is that?  Because the Canadian Internet Registration Authority is implementing a new policy effective June 10, 2008 which will limit the disclosure of information on their WHOIS database.  Personal information (name, address, phone number, e-mail, etc.) for individuals will no longer be available.  As such, neither I nor my clients will be able to write directly to individuals in situations like I recently had and warn the individuals that if they do not stop their actions there will be consequences.  Rather, the CIRA has established a message delivery system by which it will relay a message from my client or my office to the individual.  The kicker – the CIRA does not guarantee that the message will go through, so you cannot be certain that the individual received the message and is simply ignoring you.

What does this mean for you?  A couple of things.  The first is that this only applies (for the moment at least) to .ca domain names.  If, as in my recent case, you are dealing with TLDs (most likely .com), then this will not be a problem.  The second is that if you have a .ca domain, you might want to check and see if anyone else is using a similar name that might create confusion (and this possibility is growing as the CIRA announced last month that it had registered its one millionth .ca domain name).  If so, do a WHOIS check as quickly as possible since you will not be able to do so after June 10.  It does not automatically follow that you will want to send a cease and desist letter or take any action at all for the moment.  But, if you do not find out the information before June 10, the likely result will be that you will have to go to court and spend thousands of dollars to obtain an Order compelling the CIRA to disclose who is the person behind the domain name so that you can determine whether it is worthwhile to send a cease and desist letter or to start further legal proceedings.  The difficulty with this, and again to use my example, is suppose that the person who was using Bobscycle.com had the first name Bob and he ran a small bicycle shop.  In my case, it was only because I learned the information from the WHOIS that I was able to conduct some further searches and discovered that the person was clearly trying to glean work away from my corporate client.  If I had discovered that it was a guy named Bob who had a bicycle shop, then my corporate client would have likely had no reason to complain.  To conduct the WHOIS search and make that determination might have cost one hundred dollars.  Since the WHOIS search for .ca domains will not be available after June 10, if my client has to get a court order, my client may have to spend thousands just to come to the same conclusion that it has no right to complain.  I am not saying that the CIRA policy is unfair, unjustifiable, etc.  But these heightened costs will be a reality, so you might want to check the .ca WHOIS database while you still can.

Finally, I should mention that this policy only applies to the non-disclosure of individual’s personal contact information.  If you are dealing with a corporation, the information is still available.  That said, of the one million .ca registrants, it has been estimated that approximately 60% are individuals and most cyber-squatting situations involve individuals.  So, if you find yourself with someone trying to use a similar domain name to glean customers from you, hopefully that person registered the domain name through his or her company.

CALC

Duty of Employees to Mitigate – “Working Notice”

Wednesday, May 7th, 2008

An employee can be fired at any time for pretty much any reason.  The question, then, is what flows from the firing.  If the employee is fired for just cause (assuming that this can be proven), then the firing is immediate with no ramifications to the employer (beyond the damage or loss attributable to the employee’s actions or inactions).  However, if just cause cannot be proven (which is often the case), then the employer must provide reasonable notice of termination to the employee or pay in lieu of such notice.

The Supreme Court of Canada last week released its decision in Evans which looked at the issue of whether an employee was required to continue working for the employer during the notice period.  The Court held that such a requirement did exist – subject to certain exceptions.

Employers often do not give “working notice” to employees – primarily out of concerns that the employees might “take revenge” in some way against the employer or its business (eg. stealing items or data, exposing the computer system to viruses, spyware, etc.).  Instead, the employers give the employees pay in lieu of notice.  However, this does not prevent the employers from giving working notice – especially if the employee is expected to act reasonably throughout the notice period.

Unless there is some reason which would prevent an employee from continuing to work at the employer (for example, where a reasonable person in the employee’s shoes would find the workplace to be one of hostility, animosity or embarassment), then the employee will be required to mitigate his damages and work throughout the notice period.  This is because, as the Court has re-affirmed, damages for wrongful dismissal are based upon the failure of the employer to give the employee reasonable notice to permit the employee to obtain a new job and arrange his/her affairs and are not to be seen as any form of punishment against the employer for terminating the employment.

As a result, unless the workplace becomes a truly poisoned atmosphere (and whether this is so is based upon an objective, not a subjective, determination) for the employee to whom notice is given, he/she will be required to work through the working notice period if the employer so wishes.

CALC

Changing Employment Agreements

Wednesday, May 7th, 2008

The Ontario Court of Appeal released a decision last week that dealt with a situation of “constructive dismissal”.  Employment relationships are a form of contract.  In many instances, there is a formal employment agreement, but in a situation of a person simply being “hired” without any formal agreement, the law still finds that there is an unwritten agreement and will imply various terms if necessary.

One of the implied terms for an employment agreement (whether written or not) is that neither the employer nor the employee can unilaterally change any significant portions of the agreement (and thus the employment relationship).  So, if Employee A is hired on as the Eastern Regional Vice-President and three years later is demoted to the stationery manager, Employee A can claim that his/her employment relationship has been unilaterally changed by the employer in a significant way.  But, there is a twist – the employer can unilaterally change a significant portion of the agreement if it has provided reasonable notice to the employee of the change.  The question, though, is what should an employee do if the employer provides notice of the change.

This question was addressed by the Court in its decision in Wronko.  Mr. Wronko was an executive who had an employment agreement that provided for two years’ notice (or pay in lieu thereof) for termination.  A few years later, the new head of the company sought to change that arrangement to a little over one year’s notice.  Mr. Wronko refused to sign the new employment agreement and the employer gave him notice that in two years it would be changing the arrangement to the new one year notice arrangement.  Periodically throughout the two year period Mr. Wronko made it clear that he would not sign the new agreement.  Very shortly after the two year notice was up, the company wrote to Mr. Wronko advising that the time period had expired and that on a “go forward” basis, the new arrangement would apply.  Mr. Wronko took the position that he had been constructively dismissed and he sued for damages.

The Court of Appeal, relying on a decision of the same court from the 1950s, held that the employer got it right in giving notice of the impending change.  However, what it should have done was to give Mr. Wronko notice that his job would be terminated at the end of the two year notice period and at the same time offer re-employment to Mr. Wronko on the terms of the new arrangement (ie. one year’s notice of termination).  By failing to do this, the employer was held to have consented to the objection to the new terms and had implicitly withdrawn the insistence upon the new arrangement – and Mr. Wronko was therefore entitled to damages for constructive dismissal.

The moral of the story: if you wish to change an employee’s terms of employment, you must (a) give sufficient notice of the change; and (b) if the employee refuses to accept the change, you should give notice to the employee that his/her employment will be terminated after the appropriate notice period but at the same time offer renewed employment on the new terms.

CALC