OK, time to go away from legal blogging for a moment – sort of.  By an interesting turn of fate, I was in a conversation with another lawyer about a week ago and the topic of conversation turned to Toronto’s harbour front.  In particular, there used to be a high speed ferry that operated for a couple of years between Toronto and Rochester, New York.  After a contest to name it, it became known as “The Breeze”.  I had always hoped to go for a trip on the ferry but the timing never worked out with my schedule.  And then the ferry just seemed to disappear and nobody really knew where it went.

Well, as it turned out, there was a decision of the Appellate Division of the Supreme Court of New York this past Friday that dealt with The Breeze.  I have now learned that the ferry was taken over by the City of Rochester and then ultimately shut down due to operating losses.

This particular case has no legal value for small businesses.  Rather, since I know that the lawyer I was chatting with reads my blog every once in a while, I thought I’d make this post for his benefit and everyone else in Toronto who has wondered about what ever happened to the ferry.  Well now we know.

CALC

The Ontario Court of Appeal released a short endorsement this past week in Scenna.  I could not find the lower court decision in either the free or the pay-for-use legal databases.  The case is important, though, as a re-affirmation of the requirement that you do not have to have “all the I’s dotted and T’s crossed” to have a binding contract.

From the endorsement it appears that the parties were involved in the sale of a business.  As the court notes, the parties had not agreed to “whether there was to be a share sale or a share redemption; to their failure to agree on the price to be allocated to particular assets; and to their failure to agree on the terms of a co-ownership agreement and a shareholders’ agreement that would govern the parties’ continuing co-ownership of a piece of property and one corporation.”  What this would presumably show, then, is that there was at least an agreement that there would be a sale of the shares and the price for those shares to be paid by the purchaser.  The items that were not agreed upon were not unimportant, but as the Court finds, they were similarly not essential.

While not giving any clarification on this point, the Court also upheld trial judge’s finding that there was ample evidence to show that the parties had intended to create a binding agreement and that the continued negotiations did not detract from such a finding.

This case is important for your small business for two reasons.  The first is to realize that if you are negotiating any important agreement, if there are any “loose threads” to be taken care of you had better ensure that any such loose threads are either taken care of quickly or else that there is an understanding (preferably in writing) that unless and until those loose threads are dealt with there is no final binding agreement.  The second reason that the case is important is to remind you that if the I’s are not dotted and the T’s are not crossed, you could still be liable on the agreement. 

When is this type of situation likely to occur?  When you get a “better offer”.  It is not uncommon for businesses to request quotes from competing suppliers.  For example, suppose that requests are made of 5 suppliers and 4 of them give quotes right away and a decision is made on the best of them and then while negotiations are ongoing with the best of the 4 the 5th supplier finally puts in its quote which is the best by far.  Naturally, the business wants to go with the best quote and will often then try to back out of any negotiations or arrangements with the best of the 4 original quotes.  So long as you haven’t gone too far and agreed upon the essential terms of the agreement, then you should be all right.  However, if you have agreed on these essential terms and have not done anything to negate the existence of a binding agreement, then you could be faced with a breach of contract situation like in Scenna.

CALC

Years ago I acted for the Bank of Montreal in what was, at the time, an out of the ordinary situation.  A husband was an executive with the Bank and he was in the process of going through a divorce.  One of the “issues” was how to split the joint family property and this was to be determined at trial.  The wife had a lawyer who, very clearly, attempted to use a tactic to force the husband to settle before trial.  The husband, along with all executives, were potentially up for bonuses that year and the amount of the bonus was in dispute.  The wife was aware of a public statement made by the former head of the Bank who had since gone to head another bank in the U.K.  So, the wife’s lawyers had summonses issued for the current head of the Bank along with the number two executive for the purpose of having them give evidence as to what the former head had said at the public announcement.  This was not necessary and was clearly an attempt to cause so much embarrassment to the husband that the two most powerful people at his employer would be pulled into this mess that he would settle to avoid the problem.  Instead, I got the call and went running to court to obtain an order setting aside the summonses, which I did.

This occurred about eight or nine years ago and was, at the time, a “one-off fluke”.  This fluke, however, has become more frequent in recent years and it is becoming more common for parties to a lawsuit – especially those who represent themselves – to call witnesses for no good reason other than to cause problems for the other side.  In another example, I had a case where a self-represented litigant intended to call upwards of twenty witnesses to all give essentially the same evidence.  The result of this intention was to force the trial to go on the “long trial list” and pushed it back for almost two years (which, since I was on for one of the defendants – another bank, wasn’t that bad a result in the end).  The Supreme Court of Canada, in Dobreff, has upheld that summonses in cases such as these can be set aside by the courts.

A gentleman was charged with trespass at the University of Western Ontario and he represented himself on the charge.  He had summonses issued for numerous members of the top executive of the university including the President and several vice-presidents.  They sought an order relieving them from the obligation to appear as they had no relevant evidence to provide to the court.  The Superior Court agreed (in a decision which I cannot find in the free databases online).  Last October, the Ontario Court of Appeal gave short shrift to the appeal and upheld the lower court’s decision.  And now the Supreme Court has denied leave to appeal to Mr. Dobreff and has thus upheld the Court of Appeal’s decision.

Oliver Wendel Holmes wrote many years ago that a person who represents himself or herself has a fool for a lawyer.  I don’t know if I would agree with that in absolutely every case.  But I think that anyone who is considering representing themselves at trial and trying to think of ways to “embarrass” the other side, either directly or indirectly, should now think twice as the all levels of the court in Dobreff have shown unanimously that any attempt to involve witnesses who have no significant evidence to provide will not be looked on with favour and can likely result in an award of costs against the person seeking to call the unnecessary witnesses.

CALC

An interesting decision was handed down by the English House of Lords last week dealing with “without prejudice” communications.  We’ve all seen them before, the letter from a lawyer or from someone on the other side of a dispute that has near the top the words “Without Prejudice”.  The absence of the words are not determinative of anything nor are the presence of the words.  To give you an example, I have been dealing with several self-represented individuals in different lawsuits who have taken to the habit of adding “Without Prejudice” to absolutely everything they send to me simply because they have no idea what the words are used for and my attempts to educate them have clearly fallen on deaf ears.  The mere fact that the words are there doesn’t automatically turn a document that would otherwise be admitted into evidence into a prohibited document.  Similarly, the fact that the words are missing doesn’t turn a letter seeking to settle the dispute into an admissible document at trial.

The courts have a vested interest in having as many lawsuits settle as possible.  It’s not that the judges want to be out of a job, but the reality is that the courts are backlogged enough as it is – and that’s with well over 90% of all lawsuits settling!  If they didn’t settle, just think of how bad things could get.  So, the courts support the concept of settling as much as they can.  One way of doing this is to try and permit the parties to a lawsuit to enter into settlement negotiations without the fear that if they say X, Y or Z that some or all of this may come back to haunt them if a settlement cannot be reached and the matter does go on to trial.  As such, statements made in the context of settlement negotiations are privileged and cannot be put into evidence at trial.  This is said to be partly based on public policy and partly based on either an express or implied agreement among the parties to the negotiations.

There are, however, some suggested exceptions to this principle.  For example, suppose that I was in a lawsuit with you about a contract and in the course of negotiating a settlement you happened to mention in a without prejudice letter that a Hollywood celebrity was a thief.  Could the celebrity sue you for defamation based on the letter?  Some cases suggest that this could be the case since that portion of the letter had absolutely nothing to do with the balance of the letter that was trying to settle the contractual dispute.  The House of Lords has not definitively upheld this exception and, rather, reading the various decisions, it would appear that any such exceptions will be extremely limited.

In this particular case, a dispute arose between neighbouring landowners and a lawsuit arose.  In this first lawsuit, the appellants alleged that the respondents were improperly on their property and the respondents defended on the basis of an alleged lease (or assignment of a prior lease).  That lawsuit “died on the vine” and never went to trial.  However, during the settlement negotiations, an admission was made in a “without prejudice” letter in which one of the parties was admitted to be the owners of the property.  Subsequently, a new dispute arose between the same parties and the one party that made the admission argued that she had become the owner of the property due to adverse possession.  Under England’s law, the time for adverse possession stopped running if there was an admission of ownership.  If the letter was allowed into evidence, it would show that the time had stopped.  However, if it was not allowed into evidence, then there was nothing to stop the limitation period from running, as it had, and thus adverse possession would be granted.

What comes clear from the decision is that the English judges have very forcefully re-affirmed the power of the without prejudice rule and they have taken to task those who would try to import even minor exceptions to the rule.  Moreover, they have indicated a strong intention to remain committed to the rule notwithstanding the U.S. courts’ desire on occasion to make exceptions to the rule.  My expectation is that the Canadian courts will follow the House of Lords’ lead in this area of the law.

Therefore, if you find yourself in discussions with a customer or a supplier, etc. regarding a dispute, it would be helpful to put the words “Without Prejudice” on the letter.  Whatever you say will hopefully not come back to bite you in the rear end.  However, I would suggest that you do not go too far in any such statements.  But, whatever you do, please, I beg you, don’t start putting it on every darned letter – or if you’re going to do that, just don’t send make me the recipient of the letters as I’m getting enough of them already from others.

CALC

The Appellate Division of the New York Supreme Court released a decision last week that confirms old law related to joint bank accounts.  It is not that this decision is particularly earth-shattering, but it does give an opportunity to discuss the issue as clients are trying nowadays to find ways to protect their assets.

Joint ownership is a concept by which two or more people jointly own property (either real estate or personal property).  They are each allowed to use the property equally and neither has a specific half-interest (third-interest, quarter-interest, depending on how many people we have) and upon the death of (the) one joint holder the other(s) get the property by right of survivorship.  This means that if Mr. A and Mrs. B hold jointly and Mr. A dies, then Mrs. B becomes the sole owner.  Similarly, if Mr. A, Mrs. B and Ms. C hold jointly the each has an undivided one-third interest and if Ms. C dies, the Mr. A and Mrs. B continue to hold jointly as to an undivided half-interest each.

So, let’s go with an example.  Suppose your business is in trouble and has not paid on some contracts and there is a good chance that it will be sued.  Let’s suppose further that the company cannot afford to fight the lawsuit so a default judgment will be obtained against the company.  Let’s also suppose that you were concerned about this a while ago so you put the company’s bank account in the joint names of yourself and your company and the same for any real estate owned by the company.

In Ontario, the law used to be that you could not garnish a joint bank account to satisfy a judgment but it has since been changed so that only 50% (or 33%, 25%, etc.) of the joint bank account can be taken.  In New York, the banks are often not willing to turn any money over to a creditor from a joint bank account – although there are then additional problems because the account is usually frozen so money can go in but cannot go out.

In some instances, it might be appealing to think of having a joint account so that, in Ontario, only 50% can be seized by the creditor while in New York potentially nothing can be seized (although it could be frozen – but you could at least protect the money to some extent from the creditors).  Alternatively, for real estate, can you have the property go to you from the joint tenancy if the company is ever dissolved?  In New York, the answer as shown in the recent case is “no” whereas the answer in Ontario is “yes”. 

The New York court has affirmed the principle that joint ownership will only exist where there one is dealing with two or more individuals.  In that case, the joint ownership was between an individual (who was an executor of an estate) and with the estate itself.  The Court held that since the estate was not an individual, there could not be a joint ownership.

The law in Ontario is different since Section 43 of the Conveyancing and Law of Property Act not only permits joint tenancy between a corporation and an individual, but it also specifically provides that upon dissolution the property flows to the individual by right of survivorship.

Now, I don’t want everyone running out and talking to their lawyers about how they can try and protect assets through joint ownership between themselves and their companies because more than just the Conveyancing and Law of Property Act applies.  Other legislation can come into play, such as the Assignments and Preferences Act, the Business Corporations Act and even the Bankruptcy & Insolvency Act, which can greatly affect the success of any such arrangement.  But, depending on the timing and the circumstances, it may well be possible to effect an arrangement to protect assets from creditors.

Similarly, it may be a manner of avoiding probate fees if you were to take, for example, the family home and transfer it to yourself and your holding company so that when you die the holding company gets the full property on right of survivorship.  You would then have your beneficiaries as the shareholders of the holding company.  Again, though, this would be something to talk about more in depth with your wills and estate lawyer.  But, it is something to at least think about.

CALC

As the economy gets tighter and tighter, there is more of an inclination to use credit to get by for your business.  There is similarly a tendency for small businesses to “blur the lines” with the result that personal purchases get put on company credit cards.  Often, you get cards that are in more than one name.  For example, my firm’s management company has an account with VISA.  However, the credit card is in the name of both the management company as well as having my name on the card.  Let’s suppose that I decided to use the card to make a personal purchase.  (I don’t because Lord knows I have enough other, personal, credit cards to satisfy that desire, but suppose for the sake of argument that it happened.)  Could I therefore become liable for payment of the balance owing on the card – even where almost all of the balance is related to the company and not to myself?  The answer is likely yes.

Section 68 of the Ontario Consumer Protection Act provides that upon use of a credit card, the customer becomes liable under the cardholder agreement.  In a case a few months ago, a husband applied for a credit card with Royal Bank and was approved.  The Bank also provided a companion card to the wife who proceeded to use the credit card from time to time.  Credit card charges worth over $35,000 were incurred and the husband eventually went bankrupt.  The Bank sued the wife.  The wife’s response was that she had never applied for the card, had no relationship or even discussions with the Bank and should not be found liable on the credit card for its full amount owing.  The Court disagreed.  Relying on Section 68, Madam Justice Wilson held that by using the credit card the wife became liable for the credit card debt just as if she had applied for the credit card herself.

Arguably, then, a small business owner could become personally liable for credit card debts of the business in a situation such as I described above.  The key would be to restrict the use of the card to business purchases and to avoid personal purchases.  In the case mentioned above, the wife had used the card for personal purchases.  If she had used the card, for example, only for purchases for the husband at his request, it is possible that a different result may have been reached by the Court.  Similarly, if you do not engage in personal purchases with the company’s credit card you can also argue that there is no basis for personal liability.  However, if you mix business with pleasure, the result may be less than pleasurable.

CALC

In my last post I mentioned how promissory notes are not subject to defences such as set-off.  This then begs the question of what exactly is a “promissory note”.  In simple concepts, it is the typical I.O.U.  However, nothing involving money is ever simple and that is the case with promissory notes.

Section 176 of the Canadian federal Bills of Exchange Act defines a promissory note to be “an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.”  Let’s break that down. 

A promissory note is (a) an unconditional promise – so if I agree to pay you $100 once you do something (say, walk my dog for a week while I’m away), then this isn’t a valid promissory note; (b) signed by the maker; (c) paying on demand or a determinable future time – payment on demand means exactly that, whenever I ask to be repaid I must be repaid – while payment at a determinable future time means either a fixed date or something which can be determined such as Easter Day 2010 which can be determined by lookin at the calendar; (d) for payment of a “sum certain” – the easiest example is a fixed amount of dollars, but a money which can be calculated will also or determined will be sufficient – for example, “$100 plus interest at the prime rate of interest at the lender’s then current bank” can be determined by (i) calling to find out who is the lender’s bank and then (ii) calling the bank to find out its prime rate of interest; and (e) payable to a specific person or to the bearer – that is, to whomever holds the promissory note at the time.

So, when looked at with these requirements, a simple “I.O.U. $100 [signed by the maker]” is insufficient because it does not, if nothing else, say who “U” is in this example.

What happens if the note is not a “promissory note” within the meaning of the legislation?  Does that make it invalid?  No.  The document is still proof of a debt and can still be sued upon.  However, because it does not meet the technical requirements of a “promissory note” under the legislation, it is therefore not considered a valid bill of exchange and, most importantly, it does not enjoy the benefits given to bills of exchange such as the ability to avoid set-off defences.  You can still sue on the debt but if the other side has a claim against you for money and seeks to set off that claim against the debt owed to you, the other side will be able to do so.

When considering whether to use a promissory note, it would be best to have the document reviewed by a lawyer to ensure that it satisfies the requirements to be considered a true promissory note for the purposes of the Bills of Exchange Act.  If it is not, then you could be subject to greater costs and delays in collecting on the debt than if the document was a true and valid promissory note with the benefit of the protections given by the legislation.

CALC

One thing you can almost always expect if you try to collect on a debt is both an automatic defence of set-off and a counterclaim.  It usually works this way.  The plaintiff says “you owe me $100 and haven’t paid.”  The defendant says, “yeah, well I may owe you $100, but because you did X, I have suffered damages worth $300, so not only can I set off those damages to negate the $100 I might owe you, but I’m also bringing the counterclaim so that you have to pay me $200.”

When this situation arises with normal debts or loans, the set-off and counterclaim tactic has some substance to it.  However, one way around this is to have the debtor sign a promissory note when the loan or debt is first advanced or incurred.  Why is that?  Because set-off generally is inapplicable to promissory notes.  This position was recently upheld by the Superior Court in Argiris. 

In that case the defendants completely admitted that they owed money on the two promissory notes but, as usual, they claimed that their damages were in excess of the money owed on the notes.  The plaintiff then sought summary judgment for the amount owing on the notes and this was granted.

There are other tricks which could be used.  For example, I have a client who, when a customer starts to become slow in making payments, gets the customer to confirm in writing (often via e-mail) that the customer has no complaints about the way in which my client has provided its goods or services.  This can seriously reduce the force of any later complaints by the customer to damages the customer suffered – and thus the amount of money that can be set off against the debt.  But, what happens if the customer refuses to give such a confirmation?  A promissory note at the beginning of the loan or credit relationship may just do the trick to avoid such a problem.  It’s something to consider.

CALC