Archive for July, 2009

Experience Matters

Friday, July 31st, 2009

I had an interesting meeting with a client yesterday.  To oversimplify the situation, the client has ongoing litigation and I advised the client that there were three options: A, B and C.  The client really wanted to do whatever was possible to get result A, would be willing to leave with result B and wanted nothing to do with result C.  The problem was that I had told the client previously that my expectation, given all of the circumstances, was that result C was likely to be chosen by the judge.  The client was not happy to hear this advice.

What I did not know, though, was that the client used to live outside of Toronto and the client’s old neighbour is a judge who presides over court in that area.  The client called up the judge, gave him the basic story and then said “if it were you, would you choose options A, B or C?”  Luckily for me, the Judge said that he would have likely chosen option C if he were the judge hearing the case.  (As an aside, this is not improper by my client because (i) this Judge would never be the trial judge; and (ii) these types of opinions are given by judges all the time in pre-trial, or settlement conferences.)

I’m recounting this story to make two points.  The first is that the legal system is, above all else, a human system.  It is only as good as the witnesses, the lawyers and the judges – all of whom suffer from (or are benefitted by) the human condition.  This means that there are no guarantees.  If it were not a human system – and thus subject to human benefits and frailties – then the judges would all be computers.  So, I advised the client that the likely result would be option C.  Would it definitely be that result?  No.  So that is why I wasn’t bothered when I heard that the client went for a “second opinion” – whether it is from a judge or another lawyer.  I’m not perfect, nor do I profess to be – well, most of the time ;-)   In any event, there is always the possibility that I could get it wrong, another lawyer could get it wrong, the judge could get it wrong.  It happens.  But, most importantly, when it comes to litigation, it’s your lawsuit.  If you’re not happy with the advice being given by your lawyer, there is nothing to stop you from getting a second opinion and any lawyer who takes offence to the client seeking a second opinion is doing a disservice to his/her client.

I am also recounting the story for another point.  I’m asked from time to time why lawyer’s fees increase over time – for example, a lawyer out five years charges more than a lawyer out only one year; while a senior partner will charge more than the five year and two year lawyers combined.  The simple answer is experience.  After practising for 15 years, I am not perfect at guessing how judges will think.  However, I am a lot better at it today than I was 10 years ago.  Similarly, if you had the choice of a doctor who has been practising medicine for 20 years or a new graduate, who would you rather have see you?  While I cannot use too broad a brush in making this assertion (for example, I’m just as lacking in knowledge of criminal or family law today as I was 10 years ago since I don’t practice in either area), there is something to be said for being more experienced – and this brings with it certain advantages for the client (and hence larger fee rates to be able to access those advantages).

In the end, experience does count.


Shareholders Agreements – Get Independent Advice

Monday, July 27th, 2009

I was reading the latest issue of the Business Law Reports and it has a decision from late last year of the Ontario Divisional Court regarding shareholder agreements.  There is nothing particularly earth-shattering about the decision, but it does serve as a good reminder that if you wish to have a shareholder agreement upheld then you should have each party to the agreement obtain independent legal and financial advice.

In Masciathe parties had a shareholders agreement that dealt with the terms in which the parties could go their separate ways.  Dr. Mascia complained that the terms were an unfair penalty and the application judge agreed and relieved Dr. Mascia of the strictness of the terms.  The Divisional Court disagreed.  The burden of proof that the terms were an unfair penalty lay with Dr. Mascia and there was an initial presumption that shareholder agreements were fair.  As stated by the court:

        Generally, courts will not interfere with an agreement made by sophisticated parties acting at arms’ length and, in particular, will not set aside a shareholders agreement “that has been entered into in good faith by experienced persons who have had independent legal advice”: Kabutey v. New-Form Manufacturing Co., [1999] O.J. No. 3635, at para. 12 (S.C.J.). Where parties have agreed upon a formula for determining the price at which departing shareholders will be bought out of a company, the expectation is that they will live with that formula.

      When he entered into the shareholders agreement, Dr. Mascia had the benefit of both independent legal advice as well as independent financial advice. He negotiated the terms on which he was prepared to invest in Dixie. …

In these circumstances, then, the court upheld the terms of the agreement.  The upshot is that if you wish to enforce the terms of a shareholders agreement and to defend against any attack that claims that the agreement is unfair, one of the easiest ways to do so is to ensure that the other parties get independent legal and financial advice.  This is a prudent way to proceed in any event, but Mascia shows how important this prudent approach can be when a fight later occurs among the parties.


I’ll Take Care of it Later …

Saturday, July 25th, 2009

I’ve been thinking a lot about two sayings lately.  The first is “why do today what you can put off until tomorrow.”  The second is “an ounce of prevention is worth more than a pound of cure.”  I’ve been thinking of these sayings because of two clients I’ve been working for over the past few weeks.

The first client had a contract but it was a very basic contract.  The key terms were there and the intention was to then have a more detailed contract drafted a little later.  However, because everyone was getting along so well, and because they didn’t want to take the time to do a new contract and didn’t want to spend more money on legal fees they decided “What the heck, we don’t need to do it now, do we?”  So they never had the more fulsome agreement drafted and signed.  Now, surprise, surprise, it’s a few years later and they’re not getting along anymore and they’re fighting.  Either the fight would be solved or else greatly diminished if they had gone ahead and set out a procedure for ending their relationship in the full contract.  But they didn’t so now instead of fees of, say, $5,000 split between them to draft the contract, they’ll likely each end up paying 10 times that amount for litigation.

The second client was in a business relationship with a guy who was taking advantage of their relationship.  My client was also under a lot of pressures at home.  So, like Neville Chamberlain before World War II, my client did a lot to try and avoid problems with the business colleague and to appease his demands.  Unfortunately, to appease the other fellow, my client signed documents that were wrong.  My client’s view, though, was that documents would be signed today and then fixed up later on when there was time to show the other guy how, among other things, the numbers were wrong.  The only problem was that appeasement didn’t work for Chamberlain nor did it work here and now my client is stuck in the middle of very expensive litigation and is at a bit of a disadvantage because these documents were signed.  It’s not that my client cannot win at the end of the day, but in order to win it will be a long and expensive process to undo or negate what has been done.

The point of both examples is that by doing a little bit right away a lot of trouble could have been avoided in the future.  An ounce of prevention truly can be worth more than a pound of cure.


Valuing Security

Saturday, July 18th, 2009

An interesting decision of the New York Court of Appeals was recently released.  In Matter of Peaslee the court had to address the issue of the valuation of a PMSI (purchase money security interest).

A PMSI is security given to the buyer when he/she/it buys an item but has to borrow money to finance the purchase.  PMSIs are generally given priority over other security interests – but only to the value of the PMSI.  So, if I buy a car for $25,000 and finance it for $20,000, the financing company will have a PMSI for the first $20,000 in value of the car.  If I were to default on the loan and the finance company would seize it and sell it for, say, $21,000, then the first $20,000 goes to the finance company and the remaining $1,000 goes to either any other secured creditors with security over the car or else to me.

That’s simple enough in theory.  But what happens if buy a car from GM for $20,000 and then 3 years later I go back to GM and I want to buy another car.  They say that cars lose about 30% of their value the second they are driven off the lot – and the value goes down even more from there.  So, 3 years later I want to get a new car and I arrange to trade in my old car.  Let’s suppose that the amount that remains owing on my old financing is $10,000 but the market value of my car now is $5,000.  In order to make the new sale, the finance arm of GM decides to accept the old car with the result that now they are, in effect, financing the new car and a part of the old car.  What is the value of the PMSI?  Is it $20,000 – being the value of the loan for the new car portion?  Or is it $25,000 – being the value of the loan for the new car portion as well as the value of the trade-in that was part of the entire deal?  The Court of Appeals has answered that it is the latter – that is, $25,000.

While this decision is quite interesting from an intellectual standpoint, it is also illustrative of what small businesses should consider.  From time to time my clients are asked by their customers to give them credit for goods or services.  In some instances, my clients will have their customers fill out basic credit applications and will even ask me to perform security registration searches to determine what security exists in favour of other creditors.  The next step, which is sometimes taken and sometimes not, is to call up those other secured creditors to determine exactly what assets are covered by their security and the amount of the outstanding debt.  This decision will now make businesses consider more seriously whether to take this extra step of calling the other secured creditors because it could be that what appears to be a $20,000 security interest could turn out to be much more.  Something to think about.


Employee Leaves of Absence – Reservists

Saturday, July 18th, 2009

I have a couple of friends who are members of the Canadian Armed Forces reserves.  At this point in time, the Canadian Army has committed to keeping troops in Afghanistan until 2011 and then the plan is to bring them home.  Beyond this, we continue to maintain our peacekeeping duties elsewhere.  At some point, though, (if we’re not there already) we may well have to call upon the reservists to help bolster the troops and maintain our commitments.  Altenatively, while our regular forces are away, sometimes the army will be required for matters inside of Canada.  The most recent example would be when the Red River in Manitoba was going to spill over its banks and cause massive flooding in the province.  The army was called in to help fill sandbags to protect against or minimize the damage.

So what happens if you are an employee who is with the reserves and get called to “active duty”?  Similarly, what if you are an employer whose employee gets the call?  The Ontario Employment Standards Act has the answer:  Section 50.2 of the Act permits those employees to go on unpaid leave during the time of their deployment (as well as pre- and post-deployment periods if required).  During this time, the employer is required to keep the job available and the employee has the safety that when he/she returns home there is a job still there for them.

Given the sacrifice made by these men and women, it’s certainly a justifiable legislative provision.  What I hope though, is that this does not result in employers now asking potential employees about whether they are involved as reservists in the army and then trying to discriminate against such persons.  It would be a new twist on the “don’t ask, don’t tell” concept seen with the U.S. military in past years.