Archive for October, 2009

Bonne Anniversaire Asterix!

Friday, October 30th, 2009

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

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

 asterix

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

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

CALC

Quebec Companies – New Legislation

Tuesday, October 27th, 2009

It has been a long time since I studied law in Quebec and I make no efforts anymore to even try to keep up with the changes in Quebec law – nor do I advise on Quebec law anymore.  However, it is not uncommon for my clients to have Quebec subsidiary companies or affiliates or to otherwise be involved with Quebec companies from time to time (for example, being asked to be a director).  So, for the benefit of those persons, I am passing on a link to a web site for one of the larger firms in Quebec that highlights new changes that are being proposed for Quebec’s companies legislation that may be of interest.

You can find the summary here.

CALC

Litigation Outside of Toronto

Tuesday, October 27th, 2009

I was reading an article in the Law Times published online yesterday that describes the problems of lawyers outside of the major cities in Ontario who cannot find “new blood” to continue their law firms.  The problem is that as the current lawyers age, there are no new lawyers to come in and take over their practices.  It certainly is a problem.  Unfortunately, it is but one of several problems hitting lawyers and law firms outside of the major centres.  For example, I know that lawyers in Sudbury are taking a hit from the ongoing Inco strike with the result that some of my colleagues up there have suggested that it might be time to retire / move / leave the practice of law.  If it’s not the economy, then conflicts of interest are a problem.  If you have a smaller centre with, say, five lawyers and you have a fight involving a corporation with three shareholders, you might need four different lawyers (one for each shareholder and one for the company).  But what are the chances that of the five lawyers in town there are four who haven’t done any work for any of the parties?  Pretty slim.  With the result that some, if not all, of the parties must now start looking elsewhere for legal representation.  Another factor is the Internet.  It used to be that if you needed a lawyer you went and saw the local lawyer.  It’s not that you couldn’t go out of town to find a different lawyer, but you didn’t know who to see and generally didn’t know anything about the lawyer even if you were given his/her name by a friend.  Then there was the logistical difficulty – if you have to go to the out of town lawyer or you have to pay crazy long distance fees to talk with him/her by phone, it was far easier and cheaper to deal with the local lawyer.  Now, thanks to the Internet, a client in Elliot Lake can send me an e-mail for something to be prepared, I can prepare it and send it to the client within a matter of minutes (assuming it’s something simple) and it’s just as easy as going to see the lawyer down the street.

When I first started to practice I went to see many different parts of the province but that was because I worked at a law firm that represented the insurer for the provincial government.  I would be in Toronto one day, conducting a small claims court trial in Ottawa the next day and up in Northern Ontario the next week to argue a motion.  In those days, the fax machine was the technological marvel with the result that when I left that firm my practice started to went towards being more traditionally ”Toronto-centric”.  My recent experience, though, seems to mirror a bit the main premise of the article – that there are less lawyers outside of the big cities and especially up North.  In the past week I have dealt with files involving taxation disputes in Timmins, claims against directors in North Bay and an oppression remedy claim in Sudbury.  Each of these files is, in my view, directly related to the shrinking of the legal bar in Northern Ontario – which is a shame.

CALC

S.C.C. on Fiduciary Duties

Monday, October 26th, 2009

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

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

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

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

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

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

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

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

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

CALC

Legal Contracts – You Often Get What You Pay For

Saturday, October 24th, 2009

I was watching Dragon’s Den this week and there was a commercial for a legal forms web site.  It promised to save you hundreds in legal fees and to avoid the need to go to see a lawyer.  Of course, I laughed when I saw (in very small print near the bottom of the screen for only a few seconds near the beginning of the commercial and never again) a quick line saying that they did not give any legal advice and shouldn’t be taken as giving such advice.

Pre-printed, generic legal forms are nothing new.  They’ve been available in Grand & Toy or Staples or Office Depot for decades.  And, yes, $19.99 is a heck of a lot less than what you’d pay to come see me to draft a similar agreement for you.  So why should you use them and why shouldn’t you use them?

The pros:

1. As set out above, they are considerably less expensive than having a lawyer create the same document.

2. It is usually better to have some written agreement than no written agreement at all.

3. If nothing goes wrong between the parties, then whether the agreement is good, bad or otherwise is irrelevant.  (As I’ve always said, if the parties deal honourably and favourably with each other, then a “handshake deal” will be sufficient whereas if one of the parties never intended to deal honourably then even a very lengthy and detailed agreement might not be worth the paper its written on.)

The cons:

1. You are almost always dealing with a “generic” contract.  That is, one which will try to cover the legal area regardless of where it applies.  So, for example, suppose you get a template employment contract.  The contract will try and satisfy the employment laws in all of the Canadian provinces.  Oh, well, that’s assuming, of course, that it’s not a template prepared in the U.S. – where the employment laws can be very different.  But even among Canadian provinces the employment laws can be different.  In order to get a contract that complies with all provinces’ laws, you can end up with an agreement that is very unfavourable to your position than one that was written with only your province’s laws in mind.

2. How up-to-date are these contracts?  Let’s go with our example of the employment contract again and let’s suppose that the contract is restricted to being an Ontario employment contract.  The Ontario Employment Standards Act has been amended three times so far this year.  How often do you think the generic contract has been revised to reflect these amendments?  Maybe once.

3. One size does not fit all.  An employment agreement will be vastly different from one for a retail employee to one for a travelling salesperson to one for a potential employee in upper management.  Moreover, this assumes that what you want is actually an employment agreement.  It may be that what you need is an independent contractor agreement.  Well, can’t you just use an employment agreement?  Sure you can.  Oh, except for the little problem that when the person doesn’t pay his/her taxes and Revenue Canada starts to look into and sees the agreement and says “he/she is an employee, so you should have retained EI, CPP and income tax and remitted that for the past X years so now you’re on the hook for these amounts, PLUS interest, PLUS penalties.”  Then, suddenly, you’ll have wished you used the right agreement instead of using the generic employment agreement.

4.  If you have any questions or don’t understand something, then either you usually have nobody to ask or you end up going to a lawyer to get the answers with the result that your cost savings are, at best, reduced and, at worst, eliminated.

5. The old adage of “you get what you pay for” tends to apply here.  For example, if something goes wrong, such as the example of Revenue Canada coming after you for the source deductions, you have nobody to blame or to seek compensation from if you used a generic template agreement.  If you used a lawyer then you might have a claim against him/her for malpractice (depending on numerous factors but the reality is that at least you have a potential claim rather than absolutely no claim as would be the case if you had used a generic agreement).

In the end, I’m not going to sit here and be the “rah, rah, you must always use a lawyer, go lawyers go!” cheerleader.  Every decision related to your business is an assessment of risk.  Do I buy paper clips today or hope they go on sale and buy them next week?  Do I sign the agreement with customer A today at the reduced rate or hope that I can find customer B who will agree to pay a higher price next week?  Do I put this arrangement into the form of a written contract or hope that my supplier is a man of his word?  Do I use a prepared form or do I get it reviewed by a lawyer or do I get the lawyer to prepare a form agreement that is tailored specifically to my needs?  If I don’t use a form prepared specifically for my needs, what are the likely risks I will face?  In a perfect world I would tell you to have every agreement at least reviewed and preferably drafted by a lawyer.  By the same token, in a perfect world, every small business would have hundreds of thousands of dollars to pay for legal advice, accounting advice, taxation advice, marketing advice and management advice at the very beginning of their business.  But it’s not a perfect world and each small business has to decide whether the risk of using one of these generic forms is outweighed by the benefits of going ahead and using the form. 

The simple answer is that if something goes wrong, you can be guaranteed that the amount necessary to repair the damage caused by using a generic form will greatly exceed the initial savings obtained from using the generic form rather than going to a lawyer to have a similar agreement drafted.  The more complex answer requires an assessment of (1) the likelihood that there will be a breach of the agreement, (2) that the breach will involve something that is either not provided for in the agreement or that involves a part of the agreement that is not favourable to you, (3) that the damage caused to your business by the breach will be significant and (4) whether you are willing to accept the risk based on the prior three factors.

If you want to use these generic agreement templates, I’m not going to put a gun to your head and say that you cannot or even that you should not do so.  That is your call.  My only hope is that you will do so with a full knowledge of both the pros and the cons of doing so.  If everything goes fine and no problems ever arise, then congratulations for what turned out to be a good business decision.  And if things go wrong, then you can come and speak with me about the costs of the litigation that will result to deal with whatever problem arose.  (And, in fairness, this could result just the same from even a contract that was written by a lawyer – for example, where something comes up that nobody ever thought about when the contract was drafted and the fight is on as to who has to do what in that situation – so I’m not saying that you might only come see me about litigation arising from generic template agreements and that you never would from contracts drafted by lawyers.)

Something to think about.

CALC

IT Security and Small Businesses

Wednesday, October 21st, 2009

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

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

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

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

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

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

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

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

Something to think about.

CALC.

Home Based Businesses

Thursday, October 15th, 2009

The Toronto Star is running today its quarterly (approximately) special section on Small Business.  One of the main articles deals with “mompreneurs” and how there has been a 200 percent increase in the number of women-owned businesses in the past 20 years.  The article goes on to describe how many of these women business owners are now running their businesses out of their own homes.  God bless them, I say.  Don’t get me wrong, I love my kids like nothing else in this world, but there is no way in heck that I could ever run my business from home.  I have a fully functioning home office and could – from a technological standpoint – run my practice from home.  If it weren’t for the noise.  It’s hard to discuss professional matters with clients while someone is banging on the office door yelling “Daddy, why can’t I have a turn on the Wii?!”  So, congratulations to those who run their businesses from home – you’re far braver souls than I am.

In any event, the real reason for this post is that every time I see something in the paper that talks about home based businesses I usually start to see within the next day or two inquiries coming in about how to set up a home based business and, most importantly, questions about what can be deducted when running a home-based business.  For example: can I deduct the entirety of my mortgage as a business expense?  If no, can I deduct part?  Revenue Canada has an interpretation bulletin that answers many of these questions and so I’m going to pre-emptively tell you all where that bulletin is so that you can review it for yourselves and save the time in waiting for me to respond to the inquiry and send you the link.

The bulletin can be found here.

CALC

The Cost of Arbitration

Wednesday, October 14th, 2009

Arbitration is a private form of dispute resolution.  In effect, it is a “private court”.  The result can be binding or non-binding and can be final or subject to further appeals (usually to the courts but the parties could, if they wished, provide for an appeal to a panel of arbitrators).  The advantages of arbitration most commonly put forward are: (a) it can be faster to have the matter resolved than if the matter was before the courts with their backlog of cases; (b) the parties have some control over the procedure in that they can either agree to certain rules in the agreement that gives rise to the arbitration or they can agree at the time of arbitration as to the rules – as opposed to the rules of court which apply to all parties regardless of the nature of their dispute; (c) the courts are public institutions and their proceedings are part of the public record, while arbitrations (generally) are private matters and confidentiality can be maintained more easily; and (d) because of points (a) and (b), the costs of an arbitration can be less than litigation before the courts.

Over the weekend I had a chance to catch up on my pile of legal publications and I read an interesting article in the New York State Bar Association Journal’s July/August issue that questions whether the premise of lower costs is actually correct.  The courts and the judges in those courts are part of the public infrastructure and while there are various filing fees, the judges do not charge for their time to be in court.  To the contrary, arbitrators do charge.  One of the quotes given for an arbitrator with the International Chamber of Commerce (the “ICC”) was $600 per hour or $5,000 per day.  (The last arbitration I was involved with, a couple of months ago, had the arbitrator charging $500 per hour.)  The ICC handles, as the name would suggest, international arbitrations – so, for example, a dispute arises relating to a shipment from the U.S. to Canada or vice versa.  Ultimately, some of the costs for the arbitrators’ fees can reach six figures.  The author gives examples of arbitrators’ fees upheld by subsequent U.S. courts ranging from $80,000 to $468,000.

There is nothing, at present, which restricts the fees which can be charged by arbitrators.  Moreover, the “benefit” of being able to agree on the procedure for the arbitration has a flip-side in that with the court rules you know exactly what the rules will be.  But in an arbitration, if you cannot agree on the rules, then you have to get this determined by the arbitrator – which comes at a cost.

I am not saying, nor do I wish anyone to think, that I think that these fees are inappropriate.  I mentioned above the last arbitration I was involved in and I believe that the arbitrator was worth every penny of the $500 per hour fee.  (I should disclose that no decision has been given in that matter, which is still ongoing, so I can’t be making that statement based on the fact that my client won.  Nor can it be said that I am somehow “sucking up” to the arbitrator as it appears that my limited involvement in the matter is now completed.)  However, it would only take 100 hours at that rate to “eat up” a $50,000 dispute.  And, again, we have to remember that there is not just the arbitrator’s fees but also the lawyers’ fees, so it will take even less time to “eat up” the amount at issue.  The point, ultimately, is that it may not be worthwhile if you know that most disputes are going to be modest in terms of their dollar value to have mandatory arbitration for all disputes.  So, you should consider having arbitration as an alternative to be used when all parties agree to it or else after one party asks the court to send the matter to arbitration.  Instead, many contracts simply have arbitration as the only means of settling disputes.  If you make arbitration as an alternative, you can consider whether the costs of the arbitration outweigh the benefits and if the other side is going to court asking for the arbitration then you can argue that the matter should stay before the courts because the costs do not justify sending the matter to arbitration.

Something to think about.

CALC

Cell Phones in the Car

Tuesday, October 13th, 2009

As many of you have already heard by now, in less than two weeks (October 26 to be exact) Ontario will put into force its ban on the use of cell phones, Blackberries, etc. while driving.  What does this mean for your business?  If you employ travelling salespeople or delivery people or even if you have a contracting company and your team uses something like the MIKE system, then you could have problems if your people are caught using hand-held devices while driving.  Similarly, I have received many an e-mail from a colleague or opposing lawyer that says something like “Got ur msg, on the road, will answr latr.”  The “simple” solution is to get hands-free technology to your employees – such as Blue Tooth headsets – right?  Maybe and maybe not. 

The key aspect of the legislation is that drivers should not be distracted.  While hands-free tools will help to reduce the distraction, it cannot erase the distraction altogether.  There was a case in the U.S. about five years ago where a law firm was found liable for one of its lawyers getting into an accident because she was talking on the cell phone with a client at the time and therefore wasn’t paying attention to her driving.  The Court reasoned that if the accident hadn’t occurred, then the firm would have billed out the lawyer’s time for that call (as it had done for many previous instances).  As such, it took the benefit of the call in terms of billings and, correspondingly, should have to take the liability for any damage caused by such a practice.  Since then I have been waiting for a similar lawsuit to occur in Canada but I haven’t seen one yet.  With the passage of the legislation banning the use of cell phones, etc. in Ontario, I can expect such a lawsuit to come much sooner rather than later.

So what is a business owner to do?  The answer - I’m not completely sure.  Why?  Because we don’t have the full rules yet to see what types of devices will be allowed and in what circumstances.  Can a business owner create a policy to protect itself?  At this point in time, absent a complete ban on the use of all such devices, the answer is no.  In some law firms, they have advised their lawyers to not use cell phones while driving.  In some industries, though, this may not be practical.  For the time being, we’ll have to wait and see what the regulations will permit and prohibit.  Until then, it might be a good idea to go around to your employees and ask them (a) what devices they are using; (b) whether they use them in the car for business purposes; and (c) if so, for what business purposes.  Once you have this information, you can then determine your level and types of use and whether there are either means to “work around” such use or you can specifically tailor a cell phone use policy for the company that addresses likely areas of potential problems.

Something to think about.

CALC

Effect of Denial of S.C.C. Leave to Appeal Applications

Monday, October 12th, 2009

A quick note for my lawyer friends and colleagues who follow the blog.  I just finished reading a book by Christopher Nicolls entitled “Financial Institutions: The Regulatory Framework”.  An interesting book but not exactly a thrilling page-turner (as one would expect from the title).

There is, however, one piece of information that I thought was interesting as I hadn’t seen it before.  Reference was made to an obiter dicta comment in the 2007 decision of the Supreme Court in Canadian Western Bank v. Alberta.  Briefly, the case dealt with the issue of whether a bank (covered under federal jurisdiction) was subject to provincial insurance laws when it offered insurance products.  The Supreme Court ruled that the provincial laws did apply.  In doing so, the Court effectively overruled a B.C. Court of Appeal decision.

What is interesting is that the prior B.C. decision had been denied leave to appeal by the Supreme Court – which is usually seen as an indication by the Court that it did not see a need to overturn the appeal court’s ruling and we have come to be comfortable in arguing that this adds extra weight to the authority (persuasive or otherwise) of the appeal court decision.  However, the Court has clearly indicated that this is not the case.  At paragraph 88 of the decision it is written:

(We note parenthetically, as much stress was laid by the appellants on the refusal by this Court of leave to appeal the Optima case, that refusal of leave should not be taken to indicate agreement with the judgment sought to be appealed, from any more than the grant of leave can be taken to indicate disagreement.  In the leave process, the Court does not hear or adjudicate a case on the merits.  The notation “leave to appeal to S.C.C. refused” is inserted in law reports for editorial convenience.)

Accordingly, it would appear that little will be gained from future reliance upon leave applications being dismissed by the Supreme Court and if any of our opponents try to make use of such arguments they can be easily shot down.

Something to keep in mind.

CALC