Archive for June, 2010

Don’t Ignore Foreign Lawsuits

Friday, June 25th, 2010

I just had an opportunity to read an interesting little decision from a couple of weeks ago by the New York Court of Appeals. It involved the French fashion designer John Galliano. It seems that Mr. Galliano entered into a licensing agreement for various products in the U.S. with a company known as Stallion, Inc. After a dispute regarding how much money was owed by each side to the other, Mr. Galliano sued Stallion in the Paris courts in 2002. (The contract had specified that any disputes should go before the French courts – yet again why I trumpet/warn you all about these clauses.) Stallion was served with notice of the lawsuit but decided not to put forward a defense in Paris. Not surprisingly, Mr. Galliano obtained a default judgment and Stallion waited for Galliano to try and enforce the judgment in New York – which is what Mr. Galliano proceeded to do.

In opposition to the action by Mr. Galliano to have the New York Courts recognize the Paris judgment, Stallion tried to argue that certain technical defences applied. The New York Courts gave short shrift to these arguments. What was interesting, though, was that Stallion also argued that the process was unfair, and ought to be overturned, because the papers that it had been served giving it notice of the lawsuit in France were written in French and had not been translated into English. The Court of Appeals gave even shorter shrift to this argument and found that since Stallion had been personally served that this was sufficient – even though there was no English translation provided.

So, the next time you get served with something that looks official but isn’t in English, you might want to take a trip right away to a translator or interpreter’s office and find out exactly what it says. Hmmm, mais où est-ce qu’on peut trouver un avocat qui peut lire et parler le français? [Transl: "Hmmm, but where can one find a lawyer who can read and speak French?"] Did I mention my phone number and e-mail address? Let’s see, given the number of times that a New York client is going to be sued by a French company and suddenly find itself in need of a lawyer who can read the French documents … yeah, I won’t hold my breath or sit by the phone in anxious anticipation. ;-)

CALC

What Law Should Govern?

Wednesday, June 16th, 2010

There are two key considerations that should be made when dealing with transactions involving parties in different locations: what law should govern the transaction and whose courts should be able to determine any disputes that arise from the transaction. The first consideration is known as a “choice of law” while the second is known as a “choice of forum”. So, for example, if Person A is in Toronto and Person B is in New York City and they enter into a contract, which law will govern – Ontario or New York? Similarly, can Person A sue in Ontario? Can Person B sue in New York? What if Person B wants to sue in Ontario or Person A in New York?

There are numerous rules that will determine which law would apply and which courts would agree to assume jurisdiction to hear the dispute. However, the best way of doing this would be to make an express provision for this in the contract. For example, one can add a provision in the contract that says something along the lines of “The parties hereto agree that the subject-matter of the within Agreement shall be construed in accordance with the laws of [whichever location is selected] and the parties hereby agree to attorn to the exclusive jurisdiction of the Courts of that [state / province / country] for the resolution or determination of any disputes arising out of this Agreement.” [Please note that this is not properly worded and has been used solely for illustrative purposes - I wouldn't want you to simply cut and paste this and think that it will do the trick for you.]

So, this then takes us to the next question – which laws and which courts should you use? In my example, the two obvious choices are Ontario and New York. But are you restricted to just those two choices? Nope. If you wanted to choose the law of the Ivory Coast and the courts of that country to govern, you could do so if you really wanted. It probably wouldn’t be a very cost-effective choice to make, but both parties could do that if they really wanted to. Why would they want some other location? The objective answer would be that the courts of that other location would not necessarily prefer one party over the other. As well, it could be that the law in that other location is seen as being more favourable to the parties than, in my example, either the law of Ontario or the law of New York State.

So which one should you choose? That I cannot tell you because it will depend on your particular circumstances. However, I did read this evening the June 2010 issue of the American Bar Association Journal and they had a little note that indicated that the 2010 survey of U.S. businesses showed that for the fourth year in a row the worst tort liability system among the U.S. States is West Virginia while the State of Delaware is viewed as the best lawsuit climate (and this has been the case since this survey’s inception in 2002). So, if you are negotiating a contract and the other party wants to have disputes resolved by the Delaware Court applying Delaware law, you should be more willing to agree to this than if they suggest that the Court in West Virginia have authority to apply West Virginia law.

Whichever location you are thinking about, please bear in mind one thing: speak to a lawyer in that location! I often get calls from clients or potential clients asking me to look at a contract that will be governed by the laws of somewhere other than Ontario or New York State. I would like to say that all laws are the same but they are not. Let’s suppose that you are selling your business (and it is an asset sale – as opposed to a share sale). If you are selling here in Ontario, then there are special rules under the Bulk Sales Act that you have to comply with. Most other Canadian provinces have repealed their versions of the Bulk Sales Act. If you are in Saskatchewan and agree to a contract being governed by the law of Ontario, your Saskatchewan lawyer may not know about the Bulk Sales Act requirements. Similarly, I will not know whether there is some quirky legislation in Saskatchewan, in West Virginia or in Delaware that you should be aware of before you enter into the transaction. So, before you agree to any clause that is for the law to apply of someplace other than where you are conducting business, you should definitely check with a lawyer there to avoid any unpleasant discoveries regarding that law after the litigation has started.

Something to think about.

CALC

Security Issues – A Rose by Any Other Name …

Friday, June 4th, 2010

The Ontario Court of Appeal released a decision last Friday that may be of interest for small business owners.

A fairly typical practice is for an entrepreneur to incorporate a company and then to advance loans to the company for startup capital. If this is seen as pure “equity” then if the company goes under the entrepreneur runs the risk of losing whatever he/she put into the company. To try and avoid this problem, it is not uncommon to see the company give security over various assets to the owner so that if the company goes under the owner can try and get repaid his/her investment from the assets. (At this point I should mention that while this is somewhat effective, it is often undermined by the fact that most lenders will require the owner to “subordinate” his/her security to that of the lender so that the lender gets the first crack at the assets’ value to satisfy the debt owed to the lender.)

The difficulty is that the personal property security regime in Ontario is stringent and this fact was emphasized again by the Court of Appeal. In that case, the company was incorporated with the name “Friction Tecnology Consultants Inc.” Note that “Tecnology” was misspelt with the letter “h” missing from the word. It is not clear whether this was an oversight or was intentional. In any event, the company dealt with the rest of the world under the name “Friction Technology Consultants Inc.” – that is, with the correct spelling of the word “Technology”. Friction factored its receivables and then obtained a loan from a bank. When Friction failed financially, the factor and the bank fought over who had priority to the assets. Why did this matter? Because the factor had registered its security against “Friction Technology Consultants Inc.” – with an “h” – while the bank had registered against the company name as it was properly registered – that is, without the “h”.

The Court of Appeal upheld the lower court decision that since the properly registered name did not have the letter “h”, then only the bank had properly registered its security and it won the priority fight. A harsh lesson for the factoring company.

So why should you care? The simple reason is because many small businesses either seek to do incorporations by themselves or else have “quickie” incorporations done to save money. There is nothing wrong with this, but you should ensure that there are no discrepancies like existed in the recent case. The reality is that once the incorporation takes place, the entrepreneur rarely ever looks again at the articles of incorporation and over time may simply assume that there is nothing wrong or different between the “real name” and the name being used by the business. But this type of oversight could very well create problems for you in the future if it turns out that your security is in the wrong name and now whatever protection you thought you had turns out to be nothing.

Something to think about.

[Meanwhile, as a little post-script, I have to say that this particular post was probably my most fun to write as I got to do so using my new iPad. It's a welcome addition to my technology lineup. And it's kind of a fun "toy" at times as well. ;-) ]

CALC

Watch That Fine Print!

Wednesday, June 2nd, 2010

Another opportunity to preach from the pulpit of experience.  I was in the Superior Court today on a motion asking that the claim against my client, a large bank, be dismissed.  The situation was, unfortunately for the bank’s customer, something that is happening more and more frequently.  The customer left all of its accounting to its bookkeeper and gave total control to the bookkeeper.  In this instance, the bookkeeper went on an extended leave and the company brought in another bookkeeper from a temp agency.  After a month or so, the temp bookkeeper proceeded to cut a bunch of cheques to his company and deposited them.  By the time he had over $340,000 he suddenly “disappeared” along with the money.

Now comes the bad part for the customer.  Because it had left absolutely everything to the bookkeeper (and then to the temp), the customer had no clue what to do about its accounting records and decided to wait until the regular bookkeeper returned about 6 weeks later.  The problem, though, was that by the time the regular bookkeeper had returned and immediately discovered what had happened, it was too late to do anything.  The temp had left the country with the money so the bank couldn’t get it back.  The company then said to the bank that the bank ought to reimburse the company for its lost money – to which the bank replied that it wasn’t an insurance company and the lack of supervision wasn’t the bank’s fault.

The customer sued the bank and the bank responded with a motion to have the lawsuit dismissed.  The bank relied on two portions of its account opening agreement.  The first provided that any problems with the account should be brought to the bank’s attention within 30 days of the monthly account statement being issued.  The second portion provided that forged cheques would not be covered unless the customer could show that it had adequate supervision and took steps to avoid the forgeries.  These are both standard provisions that you see in every bank account opening form.  They are even usually put in bold lettering (as was the case here).

The customer effectively said “but nobody brought this to my attention” and besides, the bank should have warned me that my accounting systems were inadequate.  The Court disagreed and the case against the bank was dismissed and the customer now has to pay the bank over $14,000 in costs.

The primary moral of the story – if the customer had stopped to look at its obligations under its contract with the bank, it would have known that it should have reported this matter more quickly to the bank and should have taken more care to avoid any forgeries from occurring.  By disregarding the fine print, the customer is now stuck with not only the more than $340,000 in lost money, but also a further hit of $14,000 + for costs.

The secondary moral of the story – think twice before you try to take on the big banks (or even landlords or other companies with standard form agreements) when you have signed a contract that makes it quite clear what you are required to do.  If you didn’t read the fine print before you signed, then you’d better make sure you do before you sue because you could end up wasting a lot of money on a lawsuit that won’t get very far.  To give an example, the costs awarded were $14,000 – of which the total amount of costs for the bank were approximately double that amount.  The amount of the customer’s costs have been approximately the same.  So, to bring this lawsuit, the customer has spent approximately $28,000 so far for its lawyer and now has to pay the bank another $14,000 – for a total to date of $42,000.  It may well be that the customer will have a good claim as against the temp agency, but if it doesn’t win (and it might not depending on what background checks the temp agency did or could have done), then this could prove to be a VERY expensive lesson in futility – due, in part at least, to not paying attention to the fine print.

Something to think about.

CALC

It’s Been 4 Years and 200 Posts!

Wednesday, June 2nd, 2010

I turned around yesterday and realized that the firm has now been around for 4 years.  I’d say that time flies when you’re having fun, but it also flies when you’re busy.  And thankfully I’ve been both – although sometimes more busy than having fun, but I can’t complain.

I also realized that this is my 200th post.  Should I make it interesting?  Worthwhile?  Nah!  I’ll just quietly sing “Happy Birthday to You” to the firm and leave interesting and worthwhile to the next post.

CALC