A decision came down from the Divisional Court up in Sudbury on Oct. 31 involving a dispute over Petro Canada credit cards.  It seems that a company obtained several Petro Canada credit cards with the intention that they be used to gas up the company vehicles from time to time.  The company decided for some crazy reason to keep the credit cards - along with their PINs - in an unlocked area that was known to the various employees.  Not too surprisingly, an employee grabbed a card and proceeded to ring up thousands of dollars of purchases of cigarettes.  One of Petro Canada’s gas station employees thought that this was odd, after seeing it happen for more than a few days, so he called the company and the credit card fraud was discovered and stopped.  When Petro Canada sent the bill for payment, the company refused to pay on the basis that the company believed that the cards were only good for purchasing gas, and not for purchasing other items sold by Petro Canada.

Petro Canada responded on the basis that the cardholder agreement was clear and the company was stuck with the purchases made by its employee - whether authorized or not.  The trial judge and the Divisional Court concluded that Petro Canada lost because the application form and the credit cardholder agreement appeared to restrict the use of the card for gas purchases.  While I find this result odd, the Court did not give any specific mention of the wording of the agreement, so I will have to trust the Court that this was so.  That said, the Court did go on to expressly state:  “This is different from a situation where an employee is provided with a VISA card that can be used for the purchase of any item almost anywhere.”  It is clear that if the situation had involved a credit card that was not restricted to just gasoline purchases the company would have been on the hook.

What is also interesting about the case was the position of the trial judge.  Petro Canada had argued at trial that the company was liable on all charges against the credit card until the company advised Petro Canada that the credit card had been used without authority.  The trial judge rejected this argument and also faulted Petro Canada for not having a better fraud detection system that would have flagged what amounted to approximately $250 per day in cigarette purchases as likely fraudulent.  The Divisional Court overturned this position and held that Petro Canada could rely on its cardholder agreement that required the company to report the fraud and that Petro Canada was not required to establish a fraud detection system as this was not a requirement of the cardholder agreement.  That said, Petro Canada still lost because the purchases were not for gasoline.

Ultimately, if the credit card had not been limited to specific purchases, the company would have been obligated to pay Petro Canada the money spent on the credit card.  Small businesses should ensure that if they have corporate credit cards that they should kept in a secure place and used only by authorized employees (the fewer, the better).  Otherwise, you may find yourself with a large credit card bill at the end of the month and nothing to show for it.

CALC

There is an interesting story from the Canadian Broadcasting Corporation’s web site about an exotic dancer who was fired because she was too old (she is 44).  Her response was to file a human rights complaint.  Various people commenting on the story said things along the lines of “if you’ve got it, flaunt it” and good for her for sticking up for her rights.  I looked at it in a completely different way. 

Should she have filed the complaint and sought to have a hearing before the Human Rights Tribunal?  I’m not even going to think of wading into the minefield that is the merits of the complaint.  What I found more interesting, though, was the following statement: “[Her name] started her exotic dancing career four years ago, and says she raked in thousands of dollars each week.”  Now, let’s see, of those thousands of dollars, my guess is that she was probably “officially” paid far less than even one thousand dollars per week in salary or wages.  So the rest of that money likely came from patrons at the club.  And you can bet that that money came in the form of cash.

And you can pretty much guarantee that however many thousands of dollars she made each week from money paid by patrons at the club was not declared as income on her annual income tax returns for the last four years.  Uh oh!  Congratulations to her.  She has filed a complaint with the human rights tribunal and has obtained national exposure (pardon the pun) for her fight against the club’s owner.  Now, in doing so, she has the opportunity of obtaining compensation from the Tribunal - but the general maximum for such compensation is $10,000.  Let’s take a very quick look at undeclared income.  Suppose that she worked 40 weeks per year and made $1,000 per week in undeclared income - or $40,000.  Let’s suppose further, just to make it easy, that she was in a 25% tax bracket, so she owes $10,000 per year for taxes for the four years that she has been dancing.  In the end, then, she has put forward her complaint and is fighting what she considers to be “the good fight”, but at most she will likely get $10,000 (quite possibly less) and some feeling of vindication or satisfaction, but in return she could very well be hit with tax reassessments of $40,000 plus interest, plus penalties - if it turns out that someone at the Canada Revenue Agency happens to read her story.

And that is one of the issues you always have to consider in litigation - the “big picture”.  Often it comes in the sense of questions like: “which is more important to me, getting paid on this bill but losing the client for future work or taking the hit in the hopes of getting more work later?” or “will there be any ‘ripple effect’ if I sue and will such an effect be detrimental?”  In the case of the dancer, I get the feeling that she might have wanted to think a little bit harder about the big picture before she went ahead with her complaint.

CALC

There was an interesting story in today’s Toronto Star about credit card fraud.  It is a reminder for small business that while they are not hit with credit card fraud they are certainly exposed to the possibility.  More importantly, when you think about it, as people build better mousetraps either you get better mice or else the mice move to areas where there are no mousetraps.  In this case, bigger business has been hit with credit card fraud, so the fraudsters either are trying new ways to get at bigger business (because there is still a lure of a larger “score”) or else they focus on small business where there are less security measures.

As of June 30, 2005 (the latest date for which I could easily find statistics), the credit card industry was losing over $200 Million per year to fraud and the annual rate was increasing.  This is certainly a large incentive for the fraudsters.

So, what happens if you are the victim of fraud.  It depends on the arrangements with your credit card company / bank and the circumstances in which the fraud occurred - for example, did you fail to supervise your employees and the fraud was an “inside job”?  It may be that you are on the hook for the fraud losses.  Again, this may also depend on whether you have insurance that covers “fidelity” issues (eg. employee theft).

Let’s suppose that you are responsible for the loss and there is no insurance coverage.  Can you sue the (by now ex-) employee?  Yes.  What are your chances of recovering the money?  Not very good.  In my experience, a 25% recovery is a good recovery.  I have only had one civil fraud matter in which I retrieved over 40% recovery of the losses - and even in that case (which was quite abnormal) the recovery was only 60% or thereabouts.  Why is this the case?  Because often the fraudsters are male and just as often the money is spent on “wine, women and song”.  More realistically, fancy dinners with expensive wins, leases of high end cars that cost a lot of money for both the lease and the upkeep, renting of high cost living accommodations.  The end result - the fraudster lives the high life but everything is rented and therefore owned by someone else who takes back the items when the fraud is discovered so there are no assets to seize.

The target is lucrative, the losses (to the fraudsters) are minimal and there is great incentive for fraudsters to operate.  While small business owners should not be losing sleep over this problem, they should similarly not be turning a blind eye and hoping that the problem won’t land on their doorstep.

CALC

Ah, it’s been about half a year since the spammers started to send fake e-mails using my domain name, so I guess it’s time they start playing their games again.

As with prior instances, I apologize to anyone who is inconvenienced, but the e-mails are not coming from me.  Hopefully this will stop within a day or so.

CALC

This past Thursday the Supreme Court of Canada released its decision in RBCDS.  In that case the manager of RBC Dominion Securities’ branch in Cranbrook, B.C. orchestrated the defection of almost the entire branch to go join Merrill Lynch.  When the group departed, there were only two very junior investment advisors that remained at RBCDS’ branch - effectively wiping out the branch.  RBCDS sued the advisors and Merrill Lynch for failing to give any notice of the intended departure, inducing breach of contract and other claims.

I want to focus on two aspects of the decision in this post.  The first is that at the trial and both appellate levels it was accepted that there was an implied contractual obligation on the part of each of the investment advisors to give adequate notice to RBCDS of their intention to leave.  In this case the amount of notice required was relatively small - two and a half weeks.  However, this is another case of the “flip side” of wrongful dismissal.  Everyone has heard of wrongful dismissal and the fact that an employer cannot fire an employee without giving reasonable notice.  But few people know about “wrongful resignation” which is this flip side.  Just as employers are required to give notice, similarly, employees are required to give notice.

The other aspect of the case is the question of whether an employee can compete with the employer after the employee has left.  The trial judge in RBCDS had held that during the 2.5 weeks notice period the employees could not compete with their old employer.  The B.C. Court of Appeal and the Supreme Court disagreed.  The Supreme Court summarized the law as follows:

“Generally, an employee who has terminated employment is not prevented from competing with his or her employer during the notice period, and the employer is confined to damages for failure to give reasonable notice (Southin J.A. for the majority).  To this general proposition Rowles J.A. may be read as adding the qualification that a departing employee might be liable for specific wrongs such as improper use of confidential information during the notice period.   This appears to be consistent with the current law, which restricts post-employment duties to the duty not to misuse confidential information, as well as duties arising out of a fiduciary duty or restrictive covenant: see England, Employment Law in Canada (4th ed. loose-leaf), § 11.141.  Neither of the latter duties are at issue here.” 

Fiduciary duties will apply if the employee is in a position of management or supervisory duties and cannot be easily listed in this post.  Suffice it to say that if you have a lower level employee, the above statement will apply to them and it will therefore be open to them to compete against you once they leave.  That being the case, it is usually a good idea to have employees sign either non-competition agreements or, better yet, non-solicitation agreements (since courts are more hesitant to enforce the former than the latter).

CALC

According to a Globe and Mail article today, the Ontario government is planning to introduce legislation to permit a party to apologize to another party.  It is said to be patterned upon the private legislation put forward earlier this year in the Ontario Legislature.  As noted by the article, a few other provinces and 35 U.S. States (New York is not one of them) have similar legislation.  (To see a list of the U.S. States with such legislation, you can click here.)  The U.S. legislation appears to be aimed primarily at medical malpractice, but the proposed Ontario legislation has no limit and could conceivably be used in any type of dispute.

The first thing that most lawyers have routinely advised their clients in the past is that if there is a problem, either do not apologize or else use incredibly wishy-washy language that “sort of” apologizes.  I’ll give you an example,  “I am sorry that if you felt that somehow my actions would seem to be offensive to you in any way, I did not intend such a result and I regret that you came to feel that way.”  Needless to say, not exactly heartfelt.  The problem, though, is that if a full-blown apology was extended it would be taken in one of two ways - either as a true attempt at a reconciliation and a step towards achieving a resolution to whatever the problem is OR as an admission of liability that can be later used to club the person offering the apology over the head in subsequent litigation.

Under the private legislation that the new Act is said to be based upon, an apology would not be seen as any admission of liability.  In addition, it would not be permitted to disclose the fact that an apology was made in any subsequent lawsuit.

Is this a good development for the law?  I would hope so, but I remain a little doubtful.  There is no question that this is a welcome addition to the law.  There are many lawsuits that are started because “there is a principle at stake.”  Often, when you dig down a little deeper, the “principle” is usually just that somebody hurt someone else’s feelings (or pride, or family name, or something similar).  In cases such as this, an apology, especially early on, could be very beneficial.  In fact, if I could suggest something to the Legislature it would be to provide incentives for early apologies.  For example, in the law of defamation an early apology and retraction is permitted to limit or decrease the amount of damages awarded to a plaintiff.  Similarly, think of Mr. McCain going before the national press recently to apologize for the outbreak of listeriosis at Maple Leaf Foods.  Obviously this came before the new legislation but while the “spin doctors” said that it was a very good move from a public relations standpoint, I remember cringing when he did it and wondered how many times that would be replayed by the class action plaintiffs’ lawyers either in a court of law or in the court of public opinion to try and leverage a higher settlement.  But if a defendant such as Maple Leaf Foods could be provided with some incentive for making such apologies it may be better for all concerned.

And therein lies the rub.  The advantage of encouraging apologies is that it may lead to better resolutions of conflicts without the need for litigation.  (And I should say that I am not worried about suddenly having to practice a different type of law because there are definitely enough people out there who will not accept such apologies and will keep the litigation going.)  However, I wonder whether this may back-fire in the sense that if apologies are being made regularly that the people to whom the apologies are made will simply become jaded and think “yeah, you don’t really mean this, you’re just doing it for PR.”  I would certainly hope that this does not become the case, but in case it does, wait until the legislation passes and then send out your apology right away - before people become jaded.

CALC

I’ve been a bit distracted lately from writing any blog posts and I apologize but this will likely stay that way for a couple of more weeks.  The reason for it is because I am packing up the solo practice and moving to a firm in Markham with approximately 20 lawyers.

My new firm is Wilson Vukelich.  After much deliberating on my part I finally decided to agree to join the firm.  Don’t get me wrong, there is absolutely nothing wrong with the firm.  As several of my friends put it, the decision to join them was a “no brainer”.  Take a bunch of former Bay Street lawyers who realized at different times that there was more to life than working at the firm and missing out on family.  Have them also realize that they could charge their clients decent rates, reduce their overheads and be able to live decent lives and still be lawyers for larger files.  In that respect, I fit in very well with the firm.  Take also the fact that the firm has built up its corporate-commercial side and has a lot of room for growth on the litigation side that I could build up and, again, it’s a perfect match.  The problem - I was having too much fun on my own.  If I ever needed something to get done, I thought about it for a nanosecond and decided what to do and how to do it.  Whenever you start to add other decision makers, though, the same decision might get made (although not always) but it certainly cannot get made as quickly.  As the saying goes, there are a million problems with dictatorships, but the trains usually run on time.  In my case, I was the dictator and could decide what I wanted when I wanted.  The big question was whether it was worth it for me to let go of my little power trip.

In the end it was.  A very real example of this was when I recently had to go to Europe for personal matters.  Who was going to cover for me if one of my files “blew up” and somebody had to be in court to represent my client?  On a similar note, while I was away, if I wasn’t handling things remotely (and I could not do that all the time given the time-zone difference), then who was making money for the business while I was away?  Again, where was the firm going?  I had a three year plan, but nothing beyond that.  Did I see myself taking on associates or partners?  Not likely in the combination of my current situation and the economy.  That being the case, then where was I going to be in five years?  I didn’t have an answer.

None of these “problems” were serious.  So I didn’t have a working five year plan.  I could easily sit down and devise one.  So I didn’t have anyone to easily cover for me, I had people who could do it for me - and who did cover while I was away.  So what if I didn’t make any money while I was away for 11 days - it’s not as if I was away for 4 months. 

When everything was said and done, I was completely torn on the issue since for every reason to pack up the practice there was an equally compelling reason to keep going on.  In the end, after almost 6 months of serious contemplation, the offer was just too good to refuse.  In this situation, 2 + 2 should very easily equal 5.  Together the combination of myself and Wilson Vukelich is far greater than anything I could achieve on my own and despite the personal hesitations, I came to the realization that, as my friends had put it, it was a “no brainer”.

So, effective October 1 I will be the newest member of the Wilson Vukelich team.  Between now and then, I will be busy with my regular work combined with closing things up in my office and getting ready to start afresh in Markham.

By the way, if anyone is looking to sub-let an office for the next 3 years, please give me a call.

CALC

The Ontario Court of Appeal released a decision on Wednesday that deals with the issue of rectification of contracts.  In RBC v. El-Bris, the Bank gave a loan to a company for $700,000.  As security for the loan, the owner of the company gave a personal guarantee for $700,000 and also gave a mortgage over his house for the same amount.  The borrowing of the company eventually grew to $3.5 Million before the company failed financially.  The owner paid the Bank $700,000 and asked for, and received, a discharge of the mortgage.  However, the Bank then claimed that the owner owed the Bank a further $700,000 for the guarantee.  Its position was that the owner had agreed to give $700,000 in security through the mortgage and then a further $700,000 worth of security through the personal guarantee.  When the owner refused to pay the additional $700,000, the Bank sued the owner and the company (although the claim against the company was likely worth little).

At trial judgment was given against the company (no big surprise there) but not against the owner.  This decision was upheld at the Court of Appeal.

The mortgage did not make reference to the guarantee and it stated that the mortgage was in addition to, and not in substitution for, any other security and that the Bank could claim on the guarantee even though it may have had other security for the debt.  Similarly, the guarantee made no reference to the mortgage.  As items looked on paper in black and white, there were two separate securities, each worth $700,000, that the Bank could rely upon.  However, this was not enough since the documentary and verbal evidence given at trial showed that the true intention of the parties was to provide security for a total of $700,000 - with two avenues of securing repayment of that amount.  This, of course, made sense when you realize that at the time the documents were signed the maximum amount of the loan was $700,000.

In the end, the trial court and the appellate court permitted the contracts to be “rectified” (that is, corrected) to show that the total amount that could be obtained by the Bank under either or both of the guarantee and the mortgage was $700,000.  Since that amount was paid by the owner, the Bank had no further claim against him for any losses the Bank suffered on its loan to the company.

This type of wording is very common in financial institution documents.  While rectification is not given every day (far from it), it once again shows the importance that good paper work is important - in this case to rebut the presumption that the formal documents permitted a much larger recovery for the Bank.  Without the other documents (including a letter of undertaking and a Planning Act document) which corroborated that the total amount sought by the Bank was only $700,000, the owner would have been on the hook for $1.4 Million.  More importantly, it also shows how important it is to look at the wording of your agreements.  If the Courts had not been convinced that there was sufficient “extraneous” evidence to support the claim that the intent had always been a total security of $700,000, then, as both the trial and appeal courts noted, the clear wording would have permitted, in effect, double recovery.

CALC

I happened to be browsing a newspaper today in Toronto that is very well known for its sports section and if you are right-wing type of person who likes pictures of women in bikinis then this is your newspaper.  Honest, I picked it up for the sports section.

In any event, I happened to be flipping through its classified section and an ad caught my eye that said something to the effect of “Incorporations - Same Day - $200″.  This is truly “buyer beware”.  Why?  Because if all I had to do was pay $200, that wouldn’t cover the filing fee for articles of incorporation (which in Ontario the last time I checked were $300 if you filed electronically and $360 if you filed over the counter).

Oh, so what it really means, then, is $200 fee PLUS the out-of-pocket expenses like the filing fee.  OK, just a little miscommunication there, I get it now and all is right with the world.  Um … er … well, nope.  “Same day”.  Yes, most likely, but that is if you want a numbered company - for example, 1234567 Ontario Inc.  If you want a named company - for example “Caruana Corporation” - then you need to obtain a NUANS search AND there cannot be any sufficiently similarly named companies.  Using my example, let’s say someone else had “Caruana Incorporated”, then I would have to pick another name.  That is likely to take more than 1 day and even this also assumes that the NUANS search report can be obtained right away.  The end result is that it is only guaranteed “same day” if you have a numbered company, and if you want a named company then there cannot be such a guarantee.  Oh, another little miscommunication.

Then we have the biggest miscommunication of them all.  I have had several clients come in over the years who incorporated with an operation like this and, yes, that is exactly all that they got - an incorporated company and the original copy of the articles of incorporation.  As I have previously explained to my clients, think of it like this:

- the incorporation is like giving birth to a person who has a skeleton, skin, hair and internal organs - but nothing else.  The company is “alive”, but it cannot do anything.

- ORGANIZATION of the company (through the allocating of shares to shareholders, the passing of by-laws, the holding of the first directors’ and shareholders’ meetings at which resolutions are passed, applying for a business number with Revenue Canada, etc.) is the equivalent of giving this new person muscles, a brain and a nervous system that now allows the person to actually DO something (and, in this case, gives the actors - directors, officers, shareholders - by which those things can be done).

In the case of the ad I saw, $200 will get you the incorporation (ie. creation of the company) - that is after you pay the other expenses.  But most people when they think of incorporation, they actually think of both incorporation and organization.  They expect that when they walk out of the office they have a corporation that exists and is authorized to do things like open bank accounts and sell goods and pay taxes, etc.  However, in this case, the offer is $200 solely to do the incorporation - the organization of the company is not included.  Again, another little miscommunication.

Why does this matter?  As an example, I recently had a client come to me.  The client is a very good client who has run a reputable business for well over a decade.  I looked at the client’s corporate records and realized that not only had the client not been properly organized, but the client also had not passed any annual resolutions since the corporation was first incorporated - being almost 15 years ago.  The end result was a quite hefty legal bill while I figured out what had happened and cleaned everything up.  Far more than the client initially saved of approximately $600 by going with a “$200 to incorporate” operation.

This is not to say, however, that such places are a scam.  BUT, before you decide to go with such an operation, you should definitely ask what all the costs are and determine if the service being offered is both incorporation and organization or only the incorporation.

CALC

An article on the front page of today’s Toronto Star reports on a speech made by the federal Privacy Commissioner, Jennifer Stoddart, to the annual meeting of the Canadian Bar Association.  Ms. Stoddart is now concerned that private details of personal information should not be revealed in court judgments.  While she recognized that openness of the courts was an important requirement, it is not as important as it once was and constitutes a concern for personal privacy.  Rubbish!

If the concern is that too many personal details are being exposed in litigation, then that is not the court’s fault.  If little Cindy-Lou Who finds out that her parents have been doing all sorts of nasty things to each other by reading their divorce case online, the fault is that of the parents for, in the first place, doing those things, and in the second place, for airing their dirty laundry in public.

If the concern is with family law matters, as noted in the article, then one can easily follow the Quebec model.  There, instead of Jones v. Jones, the case is entitled “Droit de la Famille 1234″ (or “Family Law 1234″) and Mr. Jones is referred to as “husband” or “father” and Mrs. Jones as “wife” or “mother”.

When it comes to non-family matters, then often one of the only ways that one can determine with whom one is dealing is through a search of court opinions.  For example, I had a client come to me recently to start litigation.  One of the participants in the matter, and a potential defendant, is now located in southern Ontario.  However, a quick search revealed that this person had been convicted in northern Ontario of fraud.  That is an incredibly important thing to know since it now heightens the possibility that suing this person may be of little benefit since the person has many other creditors standing in line ahead of my client.

Similarly, if you want to do a deal with a new customer or supplier and you don’t know enough about this person or company, a quick web search may reveal that they have been sued many times for breaching contracts.  I cannot think of any businesses that would not want to know this information.  And even in the same vein, if Mr. Jones slept around on his wife that might not be of great interest to people potentially doing business with Mr. Jones.  But, in an age when corporate reputation is based not only on what you do but also on who you do business with, if it turned out that Mr. Jones also beat his wife, then I think that businesses would also like to know this information before they work with Mr. Jones.

If litigants are concerned about dirty laundry being aired in public, then they can always go with private mediation or arbitration and avoid the spotlight of the court.  Or, better yet, keep their laundry clean in the first place.

With respect, the benefits that Ms. Stoddart wishes to achieve will be greatly outweighed by the lost benefits of the current system and the loss of access to important information.

CALC