Professional Services & Law in Business - PDF

Professional Services Canadian Business and the Law, EIGHTH EDITION Learning Objectives After studying this chapter, you should have an understanding of how businesses use the services of professionals the legal responsibilities of professionals to their clients and others who rely on thei...

Professional Services Canadian Business and the Law, EIGHTH EDITION Learning Objectives After studying this chapter, you should have an understanding of how businesses use the services of professionals the legal responsibilities of professionals to their clients and others who rely on their work the role of professional governing bodies 2 Business and Professional Services (1) It is important to understand the relationship between professionals and business, so they can effectively use services and manage risks. professional: Someone engaged in an occupation, usually governed by a professional body, requiring the exercise of specialized knowledge, education, and skill. 3 Business and Professional Services (2) Businesses depend on professional services, which can be either supplied in- house or provided by outside firms. Professionals who are employees are governed by the basic principles of employment law. Professionals have ethical obligations that others do not have. Most are governed by the rules of professional conduct and codes of ethics of their professional bodies. 4 Business and Professional Services (3) Professionals have a duty to exercise judgment that distinguishes a professional from other employees and service providers. The professional–client relationship is a special relationship of trust and loyalty that goes beyond the protection normally provided by contract. Professionals are held to higher standards than other service providers. Professionals must avoid conflicts of interests, or deal with them promptly and appropriately when they arise. 5 Hiring Professionals In-House (1) Deciding whether to obtain professional services on a contract basis from outside providers or to hire full-time professionals as employees is an important business decision. If the cost of external professional services becomes significant, a business will likely consider the employment option, but consider these questions: o What level of experience is required of an in-house professional? o Is there a need for specialization? o Will there be enough work to justify hiring? 6 Hiring Professionals In-House (2) Some employed professionals perform purely managerial functions, so they become non-practising members of their professions. Others choose to retain their professional status. Employed professionals who retain their professional status owe similar legal obligations to their employers as outside professionals in that they are in a fiduciary relationship with their employers and may be liable for negligence for their actions. 7 Responsibilities of Professionals to Clients Three main categories of duties professionals owe to clients: o contractual o tort o fiduciary 8 Responsibilities in Contract Contractual terms are negotiated, and both professional and client must comply with the terms of the contract. Often terms are presented by the professional. Businesses should treat these contracts with the same care and detail as other contracts. retainer: An advance payment requested by a professional from a client to fund services to be provided to the client. 9 Business Application of the Law 22.1 (1) Professional Service Contracts Prior to engaging a professional’s services, a client needs to address the key terms of the engagement: o What is the purpose and scope of the service that will provided by the professional? o How fees are charged—flat fee? contingency? percentage? o Is expertise required, and does the professional understands the needs of the business? 10 Business Application of the Law 22.1 (2) Professional Service Contracts o Who will be performing the work? o What are the timelines and schedule? o What is the frequency and method of communication? o How will disputes be handled? o How will risk be managed? 11 Responsibilities in Tort In addition to their contractual duties to their clients, professionals have duties in tort similar to those of other service providers. A professional may also be liable to a non-client in some situations, such as an engineer who carelessly designs a bridge that collapses and injures drivers and pedestrians. Negligence is the most common cause of tort liability for professionals. 12 Negligent Misstatement (1) Professional negligence often occurs in the form of a negligent statement or negligent advice. o Defining the scope of a professional’s liability for negligent misstatement or provision of services has been a particular challenge for the courts. o Losses resulting from a professional’s negligent misstatement typically consist of “pure economic loss”—lost profits, reduced profitability, loss of investment, or some other loss that is purely financial nature—losses that can be very significant. 13 Negligent Misstatement (2) o Professionals are often unable to control how the advice they have provided is subsequently used or distributed. o As with other any other negligence action, the defendant may raise defences such as volenti non fit injuria or contributory negligence. 14 Elements of a Professional Negligence Action (1) 1. Was the Plaintiff Owed a Duty of Care? Stage 1: In the relationship between the plaintiff and professional, is there a prima facie duty of care? The plaintiff must demonstrate two things: proximity and reasonable foreseeability: o Is there proximity between the plaintiff and professional? o Was the harm to the plaintiff a reasonably foreseeable consequence of the defendant’s negligence? That is, should the defendant have objectively anticipated that their act or omission would cause harm to the plaintiff? Stage 2: Are there residual policy considerations outside the relationship of the parties that may negate imposing a duty of care? 15 Elements of a Professional Negligence Action (2) 2. Did the Professional Breach the Standard of Care? Did the professional breach the standard of care that would be exercised by a reasonable member of the profession? o A specialist will be held to a higher standard than a generalist. o There is no allowance given to an inexperienced or novice practitioner. The expected standard of care of the professional will be proven by expert witnesses, who will provide evidence as to the expected standard in the profession. 16 Elements of a Professional Negligence Action (3) 3. Did the Plaintiff Sustain Damage? Losses in the case of negligent misstatement are often financial in nature, or what the law terms “pure economic loss.” 17 Elements of a Professional Negligence Action (4) Was That Damage Caused by the Professional’s Breach? The defendant will avoid liability for losses that the defendant proves would have still occurred without the defendant’s negligence. 18 Elements of a Professional Negligence Action (5) 5. Was the Damage too Remote? The remoteness analysis examines the reasonable foreseeability of the actual injury suffered by the plaintiff and is concerned with whether the harm is too unrelated to the defendant’s carelessness to be fairly attributed to the defendant. 19 Case 22.1 (1) Tellini v Bell Alliance, 2022 BCCA 10 Tellini, a non-Canadian resident or citizen, purchased a home but was unable to obtain a mortgage unless she and her partner were both on the title and bound by the mortgage. The couple afterward separated, and it was necessary for the husband to transfer his interest to Tellini. The transfer triggered a foreign property tax and the lawyer miscalculated the amount of the tax. 20 Case 22.1 (2) Tellini v Bell Alliance, 2022 BCCA 10 After the transfer, the BC government gave notice that it would refund foreign tax payment if she became a citizen/permanent resident within one year of the transfer. Tellini became a resident but missed the one-year period and sued her lawyer. Court: It was not foreseeable at the time the transfer was filed that the government would enact the refund legislation. 21 Fiduciary Responsibilities (1) The essence of the professional–client relationship is also fiduciary. Professionals act in a fiduciary capacity and, as such, owe their clients duties of loyalty, trust, and confidence that go beyond the contractual or tort responsibilities that are owed by service providers who are not professionals. duty of confidentiality: The obligation of a professional not to disclose any information provided by the client without the client’s consent. lawyer–client privilege: The right of a client not to have communications between lawyer and client divulged to third parties. 22 Fiduciary Responsibilities (2) Fiduciary duties include the following: o They must avoid any conflict of interest between the client’s affairs and those of the professional or the firm. o They must refrain from using the relationship for personal profit beyond charging a reasonable fee for services provided. o They must disclose all relevant information to the client. o They must act honestly and in good faith. o They must maintain confidentiality of client information. 23 Case 22.2 (1) Strother v 3464920 Canada Inc, 2007 SCC 24 Monarch engaged Strother in written retainer agreements that prohibited him from acting for clients in relation to tax shelter schemes. The retainer ended at the end of 1997, but Monarch continued as a client of the firm. In late 1996, the federal government announced rules to defeat the tax shelters, and Strother advised Monarch that he did not have a “fix” to avoid the rules. Strother and a former Monarch employee formed a new tax shelter company in the film industry but did not tell Monarch and earned profits of $27M. 24 Case 22.2 (2) Strother v 3464920 Canada Inc, 2007 SCC 24 Court: Strother breached his fiduciary obligations by acquiring a substantial and direct financial interest in the new business in the same services market. The lawyer compromised his duty to “zealously” represent Monarch’s interest, as his interest in the profits of the new competitor created a substantial risk that his representation of Monarch would be materially and adversely affected by consideration of his own interests. Strother was required to account to Monarch for all profits earned with the new company. 25 Professional Risk Management Practices Four ways in which professionals can manage risk are through contracts, incorporation or limited liability partnerships, and insurance. professional corporation: A corporation authorized by statute to carry on a specific profession. Professionals are usually prohibited from attempting to limit their personal liability through a corporation. Partnerships can register as LLPs: o This protects individual partners from personal liability for negligence committed by another partner in the firm, but firm itself remains liable for the negligence of all of its partners, and the firm’s assets (and insurance) can be used to compensate for losses. 26 Insurance It is a condition of practice in most professions that members carry professional liability insurance. Guarantees of insurance coverage are essential and have important consequences for the claimant. 27 Governance Structures of Professions (1) Professions are self-regulating—provincial statutes allow them the right to govern themselves. Legislation gives professional bodies autonomy and sometimes a monopoly over specific activities. Each profession is governed by similar legislation in each province. Professionals must belong to a provincial governing body in order to practise within the particular province. 28 Governance Structures of Professions (2) Disciplining professionals: o Each profession has established rules of professional conduct or codes of ethics that prescribe acceptable behaviour. o Each has mechanisms for receiving complaints, enforcing rules, and disciplining any member who violates them. o Some professions have an indemnification or assurance fund to compensate clients. 29 Case 22.3 (1) Osei (Re), 2022 LSBC 43 Osei, a new lawyer who was practicing as a sole practitioner, was approached by MP and agreed to a monthly flat-fee legal services agreement in which Osei would receive $5000 per month. He did not verify MP’s identification, contrary to the Code of Professional Conduct for British Columbia. Over the course of 18 months, he effectively allowed MP to use his trust account as a bank account, receiving and paying out of his account, $2 147 311 on instructions from MP. Over time there were numerous “red flags” in his dealings with MP. 30 Case 22.3 (2) Osei (Re), 2022 LSBC 43 Disciplinary panel: o Osei's conduct was “a marked departure from that conduct the Law Society expects of lawyers.” o Osei was suspended for four months and ordered to pay costs of $3500 to the Law Society. 31 The Sale of Goods Canadian Business and the Law, EIGHTH EDITION Learning Objectives After studying this chapter, you should have an understanding of the principles that govern the sale of goods and the impact of sale of goods legislation the effect of implied conditions and warranties on sale of goods transactions how businesses use standard shipping terms to manage risk when title will transfer from a seller of goods to the buyer remedies for breach of contract in regard to the sale of goods 33 The Sale of Goods One of the purposes of business law is to promote trade and commerce; in order to achieve that goal, the law takes a role in transactions involving the sale of goods. In regard to the sale of goods, several legal issues arise: o the sale of goods contract itself o the impact of sale of goods legislation o the implied terms in a sale of goods contract o when ownership and the risk of loss are transferred from a seller of goods to the buyer o the remedies available when a sale of goods contract is breached 34 The Common Law The common law concerning the sale of goods is reflected by the Latin phrase caveat emptor. caveat emptor: “Let the buyer beware” or “let the buyer take care.” Historically, the common law required prospective purchasers to take care of themselves, to be aware of what they were purchasing, and to make appropriate investigations before buying. o The customer was expected to include any import aspects of the sale in the contract. This led to harsh results and over time, judges began to create principles to protect purchasers of goods. Eventually these principles were codified in the Sale of Goods Act. o Similar or identical legislation has been adopted in each province. 35 Sale of Goods Legislation Sale of goods legislation implies a set of terms into every transaction for the sale of goods and provides remedies if these statutory terms are breached. The terms are mandatory in consumer transactions but may be excluded or varied in commercial contracts by use of express contract terms. 36 Goods and Services (1) The Sale of Goods Act, (SOGA) applies to sale of goods only. “Goods” means personal property in its tangible, portable form as well as items attached to land that can be severed. SOGA does not apply to service contracts. o It may be difficult to distinguish a contract for the sale of goods from one for the provision of services—for example, a contract to paint a portrait. o The legal test is whether the contract was primarily for the sale of goods or primarily for the supply of services. 37 Goods and Services (2) A “sale” means that money and ownership must be exchanged. o SOGA does not apply to loans, gifts, leases, or licences. o For example, a licence to use computer software would not be considered a sale for the purposes of SOGA. 38 Implied Terms—Conditions and Warranties (1) If SOGA applies to a contract for the sale of goods, the effect is that a number of terms are automatically implied into the contract. These terms will be either conditions or warranties. The remedy for breach will depend on whether the term is a condition or warranty. 39 Implied Terms—Conditions and Warranties (2) Condition—if breached, the buyer will be able to repudiate the contract of sale, return the goods, and obtain a return of the purchase price.  Alternatively, the buyer has the option to proceed with the contract, treat the breach of condition as a breach of warranty, and sue for damages. Warranty—if breached, the innocent party cannot repudiate the contract and may only sue for damages for breach of contract. 40 Conditions Implied by the Sale of Goods Act The seller has the right to sell the goods (i.e., the seller owns the goods or will own them when ownership transfers to the buyer). The goods will be reasonably fit for the intended purpose where the buyer makes the intended purpose known. The goods will be of merchantable quality (the goods are of reasonable quality considering the price and free of defects not apparent on a reasonable examination). If sold by sample, the goods will correspond to the sample. If the goods are sold by description, they will correspond with their description. 41 Warranties Implied by the Sale of Goods Act The buyer will enjoy quiet possession of the goods (i.e., third parties will not claim rights against the goods). Goods are free from liens and encumbrances in favour of third parties that were not declared or known to the buyer. Payment will be made within a reasonable time. Delivery will be made within a reasonable time. 42 Case 23.1 (1) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 Pine Valley (PV) was hired by the City of Toronto to build a dry pond to capture excess water. PV was selected in part because it proposed to use a particular soil—45 percent to 70 percent sand, 1 percent to 35 percent silt, and 14 percent to 20 percent clay, and PV had provided the city with a sample of “R Topsoil” from the defendant, Earthco, a custom soil provider. 43 Case 23.1 (2) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 PV entered into a contract with Earthco to purchase a large quantity of the soil. The contract included these terms: o [PV] has the right to test and approve the material at its own expense at our facility before it is shipped and placed … o If [PV] waives its right to test and approve the material before it is shipped, Earthco Soils Inc will not be responsible for the quality of the material once it leaves our facility. 44 Case 23.1 (3) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 The contract also provided that Earthco would provide “soil testing if required,” at $300 per test. Due to strict time constraints imposed by the city, PV did not exercise its right to test the soil before it left Earthco. The soil was installed and failed. Subsequent testing revealed it was significantly different in composition from the sample. PV sued Earthco. 45 Case 23.1 (4) Pine Valley Enterprises Inc v Earthco Soil Mixtures Inc, 2022 ONCA 265 Court: o The parties may exclude or vary any of the Act’s conditions or warranties with “explicit” and “clear and direct” language. o SOGA imposes an implied condition that when a sale is by description, that the goods will correspond to the description. o The contract’s reference to Earthco not being responsible for “the quality of the material” did not provide explicit, clear, and direct language to oust the statutory condition that the product supplied would be of the same description or identity as the original sample of soil. 46 International Perspective 23.1 Contracts for the International Sale of Goods The Convention on the International Sale of Goods (CISG) provides a uniform set of rules for forming contracts. It applies to business-to-business contracts automatically if both parties are from ratifying countries. It does not apply to contracts for services, technology, leases, and others. Business people must be aware of differing rules among other legal systems in order to manage risk and make effective decisions. o For example, the CISG states that contracts need not be in writing and makes no distinction between conditions and warranties. 47 Shipping Terms (1) Businesses use standardized terms are used for delivery and payment in contracts of sale. bill of lading: A shipping document that serves as a contract between the seller and the carrier. o It also provides evidence the goods have been transferred to the carrier. o It often also sets out the terms of the shipping arrangement, such as fees, expenses, delivery times, and any agreed-upon limitations of liability. stoppage in transit: The right of a seller to demand that goods be returned by a shipper to the seller, provided the buyer is insolvent. 48 Shipping Terms (2) CIF: A contractual term making the seller responsible for insurance and shipping. o The seller is responsible for arranging the insurance (in the buyer’s name) and shipping. o The purchase price includes the cost of the goods, insurance, and shipping. FOB: A contractual term whereby the buyer specifies the type of transportation and the seller arranges that transportation and delivery of the goods to the carrier at the buyer’s expense. o i.e., “free on board”—the seller incurs the cost of delivering the goods to the carrier, and generally the buyer pays for shipping and insurance. 49 Shipping Terms (3) COD: A contractual term requiring the purchase to pay the carrier upon deliver of the goods. o i.e., “cash on delivery”—the purchaser pays for the goods upon delivery. o This was more common before credit cards existed. 50 Transfer of Title (1) Title (ownership) is a key feature of every transaction because risk of loss (theft, damage, destruction) will be borne by the owner of the goods. It is commonly assumed that delivery and payment result in transfer of title to the buyer, but this is not necessarily the case. o Possession and ownership can be held by different parties. o For example, the seller may still possess the goods, but they are owned by the buyer. o Payment does not necessarily result in transfer of title. SOGA legislation sets out a series of rules that determine when title passes to the buyer. 51 Transfer of Title (2) specific goods: Goods that are in existence and identifiable at the time the contract of sale is formed. unascertained goods: Goods that are not yet set aside and identifiable as the subject matter of the contract at the time a contract of sale is formed. future goods: Goods that are not yet in existence at the time the contract of sale is formed. 52 Rule 1 Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery or both are postponed. 53 Rule 2 Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property does not pass until the thing is done and the buyer has received notice. 54 Rule 3 Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh, measure, test, or do some other act or thing for the purpose of ascertaining their price, the property does not pass until such act or thing is done and the buyer has received notice. 55 Rule 4 Where goods are delivered to the buyer on approval or on “sale or return” or other similar terms, the property passes to the buyer o when they signify approval or acceptance; or o if they do not signify approval or acceptance to the seller but retains the goods without giving notice of rejection. 56 Rule 5 Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, the property passes to the buyer, and such assent may be express or implied. 57 Remedies (1) Whether or not title has passed from the seller to the buyer affects the compensation to which the seller is entitled in the event of a breach by the buyer. damages for non-acceptance: Damages to which a seller is entitled if a buyer refuses to accept goods prior to the passing of title. o When title has not passed to the buyer, these are damages to which a seller is entitled if a buyer refuses to accept goods prior to title shifting. action for the price: The seller’s claim when the buyer has breached the contract and title to the goods have passed to the buyer. o When title has passed to the buyer, the buyer must pay the full amount under the contract (purchase price). 58 Remedies (2) When a term of a contract of sale is breached, classification of the relevant term of the contract is essential to determining the remedy. Breach of a condition by the seller—this will give the innocent party the right to claim damages and also to reject the goods and treat the contract as ended. Breach of warranty—the innocent party is entitled only to claim damages or a reduction of the purchase price due to the breach. A buyer cannot return the goods as a result of a breach of warranty and must continue to perform its obligations under the contract. 59 Consumer Protection and Competition Law Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the laws that protect consumers when they are purchasing goods or services the obligations of manufacturers regarding product safety, and the packaging and labelling of products the scope of competition law and the various practices that are prohibited by competition legislation 61 Consumer Protection and Competition Law Consumer protection law and competition law overlap to some degree. A fair and competitive marketplace also protects consumers. 62 Consumer Protection Law (1) consumer: An individual who purchases goods or services primarily for personal, domestic, or household purposes. Consumer protection law is primarily concerned with protecting the interests of consumers. o Consumers are often less well informed and have less bargaining power. 63 Consumer Protection Law (2) The goals of consumer protection laws are to protect consumers: o in contracts for the purchase of goods and services o from unfair selling and marketing practices o from physical harm and injury Many businesses are regulated, largely for the benefit of consumers —for example, payday loans and funeral homes. 64 Expansion of Sale of Goods Law Consumer protection legislation supplements the Sale of Goods Act and has a broader focus. It prevents parties from excluding or modifying conditions and warranties. Some provinces imply certain conditions and warranties into all retail sales. Other provinces prevent exclusion or modification of the conditions and warranties. Overall, all provincial statutes are similar. Legislation applies to all consumer transactions, not just sale of goods. 65 Unfair Practices unfair practices: Illegal business practices that exploit the unequal bargaining position of consumers. Provincial legislation prohibits unfair selling and marketing practices. o Examples: Targeting customers with physical infirmity, or selling at a price grossly exceeding a price available to others. 66 False or Misleading Claims false or misleading representation: A promotional statement made to a consumer that is false, deceptive, or misleading. o It is prohibited in all provinces. o It can include claims such as the following:  A good/service is endorsed or sponsored when it is not.  The good has features it does not have.  The goods are new, when they are used. The consumer can usually rescind the contract. The Competition Act also covers misleading representation. 67 Direct Marketing door-to-door selling: The act of selling in person directly, at a customer’s residence. Direct consumer selling is a broad concept that includes a variety of sales approaches. o The seller initiates contact with the prospective purchaser, rather than the other way around. Provinces vary in approach. o Some require door-to-door salespeople to be registered and post a performance bond; others provide “cooling-off” to cancel the sale. telemarketing: The use of unsolicited telephone calls to market goods and services to prospective customers. o Telemarking is regulated by the Competition Act, and also some additional federal/provincial laws. 68 Online Sales (1) Direct-to-consumer selling online is the fastest-growing area of retailing in Canada. o Online sellers must comply with same laws as traditional retailers, such as Sale of Goods Act, Competition Act, consumer protection legislation, anti- spam legislation, and the common law. Some unique issues: o Websites can disappear (where to get a refund?). o Sellers collect and use private information (additional laws to comply with). o The location of the business can be unclear (whose laws apply?) 69 Online Sales (2) The challenge for the law is to provide security and regulation of online transactions without stifling commercial potential. Each province has adopted legislation on online sales, typically including the following requirements: o imposing disclosure of vendor contact information and return policy o requiring the vendor to provide a copy of the contract in a reasonable time o requiring the vendor to pay for the return of goods o permitting the purchaser to cancel the contract if disclosure requirements are not met o requiring the vendor to provide a refund for cancellation 70 Packaging and Labelling (1) Most legislation is federal in scope, and some is industry specific. o Example: Textile Labelling Act o The most comprehensive legislation applying to food and non-food prepackaged products is the Consumer Packaging and Labelling Act (CPLA).  CPLA applies to nearly all food and non-food goods with the exception of drugs, cosmetics, and medical devices, which are regulated by the Food and Drugs Act.  It prohibits false and misleading representations.  It prohibits claims such as “made in Canada” unless specific requirements are met. 71 Packaging and Labelling (2) The Safe Foods for Canadians Act (SFCA) came into effect in 2019 and applies to all food for human consumption, including imported or exported food. o The SFCA includes requirements for bilingual labelling, type size of information, the manner of declaring the net quantity, the common name, the name and principal place of business, the pictorial representations and standardization of container sizes. o The SFCA prohibits false or misleading representations. 72 Packaging and Labelling and Product Safety The Canada Consumer Product Safety Act (CCPSA) deals with products that are inherently hazardous: o CCPSA requirements include sufficient warning of any hazards, special instructions for handling or using the product, and what to do if the product causes harm to the user. o It addresses concerns over the safety of consumer products. o It regulates the manufacture, importation, advertising, and selling of potentially hazardous or dangerous consumer products and chemicals. 73 Product Design and Manufacture The CSA Group (formerly the Canadian Standards Association) develops guidelines for producers and users—can be adopted by regulators as mandatory, and become the measure of the standard of care for tort liability. Businesses must be familiar with voluntary guidelines and mandatory standards that may apply to their products: o For example, the Motor Vehicle Safety Act regulates the manufacture and importation of motor vehicles and motor vehicle equipment. 74 Advertising Standards All advertising must comply with false or misleading claim legislation, and some advertising must comply with additional voluntary standards. AdStandards (AS), is an organization established by the advertising community to promote public confidence in its products and services. o AS has a detailed code of guidelines and provides a mechanism for complaints and violations. Canadian Broadcast Standards Council (CBSC) has a detailed code of ethics and a complaints process for broadcast media. 75 Competition Law (1) The goals of competition laws: o promote a fair, competitive, and equitable marketplace o strengthen businesses’ ability to adapt and compete globally o give small and medium-sized businesses the ability to compete in the marketplace o provide competitive prices for consumers, product choices, and information for informed choices 76 Competition Law (2) The Competition Act is the primary source of competition law and is administered and enforced by the Commissioner of Competition, who is also responsible for the Consumer Packaging and Labelling Act, Textile Labelling Act, and Precious Metals Marking Act. Competition law seeks to balance: o the interests of consumers and producers o the interests of wholesalers and retailers, dominant market players and minor players, and public and private interests 77 Competition Law (3) Offences under the Competition Act are either criminal or civil in nature. Criminal matters are of a more serious nature than civil matters. o Examples of criminal offences are materially false or misleading representations made knowingly or recklessly, price fixing, and deceptive telemarketing. Civil matters—the primary purpose of the civil process is to stop the anticompetitive activit,y and civil matters require a lower standard of proof. o Civil matters may result in fines and penalties. o The Competition Act allows civil actions to be brought by individuals or commercial complainants who are harmed by the actions of competitors.  The complainant may seek an injunction in addition to any damages incurred. 78 Mergers, Acquisitions, and Takeovers Mergers, acquisitions, and takeovers may be subject to review by the Competition Bureau. The commissioner will determine if the merger will substantially lessen or prevent competition, and if it can proceed. 79 False or Misleading Claims—Federal Laws (1) This occurs when a person makes a representation to the public that is false or misleading, for the purpose of promoting, directly or indirectly, the supply or use of a product, or for the purpose of promoting, directly or indirectly, any business interest. Falsity is judged by the impression formed by an ordinary member of the group to whom the statement is directed. 80 False or Misleading Claims—Federal Laws (2) The misrepresentation must be “material”—that is, it must apply to statements that entice prospective purchasers to the place of business or that influence the customer’s decision to purchase the particular item. It can be criminal or civil matter under the Act. The Competition Bureau can pose monetary penalties and participate in class action settlement agreements on behalf of consumers. 81 Ethical Considerations 24.1 (1) Greenwashing: Keurig Brews Up Misleading Recyclability Claims Greenwashing occurs when a business overstates the environmental features of a product or service, and it is an illegal practice under the Competition Act’s deceptive marketing provisions. Keurig Canada Inc was the subject of the Competition Bureau’s increased focus on greenwashing. In its advertising and social media campaign, Keurig maintained that its K-Cup pods could be recycled after use if the consumers simply peeled off the lid and emptied the grounds. Keurig was aware that many recycling programs did not accept the pods or required additional steps to be taken by the consumer. 82 Ethical Considerations 24.1 (2) Greenwashing: Keurig Brews Up Misleading Recyclability Claims Keurig entered into a Consent Agreement, agreeing to pay a $3 million penalty, to donate $800 000 to a Canadian charitable organization focused on environmental causes and publish corrective notices about the recyclability of its product on its website, on social media, in national and local news media, in the packaging of all new brewing machines, and via email to it subscribers. Keurig was also required to enhance its corporate compliance program to promote compliance with the law and prevent deceptive marketing issues in the future. “Greenwashing” may also run afoul the Consumer Packaging and Labelling Act, which prohibits false or misleading representations about a product. 83 Deceptive Telemarketing (1) Telemarketers are prohibited from calling consumers who have registered their phone numbers with the National Do Not Call List (DNCL). o Exemptions: registered charities, newspapers, political parties, survey data All telemarketers must register with the DNCL and must o disclose the reason they are calling and on whose behalf they are calling o disclose the type of product/business they are promoting Violating DNCL rules results in fines of $1500 per violation for individuals and $15 000 for corporations. 84 Deceptive Telemarketing (2) Deceptive telemarketing practices are also subject to Competition Act provisions. Telemarketers are forbidden to: o make any representation that is false or misleading in a material respect. o conduct a contest, lottery, or other game in which delivery of the prize is conditional on payment in advance, or where the approximate value of the prizes and other facts that affect the chances of winning are not fairly disclosed. o offer a free gift or a product at minimal cost as an inducement to buy a second product (unless the approximate value of the gift or premium is disclosed). o require payment in advance where the price of the product upon delivery is found to be grossly in excess of the fair market value of that product. 85 False Sale or Bargain Prices A “false sale” arises if a business advertises a product as “on sale” when it is not. o This misleads consumers about the ordinary price and is a reviewable offence. o To claim a sale price:  A substantial volume of the product (more than 50 percent) must have been sold at the regular price within a reasonable amount of time (12 months) before a lowered price can be called “on sale,” or the product has been offered for sale in good faith at that regular price (or higher) for a substantial period of time before or immediately after making the representation (time test). 86 Sale Above Advertised Price A civil provision of the Act prohibits the sale of a product at a price higher than advertised. o Exception: The price was a mistake, which was immediately corrected. Accordingly, sellers should take care to ensure that the prices charged for products are the same as the advertised prices. Note that this type of behaviour would not be an issue under contract law, because an advertised price is generally considered to be an invitation to treat rather than an offer to sell. 87 Business Application of the Law 24.1 (1) Drip Pricing—The Unattainable Price Sometimes an advertisement includes a price, but when all other charges are added, the price is much higher. Additional costs are “dripped” in the form of extra fees and surcharges during purchasing. In 2016, Avis and Budget rentals were investigated by the Competition Bureau and paid a $3 million penalty for drip pricing. In 2017 and 2018, the Competition Bureau reported similar settlements with several other rental companies. 88 Business Application of the Law 24.1 (2) Drip Pricing—The Unattainable Price As of 2019, Ticketmaster must pay pay a $4 million penalty and $500 000 for costs of the investigation into allegedly misleading pricing claims in online ticket sales. Ticketmaster’s advertised prices were not attainable due to added mandatory fees that added up to more than 20 percent, and, in some cases, over 65 percent to the advertised prices. In 2020, StubHub Canada Ltd and StubHub Inc were required to pay a $1.3 million to correct what the Competition Bureau concluded were misleading pricing claims in the online sale of tickets. As of June 2022, drip pricing is now expressly recognized as a deceptive marketing practice and is prohibited under ss 52(1.2) and 74.01(1.1). 89 Double Ticketing, and Tests and Testimonials double ticketing: The offence of failing to sell at the lower of the two or more prices marked on or otherwise appearing with a product. o If consumers move the labels to cause this, it is fraud. Tests and testimonials must be accurate and current. 90 Comparative Advertising Comparative advertising occurs when providers compare their offerings to those of their competitors. o This is not prohibited by the Act because it fosters competition. o But if claims are false or misleading, it is a violation. The Act allows for civil actions by individuals harmed by competitors making false or misleading claims and restitution may be ordered by the commissioner. 91 Performance Claims, and Bait and Switch Performance claims must be based on adequate and proper testing and tests must be done before the promotional statement is made. bait and switch: Advertising a product at a very low price to attract customers, then encouraging them to accept another product that is more expensive. o Consumers are told the product is “not in stock” or “of poor quality.” 92 Promotional Contests and Deceptive Prize Notices (1) Promotional contests are regulated by the Competition Act, the Criminal Code, and provincial legislation in some provinces. o Improper operation of a promotional contest may lead to civil or criminal liability. o Generally, operating a lottery is a criminal offence. o Contest operators will often require a skill-testing question, or ensure that contestants can enter with “no purchase necessary,” in order to avoid the contest being considered a lottery under the Criminal Code. 93 Promotional Contests and Deceptive Prize Notices (2) The Competition Act imposes disclosure requirements, including the following: o the number and approximate value of prizes o the area or areas to which they relate o any important information relating to the chances of winning such as the odds of winning The distribution of prizes cannot be unduly delayed. It is a criminal offence under the Competition Act to notify a person that they have won a prize, and ask for payment before the person can collect the prize. 94 Illegal Agreements Some agreements between competitors are unlawful under the Competition Act: o price fixing agreements o market allocation agreements o agreements to restrict supply o bid rigging As of June 2023, agreements to fix wages and anti-poaching agreements between employers (even non-competitors) are also criminalized under the Competition Act. 95 Business and Legislation 24.1 (1) Simultaneous Cancellation of “Hero Pay” by Three Grocers Leads to Amendment of Competition Act On June 11, 2020, it was announced that three of Canada’s leading grocery chains would be simultaneously cancelling their $2-per-hour “hero pay” bonuses for front-line workers who had been paid the bonus during the COVID- 19 pandemic. New legislation taking effect June 2023 makes it illegal for unaffiliated employers to enter into agreements to fix, maintain, decrease, or control wages or other terms of employment, or agreements to not solicit or hire each other’s employees. 96 Business and Legislation 24.1 (2) Simultaneous Cancellation of “Hero Pay” by Three Grocers Leads to Amendment of Competition Act The rationale is that wage fixing and anti-poaching agreements undermine competition and the efficient allocation of resources and maintaining and encouraging competition among employers results in higher wages and salaries, as well as better benefits and employment opportunities for employees. Defences include the following: o The employers’ conduct was regulated or in the course of collective bargaining. o A desirable business transaction or collaboration requires restraints on competition to make it efficient or possible (such as a merger). 97 Pricing Conspiracies price fixing: conspiring with competitors to fix the prices charged for goods or services. o Price fixing is prohibited by the Competition Act but can be difficult to prove. Proof of price fixing requires proof of the existence of an agreement or a conspiracy to set prices, and that the agreement lessened competition. There is a growing volume of private competition class actions by the purchasers who purchased products for the “fixed” prices. The Competition Act also prohibits similar anticompetitive agreements between competitors and potential competitors. 98 Bid Rigging bid rigging: Conspiring to fix the bidding process to suit the collective needs of those submitting bids. o No market impact needs to be proven. Bid rigging is not uncommon, and between November 2017 and November 2022, investigations resulted in 14 convictions for bid rigging, with fines of over $12 million, as well as prison sentences in at least four cases. o The majority of cases involved municipal infrastructure contracts. 99 Abuse of Dominance (1) abuse of dominant position: A dominant company or group of companies engaging in anticompetitive behaviour that unduly prevents or lessens competition. An anticompetitive act is defined as one that is intended to have a predatory, exclusionary, or disciplinary negative impact on a competitor, or to have an adverse effect on competition. 100 Abuse of Dominance (2) These anticompetitive activities may be o predatory (such as incurring short-term losses to eliminate a competitor and gain future market power) o exclusionary (such as trying to prevent a business from operating in a market) o disciplinary (such as trying to punish a business) o intended to adversely affect competition (e.g., by making other companies want to compete less and denying consumers the benefit of competition) 101 Abuse of Dominance (3) A non-exhaustive list of conduct that may be considered an abuse of dominance: o using long-term or exclusive contracts to stop customers from changing suppliers o using contracts that prevent commercial partners from giving more favourable terms to rivals o cutting off essential supplies to rival companies o selling products or services below cost to hurt or discipline a competitor. o a selective or discriminatory response by a dominant player to make it more difficult for a competitor to enter a market or grow, or to remove a competitor from a market 102 Abuse of Dominance (4) Proof of abuse of dominance requires proof of the following: o The company or group of companies substantially controls the market under investigation such that it has the ability to set prices above competitive levels or reduce other factors, such as quality, below competitive levels. o The dominant firm engaged in anticompetitive practices that are intended to have a negative predatory, exclusionary, or disciplinary impact on a competitor, or to have an adverse effect on competition. o The anticompetitive practices have substantially reduced the overall level of competition in the market. 103 Abuse of Dominance (5) Predatory pricing is reviewable conduct that occurs when a seller sets prices unreasonably low with the intent of driving out its competition. Price discrimination is reviewable conduct and arises where a seller provides different pricing terms and conditions to competing customers for equivalent volume sales at an equivalent time. 104 Price Maintenance price maintenance: The attempt to drive the final retail price of goods upward and the imposition of recriminations upon noncompliant retailers. Price maintenance is illegal if it has adversely affected competition in a market and one of the following is true: o The supplier uses a threat, a promise or an agreement; influences upward; or discourages the reduction of prices charged or advertised by another business. o The supplier refuses to supply a product or discriminates against because of their low pricing policy. o As a condition of doing business with a supplier, it induces that supplier to refuse to supply a product to another person because of that other person’s low pricing policy. 105 Restrictive Distribution Practices (1) When choosing a channel to sell goods to, sellers must resist the temptation to control distribution to the extent that it could affect competition. Reviewable practices include the following: o exclusive dealing: When a seller agrees to sell to the purchaser only if the purchaser buys from it exclusively. o tied selling: When a seller will sell to the purchaser only if the purchaser buys other, less desirable goods as well. 106 Restrictive Distribution Practices (2) o refusal to deal: When a seller refuses to sell to a purchaser on the same terms as those that are offered to the purchaser’s competitors. o market restriction: When a seller requires a purchaser to sell specified products in a defined market or penalizes the seller for selling outside a specified market. 107 Multi-Level Marketing (1) multi-level marketing: A scheme for distributing products or services that involves participants recruiting others to become involved in distribution. Commissions are paid upward through the levels. It is legal, but it must be distinguished from pyramid selling. 108 Multi-Level Marketing (2) pyramid selling: A form of multi-level selling that is illegal under the Competition Act. o It arises if the following occurs:  Participants pay for the right to receive compensation to recruit new participants.  It requires purchases as a condition of participation other than a specified amount of product at the seller’s cost for the purpose of facilitating sale.  Participants are knowingly sold commercially unreasonable quantities of the product or products (inventory loading).  Participants are not allowed to return products on reasonable commercial terms. 109 Business and Banking Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of how banks are regulated the relationship between a business and its bank the legal issues involved in online banking the legal framework of negotiable instruments the rights and obligations of those connected with negotiable instruments 111 The Regulation of Banks (1) Canadian banks fall under federal jurisdiction. The Bank Act and regulations provide the central framework. o Section 409(1) constrains banks by limiting their permitted scope of business. o Section 409(2) identifies the business of banking as including the following:  providing any financial service  acting as a financial agent  providing investment counselling services and portfolio management services  issuing payment, credit, and charge cards  operating a payment, credit or charge card plan in co-operation with 112 others, including other financial institutions The Regulation of Banks (2) Banks are bound by their contractual agreements with their individual customers. Contract law guides interpretation and enforcement of the rights and obligations of the parties in this relationship. Banks offer international banking services (e.g., letters of credit and foreign currency accounts). o These services are governed by contract or agreement between the financial institution and the customer. o Letters of credit are governed by non-binding or voluntary rules found in the International Chamber of Commerce instruments. The Regulation of Banks (3) In 2022, the federal government amended the Bank Act to provide enhanced protections for the consumer, including the following: o the requirement to provide timely information for customer decision making o higher standards for bank sales practices o more effective customaer issue resolution process The Bank Act was also amended to changed the maximum liability of a borrower for the unauthorized use of a credit card to $50 unless gross negligence (or gross fault in Québec) was demonstrated by the borrower. The Bank–Customer Relationship In terms of the customer’s money on deposit with the bank: o The relationship is that of the bank as debtor and the customer as creditor. o The relationship is largely governed by the account agreement. The bank is not usually obligated to give advice or to look out for the best interest of the customer, but if it does give advice, it may owe fiduciary duties to the client. Duties of the Bank and the Customer The common law and banking practice imply legal duties on both parties in the banking relationship. The bank must do the following: o honour payment instructions and repay deposits o collect payments for the customer o provide account information to the customer on a regular basis or on request o maintain the confidentiality or secrecy of the customer’s affairs  The bank’s duty of confidentiality is not absolute and may be qualified by context or legislation. Business Application of the Law 25.1 (1) Money Laundering and Banks money laundering: The practice of disguising the origin of the proceeds of criminal activity to make it appear as if the proceeds originated from legitimate sources. Money laundering is crime with a huge impact on the Canadian economy. Tactics used by criminals to launder money include gambling in casinos, buying and selling luxury goods, and taking out residential mortgages that are paid off in cash installments. The process involves getting “dirty” money into the financial system, while concealing the source through a series of financial transactions and fabricating a legal source for the proceeds. 117 Business Application of the Law 25.1 (2) Money Laundering and Banks Several products and services that banks offer are conducive to money laundering: o Investments and mortgages can make illicit activities look legitimate. o Online services do not raise the suspicion of tellers. o Electronic fund transfers are convenient for moving money around. Banks are subject to legislation (called the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c 17). Banks are required o to verify the identity of individual corporate customers and the validity of their business activity o to determine the source of transfers exceeding $10 000 118 Business Application of the Law 25.1 (3) Money Laundering and Banks Banks must also report the following to the Financial Transactions and Reports Analysis Centre (FINTRAC): o suspicious financial transactions o large cross-border currency transfers Banks are authorized to disclose client information to FINTRAC, but disclosure to other banks is not authorized. o PIPEDA’s safeguards are meant to protect consumers from unreasonable privacy intrusions, but they also allow suspected money launderers to switch banks without detection. 119 The Bank–Customer Agreement (1) account agreement: A contract that specifies the rights and obligations of the bank and its customer. o Some specific terms may be negotiable, but most of the terms are not negotiable. The purposes of the account agreement: It determines who has the authority to issue instructions to the bank and sign cheques on behalf of the customer. It allocates the risk of loss resulting from problems with verifying the customer’s authority and carrying out the customer’s instructions. It describes the fees and other service charges which the bank may charge the customer. The Bank–Customer Agreement (2) The bank agreement also establishes procedures and allocate risk for the security of accounts and confidential information. Large customers may have some bargaining, but small businesses do not. Many business accounts have an overdraft feature. overdraft: The result when money is withdrawn from the account and the balance goes below zero. o Usually, a high interest rate is charged on any overdraft balance, making it an unattractive source of funds on an ongoing basis. Online Banking Online banking: Method by which the customer conducts its banking through the internet via computer or mobile device. Risks associated with online banking include phishing attacks and malware. The account agreement largely determines whether the business or customer is responsible for a financial loss related to cybercrime. Methods of Payment (1) Payment system: Payment methods, procedures, rules, and technology used to exchange money. Examples include the following: o cash: Typically inconvenient method of payment for both the payer or payee and does not leave a paper trail. o cheque: A bill of exchange that is drawn on a bank and is payable on demand. o credit card: A card issued by a financial institution that allows the user to borrow funds on a short-term basis, usually to purchase goods or services. Credit cards involve three contracts: 1. card issuer and the cardholder 2. card issuer and the merchant 3. card issuer/consumer and the merchant Methods of Payment (2) debit card: Payment method for a purchase whereby payment is transferred directly from a bank account to the seller. electronic Funds Transfer (EFT): The electronic transfer of money between bank accounts within Canada through an online payment system without the direct assistance of bank staff. The following apply: o Financial institutions place daily monetary limits on EFTs. o Transfers can only occur between bank accounts in Canada. o The process can take several days to process. Methods of Payment (3) Interac e-transfer: Electronic payment transfer option offered by participating institutions. o Recipients receive an email or text message notice about the money transfer and how to collect the funds. o Limits are placed on the amount that can be transferred, but transfers happen in real time. cryptocurrency: A type of virtual asset protected using cryptography. o Blockchain records and keeps a history of transactions. o Some cryptocurrencies operate independently from of governments, central banks, or other central authorities. o Crypto assets are regarded risky and are accepted by only a few people and Negotiable Instruments (1) negotiable instrument: A signed document containing an unconditional promise or order to pay a specific sum of money on demand or on a specified date to a specific person. o promissory note: An unconditional, written promise signed by the maker to pay another person a specific amount on demand or on a specified date. o bill of exchange: An unconditional written order addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay a specific sum of money to another person, or bearer, on demand or on a specific date. o cheque: A bill of exchange that is drawn on a bank and is payable on demand. Negotiable instruments may be transferred from one holder to another and are Negotiable Instruments (2) There are several requirements for an instrument to be regarded as negotiable (i.e., transferable): It must be in written form and must be signed by the person making the promise or authorizing the payment. It must identify the person who is required to pay. It must provide for a specific amount of money. It must require payment either on demand or on a specific date. The obligation to pay must be unconditional. Implications of Creating a Cheque (1) A negotiable instrument (including a cheque) is markedly different from an ordinary assignment of contractual rights, where there can be any number of defences against paying. The Bills of Exchange Act classifies a promissory note arising from a consumer credit sale as a consumer bill/note. o The holder of a consumer bill/note is not accorded the special status of a holder in due course and is subject to claims arising from the original contract of sale. o The consumer’s obligation to pay the bill/note is subject to remedies the consumer may have against the seller if the goods or services are defective. Implications of Creating a Cheque (2) holder: A person who has possession of a negotiable instrument. holder in due course: A holder in good faith without notice of defects, who acquires greater rights than the parties who deal directly with each other as the drawer and payee. consumer bill/note: A negotiable instrument signed by a consumer to buy goods or services on credit. Implications of Accepting a Cheque (1) The major risk involved in accepting a cheque relates to the financial health of the drawer of the cheque. In larger transactions, the following can help overcome the risk of a cheque not clearing the bank: o bank draft: A cheque written by a bank on the request (and payment) of its customer. The customer pays the bank the amount of the draft when the draft is created, so the bank bears no risk that its customer will not have sufficient funds to cover the draft. o certified cheque: A cheque on which the drawee bank has guaranteed payment. Certification means that the bank immediately removes the money from the drawer’s account and holds it in reserve until the cheque is presented for payment. Implications of Accepting a Cheque (2) stop payment (countermand): When the drawer orders its bank not to pay the holder who presents the cheque for payment. o These instructions can be issued at any time before a cheque has been charged against the drawer’s account. o The account agreement often absolves the bank from responsibility if the cheque is cashed accidentally, despite the stop payment order. o Certifying a cheque usually prevents a stop payment. postdating: A cheque is made payable on the future specified date and not on the date of creation. The cheque cannot be cashed until that future date. Implications of Accepting a Cheque (3) Banks are reluctant to cash cheques for people who are not their customers with significant balances on deposit with them, for the following reasons: o If the cheque comes back to the bank due to a lack of funds in the drawer’s account, the amount cannot be deducted from the person’s account like it could from a customer’s account. o If the bank cashes a cheque for someone who is not a customer, it will be more difficult to recover the funds if the cheque turns out to be worthless. Bills of Exchange Bill of exchange: A written order by one person to another person to pay a specific amount of money to a third person. o A cheque is simply a special type of bill of exchange, with the major difference being cheques are drawn on a bank and bills of exchange may be drawn on a bank or another third party. The bill of exchange is a negotiable instrument, so the supplier could endorse the bill of exchange and transfer (negotiate) it to another holder (a holder in due course). Bills of exchange were at one time more common than cheques for ordinary business transactions, but they are now used primarily in connection with international trade. Promissory Notes Promissory note: A written promise made by one person to pay a specific amount of money to another person. A promissory note is a negotiable instrument and is evidence that the maker of the note is indebted to the payee. Promissory notes may contain additional payment provisions, such as interest or payment by installments. Endorsement and Transfer of Negotiable Instruments (1) A cheque normally follows a relatively short route, but it may also be transferred many times from holder to holder. The transfer process is known as negotiation. o Negotiation: the current holder to endorse, or sign, the instrument over to a new holder, who then becomes entitled to either present the instrument for payment or transfer it to yet another holder.  endorsement: To sign a negotiable instrument (such as a cheque) in order to enable negotiation. The principles of negotiation and endorsement apply to all negotiable instruments, including the following: o cheques o bills of exchange o promissory notes Endorsement and Transfer of Negotiable Instruments (2) Anyone who has endorsed the cheque is also potentially liable for the amount of the cheque if the drawer fails to pay. Canadian law requires the bank to know their customer’s signature on a cheque. o Account agreements containing a verification clause place an obligation on the customer to notify the bank of “irregular” entries on the customer’s bank statement within a set period of time. Apart from a bank draft or certified cheque, there is no guarantee of payment. Case 25.1 (1) SNS Industrial Products Limited v Bank of Montreal, 2010 ONCA 500 There are situations where the bank fails to detect forged signatures, and the customer does not immediately notice that a forged cheque has been cashed from its account. Sanfillippo was the president of SNS Industrial Limited. In 1994, he opened an account at the Bank of Montreal and signed an agreement which included a verification clause stating the corporation would examine the cheques and vouchers and notify the bank in writing of any errors, irregularities, or omissions within 30 days. Over a three-year period from 2003 to 2006, the office manager of SNS forged Sanfillippo’s signature on a number of cheques worth $186 488. 137 Case 25.1 (2) SNS Industrial Products Limited v Bank of Montreal, 2010 ONCA 500 In May 2006, Sanfillippo noticed considerably less money in his account than he expected and inquired at the bank, where he was advised to begin telephone or online banking so that he could more easily monitor his account balance. At this time, he signed a new agreement whose verification clause made explicit reference to forged cheques. Shortly afterward, Sanfillippo discovered the forgeries and claimed the value of the cheques from the bank. 138 Case 25.1 (3) SNS Industrial Products Limited v Bank of Montreal, 2010 ONCA 500 The Court of Appeal relied primarily on the applicable legislation. The Bills of Exchange Act (s 48) states: “where a signature on a bill of exchange is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative ….” The court ruled that it was open to the bank to transfer the risk to the customer, but in the 1994 agreement, it did not succeed in doing so, given the drafting. The bank remained responsible for losses incurred due to honouring the forged cheques. Business Application of the Law 25.2 (1) University Student Falls Victim to a Cheque Scam A University student relied on communications over email designed to defraud her. The student thought she had been hired by Aritzia to work remotely and that the cheque for $3 485 that was sent to her by the scammers was actually from Aritzia so that she could purchase office supplies. The scammers specified that the office supplies were to be acquired from a specific company which also formed part of the scam. The student deposited the cheque in her bank account and, after waiting two days, she e-transferred the money to the scam office supply company for purported online purchases. 140 Business Application of the Law 25.2 (2) University Student Falls Victim to a Cheque Scam She realized her mistake when her bank then told her the cheque was NSF (i.e., returned for non-sufficient funds) and she would be held financially responsible for that entire amount because she had deposited a counterfeit cheque, albeit innocently. The student was devastated though, fortunately, the bank did not enforce the repayment obligation in the end. 141 Defences (1) Defences available in connection with a negotiable instrument depend on the parties to the dispute and the particular circumstances. A party can use any available defence, including a personal defence, if a dispute arises between the immediate parties to the transaction. Real defences are the only defences available against a holder in due course and are available when the negotiable instrument itself is fundamentally flawed: o The negotiable instrument was obtained by fraudulent means. o The negotiable instrument was obtained obtained under duress. o The transaction was illegal. o A party to the transaction lacked capacity. Defences (2) Forgery of the instrument, or a material alteration made to the instrument after it is drawn, will result in a real defence against a holder in due course. o A person who signed the instrument after the forgery or alteration would still be liable to pay. Real defences are based on the principle that a negotiable instrument is a specific type of contract and, therefore, there are no resulting legal obligations when a defect in the instrument renders it void. The Bills of Exchange Act provides the consumer’s obligation to pay is subject to any remedies the consumer may have against the seller if the goods or services are defective, even though the note may have been transferred by the seller to another person. Defences (3) The Bills of Exchange Act provides that the holder of a consumer note, given as payment for goods or services, is not a holder in due course and is therefore subject to claims arising under the original contract of sale. Risk Management Payment by cheque may create an unconditional obligation independent of the purchase for which the cheque is used as payment. Accepting cheques includes the risk that there will not be sufficient funds in the customers’ accounts to honour the cheques. When responsibility is shared with someone else, the terms of the arrangement must be clear to the persons receiving the authority and to the bank. The Legal Aspects of Credit Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the legal significance of credit transactions in business methods used by creditors to reduce risk the difference between secured and unsecured creditors the ways that lenders and borrowers are protected the implications of guaranteeing a debt 147 Introduction to Debt and Credit (1) Credit is a contractual agreement, so all fundamental principles of contract law apply. Credit can be secured or unsecured. o secured credit: A debt where the creditor has an interest in the debtor’s property to secure payment. o unsecured credit: A debt where the creditor has only a contractual right to be repaid. ▪ If a debtor fails to pay on time, the creditor may have to sue the debtor. ▪ The creditor may end up not being paid if the debtor has limited financial resources. 148 Introduction to Debt and Credit (2) Trade credit: o usually unsecured o payment must be made within a designated time period o can be risky Capital may be raised by borrowing: o These arrangements are more formal and provide more security to the lender. o Rights and obligations of the parties are carefully negotiated. o Extensive documentation is required to support the application (e.g., business plan). 149 Introduction to Debt and Credit (3) The bank focuses on the debtor’s o financial health o security and value of security Terms of the credit or loan agreement can include the following terms and conditions: o repayment terms o interest and security fees o events of default: Failure by the debtor to make required payments on a loan or to fulfill its other obligations under the credit agreement. 150 International Perspective 26.1 (1) Credit Risk in International Trade Star Clothing, based in Canada, travels to China and identifies Beijing Clothing as a manufacturer that can supply high-quality clothing at a lower cost. Representatives negotiate and agree upon a contract worth $50 000 for clothing to be delivered in time for the spring fashion season in Canada. Beijing Clothing wants payment before the goods are delivered. Star Clothing wants to pay after the goods are received and of the agreed upon quality and quantity. 151 International Perspective 26.1 (2) Credit Risk in International Trade A letter of credit is a written promise made by the importer’s bank (on the importer’s instructions) and given to the exporter’s bank to make payment to the exporter when specified conditions are met, which many include the following: o invoice o shipping receipt (bill of lading) o proof of insurance o customs declaration When the documents are presented, payment is made one the goods have 152 Methods Used to Reduce Risk in Credit Transactions Creditors can employ good credit policies and procedures (e.g., credit applications). Creditors can change structure a transaction so it is not a credit arrangement (e.g., lease agreements). Creditors can insist on security (collateral). o collateral: Property in which a creditor takes an interest as security for a borrower’s promise to repay a loan. Creditors can also ask for assurances from another creditworthy person. Creditors can also Include covenants in the credits agreement. o covenants: Provisions found in credit agreements that require debtors to 153 carry on business in accordance with specific requirements. The Credit or Loan Agreement (1) Trade credit: o These agreements may be an informal or even oral agreements. o If written down, a standard form is used (e.g., purchase order, terms and conditions). Large debt financing (i.e., loan agreement): o The application process and terms of credit are similar to any other contract. ▪ Risks are assessed and decisions are made at the regional or corporate level on a case-by-case basis and consider the following: total business package 154 The Credit or Loan Agreement (2) Terms of an approved loan: o security or collateral required o amount and distribution of by the lender the loan o requirements for o rate and type of interest maintenance of the borrower’s financial position o repayment terms o events that constitute default o term of the loan and o the lender’s remedies conditions for renewal o fees to be paid o fees to be paid by the borrower Other agreements may be o conditions that must be included as well (e.g., mortgage, satisfied before the loan is security agreement, personal155 Security (1) Lenders may require borrowers to provide collateral to reduce the risk of non- payment. o Lenders often try to match the security to the use of the loan proceeds. o Lenders may require real property (Chapter 19) or personal property as security. ▪ general security agreement: A security agreement that includes all of the debtor’s personal property assets as collateral. ▪ after-acquired property: Collateral that includes personal property acquired by the debtor during the term of the loan. o The debtor is free to use their assets as long as it makes the required payments. 156 Security (2) Some assets used as collateral are intended to be retained by the debtor (e.g., equipment). Some assets used as collateral are meant to circulate through the business on a regular basis (e.g., inventory, accounts receivable). The type and extent of security required depends on several factors: o risk of default o market value of collateral 157 Personal Property Security Legislation (PPSA)* The PPSA allows lenders to grant credit with respect to the collateral in the event of default by the debtor based on information gleaned from the relevant system. The PPSA applies to every transaction that in substance creates a security interest. o security interest: Includes an interest in personal property that is intended to secure payment or performance of an obligation (usually a debt). Any transaction that creates an interest in personal property to secure payment or performance of an obligation is subject to the PPSA as well as the following: 158 o leases for a term of more than one year Attachment The following conditions must be met to attach a security interest: o The debtor has rights in the collateral (e.g., ownership). o The secured party has provided value (e.g., granted a loan or extended credit). o The debtor has signed a written security agreement properly describing the collateral or is in possession of the collateral. The security interest is enforceable once attachment has occurred. 159 Perfection Perfection is the combination of attachment and registration. o registration: The registration of a financing statement to record a security interest. ▪ financing statement: The document registered as evidence of a security interest. o Perfection is not “perfect.” A perfected security interest has priority over the following: o security interests that have not been perfected o the trustee (in bankruptcy) Possession occurs when the secured party physically takes possession of the 160 Priority Among Creditors (1) The PPSA determines priority when there are competing interests in the same collateral. o A security interest that has been made public (e.g., by registration) should have priority over subsequent interests in the same collateral, except where specific policy objectives warrant a different outcome. The rules promotes the extension of credit generally: o When there are two unperfected security interests that have both attached, the first to attach has priority. o When there is one unperfected security interest and one perfected security interest, the perfected security interest has priority. o Where two security interests are perfected by registration, the first to 161 register (not the first to perfect) ordinarily has priority. Priority Among Creditors (2) purchase-money security interest (PMSI): A security interest that enables the debtor to acquire assets and gives the secured party priority over previously registered perfected security interests. Two conditions must be met to claim PMSI: o Credit advanced must allow the debtor to acquire the assets in which the security interest is taken. o The security interest must be registered within a specific period of time. Debtors can obtain financing after they have entered into a security agreement that includes after-acquired property as collateral. 162 Priority Among Creditors (3) Perfection may also give priority over a competing judgment creditor. Registration of a judgment or other judgment enforcement steps may give a judgment creditor priority over a subsequent security interest, even if the interest is perfected. 163 Transfers of Collateral PPSA contains a provision that gives priority to a buyer who buys goods in the ordinary course of the seller’s business. The PPSA system is a major improvement over the state of earlier patchwork statues and rules; however, there are still challenges: o inconsistencies among provincial statutes o portable nature of personal property ▪ Rules designed to address this issue are complicated and vary by jurisdiction. When considering whether to grant credit, lenders can o search the PPSA to identify existing registrations 164 Business and Legislation 26.1 (1) Section 89 of the Indian Act The federal government has jurisdiction under the Constitution Act, 1867, regarding the property and civil rights of Indigenous Peoples in Canada. Section 89 appears to protect Indians by prohibiting the execution or seizure of their on-reserve property by non-Indian creditors. Several issues arise from Section 89. 165 Business and Legislation 26.1 (2) Section 89 of the Indian Act Determining whether property is “situated on a reserve”: o Paramount location test: Property may be considered “situated on a reserve” if there is a sufficient connection between the property and the reserve, even if the property is physically not located on the reserve. o Courts have generally held that property located on-reserve is exempt from seizure, and property located off-reserve can be seized. Determining who constitutes “an Indian or a band”: o A corporation cannot be an Indian or a band, even if it is owned and controlled by an Indian or a band and even if its head office is located on 166 a reserve. Business and Legislation 26.1 (3) Section 89 of the Indian Act Section 89 may limit the ability of Indigenous Peoples to participate fully in the economy by restricting their ability to obtain financing. It has been suggested that the courts ought to take a narrow interpretation of the exceptions in section 89, so as to allow non-Indian secured creditors to enforce their security, and thereby facilitate the obtaining of credit by Indians. 167 Other Security Legislation The federal Bank Act permits banks regulated by the Bank Act to take security in the inventory and other assets of certain business borrowers. Bank Act security is registered but differs from the PPSA system. Most provinces and territories have statutes similar to the PPSA, and all provinces and territories have legislation that allows for construction or builders’ liens. o They remain in place until the supplier, subcontractor, or worker has been paid in full. o Property owners who enter into contracts with builders must hold back a portion of the contract price until the lien period has expired as defined by the Act or a certificate of substantial performance is issued. 168 Remedies A creditor’s remedies are largely determined by whether the creditor is secured or unsecured. Unsecured creditors have the right to sue the debtor for the unpaid debt and may obtain a judgment against the debtor at the end of litigation. o If the debtor ends up bankrupt, the unsecured creditor will have no remedy except under bankruptcy proceedings. Secured creditors, too, have the right to sue the debtor but can immediately seize the collateral and sell it to pay down the debt owed. o If the debtor ends up bankrupt, the secured creditor will still be able to claim its collateral. 169 Lenders’ Remedies (1) The security agreement and the PPSA provides remedies for secured parties. acceleration clause: A term of a loan agreement that makes the entire loan due if one payment is missed. A secured party can seize the collateral immediately upon default by the debtor. o The secured party must not break the law. o The secure party generally must provide advance notice to the debtor. If the amount received by the secured party in disposing of the collateral (less its costs) exceeds the amount owed by the debtor, the surplus must be paid to a subordinate secured party or judgment creditor, if there is one, and then to the debtor. 170 Lenders’ Remedies (2) receiver: A person appointed by the secured party or by the court seize, and usually sell, collateral. They may also manage the business of the debtor while a sale of the collateral can be arranged. o If the security agreement does not state if receiver may be appointed, the secured party can apply to a court for an order appointing a receiver or receiver–manager. The secured party might be able keep the collateral in satisfaction of the debt owed. o The debtor can object to this. o In most provinces, keeping the collateral will extinguish any deficiency. 171 Limits on Lenders’ Remedies When enforcing its security, the secured party must o act in a commercially reasonable manner o give the debtor reasonable notice before calling a loan or enforcing their security, even if the credit agreement does not require notice o provide the debtor with 10 days’ notice of its intention to enforce its security when enforcing a security interest against all or substantially all of the inventory, accounts receivable, or other assets of a business debtor The PPSA and other legislation provide special protection for consumer debtors. 172 Guarantees guarantee: A conditional promise to a creditor to pay a debt if the debtor defaults. guarantor: A person who guarantees a debt. o Terms and conditions of the guarantee are set out in the guarantee contract. Guarantors are liable to the extent of their promises to the creditor. o If the debtor defaults, the creditor can pursue the guarantors for payment immediately and without the need to take any further legal