The Tort of Negligence PDF

The Tort of Negligence Canadian Business and the Law, EIGHTH EDITION What Is Negligence? Negligence is as a careless act that causes harm to another. In law, this refers to a failure to show the care that a reasonable person would have shown in a similar situation. The plaintiff does n...

The Tort of Negligence Canadian Business and the Law, EIGHTH EDITION What Is Negligence? Negligence is as a careless act that causes harm to another. In law, this refers to a failure to show the care that a reasonable person would have shown in a similar situation. The plaintiff does not need to prove the defendant intended to cause the damage or that the defendant acted deliberately. reasonable care: The care that a reasonable person would exhibit in a similar situation. The law of negligence attempts to provide compensation to victims without discouraging legitimate activity or imposing unreasonable standards. 2 Landmark Case 11.1 (1) Donoghue v Stevenson, AC 562 (HL) A customer bought an opaque bottle of ginger beer to share with her friend, Donoghue. A decomposed snail was discovered in the contents, and Donoghue became ill and sued the manufacturer for negligence. At the time, a manufacturer could only be sued by those with whom it shared a contractual relationship, which resulted in most consumers being unable to recover from manufacturers. 3 Landmark Case 11.1 (2) Donoghue v Stevenson, AC 562 (HL) Resolution: o Lord Atkin wrote this now classic statement discussing to whom a duty of care is owed:  The rule that you are to love your neighbour becomes in law, you must not injure your neighbour, and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be—persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. 4 Establishing a Negligence Action (1) The Elements of a Negligence Action 1. Does the Defendant Owe the Plaintiff a Duty of Care? o duty of care: The responsibility owed to avoid carelessness that causes harm to others. o This step involves two stages:  Stage 1: Is there a prima facie duty of care? The plaintiff must prove reasonable foreseeability and proximity. prima facie: At first sight or on first appearances. 5 Establishing a Negligence Action (2) The Elements of a Negligence Action Reasonable foreseeability arises if the harm to the plaintiff was a “reasonably foreseeable consequence of the defendant’s negligence.” Reasonable foreseeability considers whether the defendant should objectively have anticipated that their act or omission would cause harm to the plaintiff. Proximity arises when the parties are in such a close and direct relationship that it would be “just and fair having regard to that relationship to impose a duty of care in law.” 6 Establishing a Negligence Action (3) The Elements of a Negligence Action  Stage 2: Are there residual policy considerations outside the relationship of the parties that may negate imposing a duty of care? For example, would imposing a duty expose businesses and other defendants to an unreasonably broad, unknowable, and indeterminate extent? 7 Establishing a Negligence Action (4) The Elements of a Negligence Action 2. Did the Defendant Breach the Standard of Care? o The defendant’s conduct is judged according to the standards of behaviour that would be observed by the reasonable person in society. o reasonable person: the standard used to judge whether a person’s conduct in a particular situation is negligent.  A reasonable person is not perfect and is a person of ordinary intelligence who uses ordinary prudence.  Professionals must meet a higher or specialized standard of care. For example, a heart surgeon must meet the standard of a reasonable heart surgeon.  When the activity poses a high risk, the law imposes a higher standard 8 of care. Establishing a Negligence Action (5) The Elements of a Negligence Action 3. Did the Plaintiff Sustain Damage? Damage is a requirement of the tort of negligence. 4. Was that Damage Caused by the Defendant’s Breach? o The plaintiff must show causation:  causation: The relationship that exists between the defendant’s conduct and the plaintiff’s loss or injury.  Causation is usually determined by asking the following question: Would the harm not have occurred but for the defendant’s actions? 9 Case 11.1 (1) Resurfice Corp v Hanke, 2007 SCC 7 Hanke was the operator of an ice-resurfacing machine and was was severely burned because he mistakenly placed hot water in the gasoline tank portion of the machine rather than in the hot water tank portion, where it belonged. Vapourized gasoline was released into the air, which was ignited by an overhead heater, resulting in a fire and explosion. Hanke sued the manufacturer of the machine, Resurfice Corp, among others. Hanke argued the design was negligent because the gasoline and water tanks were similar in appearance and placed close together on the machine, making it possible to confuse one tank for the other. 10 Case 11.1 (2) Resurfice Corp v Hanke, 2007 SCC 7 The legal question: Did the manufacturer cause Hanke’s loss? Resolution: o The trial judge found that Hanke was aware of which was the water tank and which was the gas tank and was aware water should not be introduced to the gas tank. o The Supreme Court of Canada restored the trial judge’s findings. o In short, the accident did not happen because the machine had a confusing design. Hanke understood how the machine worked and, tragically, was simply not paying proper attention to what he was doing. 11 Establishing a Negligence Action (6) The Elements of a Negligence Action 5. Was the Damage Too Remote? o At this point, a court asks: If there is an obligation to take reasonable care and it was breached, how far will the legal liability of the defendant stretch?  remoteness of damage: Whether the actual harm suffered was reasonably foreseeable or not. 12 Establishing a Negligence Action (7) The Elements of a Negligence Action o thin skull rule: The principle that a defendant is liable for the full extent of a plaintiff’s injury even where a prior vulnerability makes the harm more serious than it otherwise might be.  This rule protects the plaintiff who has an inherent weakness or “thin skull” that makes a given injury more serious than one might otherwise reasonably anticipate. The law requires the plaintiff to prove each and every element in a negligence action. It is not enough to establish some of the elements or even most of them. 13 Case 11.2 (1) Mustapha v Culligan of Canada Ltd, 2008 SCC 27 Mustapha was a customer of Culligan, a manufacturer and supplier of drinking water and used its services because cleanliness and proper sanitation were tremendously important to him. As Mustapha was replacing a large, empty water bottle with a new, unopened one, he noticed that the new bottle contained a dead fly. ­ Mustapha became obsessed with the dead fly and its “revolting implications” for his family’s health and well-being. At trial, he was awarded $80 000 for emotional upset $237 600 for past and future economic loss. The decision was appealed and eventually went to the Supreme Court of Canada. 14 Case 11.2 (2) Mustapha v Culligan of Canada Ltd, 2008 SCC 27 Resolution: o The Supreme Court of Canada agreed that Culligan owed a duty of care to Mustapha to provide clean water and that it breached the standard of care. o While the breach was the factual cause of the serious psychological damages Mustapha suffered, only if mental injury would occur in a person of ordinary mental fortitude could recovery for such damages flow. 15 Defences Contributory negligence—this defence recognizes that, in many instances, both the defendant and the plaintiff may have been negligent. o If proven, the court will reduce the plaintiff’s award by their proportion of fault. voluntary assumption of risk: The defence that no liability exists as the plaintiff agreed to accept the risk inherent in the activity. o This is a complete defence, and the plaintiff will be awarded nothing even though the defendant had been negligent. o The defendant must show that the plaintiff—knowing of the virtually certain risk of harm—released their right to sue for injuries due to the negligence of the defendant. 16 Case 11.3 Kralik v Mount Seymour Resorts, 2008 BCCA 97 Kralik, an experienced skier, was trying to clear some snow and ice from the chair of a chairlift as it moved toward him and failed to seat himself in time. He instinctively grabbed onto the chair and dangled from it as the chair began to ascend. He let go and fell into an embankment, injuring his right shoulder and resulting in a loss of future earning capacity. At trial, the lift operator was found 100 percent at fault for failing to notice the situation and immediately stop the lift. On appeal, the Court of Appeal found Kralik 50 percent contributorily negligent, for not simply stepping aside and letting the chair pass by and continue on without him. 17 Case 11.4 (1) Crocker v Sundance Northwest Resorts Ltd, 1988 CanLII 45 (SCC) Crocker entered an inner-tube race at an event put on by Sundance, the operators of a ski slope after seeing a video of the event held in the previous year. He was required to sign a waiver and did so without reading it or knowing what it involved. It was obvious to the manager of the facility that Crocker had been drinking and on his second trip down the hill, the manager advised him not to proceed with the race. Crocker did not listen. On his way down the hill, Crocker fell off the tube, broke his neck, and was rendered quadriplegic. Crocker sued. 18 Case 11.4 (2) Crocker v Sundance Northwest Resorts Ltd, 1988 CanLII 45 (SCC) Resolution: o The Supreme Court of Canada held:  Sundance owed a duty of care to the participants because it had set up an inherently dangerous event for profit.  It was obligated to take all reasonable care to prevent Crocker—who was clearly drunk—from injury, and the manager’s suggestion that he not continue was insufficient to meet the standard of care and was liable in damages. 19 Case 11.4 (3) Crocker v Sundance Northwest Resorts Ltd, 1988 CanLII 45 (SCC) o The court rejected Sundance’s defence of voluntary assumption of risk. o While Crocker’s participation could be regarded as an assumption of the physical risks, even this was a questionable conclusion given that Crocker was inebriated. o Crocker had not consented to the legal risk, as even though he had signed it, this had no legal effect since he had not read it and nor did Sundance have any reasonable grounds for concluding that the signed waiver expressed Crocker’s true intention. o Crocker was found 25 percent contributorily negligent for his voluntary intoxication. 20 Negligent Misstatement (or Negligent Misrepresentation) (1) Only in a relatively few areas, such as negligent misstatement or negligent performance of a service, may a plaintiff recover for pure economic loss. pure economic loss: Financial loss that results from a negligent act where there as been no accompanying property or personal injury damage to the person claiming the loss. negligent misstatement or negligent misrepresentation: An incorrect statement carelessly made. professional: Someone engaged in an occupation, usually governed by a professional body, requiring the exercise of special knowledge, education, and skill. 21 Negligent Misstatement (or Negligent Misrepresentation) (2) Professionals such as an accountants, lawyers, and engineers are most likely to commit the tort of negligent misstatement by giving bad advice or providing the client with an incompetently prepared report. o The professional may also be in breach of contract with the client. 22 Business Application of the Law 11.1 (1) Negligent Misrepresentation and Auditors Accountants are often retained by corporations to perform a statutory audit, the primary purpose of which is to allow shareholders to evaluate the performance of management. However, the audit may also end up being relied upon for secondary or extraneous reasons, such as to attract new investors or get a loan, and current or prospective investors may make personal investment decisions based on them. Should auditors be liable for losses arising from such secondary uses of the audit? This question was addressed by the Supreme Court of Canada in Deloitte & Touche v Livent Inc (Receiver of), 2017 SCC 63 [Livent]. 23 Business Application of the Law 11.1 (2) Negligent Misrepresentation and Auditors The auditors in Livent failed to detect a massive financial fraud being perpetrated on Livent, its client, by two of Livent’s directors and their associates. To its detriment, Livent relied on the audit to assess management and, additionally or secondarily, to solicit investment in Livent. Livent ultimately went bankrupt, leading the receivers to sue the auditor because Livent continued to operate with fraudsters at the helm, thereby growing its liquidation deficit. 24 Business Application of the Law 11.1 (3) Negligent Misrepresentation and Auditors Resolution: o The Supreme Court ruled that the duty of care assessment is essentially the same whether the loss in question is caused by negligent words or negligent actions. o In applying the first stage, the court emphasized that proximity and reasonable foreseeability are determined strictly in relation to what the auditor has undertaken to do. o The auditor will not be liable for the use of the audit beyond that scope. o The auditor was liable for losses when the statutory audit was used for its intended purpose, namely to oversee and evaluate management performance. In that context, the auditor and Livent were in a proximate 25 relationship, and Livent’s financial losses attributed to the faulty audit to Business Application of the Law 11.1 (4) Negligent Misrepresentation and Auditors Resolution: o In contrast, Livent’s losses related to using the audit to solicit investment were not recoverable. The audit was not prepared for that purpose, and the auditors were able to escape liability to this extent. o Livent also confirmed that auditors are not generally liable to a third party, like current shareholders or new investors, who rely on the audit to make personal investment decisions. 26 Negligence and Product Liability product liability: Liability relating to the design, manufacture, or sale of the product. The same elements of proving negligence apply to negligence claims against a manufacturer. 27 Negligence and the Service of Alcohol Commercial establishments serving alcohol owe a duty of care to impaired patrons to assist them or prevent them from being injured and to members of the public who are injured by the conduct of their drunken customers. The economic relationship between the commercial host and patron provides an important rationale for extending the law of negligence in this way. 28 Case 11.5 (1) McIntyre v Grigg, 2006 CanLII 37326 (ONCA) McIntyre, a McMaster University student, was walking with several friends, on her way back home from The Downstairs John, operated by the McMaster Students Union. As McIntyre was walking along the side of the curb, she was struck by Grigg’s vehicle. Grigg had also been drinking at The Downstairs John and other venues earlier. Grigg’s blood alcohol level two hours after the accident was three times the legal limit, suggesting he was served 18 drinks. Some but not all patrons observed signs of intoxication at the club ,and the court concluded there were visible signs. McIntyre sued Grigg as well as the McMaster Students Union. 29 Case 11.5 (2) McIntyre v Grigg, 2006 CanLII 37326 (ONCA) Resolution: o Commercial vendors of alcohol owe a duty of care to persons who might reasonably be expected to come into contact with an intoxicated person and do not escape liability simply because a patron does not exhibit any visible signs of intoxication if in the circumstances the tavern knew or ought to have known that the patron was becoming intoxicated. o Grigg was found 70 percent liable and the Student’s Union was found 30 percent at fault. Grigg was also ordered to pay punitive damages. 30 The Negligence Standard versus Strict Liability strict liability: The principle that liability will be imposed irrespective of proof of negligence. The scope of strict liability is limited. o Strict liability is largely confined to vicarious liability as well as liability for fires, dangerous animals, and the escape of dangerous substances. o Liability in contract is also strict liability. 31 International Perspective 11.1 Strict Liability Members of the European Union (EU) and areas in the United States use a strict liability rather than a fault-based standard in defective-product liability cases, meaning that manufacturers can be held liable for unsafe products even if they were not negligent in any way and exercised due care. In the EU: o A product is defective when it does not provide the safety that a person is entitled to expect, taking into consideration all the circumstances. o Relevant considerations include the presentation of the product, expectation of use, and the time the product was put into circulation. 32  Other Torts Canadian Business and the Law, EIGHTH EDITION Torts and Property Use occupier: Someone who has some degree of control over land or buildings on that land. o An occupier may be an owner or even a tenant. Tort actions may arise in relation to property in a number of ways, most commonly when the occupier of the property harms others. 34 Occupiers’ Liability: The Common Law (1) This area of the law varies by jurisdiction. The common law determines liability by classifying the visitor as either a trespasser, licensee, invitee, or contractual entrant. Each class is owed a different standard of care, with the trespasser being owed the lowest standard and the contractual entrant being owed the highest. 35 Occupiers’ Liability: The Common Law (2) contractual entrant: Any person who has paid (contracted) for the right to enter the premises. o The duty owed to this class (in the absence of a contract specifying the duty) is a warranty that the premises are as safe as reasonable care and skill on the part of anyone can make them. invitee: Any person who comes onto the property to provide the occupier with a benefit. o The occupier must warn the invitee of any unusual danger. o There is no requirement to warn of a usual or common danger that ordinary reasonable persons can be expected to know and appreciate. 36 Occupiers’ Liability: The Common Law (3) licensee: Someone who has been permitted by the occupier to enter for the benefit of the licensee. Occupiers are responsible to licensees for any unusual danger of which they are aware or that they have reason to know about. trespasser: Any person who is not invited onto the property and whose presence is either unknown to the occupier or is objected to by the occupier. o The occupier is liable for any act done with the deliberate intention of doing harm to the trespasser, or an act done with reckless disregard for the presence of the trespasser. o Sometimes a child trespasser is classified as an invitee, or the duty owed to a child trespasser is interpreted generously to avoid the harshness of the general rule. 37 Liability Under Occupiers’ Liability Legislation Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, and Prince Edward Island have enacted occupiers’ liability legislation. The legislation differs somewhat between jurisdictions, but there are some common general principles. o A high duty of care, equivalent to the negligence standard, is owed to entrants who are on the property with express or implied permission. o Occupiers may not deliberately harm or endanger trespassers. o Alberta has special provision for child trespassers. 38  Case 12.1 (1) Martin v AGO, 2022 ONSC 1923 Martin suffered injuries when he slipped and fell on a small amount of water in the Hamilton courthouse. He sued the building owner, Ontario Infrastructure and Land Corporation, and the maintenance company, Bee-Clean Building Maintenance, for failing to take “care as in all the circumstances of the case is reasonable to see that persons entering on the premises … are reasonably safe while on the premises.” 39  Case 12.1 (2) Martin v AGO, 2022 ONSC 1923 Resolution: o The claim was dismissed—the standard was not perfection or constant surveillance. o The defendants demonstrated that they adopted a system of inspection and cleaning, had carefully placed mats at the entrances, and used appropriate signs. o Even if they had not met the expected standard, the fall would have occurred anyway as the amount of water was very miniscule, and Martin would have been found 30 percent at fault for choosing to wear footwear with partially worn soles. 40 The Tort of Nuisance (1) nuisance: Any activity on an occupier’s property that unreasonably and substantially interferes with the neighbour’s rights to enjoyment of the neighbour’s own property. o The general test is whether the impugned activity has resulted in an unreasonable and substantial interference with the use and enjoyment of land. 41 The Tort of Nuisance (2) The courts have developed the following guidelines: o Interference must be substantial and unreasonable. o Nuisance typically does not arise where the interference is only temporary. o Not all interests are protected by the tort of nuisance—such as the right to sunlight. o In nuisance actions, courts will consider tradeoffs in interest. For example, when the noise in question is reasonable and for the public good, the action in nuisance will fail. 42 Case 12.2 (1) TMS Lighting Ltd v KJS Transport Inc, 2014 ONCA 1, varying 2012 ONSC 5907 TMS manufactured high-end commercial lighting fixtures at a location selected because it required clean premises for lighting fixture manufacturing. KJS, a long-haul trucking service, moved in next door some time later. KJS did not pave its parking lot, and, as a result, for four years, dust particles raised by KJS trucks driving on its unpaved parking lot caused damage as dust blew into TMS’s factory and settled on the lighting products manufactured on site. Even if TMS closed all its windows and doors, factory fans, which were necessary for tolerable working conditions, would draw in dust, resulting in production slow-downs and shut-downs. KJS failed to remedy the dust problem and TMS sued. 43 Case 12.2 (2) TMS Lighting Ltd v KJS Transport Inc, 2014 ONCA 1, varying 2012 ONSC 5907 Resolution: o Nuisance involves an interference with the plaintiff’s use or enjoyment of land that is both (1) substantial (i.e., non-trivial) and (2) unreasonable. o Unreasonableness is assessed by balancing the gravity of the harm against the utility of the defendant’s conduct in all of the circumstances, such as the severity of the interference, the character of the neighbourhood, the sensitivity of the plaintiff to the harm caused, and the frequency and duration of the interference. o Court of Appeal upheld the trial judge’s decision that had found the interference of KJS was both substantial and unreasonable. o A further trial was ordered to determine an appropriate award of damages. 44 Trespass trespass to land: Wrongful interference with someone’s possession of land. Trespass arises in several ways: o A person comes onto the property without the occupier’s express or implied permission. o A person comes onto the property with the occupier’s express or implied consent but is subsequently asked to leave. Any person who refuses to leave becomes a trespasser. o A person leaves an object on the property without the occupier’s express or implied permission. Trespass is actionable without proof of harm or damage, and injunctions are usually the remedy sought. Legislation in some provinces impose fines for trespass. 45 Case 12.3 (1) TMS Lighting Ltd v KJS Transport Inc, 2014 ONCA 1 (continued from Case 12.2) TMS’s legal complaint against KJS was not just in nuisance. Very large trucks owned by KJS would frequently pull onto TMS’s driveway because there was an insufficient turning radius on KJS premises. To prevent the trespass from continuing, TMS first installed six-inch-high concrete curb stones along the edge of its factory driveway, but KJS trucks simply drove over those stones, ultimately destroying them. In response, TMS installed three-foot-high concrete blocks, which KJS trucks continued to strike and often ended up pushing them right onto TMS’s driveway. This blocked TMS’s driveway, requiring TMS to send employees out with forklifts to reposition the blocks on a regular basis. 46 Case 12.3 (2) TMS Lighting Ltd v KJS Transport Inc, 2014 ONCA 1 (continued from Case 12.2) Resolution: o KJS’s use of the driveway was found to be a substantial interference with TMS’s rights, and TMS was granted an injunction to prohibit future trespass by KJS. A further trial was ordered to determine an appropriate award of damages. 47 Environmental Perspective 12.1 (1) Tort Actions Relating to the Environment Four main torts provide remedies for environmental damage: (1) the tort of negligence; (2) the tort of trespass; (3) actions based on Rylands v Fletcher; and (4) the tort of nuisance. Each of these torts can offer a way for a plaintiff to secure an injunction and damages. To successfully sue in negligence, the plaintiff must establish all the elements of a tort action,n including that the environmental damage was caused by the defendant’s carelessness. To succeed in trespass, the plaintiff must show direct intrusion of pollutants generated by the defendant which came onto the plaintiff’s land without permission or authorization. 48 Environmental Perspective 12.1 (2) Tort Actions Relating to the Environment The tort in Rylands v Fletcher does not require the plaintiff to show that the defendant was careless but rather that something from the defendant’s land (such as water or gas) escaped onto the plaintiff’s land due to the defendant’s dangerous and non-natural use of their land. The tort of nuisance requires proof that the defendant’s pollutants amounted to an unreasonable and substantial interference with the plaintiff’s enjoyment of their own property. 49 Environmental Perspective 12.1 (3) Tort Actions Relating to the Environment Governments have enacted legislation that seeks to balance economic development with a degree of “acceptable” environmental damage. Municipal and land-use planning laws also put constraints on the kind of activity that can occur on the land affected. 50 Torts from Business Operations (1) Negligence was reviewed previously, but there are other torts that may impact business operations. assault: Threat of imminent physical harm by disturbing someone’s sense of security. battery: Intentional infliction of harmful or offensive physical contact. For example, security personnel may commit the torts of assault and battery when seeking to apprehend a suspected shoplifter or eject a patron. 51 Torts from Business Operations (2) false imprisonment: Unlawful detention or physical restraint or coercion by psychological means. legal authority: The authority by law to detain under section 494 of the Criminal Code. To defend against the tort of false imprisonment if detaining a suspected shoplifter, the retailer and/or its employees must show legal authority to detain under section 494 of Canada’s Criminal Code. o The arrest can happen at the time of the offence or “within a reasonable time after the offence is committed and they believe on reasonable grounds that it is not feasible in the circumstances for a peace officer to make the arrest.” o If store personnel detain a suspected shoplifter, they must immediately call the police. 52 Torts from Business Operations (3) deceit or fraud: A false representation intentionally or recklessly made by one person to another that causes damage. o In contract law, the victim is also entitled to be released from the contract. passing off: Presenting another’s goods or services as one’s own. o This tort can be intentional or even accidental. o Damages and/or an injunction may be sought. Note: The Trademarks Act also contains a statutory form of action that bears a strong resemblance to the tort of passing off. 53 Case 12.4 (1) Ciba-Geigy Canada Ltd v Apotex Inc, 1992 CanLII 33 (SCC) Ciba-Geigy Canada Ltd manufactured and sold the drug metoprolol tartrate in Canada. Apotex began to manufacture and sell the same drug in Canada. The products were officially designated as “interchangeable,” meaning that the pharmacist could, in filling a prescription, give the defendant’s product in place of the plaintiff’s product provided the prescription did not contain a “no substitution” notation. The plaintiff sued for passing off on the basis that the defendants were copying the plaintiff’s “getup” in relation to the size, shape, and colour of the pills, claiming this was confusing consumers. 54 Case 12.4 (2) Ciba-Geigy Canada Ltd v Apotex Inc, 1992 CanLII 33 (SCC) Resolution: o The Supreme Court of Canada confirmed that competing laboratories must avoid manufacturing and marketing drugs with such a similar getup that it sows confusion in the customer’s mind. It outlined three steps to proving the tort of passing off:  The existence of goodwill.  Deception of the public or likely creation of confusion in the public mind.  Actual or potential damage to the plaintiff. 55 Torts from Business Operations (4) interference with contractual relations: Inducing someone to break a contractual obligation owed to another. o For example, poaching an employee and enticing them to breach their contract with their existing employer. defamation: The public utterance of a false statement of fact or opinion that harms another’s reputation. o The key ingredients to this tort:  The defendant’s words would “tend to lower the plaintiff’s reputation in the eyes of a reasonable person.”  The statement did in fact refer to the plaintiff.  The words were communicated to at least one other person beyond the plaintiff. 56 Torts from Business Operations (5) Defences to defamation: o justification: A defence to defamation based on the defamatory statement being substantially true. o qualified privilege: A defence to defamation based on the defamatory statement being relevant, without malice, and communicated only to a party who has a legitimate interest in receiving it. 57 Torts from Business Operations (6) Defences to defamation: o fair comment: A defence to defamation that is established when the plaintiff cannot show malice and the defendant can show that the comment concerned a matter of public interest, was factually based, and expressed a view that could honestly be held by anyone. o absolute privilege: A defence to defamation in relation to parliamentary or judicial proceedings. 58 Technology and the Law 12.1 E-Torts: Defamation on the Internet Negative reviews can have a devastating consequence for the business involved. At the same time, however, customers have the right to raise concerns about the quality of goods or service received. In Premier Finance Ltd v Ginther, an individual who made untrue statements in an online review that accused a business of deceit and fraud was ordered to pay $90 000 in damages. 59 Torts from Business Operations (7) injurious or malicious falsehood: A statement about another’s goods or services that is false and harmful to the reputation of those goods or services. o Injurious falsehood requires the plaintiff to establish that the statement about the goods or services was false and was published (or uttered) with malice or improper motive. o Malice includes publishing material one knows is false or with a reckless disregard as to its truth or falsity. 60 Business Application of the Law 12.1 Protection of Privacy The common law has historically protected privacy interests through the torts of defamation trespass, nuisance, assault, battery, and false imprisonment. In 2012, the Ontario Court of Appeal recognized a tort, intrusion upon seclusion, which permits a person to sue for invasion of privacy and suggested a $20 000 ceiling for damages. intrusion upon seclusion: Intentional, offensive invasion of another’s personal affairs without lawful justification. Government protects ­privacy through legislation that deals with the collection, use, and disclosure of personal information by organizations in the course of commercial activities, and some provinces have passed legislation that creates the tort of breach of privacy. 61 The Agency Relationship Canadian Business and the Law, EIGHTH EDITION The Nature of Agency Agency is the relationship between two persons that permits one person, the agent, to affect the legal relationships of another, known in law as the principal. agency: A relationship that exists when one party (the agent) represents another party (the principal) in the formation of legal relations. agent: A person who is authorized to act on behalf of another. principal: A person who has permitted another to act on their behalf. 63 Examples of Agency Relationships A sports agent negotiates a multimillion-dollar deal on behalf of a hockey player. An insurance agent sells fire and theft insurance on behalf of several insurance companies. A travel agent sells tickets, cruises, and vacation packages on behalf of carriers and hotels. 64 Relationships in Agency There are two key relationships at play in an agency situation: o agent–principal relationship o outsider–principal relationship  relationship between the principal and the party with whom the agent does business (the outsider or third party) 65 Law of Agency This law governs the relationship where one party, the agent, acts on behalf of another, the principal. It addresses and rights and duties of the principal, agent, and third party (outsider), and the complications resulting from these relationships. It is derived largely from tort and contract law. 66 Creation of Agency (1) An agency relationship usually arises by contract between the parties in which the principal authorizes an agent to act on their behalf and the agent agrees to do so. The contract may be created only for a single purpose—for example, to purchase a delivery van. Alternately, it can arise as part of a larger contract—an employment contract, for example, where the employee’s duties include entering into sales transactions for the employer (principal). 67 Creation of Agency (2) Sometimes a relationship arises by conduct or behaviour of the principal, which leads outsiders to believe there is an agency relationship. An agency agreement can be express, implied, oral, in writing, or in writing under seal. power of attorney: A document, with or without seal, granting wide or specific powers to the agent to act for the principal. 68 The Concept of Authority The authority of the agent is a key aspect of the agency relationship. It determines whether there is a contract between the principal and the outsider. When an agent acts within the scope of the agent’s authority and negotiates a contract for the principal, the principal is bound by the contract, whether or not the principal likes it. 69 Actual Authority actual authority: The power of an agent that derives from either express or implied agreement. Express authority may be written or oral and is the authority specifically granted by the principal to the agent—for example, authority to purchase supplies. Implied authority arises by implication, such as from o the position the agent occupies o necessity in order to carry out or implement the agent’s express authority o well-recognized custom in a particular trade, industry, or profession 70 Apparent Authority apparent authority: The power that an agent appears to have to an outsider because of conduct or statements of the principal. 71 Business Application of the Law 13.1 Agent’s Authority to Enter Agreement to Share Prize Finalists agreed to share a $100 000 prize when one won. The winner’s wife had been present to agree with the plan and signed a document agreeing to share. When the winner was named, he did not share—other finalists claimed their amount. The court found that the winner’s wife was acting as her husband’s agent to be present at the location but did not have apparent authority. 72 Agency by Estoppel This form of agent authority can arise in three situations. o An agent exceeds their actual authority but acts within their apparent authority and thereby binds a principal to a contract against their wishes. o The principal indicates that another is their agent when, in fact, no agency relationship exists. The principal is not permitted to avoid the contract by claiming that no agency relationship existed, because the principal gave every appearance that one did. o Where an agency relationship has been terminated or an agent’s authority has been curtailed. 73 Case 13.1 Rockland Industries Inc v Amerada Minerals Corporation of Canada, 1980 CanLII 188 (SCC) Kurtz was the manager of Amerada’s petrochemical products with responsibility for domestic and foreign sales. Kurtz and representatives of Rockland concluded an agreement by telephone on September 5. On September 3, Kurtz had been informed by his employer that he would need to get the approval of the executive operating committee for the sale to Rockland. Rockland did not comply with the agreement and was sued for breach of contract. Court: Onus was on Amerada to notify Rockland of the limitation—it was not up to Rockland to inquire as to Kurtz’s authority. By permitting Kurtz to act in its business by conducting negotiations, it had represented to Rockland that 74 he had permission to act. Agency by Ratification (1) An agency relationship is created when one party adopts a contract entered into on their behalf by another who at the time acted without actual or apparent authority. o Unlike agency by estoppel, the principal has not conducted themself in a misleading way, and the law does not force the principal to adopt the contract. In agency by ratification, the agent does not have the authority to do what they do. 75 Agency by Ratification (2) A principal cannot ratify every contract that their agent enters. A principal can only ratify a contract if o the principal does so within a reasonable time; o They have the capacity to create the contract at the time the agent entered into it and at the time of ratification; and o the agent identified the principal at the time of entering the contract. 76 Business Application of the Law 13.2 Real Estate Agents Real estate agents usually have no authority to make a binding contract of sale on behalf of the principal (the homeowner or the purchaser). Normally, the agreement between the owner or the purchaser and the real estate agent does not confer any authority on the agent to enter a contract on behalf of the property owner or purchaser. The term agent is often used very loosely to refer to anyone who represents another, and it is not always restricted to relationships where the agent enters into contracts on behalf of the principal. 77 Duties of the Agent (1) The agent is required to perform in accordance with the principal’s instructions. If the agent fails to perform these duties, they are in breach of the contract. Performance must meet the standard of the particular trade or industry. Normally, it is expected that the agent will personally perform the obligations, but there may be an express or implied provision for delegation. 78 Duties of the Agent (2) An agent owes a fiduciary duty to the principal. fiduciary duty: A duty imposed on a person who has a special relationship of trust with another. Fiduciary duty includes the following: o making full disclosure of all material information that may affect the principal’s position o avoiding any conflict of interest that affects the interests of the principal o avoiding acting for two principals in the same transaction o avoiding using the principal’s property, money, or information to secure personal gain o avoiding accepting or making a secret commission or profit 79 Case 13.2 (1) Duraguard Fence Ltd v Badry, 2019 ABQB 783 Duraguard makes and installs chain-link fences. It was a long-time client of an insurance brokerage firm and broker with 43 years of experience. It deferred to the broker for all the company’s insurance needs. In 2004, without being asked or discussion, the broker made changes to Duraguard’s insurance including reduction of coverage for theft to $5000. In 2007, Duraguard discovered that an employee had stolen approximately $589 000. Duraguard sued the broker for negligence and breach of fiduciary duty. 80 Case 13.2 (2) Duraguard Fence Ltd v Badry, 2019 ABQB 783 Court: Brokerage was negligent. o Insurance agents owe a duty to their customers. o The onus is on the agent to review the customers’ insurance needs and provide the full coverage requested. o Should an uninsured loss occur, the agent will be liable unless he has pointed out the gaps and advised how to protect against those gaps. o The broker failed to discuss the adequacy of the $5000 limit and failed to ask about previous employee dishonesty. o The broker had no fiduciary duty because the broker did not have authority to bind Duraguard to a contract. 81 Case 13.3 (1) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Rafealla Sirianni and her husband wanted to invest in income producing property. They asked her brother-in-law, Guerino Siriianni, who was a realtor, to find an investment property. He found a property that was not for sale and prevailed upon the owners to list it for sale and then brought them an offer from “R. Raso in trust,” which was actually from Rafealla, who used her maiden name for the offer. The realtor did not disclose his relationship with the offeror. The price was agreed upon after several offers and counteroffers. Later, the seller learned about the relationship and refused to complete the contract. 82 Case 13.3 (2) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Raffaela Sirianni sued for specific performance of the contract, and Sirianni and the real estate agency sued for their commission. Court: o Sirianni was not a mere middleman and took an active role in the transaction. o A real estate agent who acts for both sides has a fiduciary duty to both his principals to disclose all material facts. o Sirianni breached his fiduciary duty to the sellers by failing to disclose the relationship and failing to advise of the money that the purchasers had available. 83 Case 13.3 (3) Raso v Dionigi, 1993 CanLII 8664 (ONCA) Court: o It is immaterial whether the transaction is fair, and it is irrelevant whether the principal would still have entered the transaction if disclosure had been made. o Where an agent has breached a fiduciary duty in this manner, the agent is precluded from claiming any commission. o The purchasers are not entitled to specific performance, as they had knowledge of the agent’s breach and actively participated in the scheme. 84 Duties of the Principal Duties are usually set out in the contract. The contract usually requires the principal to do the following: o compensate the agent o assist the agent as agreed in the contract o reimburse the agent for reasonable expenses o indemnify the agent against losses incurred while carrying out agency business 85 Ethical Considerations 13.1 Real Estate Agents' Commissions and “Steering” Real estate agents representing buyers have access to information about the amount of commission available and may “steer” the buyer away from low commission houses to high commission houses. The practice of steering buyers toward listings where the seller is offering higher commissions over those offering lower commission is illegal in Ontario where agents are required to inform the buyer of properties that meet the buyer’s criteria without regard to the amount of remuneration. 86 Contract Liability in the Agency Relationship When an agent enters into a contract with a third party on behalf of a principal, it is the principal, not the agent, who ordinarily is liable on the contract. An agent who acts without authority and contracts with an outsider is liable to the third party for breach of warrant of authority. warrant of authority: A representation of authority by a person who purports to be an agent. An agent may be bound when they contract on their own behalf to be a party to the contract along with their principal. 87 Liability of an Undisclosed Principal (1) An agent may incur liability when they contract on behalf of an undisclosed principal (i.e., the outsider does not know they are dealing with an agent at all). undisclosed principal: A principal whose identity is unknown to a third party who has no knowledge that the agent is acting in an agency capacity. The general rule is that the principal is still liable on the contract so long as the agent is acting within their authority and the agent has no liability. 88 Liability of an Undisclosed Principal (2) If the agent pretends to be the principal, they may be personally liable on the contract. If the agent says they are acting for a principal but cannot reveal their identity, the principal alone is liable on the contract. 89 Liability of the Agent to the Principal An agent can be sued by the principal for breach of their contract if the agent exceeds their actual or apparent authority. 90 Tort Liability in the Agency Relationship As a general rule, an agent is personally liable for any torts that they commit. The principal is vicariously liable for the agent’s actions so long as the agent is acting within express, implied, or apparent authority. 91 Termination of Agency Agreements An agency agreement can come to an end in a number of ways: o The agency relationship ceases by operation of the law; this most commonly occurs due to the death, dissolution, insanity, or bankruptcy of one of the parties. o The parties agree to bring their relationship to an end. o One party gives notice of termination to the other. The principal should give notice to third parties. 92 Business Forms and Arrangements Canadian Business and the Law, EIGHTH EDITION The Sole Proprietorship (1) This is the oldest, simplest form of business organization. It is the most often used form of business organization. There is no legislation pertaining to the sole proprietorship as such, but you may need to obtain a business licence and register a trade name. It is easy to set up. 94 The Sole Proprietorship (2) Sole proprietorship: An unincorporated business organization that has only one owner. The owner has unrestricted legal responsibility for obligations. There is no legal distinction between the business and its owner. 95 Financial Liability in a Sole Proprietorship Sole proprietors have significant financial liability because any obligation of the business is the owner’s personal liability. Borrowing o As it is not a legal entity, it must borrow in the name of the owner, who is personally liable for the debt. Contract liability o Contracts must be entered into by the owner, who is personally liable for breach of any contract. Tort liability o The owner is personally liable for torts committed by employees. 96 Profit Sharing and Decision Making in a Sole Proprietorship The owner bears all of the risk of failure and reaps all of the profits. The owner has all decision making authority and can made decisions quickly and independently. 97 Sources of Capital, Taxation, and Transferability in a Sole Proprietorship Sole proprietorships have limited access to capital because of sole ownership. Access to capital is limited to owner’s own assets and any credit available to the owner. A sole proprietorship is not a legal entity, and all profits and losses are reported on the owner’s personal income tax return and taxed at the owner’s tax rate. A sole proprietorship cannot be transferred or sold because it is not a legal entity, but its assets may be sold. 98 Regulation of Sole Proprietorships There are no formal requirements to form a sole proprietorship; one simply begins business activity. They are subject to the same regulation as any other form of business, such as zoning laws and consumer protection legislation. Some specialists may require a licence to practice their specialty—for example, lawyers, doctors, electricians. Some industries and forms of business are subject to regulation—for example, door-to-door selling and interprovincial trucking. Municipalities may impose registration or licensing requirements. The name must be registered if the business uses a name other than the owner’s name. 99 Pros and Cons of a Sole Proprietorship Pros Cons simplicity unlimited personal liability speed and independence working alone (but can have profit motive employees) lower costs limited access to capital (can tax benefits—can claim only borrow) business expenses limited lifespan (dies with control over decision making owner) tax disadvantages (must claim all business income with personal taxes) 100 The Partnership partnership: A business carried on by two or more persons with the intention of making a profit. It is similar to a sole proprietorship, in that neither has a legal personality— or legal existence—separate from the people who comprise them. There are no special steps to create a partnership—it arises automatically when two or more people do business together with an objective of making a profit. 101 Financial Liability in a Partnership Each owner has unlimited personal liability for the entire debt of the partnership, not just a proportion of the debt, but they are entitled to be reimbursed from the other partners for their share of the debt. joint liability: Liability shared by two or more parties where each is personally liable for the full amount of the obligation. As it is not a legal entity, its debts are personal debts of the partners. Each partner is liable for any breach of contract by the business. The personal assets of the partners are available to satisfy any debts of the business. 102 Profit Sharing and Decision Making in a Partnership The partners decide how profits and firm assets are to be divided. o For example, ownership may be 50%–50%, 70%–30% ,and so forth. o Legislation presumes equal ownership if the partners cannot agree on how to divide the partnership. Decision making is by majority, and disagreement can impede business decision making. 103 Sources of Capital, Taxation, and Transferability of Partnerships More owners give the partnership access to more capital availability. The partnership is not a separate legal entity, and therefore any income from the partnership business is allocated to the partners on the basis of their interest in the partnership, and they must, in turn, include it on their individual tax returns. Partners do not individually own or have a share in specific partnership property. Each partner has an interest in all partnership property. 104 Agency and the Partnership Act Partnership law is based on contract law, agency law, and provincial partnership legislation. Provincial partnership legislation defines when a partnership exists and what the relationship of partners is to the outside world. Provincial partnership legislation has optional rules (subject to an agreement to the contrary) for the relationship of the partners to one another and how the partnership ends. 105 When a Partnership Exists A partnership exists when two or more people carry on business in common with a view toward profit. The court will look to the essence of the relationship rather than the labels used by the parties. o A person who conducts themself as if they were a partner—by sharing in profits, managing the business, or contributing capital to establish a business—is a partner in the eyes of the law. Partnership legislation also sets out circumstances that do not by themselves create a partnership, such as joint ownership of of property. 106 The Relationship of Partners to One Another Partnership legislation provides that partners are agents of one another and of the firm. As agents, partners are fiduciaries: o Partners must put interests of one’s partners ahead of one’s own interests. o Partners cannot compete with the partnership. o Partners cannot use partnership property for personal profit. o Partners cannot use a partnership opportunity for personal gain. 107 Partnership Agreements Partnership agreements are recommended but not mandatory. A partnership agreement should address the following: o creation of the partnership (names, addresses, description of business) o capital contribution of each partner, and how it is managed o decision making duties, limits, and dispute resolution mechanisms o profit distribution o rules for changing the partnership, adding new partners, retirements o dissolution of partnership, valuation of assets 108 The Relationship of Partners to Outsiders Partners are agents of the firm, and the firm and other partners are responsible for the contract entered into by a partner. Partners may enter into an agreement to restrict their authority, but outsiders will not be bound by this unless they are aware of the agreement. Partners are jointly and severally liable for torts committed by a partner. joint and several liability: Individual and collective liability for a debt. Each liable party is individually responsible for the entire debt as well as being collectively responsible for the entire debt. 109 Case 14.1 (1) Blue Line Hockey Acquisition Co, Inc v Orca Bay Hockey Limited Partnership, 2008 BCSC 27, aff’d 2009 BCCA 34, leave to appeal denied 2009 CanLII 38635 (SCC) Three businessmen, A, G, and B, agreed to work together to potentially purchase 50 percent of the Vancouver Canucks. They discussed generally the terms of an offer but did not discuss the specific terms other than each would own one-third of the interest acquired in the Canucks. All three understood that no member of the group could bind the others. Several proposals were made that were rejected by the owners. A left the group but indicated he was still interested in acquiring a share. G and B developed a proposal to purchase 100 percent of the team and arena and told A he could not participate. 110 Case 14.1 (2) Blue Line Hockey Acquisition Co, Inc v Orca Bay Hockey Limited Partnership, 2008 BCSC 27, aff’d 2009 BCCA 34, leave to appeal denied 2009 CanLII 38635 (SCC) A, without informing G and B, entered negotiations with the team owners and reached agreement to purchase 50 percent of the team and the arena with an option to purchase the remaining 50 per cent. G and B sued A for breach of fiduciary duty. Court: o They agreed one would be a spokesperson but would not have authority to bind the others. o There was no valid contract between A, G and B to form a partnership, merely an agreement to work together to purchase property. 111 Pros and Cons of Partnerships Pros Cons ▪ simplicity ▪ unlimited personal liability ▪ lower costs ▪ loss of speed and ▪ greater access to capital independence ▪ profit motive ▪ limitations on transferability ▪ tax benefits ▪ profit sharing ▪ tax disadvantages 112 Business and Legislation 14.1 (1) The Partnership Act: The Relations Between Partners All common law provinces have an Partnership Act modelled on the British Partnership Act. Mandatory provisions relate to the relationship between partners and outsiders. The relationship between partners is captured in optional rules: o All partners share equally, in profits and losses. o Property acquired is used for the partnership. o Partners are indemnified by others for liability incurred for the partnership. o Excess payments from a partner earn interest. 113 Business and Legislation 14.1 (2) Optional rules, continued o Each partner takes part in business management. o No partner will receive payment for acting in the business. o No new member will be admitted without consent from all. o Disputes may be decided by a majority. o Partnership books will be kept at the place of business. o No simple majority can expel a partner. 114 Business Application of the Law 14.1 Responsibility for Partner’s Debts Conduit, a partner in a Toronto bar, learned her partner had not paid HST, and then learned a bank had obtained a $62 000 judgment against him for another debt from another business venture. The bank ended up getting a court order against the bar for his debts and sought to make Conduit personally liable for his debt. Conduit and the bank settled out of court in a confidential settlement. 115 How and Why a Partnership Ends The Partnership Act provides for termination under certain circumstances. o If entered into for a fixed term, by the expiration of the term. o If entered into for a single venture or undertaking, by the termination of that venture or undertaking. o By any partner giving notice to the others of their intention to dissolve the partnership. o Following the death, insanity, or bankruptcy of a partner. This can be changed by the agreement and needs to be in cases such as large firms, who have partners entering and leaving. Legislation provides process for property—proceeds from sales go to debts and liabilities, then to loans, then capital contributed by partners, and then divided to partners. 116 Business Application of the Law 14.2 Managing Partnership Risks Choose partners with care. Educate partners on their authority and limits, and the consequences of exceeding them. Monitor the activities of partners. Notify clients and customers of the departure of partners to prevent being held liable for debts contracted by departed partners. Insure against liabilities for wrongdoing. 117 Limited Partnership limited partnership: A partnership in which the liability of some of the partners is limited to their capital contribution. A limited partnership requires a written agreement that must be registered with the appropriate provincial body. At least one partner has unlimited liability (the general partner(s)), while others have limited liability. Limited partners have a liability limited to the amount that they have contributed to the partnership capital. Limited partners have the right to share in profits and the right to have their contribution returned on dissolution, but they cannot take part in the management of the partnership or they lose their limited liability. 118 Limited Liability Partnership limited liability partnership (LLP): A partnership in which the partners have unlimited liability for their own malpractice but limited liability for other partners’ malpractice. An LLP has the characteristics of a general partnership, but with specific limitations on the liability of partners. It is designed to address the concerns of professionals who are not permitted to use incorporation as a means of achieving limited liability. The limited liability varies between jurisdictions. 119 The Corporation A corporation is a distinct legal entity in law and capable of assuming its own obligations. It is usually the safest vehicle for conducting business because the owners have limited liability. limited liability: Responsibility for obligations restricted to the amount of the investment. It is the most important form of business organization today. It is managed by a board of directors elected by the shareholders. Shareholder: A person who has an ownership interest in a corporation. Director: A person elected by the shareholders to manage a corporation. 120 Profit Sharing, Decision Making, and Sources of Capital in a Corporation Profits are distributed to shareholders through dividends. dividend: A division of profits payable to shareholders. The corporation is managed by a board of directors who may hire officers to assist in running the corporation. A corporation obtains capital by borrowing or selling shares. A share represents a unit of ownership in the corporation and provides an opportunity to earn dividends and an increase in share value. In the event of business failure, creditors are paid ahead of shareholders. 121 Taxation and Transferability of Ownership in a Corporation Corporations are legal entities that pay their own taxes apart from the shareholders, who pay tax on capital gains, dividends, and salaries received from the corporation. Reduced or deferred taxes may sometimes be gained through the appropriate splitting of distributions to shareholders between dividend and salary payments. A shareholder can sell or bequeath their shares with no interference from corporate creditors because the shareholder has no liability for corporate debts. Transferability may be restricted by the corporation’s incorporating documents or a shareholders’ agreement. 122 Perpetual Existence and Regulations Because the corporation exists independently of its shareholders, the death or bankruptcy of one or more shareholders does not affect the existence of the corporation. Like sole proprietorships and partnerships, a corporation must comply with laws of general application. 123 Pros and Cons of Corporations Pros Cons limited liability higher costs flexibility public disclosure greater access to capital greater regulation continuous existence dissolution tax benefits tax disadvantages transferability possible loss of control potentially broad management potential bureaucracy base 124 Comparison of Major Forms of Business Organization Characteristic Sole Proprietorship Partnership Corporation Creation At will of owner By agreement or conduct of By incorporation documents the parties Duration Limited by life of owner Terminated by agreement, Perpetual unless dissolved death Liability of owners Unlimited Unlimited Limited Taxation Net income taxed at Net income taxed at Income taxed to the corporation; personal rate personal rate dividends and salary taxed to shareholders Transferability Only assets may be Transferable by agreement Transferable unless incorporating transferred documents restricts transferability Management Ownder manages All partners manage equally Shareholders elect a board to manage unless otherwise specified in the affairs of the corporation; officers agreement can also be hired 125 Business Arrangements: The Franchise It is a contractual agreement between a manufacturer/wholesaler/service organization (franchisor) and an independent business (franchisee) who buys the right to own and operate unit(s) of the franchise. The franchisor owns the trademark or trade name and permits another to sell under that trade name. Franchise agreements cover how the business is run, where supplies can be purchased, royalties paid, charges for advertising, etc. The relationship between franchisor and franchisee does not normally create fiduciary obligations. 126 Business and Legislation 14.2 Ontario’s Franchise Legislation: Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, C 3 The regulation of franchising is within provincial jurisdiction and six provinces have enacted franchise statutes. The act does the following: o defines franchise and elements need to establish a franchise o sets out disclosure requirements o imposes a duty of fair dealing o establishes a right of association 127 Case 14.2 Fairview Donut Inc v TDL Group Corp, 2012 ONSC 1252, aff’d 2012 ONCA 867, leave to appeal refused 2013 CanLII 26760 (SCC) Tim ­Hortons franchisees complained that changes introduced by the franchisor negatively affected their profitability, including a requirement that franchisees to purchase par-baked goods from a central bakery rather than baking the products in-store from scratch and that the franchisor charged unreasonably high prices for the ingredients. Court: There was no requirement that a new product or model had to be profitable in its own right and no implied term requiring Tim Hortons to supply ingredients to franchisees at lower prices than they could obtain on the open market. The good faith and fair dealing duty does not require the franchisor to consider the franchisees’ interests at the expense of its own. 128 Business Arrangements: Joint Venture A joint venture is an association of business entities that unite to carry on a business venture. Normally, the entities will share profits and losses from the venture, which is usually but not always limited to a specific project or a period of time. Joint ventures can take a variety of forms, such as a partnership or an equity joint venture, or may simply be a contractual arrangement between parties. 129 Case 14.3 Blue Line Hockey Acquisition Co, Inc v Orca Bay Hockey Limited Partnership, 2008 BCSC 27, aff’d 2009 BCCA 34, leave to appeal denied 2009 CanLII 38635 (SCC) Refer to Case 14.1 discussion for facts. Was there a joint venture between Gaglardi, Beedie, and Aquilini? Did Aquilini owe any duties to Gaglardi and Beedie? Court: Like partnerships, joint ventures must be founded on contract. The parties must intend to enter a joint venture and must have agreed on all essential terms. In this case, there was no agreement as to the identity of the parties, there was no certainty of subject matter, and there was no agreement on the price. 130 Business Arrangements: Strategic Alliance A strategic alliance is a co-operative arrangement among businesses that may involve joint research, technology sharing, or joint use of productions. The relationship is usually contractual in nature. For example, KPMG in Canada has a host of alliances with leading technology, data, and services companies such as IBM and Microsoft to assist clients with a range of issues including cybersecurity, blockchain technology, digital labour, and regulatory change. 131 Business Arrangements: Distributorship or Dealership These are similar to a franchise and usually arise when one party agrees to sell products or provide services prescribed by a manufacturer. It is often seen in the automotive and computer industries. The relationship is governed by a contract. Normally there is no agency or fiduciary relationship. 132 International Perspective 14.1 Going Global Strategic alliances are one of the leading business strategies of the 21st century. Strategic alliances can help firms lower costs, exploit each other’s specialized skills, fund costly research and development efforts, and expand into foreign markets. Using a strategic alliance to access a foreign market usually involves “partnering” with a “local” to take advantage of their familiarity with the social, cultural, legal, and other conditions in the market. 133 Business Arrangements: Sales Agency sales agency: An agreement in which a manufacturer or distributor allows another to sell goods or services on its behalf. The agent is not the vendor but acts on behalf of the owner (the principal) of the goods or services. Fiduciary obligations are owed. This arrangement is often seen in the travel, real estate, and insurance industries. 134 Business Arrangements: Product Licensing product licensing: An arrangement whereby the owner of a trademark or other proprietary right grants to another the right to manufacture or distribute products associated with the trademark or other proprietary right. The relationship is contractual. It is common in clothing, sporting goods, and merchandise connected to the entertainment industry. 135