LAW603-Final-Notes

o Agency created through express agreement – usually describes the authority given to the agent.  Actual authority: exists when a principal authorizes agent to act on its behalf  Express grant could be given: o Employment contract with the agent through a resolution of the corporation’s board of directors o Agency agreement o Can also be granted less formally – oral delegation of authority by principal o Appointing an agent to a particular position, such as sales manager, that has certain authority in the principal’s organization gives the agent the actual authority of that position. o Agents considered to have implied powers to do what is necessary to fulfill responsibilities of their position, even if not expressed anywhere.  Apparent authority: authority created when actions of principal give 3 rd party the reasonable impression that the agent has authority to act on behalf of principal  When a principal represents, or holds out, someone as their agent in discussions with a third party o That person will have authority to deal with the 3 rd party that is suggested by the principal’s actions, even if they were never properly appointed by the principal as an agent  Can be created by a statement to you by the president of a corporation that the sales manager has authority to sign contracts to buy office supplies for the corporate principal. o A contract created by an agent within their apparent authority is just as enforceable as if the agent had actual authority o Agency can arise a matter of law.  Partnership law – each partner is an agent of the partnership  Can bind the partnership to obligations that arise in connection with carrying on the business of the partnership in the usual way.

Deemed Authority: Agency relationships deemed to exist as a matter of law  E.g. partnerships, statutory agents When is the agent liable?  When agent claims to be principal himself/herself to a third party (undisclosed principal).  Agent and the third party agree that the agent will be liable  The agent fraudulently or deceitfully claims to act on the alleged principal’s behalf Agent duties to the Principal  Fiduciary duty o Agent’s personal interests must be subordinated to the interest of the principal.  Agent does not personally profit from its position as agent  Agent avoids a conflict of interest  Agent discloses all relevant information to the principal  Agent does not compete with the principal  Duty of care o The agent must take reasonable care in the performance of its responsibilities. Principal’s Duty to Agent  Principal must meet its contractual obligations to the agent  Principal must pay reasonable remuneration (unless the parties have agreed to agent services at no change).  The principal must indemnify the agent for reasonably incurred expenses Risk Management Issues for Principals  Breach of Contract o A principal is liable for contracts created by an agent with either actual or apparent authority.  Sue the agent – but usually agents don’t have as much money to sue for  Commission of a Tort o A principal may be liable to a third party for any tort committed by agent acting within the scope of its actual or apparent authority.  Important to remember vicarious liability – responsible for torts committed  Risk Mitigation Strategies o If you appoint an agent, make sure you clearly specify what his/her rights, responsibilities, tasks are (express agreement always safer) o Principal must effectively monitor the agent’s activities with third parties o The principal must properly train the agent in regard to its rights and duties o The principal must clearly communicate to third parties the agent’s role and scope of authority

CHAPTER 21: Basic Forms of Business Organizations Sole proprietorship: exists when a person carries on business on their own, without adopting any other form of business organization  Sole proprietor is exclusively responsible for performing all contracts entered into in course of the business  Sole proprietor is exclusively responsible for all torts committed personally in connection with the business & vicariously liable for employees’ torts  Income/loss from sole proprietorship included with income/loss from other sources in calculating sole proprietor’s personal tax liability  Unlimited personal liability: 3 rd parties may take all the sole proprietor’s personal assets to satisfy business obligations Legal Requirements for Sole Proprietorships  Must register the name of the sole proprietorship if the name is something other than the proprietor’s name exactly o Must be done in every province the sole proprietorship carries on business  Business license: government permission to operate a certain kind of business General Partnerships  General partnership: form of business organization that comes into existence when 2 or more persons carry on business together with a view to a profit  No formalities required – may have to register name & obtain a license Characteristics of General Partnerships  Partnerships can hold land/be sued, but are not legally separate from partners o Partner cannot be employed by the partnership o All benefits of the partnership business accrue directly to partners o All partners (even those who didn’t consent to obligation) are personally liable for all obligations of the business—including partner’s torts  Unlimited personal liability Partnership Legislation and Partnership Agreements  Partnership agreements: a contract between partners regarding the operation of the partnership  Legal issues resolved based on this and legislation based on Partnerships Act Creating a Partnership (Factors)

 General by-law: sets out arrangements for carrying on the legal business of the corporation, directors decide: o Notice to be given for meetings of directors/shareholders o Number of members required at a meeting o Who can sign contracts for corporation o What officers corporation will have  Shareholders’ agreement: contract between shareholders that customizes their relationship by providing rules better suited to their particular needs  Minute book: book in which corporate records are kept (by-laws, aoi, etc.) o Shareholders, creditors must be given access to documents  Corporations incorporated under CBCA have a right to carry on businesss throughout Canada, no licence required Characteristics of Corporations Separate Legal Existence  Owns property, possesses rights, incurs liability, carries on business  Shareholders don’t own the business/property but have corporation rights  Implications: a) Shareholder can be employee/creditor of corporation b) Corporation is unaffected is a shareholder dies of withdraws c) Separate tax payer for income tax; shareholders taxed only when they receive something e.g. dividend  Shareholders have limited liability as they cannot lose more than they invest in a corporation in return for their shares  A court may pierce the corporate veil by disregarding the separate legal existence of the corporation to impose personal liability on a shareholder for corporation’s obligation o E.g. permit creditor to claim against controlling shareholder if corporation has insufficient assets for creditor’s claim o Often happens when wrongdoing/unfairness/fraud happens Separation of Ownership and Management  Board of directors: consists of individuals elected by shareholders to manage corporation  Officers: people to whom board of directors delegates responsibility for managing the corporation  Shareholders don’t participate in management  In small corporations, shareholders can be directors/officers Corporate Finance

Corporate statues permit any business that must done at a meeting to be recorded in written resolutions and signed by all shareholders  Such signed resolutions are commonly used as an alternative to meetings in corporations with few shareholders – as effective as actions taken at a meeting Small percentage of shareholders attend shareholders’ meeting in person  However can participate without attending by appointing a proxy Proxy/proxy holder: a person designated by a shareholder to vote at a shareholders’ meeting  has all the powers of the shareholder at the meeting, but must vote in accordance with any direction given by the shareholder For all public corporations, management must send the shareholders a form of proxy allowing them to appoint a proxy holder. Form is sent along with a management proxy circular. Management proxy circular: a document containing management proposals and information regarding the proxy, the business to be dealt with at the meeting, and certain other information.  Information provided by the circular enhances shareholders’ ability to ensure that management is acting in their interests and to make informed choices regarding how to vote Dissident shareholders: those who disagree with management proposals  Entitled to obtain a list of shareholders and their addresses from the corporation  Can use this information to contact other shareholders (to encourage to vote against management)  With some exceptions, must send out a dissidents’ circular Dissidents’ circular: document sent to all shareholders by shareholders who seek the votes of other shareholders against management  Contains information on their identity, relationship to corporation, interest in the proposal  Relatively rare in Canadian marketplace; costs of complying with disclosure requirements often too high At shareholders’ meeting, voting is usually by a show of hands  Any shareholder may require each vote be recorded on a ballot that is collected and counted  Approval usually by majority vote Shareholders’ Access to Information Corporation must maintain these records and allow shareholders access to them:  Articles

 Directors may not act if the wrong is a breach of duty by themselves  Any damages or reliefs goes to the corporation  One way for shareholders to ensure that directors and officers comply with their duties to the corporation Oppression Remedy: allow a shareholder to claim relief from an act or omission by the corporation or its directors that oppresses or unfairly disregards or prejudices the interest of the shareholder  Relief from oppression is obtained by shareholders directly  One of the most flexible and effective shareholder remedies in the world  Relief is available when reasonable expectations of the shareholders about management behaviour have not been met  Relief can include anything the courts decide is necessary to remedy the problem o Including ordering corporation to buy oppressed shareholder’s shares and orders against other shareholders  Examples of behaviours that courts have found oppressive: o Approval of a transaction lacking a valid corporate purpose that is prejudicial (detrimental) to a particular shareholder o Failure by corporation and its controlling shareholder to ensure a transaction between them was on terms that were comparable to the terms that would have been negotiated by parties who were not related to each other o Actions that benefit the majority shareholder to the exclusion or the detriment of minority shareholders o Lack of adequate and appropriate disclosure of information to minority shareholders o Planning to eliminate minority shareholders Other Shareholder Remedies On an application by a shareholder, a court may even direct: Liquidation and Dissolution/Winding up: the corporation’s assets are sold, its creditors paid off, any remaining money distributed to the shareholders, and the corporation’s existence terminated  May be ordered when it is “just and equitable” to end the corporation’s existence  E.g. when a corporation with two equal shareholders cannot agree on how the corporation should carry on business Dissent and Appraisal Right: entitles shareholders who dissent from certain fundamental changes to have the corporation buy their shares  Remedy available for a shareholder who disagrees when at least 2/3 of shareholders approve certain fundamental changes to the corporation o Specific major amendment to articles, sale of most/all assets of corporation outside of ordinary course of business o Shareholders who vote against changes are entitled to have their shares bought by corporation at fair value

governments and the environment” in determining the best interests of the corporation o In resolving any conflicts between interests of stakeholders, court said that directors’ duty requires them to treat all stakeholders fairly and “to act in the best interests of the corporation, viewed as a good corporate citizen” Fiduciary duty’s main purpose is to prevent directors and officers from benefitting themselves when their personal interests and their duty to the corporation conflict.  Protects shareholders’ investment by prohibiting directors and officers from favouring their interests at corporation’s expense Transacting with the Corporation Conflict of interest arises when a director or officer contracts with the corporation.  E.g. suppose you have opportunity to sell goods to a corporation of which you are a director. If, as a director, you are responsible for negotiating the contract on behalf of the corporation, you have a serious conflict of interest. Your duty binds you to do whatever is in your power to get the lowest price for the corporation. At the same time, your personal interest is in selling for the highest price. Historically, because of the inevitable conflict between duty and personal interest, a fiduciary was prohibited from participating personally in any transaction with the corporation.  But this is a problem, when the best price or only supplier is a director or officer or a related business to a business or officer.  E.g. two corporations under common ownership and one supplies the raw material that the other uses in its manufacturing business. o Good arrangement, but if one is a director of both, that person has a conflict of interest and transaction between them would be a breach of fiduciary duty.  The solution to this problem in the CBCA and most other Canadian statutes, is to permit a transaction between the corporation and a director or officer (or a business related to them) if procedural safeguards are observed. o The director or officer must give adequate notice of their interest to the board and may not vote on the approval of the contract by the board of directors o Contract must be fair and reasonable to the corporation (objective in the best interests of the corporation [CBCA Section 120] o In practice, notice regarding the interest should be recorded in the minutes of the board meeting at which the contract is approved. o Compliance with these requirements is the ONLY way to avoid a fiduciary breach Taking Corporate Opportunities Fiduciary duty prohibits fiduciaries from taking an opportunity belonging to the corporation  If they breach their duty, any personal profit from opportunity must be paid over to corporation – eliminates any incentive for fiduciary to take opportunity in first place

In addition to those cited in Canadian Air Services (Case Brief 22.1, Page 566), the courts have said that these factors indicate an opportunity belongs to the corporation: Significance of opportunity: opportunity would have represented a major component of the corporation’s business if acquired or was a unique opportunity rather than merely one of many considered by the corporation Private opportunity: opportunity was not publicly advertised or otherwise widely known, but was one to which the fiduciary had access only by virtue of fiduciary’s position in the corporation No rejection: opportunity had not been rejected by the corporation before the fiduciary acquired it Additional from case Specific nature of opportunity: was an opportunity that the corporation had been actively pursuing, rather than one that as simply in same general area as the corporation’s business Maturity of opportunity: a mature opportunity; done extensive work preparing for it Competition by Directors and Officers with the Corporation Not a breach of fiduciary duty to terminate one’s relationship with a corporation and go into competition with it  Otherwise, fiduciary duty might become an unreasonable constraint on a person’s ability to earn a living  But a fiduciary may not compete with corporation while still in fiduciary relationship with it o E.g. cannot quit to take an opportunity you developed while working for the corporation  Using corporation’s confidential information for personal gain would also be a breach of fiduciary duty  Any competing fiduciary will be forced to pay over all profits from the competing business to the corporation Duty of Care The CBCA defines in these terms [CBCA Section 122(1)(b); OBCA Section 134 (1)(b):  “Every director and officer of a corporation in exercising his powers and discharging his duties shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”

Degree of care depends on facts of case – but in all cases, directors must have at least a basic understanding of the business; those who do not, should acquire it or resign In addition to a basic level of competence, duty of care requires some monitoring of the business by directors.  Must keep informed of corporation’s policies and its business, regularly attend board meetings “In comparable circumstances” means that the duty has a subjective element  If you have significant knowledge or experience, you have to meet a higher standard of care Standard of care also depends upon a person’s position  E.g. all public corporations must have an audit committee to review financial statements and reporting process o Directors who serve on this committee have more opportunity to examine the financial affairs of the corporation than other directors o Therefore, more is expected of them in terms of monitoring these affairs and warning other directors about problems Not being involved does not relieve director of duties  Example: o a chartered accountant, who is also a CFO is responsible for the financial side of corporation’s business. o But other directors are still required to comply a standard of care in financial matters o If another director learns corporation failed to properly withhold income tax and remit the tax to CRA, director must do everything reasonably possible to make sure corporation puts in procedures to ensure it does not happen again Courts have been reluctant to find a breach of the duty of care when involving second-guessing management on issues of general business judgment  Whether a deal was the best one for corporation  Acknowledged lack of business expertise, unfair for them to evaluate business decisions when they have the benefit of hindsight Business decisions are not a breach of duty as long as they fall within range of reasonable alternatives that were available in the circumstances

 E.g. managers must ensure decisions are based upon adequate information and advice  Business judgment rule: a rule that courts should defer to the business decisions of directors and officers where they acted reasonably and the decision was within the range of reasonably available alternatives Protection for Creditors Directors and officers do not have a duty to creditors of the corporation  Creditors are often left to protect themselves by contract  Duty of care and fiduciary duty may provide some protection to creditors (recent cases)  Specific law provisions that benefit creditors such as: o Rules that try to ensure that corporation’s money and assets are not distributed to shareholders, directors, officers, or employees, if that would threaten corporation’s ability to pay its creditors  E.g. corporation cannot declare/pay dividend UNLESS there are reasonable grounds for believing that the corporation could pay its liabilities to its creditors as they become due, and some other financial tests have been satisfied  Directors are personally liable to corporation if they do this when tests are not met [CBCA Section 118 (2)] o Even though these provisions are to protect creditors, they are not enforceable directly by creditors  The director’s obligation not to authorize payments if the tests are not met, and to compensate the corporation if they do is owed to the corporation  Only the corporation can enforce those obligations Other Sources of Personal Liability for Directors and Officers Directors and officers are subject to wide range of other potential liabilities in connection with corporate activity  Government have imposed personal liability on directors and officers, including fines and imprisonment; encourages their corporation to comply with laws relating to income tax remittance, environmental protection, and other regulatory objectives  Directors and officers are increasingly behind held personally liable for torts o Such as breach of contract by their corporation Managing Liability Risk for Directors and Officers Directors and officers are not liable for breach of their duty of care or some other duties under the statute if they reasonably relied on financial statements or reports of lawyers, accountants, and other professionals.  To offset liability risks, a corporation can reimburse directors and officers for any expenses that they reasonably incur in connection with the defence of any civil, criminal,

administrative, or investigative proceeding that is connected to their position with the corporation. o This reimbursement is called an indemnity Indemnity: compensation paid by a corporation to a director or officer for costs incurred in connection with performing their duties  Mandatory if directors or officers: o Were not found to have committed any fault o Complied with their fiduciary duty o Had reasonable grounds for believing the conduct was lawful  Even when director or officer is found to have committed a fault, a corporation may still decide to provide indemnification if the other two criteria are met.  Indemnification may include: o Amounts not directly related to the defence, such as money paid to settle an action to satisfy a judgment o If there is risk that an indemnifying corporation may not have enough money to pay, the director or officer can seek a guarantee, e.g. from shareholder, to provide greater security. o Common for directors and officers to ask their corporations to pay for insurance to compensate if they are held liable o Corporations are permitted to obtain such insurance covering any liability  Directors and Officers Liability Insurance Securities Regulation Page 571-572 (was not in lecture notes or slides) Securities: include shares and a wide range of other kinds of claims issued by corporations and other business organizations Prospectus: extensive disclosure document that management of a corporation must prepare and make public before the corporation issues securities to the public that describe the characteristics of the securities and the corporation’s business Material Change: to the corporation’s business operations or capital is a change that could significantly affect the value of its shares Corporate Governance in Practice Issues:  Lack of statutory recognition of officers’ liability  Remoteness of shareholders from corporate activities (in larger corporations with many shareholders, particularly institutional shareholders)  Remoteness of directors from the affairs of the corporation

o Degree of “legal fiction” to directors’ liability for the management of corporations Page 572-574 (not in lecture notes or slide) Corporate Social Responsibility Page 574-575 (was not in lecture notes or slides) Corporate social responsibility: pursing a commitment to environmental protection and sustainability as well as going beyond what the law requires to ensure that a corporation takes responsibility for the impact of its actions on the environment, consumers, employees, the local community, and other affected stakeholders Corporate Liability Rules governing corporation’s liability for contracts, crimes, and torts determine how a corporation is legally affected by the behaviour of people acting on its behalf  These rules influence how corporation organizes itself to participate in marketplace  E.g. rule that determines when a corporation is liable in tort for acts of its employees determine how a corporation supervises employees in their interaction with customers to minimize risk of liability  Rules also affect risks for people dealing with the corporation because they define when the corporation will be held responsible for its behaviour with regard to them Liability for Contracts Corporation becomes liable to perform contracts only as a result of actions by agents  Sales people, purchasing clerks, directors, and officers all considered agents of the corporation for specific purposes Agent of a corporation: a person authorized to act on behalf of corporation

Agent can bind a corporation only if the corporation has given the agent one of these types of authority: Actual authority: authority that is actually given to an agent by a corporation Apparent (or ostensible) authority: created by a representation on behalf of the corporation that an agent has authority to bind the corporation to the obligation in question  For a third party to rely on apparent authority, the representation must have induced the third party to enter into the disputed contract with the corporation Indoor management rule : states that a corporation cannot rely on any provision in its articles or by-laws, or in any unanimous shareholder agreement, that creates a defect in the agent’s authority to defeat a claim that the corporation is bound to a contract.  A corporation cannot claim that a person held out by a corporation as an officer, director, or agent, has not been duly appointed or does not have the authority that a person in that position usually has in the business of the corporation A person cannot enforce a contract against a corporation, if that person knew that there was a defect in the agent’s authority or if they should have known of that defect.  E.g. you are customer of shoe manufacturer. Sales representative purports (claims to do something, especially falsely) to sell you $1,000,000 worth of inventory. If you knew the sales representative are not allowed to enter into contracts for more than $500,000, the contract would be unenforceable. Liability for Crimes Consequences of imposing criminal liability on corporations are different from those of imposing criminal liability on individuals, because corporations have “no soul to damn; no body to kick.”  Corporations concerned about criminal conviction on their reputation  Threat of conviction might not deter them from misbehaving to same extent as individual

Absolute liability offence: committed by a corporation when a person acting on behalf of the corporation commits an act prohibited by law  When a person commits the prohibited act on behalf of the corporation  Acts of employee in course of their employment will satisfy this test  E.g. employee drove company truck that did not meet mandatory safety standards  The corporation would be held liable Strict liability offence: committed by a corporation when a person acting on behalf of the corporation commits an act prohibited by law unless a person who is a directing mind of the corporation act reasonably in the circumstances to prevent the offence  Unlike absolute liability, for this offence, there is the defence of due diligence o Liability does not arise if the accused acted reasonably in the circumstance  Corporation can rely on this defence if a person with responsibility for establishing corporate policy n the relevant area of the corporation’s affair used due diligence o Person is described as the directing mind of the corporation o Due diligence : reasonable steps taken by a person in order to satisfy a legal requirement Directing mind: of a corporation is a person who has responsibility to establish corporate policy in the area in which the offence occurred  Care exercised by this person is considered to be care exercised by corporation itself  E.g. truck example – if corporation’s trucking manager had exercised the required level of care to ensure that the truck met safety standards, likely the corporation would not be liable Mens rea: offence that arises upon the commission of an act prohibited by law by a person who had the degree of knowledge or intention required for the offence  “Guilty mind”  Under traditional common law rules, corporation may be liable under this category of offence if person who had the mens rea to commit the crime was a directing mind of the corporation.  The person who was the directing mind can be held individually responsible as well. Before amendments to the Criminal Code in 2003, corporate liability was not triggered if the crime was committed by a person who had authority only to carry out policies that someone else in the corporation created.  As a result of the amendments, liability may be imposed even if the person who acted did not have authority to set policy in an area, as long as they were responsible for management in that area  Criminal Code also provides that corporate liability can arise where actions constitution the crime was innocently committed by employees or other lower-level representatives of the corporation, so long as a senior officer had the required guilty mind.

o If senior officer directed employees to deal in stolen goods, the corporation would be liable, even though the employees had no idea the goods were stolen o A corporation can also be held liable if a senior officer knew employees were going to commit a crime but failed to take all reasonable measures to stop them Liability in Tort May be liable in tort in two ways:  Directly liable when a person who is a directing mind of the corporation has committed the tort  Vicariously liable for acts of employees in course of their employment ADDITIONAL READING: Non-profit Organizations Guided Reading Questions  Why is it important to distinguish between: o (a) “for-profit” businesses; and o (b) “non-profit” organizations & charities? o Because non-profits don’t pay income tax! Significant difference!

Similarities of NPO and Charities  Both operate on a non-profit basis  Neither can distribute its income to members, directors, officers, or trustees  Both are exempt from taxation on their income What is a charity?  Must be engaged in the following: o Relief of poverty o Advancement of education o Advancement of religion o Other purposes beneficial to the community (e.g. disaster relief)  Can take only one of the following forms: o Charitable organizations o Public foundation o Private foundation  Only a registered charity can issue receipts to donors for income purposes What is a non-profit?  A non-profit can pursue a broader mandate than a charity. o “Under the Income Tax Act, R.S.C. 1985, c. 1 (5 th Supp), a non-profit organization is defined as “not a charity organized and operated exclusive for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit”” (p. 153) o E.g. recreational, social and arts organizations o Not created to make profit/money Federal Legal Environment  Canada Not-for-profit Corporations Act, S.C, 2009, c.23 o This statute covers the incorporation and general governance of federal non-share capital corporations o It includes the requirements for incorporation, its capacity and powers, eligibility, roles and responsibilities of officers and directors, etc.  Income Tax Act, R.S.C. 1985, c. 1 (5 th Supp)

o Determines whether an organization is a charity or a non-profit organization; o Places certain obligations on directors of organizations Ontario Legal Environment  Trustee Act, R.S.O. 1990, c. T. 23 o Among other things, it requires that directors of a charitable corporation have the authority to invest assets as a prudent investor.  Charities Accounting Act, R.S.O. 1990, c. C.10 o Establishes certain requirements for the operation of a charity, including limits on its activities. Legal Structures (Non-profit)  Unincorporated Association o “A group of two or more persons united together by mutual consent in order to determine, deliberate and act jointly for a common purpose”; (p. 162) o Typically governed by a contract, constitution or by-laws; o Does not have independent legal capacity. It is not a legal person.  National Association Model o Separate incorporated provincial or local organizations with a national federally incorporated governing body (e.g., Canadian Bar Association); o Liability is contained within each provincial or local organization; o The challenge is maintaining national control over the activities of the local organizations.  Centralized Chapter Model o A national organization (typically incorporated) with provincial or other local “chapters” or “branches”; o The chapters or branches are not separate legal entities; o The disadvantage is that liability is not restricted to the local level.  Relevant Considerations o Costs. The more formal the legal structure the greater the cost; o Legal Capacity. Advantages accrue to an organization carrying on activities and incurring liability in its own name;  The corporate form restricts (although does not eliminate ) the personal liability of directors, officers, trustees, etc. Legal Structures (Charities)  If a non-profit organization has a charitable purpose, it is a charity and should register under the Income Tax Act.  Types of Registered Charities o Charitable Trust o Charitable Organization

o Public Charitable Foundation o Private Charitable Foundation  Charitable Trust o Refers to the relationship between a donor (“settlor”) and the trustee(s); o A trustee(s) holds the property of the settlor for stipulated objectives or purposes of the beneficiary(ies); o The trust document must have certainty of intention, subject-matter and objects; o The purposes or objects of the trust, the property to be held in trust, and the beneficiaries of the trust all must be identified.  Charitable Organization o Devotes all its resources to charitable activities; o Is a “doing” organization; o May be organized as a corporation, an unincorporated association or a trust; o Defined in the Income Tax Act (ft. 62). Rules for Registered Charities  Control o For charitable organizations and public foundations, the Income Tax Act requires that more than 50% of directors, trustees, etc., must deal with each other at “arm’s length,”  i.e., not be related to each other o Charitable organizations and public foundations cannot be controlled by a person who has contributed more than 50% of its capital, unless the contributor was a government, another registered charity that was not a private foundation, or a non- profit organization.  Disbursement Quota o Registered charities are required to annually expend at least 3.5% of their assets that are not used directly in charitable activities or administration.  Related Business o Charitable organizations and public foundations can carry on related businesses; o If they carry on unrelated business they may lose their charitable status; o Private foundations cannot carry on any business activity.  Political Activities o According to the CRA, activities can be categorized as charitable, political or prohibited; o Charitable activities are permissible without limits, including contract with a public official concerning a matter related to the organization’s charitable purpose;

o An activity is presumed to be political if:  It is a call to political action (e.g., to oppose or change a law);  It publicly supports, opposes or calls for a change in any law;  It intends to incite, organization or put pressure on governments to retain, oppose or change any law, policy, or decision of government. o Charities may engage in political activities that:  They are non-partisan (not biased especially toward any particular political group)  The issue is connected to the charity’s purposes;  The activities are subordinate to the charity’s purposes;  The charity’s views are “well-reasoned”, and  The activities fall within the expenditure limits under the Income Tax Act.  Charitable Activities o Charitable organizations may not provide more than 50% of their income annually to other charitable organizations, unless they are associated charities; o Public foundations are required to give more than 50% of their income annually to qualified donees; o Private foundations can carry on their own charitable activities and give funds to qualified donees  Borrowing o Public and private foundations cannot incur debt except for operating expenses, purchase and sale of investments, or administration of charitable activities  Control of Other Corporations o Public and private foundations cannot acquire control of any corporation o Charitable organizations may acquire control of a corporation o Ref. Summary Chart pp. 178-79 Regulatory Regime  Sanctions o There are penalties if a registered charity fails to meet any of the various standards and requirements o The penalties range from fines and suspensions, up to and including revocation of charitable status

 Appeals o Appeals for refusal to grant, or to revoke, charitable status are first to the Ministry of National Revenue, then to the Federal Court of Appeal o Appeals regarding monetary penalties, suspension, or revocation of tax receipting privilege are first to the Ministry of National Revenue, then to the Tax Court of Canada  Fundraising o CRA fundraising policy provides that a charity’s fundraising activity is not acceptable when:  It is one of the charity’s purposes  It is an unrelated business  It is deceptive  It provides more than an incidental private benefit  It is illegal and against public policy Risk Management  Choice of Legal Structure o Primarily one of risk assessment; o Unincorporated Association  Individual members bear the risk and liability personally o Trust  Trustee(s) bear the risk and liability personally  Vicarious Liability (IMPORTANT) o The same legal tests apply as for-profit organizations; o Charities and non-profit organizations an be vicariously liable for the conduct of their employees and agents; o Relevant Tests  The relationship between actor and employer is sufficiently close;  A wrongful act is sufficiently connected to conduct authorized by the employer. o Proceeds of Crime (Money Laundering) and Terrorist Financing Act  Requires reporting and record-keeping in regard to large financial transactions. o Designation of Terrorist Organizations  Non-profit and charitable organizations are not exempt from possible designation.  Duties of Directors and Officers o As with for-profit corporations, directors of non-profit and charitable corporations have legal responsibility to manage or supervise the management of the organization; o In doing so, they have same legal duties:  Loyalty, diligence, honesty, good faith, prudence, and obedience.

 Standard of Care and Duty of Care o Directors and officers are required to act honestly and in good faith with a view to the best interests of the non-profit or charitable corporation; o In discharging their duties, they will be held to a reasonable-person standard; o They will not be liable if they exercise the care and skill of a reasonably prudent person in comparable circumstances.  Statutory Liability of Directors o As with for-profit corporations, directors can be personally liable under certain specific situations, notably:  Unpaid wages up to six months;  Failure to remit employee source deductions;  Failure to comply with certain reporting and record-keeping requirements  Indemnification o As with for-profit corporations, directors may be indemnified by the non-profit and charitable corporation for any penalties, costs or other damages incurred in their capacity as director; o Indemnity is not available for any breach of the director’s legal duties; o Indemnity must be provided for in the by-laws of the corporation; o The indemnification may be supported by Directors and Officers (D&O) Insurance in case the corporation cannot satisfy the indemnification. Additional:  Name 2 important court cases with respect to how to determine whether charitable status is granted to an organization: o Pemzel  Tried to determine whether is something a charity or not

 Pemzel said you got to look at the:  “activity”  what are they doing?  If the activity is one of the 4 categories of charity, then it’s a charity  That’s what Pemzel stood for o Vancouver Society of Immigrant…  Vancouver Society changed that approach  Rather than looking at the activity  look at the ultimate purpose of the activity  Significant decision  focusing on purpose makes it easier to argue that “what we’re doing right now, is not to relieve poverty or education, etc” but underlying purpose is to ASSIST with those things  What principles do those cases stand for?  How does the Canadian Income Tax Act (“ITA”) define a non-profit organization? o If you are a non-profit, you are not a charity  What is the ITA’s approach towards charitable status?  Is it possible to be both a charity and a non-profit organization? o No it’s not. It’s either one or the other as far as income tax is concerned.  Which category is more restrictive with respect to permitted purposes? o Charities! You have to fit into one of those 4 categories.  At the federal level, there is legislation that permits the creation of “Not-for-Profit Corporations” – what other relevant federal statutes relate to non-profit & charitable organizations?  Broadly speaking, name the issues those statutes address.  What relevant provincial legislation exists for non-profit and charitable organizations?  Is the situation the same across all provinces in Canada? o No, they vary from province to province.  Name 4 different legal structures that could be used for non-profit organizations: o Trust o Non-profit corporations o Coops o Foundations LAW603 Legal Test 1. What is the legal issue (is it a problem of agency, franchisor/franchisee, corporation’s director’s rights or responsibilities, shareholders’ rights or responsibilities, charities…) 2. What law or legal rule applies 3. Apply the legal rule or law to the facts to answer the exam question

How to solve a Legal Question (in-class slides)  Start with the facts: o Who, what, where  Identify the relevant issues: o What do we want to determine?  E.g. is the contract enforceable? Has a tort been committed?  How can the principal limit his or her liability  Analyze the relevant law, jurisprudence o Is there a legal test, rue or criteria that apply?  Apply the law to the facts o Determine the likely decision Chapter 14 – Special Contracts: Negotiable Instruments Introduction  When you pay for something with a cheque, you are dealing with a negotiable instrument  Pay cash or with a cheque?

 Cash (bills and coins): currency  = valuable in itself  = does not simply represent a right to acquire something else that is valuable  However: o Cash can be inconvenient (bulky) o Cash can be dangerous (usually impossible to recover if lost or stolen) o An honest purchaser might acquire title to stolen money  A person can become the owner of cash by honestly paying for it  E.g. steal 10,000 from your wallet  dishonesty prevents me from owning that money  But if I use cash to buy stereo from a storekeeper who was unaware of theft, we no longer own the money, they do! o You can’t retrieve from them  sue me but likely I am too broke to be worth suing  = negotiable instruments are safer Negotiable instruments  Definition: A contract that contains an obligation to pay money o Cheques o Promissory notes o Bills of exchange o E.g. Hrithik buys a car, pays with a cheque: if the bank refuses to honour the cheque, the car dealer can sue him either on:  The sale contract or (no consideration)  The cheque itself (this option is usually preferable  easier to prove existence of a negotiable instrument than existence of a sale contract)  A cheque is a type of contract  3 main differences between negotiable instruments and contracts: o Consideration o Privity o Assignment Consideration  Like all contracts, cheque is enforceable only if it is supported by consideration o Something of value must be given in exchange for it o In case of cheque, requirement of consideration is more easily satisfied  Consideration normally cannot consist of a promise to perform an obligation that is already owed to the same party

o This rule does not apply to a cheque  dealership’s promise to transfer a car to you acted as consideration twice: first for sale contract then for your cheque o normally required for each transaction, but negotiable instrument can be issued for pre-existing obligation  Bills of Exchange Act s.52 allows consideration for the instrument to be consideration for another contract  Normally for a contract, it has to be for something done in the future; cheques can be for something done in the past Privity  Normally, a contract can be enforced only by someone with privity  Privity in contract: only the parties have status o A stranger, someone who did not participate in creation of agreement, cannot sue on it  However: anyone with negotiable instrument can sue or be sued  Legal action available between distant parties  Anyone with negotiable instrument can be sued or sue someone; legal action is possible even between distant parties Assignment of Contract  Contractual obligations can generally be assigned to a stranger  A person who receives a contractual right through an assignment takes it subject to equities o The assignee cannot be in a better position than the assignor o E.g. dealership assigned its rights under the sale contract to Daily Bugle o If newspaper sued you for the price, you could use any defence that you could have used against the dealership o Suppose dealer breached the contract by selling you a car that required $5000 in repairs  purchase price was 20,000  you would only have to pay 15,000 to the newspaper  However: the instrument can improve through negotiation o  the newspaper might be able to recover 20,000 from you even though your car was defective o You would have to sue the dealership for breach of contract if you wanted to be paid $5000 for the repairs  New party may enjoy better rights than old  Negotiable instruments represent a compromise between simple contracts and money o Negotiable instrument more valuable than simple contract because it is negotiable  Disadvantages of negotiable instruments: non-performance  often much better to sue on a negotiable instrument than a simple contract, enforcement is ultimately necessary in either event! They also may be worthless, whereas coins and bills have value in themselves Bill of Exchange Act  British Parliament (1882)  Formally adopted rules that judges had developed over several centuries

 Aim  increase economic efficiency by providing business people with a comprehensive set of rules regarding non-monetary payments  Canadian Parliament  introduced own Bill of Exchanges Act (1890) o With a few exceptions, statute has hardly changed in more than a century  Contains a large number of rules that a contract must satisfy o If requirements are not met, the Act does not apply o Negotiable instruments are designed to be freely transferred amongst many people  Federal Competence  Designed to enhance certainty and efficiency  Long and complex  Only applies when certain requirements are met  Covers 3 types of negotiable instruments o Cheques o Bills of exchange o Promissory notes Requirement of negotiable instruments 1. Signed and written

o A promise cannot be clearly passed from one person to the next unless it is in writing 2. Parties identified o Must be possible to immediately determine who is required to make the payment  info is important when time comes to “cash” the instrument o Also useful in deciding whether to buy a document in the first place o Cheque created by a con artist who holds an account at a bank that is in the process of collapsing is probably not worth the paper it is written on 3. (Contract must involve an obligation to pay a ) Certain sum of money o Obligation must deal entirely with the payment of money, not with such things as the delivery of goods or the performance of services o Must be possible to calculate the amount of money by simply looking at document itself o While a negotiable instrument may involve payment of interest, it cannot, for instance, require the payment of a “reasonable price” or “any money that may be won in a lottery” 4. State the time of payment o Time of payment must be clearly stated o Person buying a negotiable instrument must be able to determine precisely when that piece of paper can be turned into cash 5. (Contract must contain an) Unconditional obligation  you can’t put condition on a cheque o E.g. if person paid the price of a car with a cheque, that document could not require payment to be made “if buyer is satisfied with vehicle”  as always, must be possible for a person who buys a negotiable instrument to immediately know exactly what they are receiving

Cheques  Most common form of negotiable instrument  Created when a person orders a bank to pay a specific amount of money to someone  E.g. Hank Quinlan, an accountant, bought oak desk from Anna Schmidt for $5000 o Hank did not have money in pocket but did have chequing account at Bank of Edmonton o Gave Anna a cheque which shows that: o i) Hank is the drawer o ii) the Bank of Edmonton is drawee o iii) Anna is the payee  Definition: order to bank to pay money to someone  Parties to a cheque: o Drawer: person who “draws” or creates, or makes the cheque o Drawee: the bank that is ordered to make payment o Payee: person entitled to receive payment from bank  Operation of a cheque: o Drawer has account in a bank o Bank pays money to payee, then debit’s drawer’s account  Relationship that exist between the parties o Hank and Anna  there are two contracts between Hank & Anna o 1 st  sale of goods agreement 2 nd  the cheque itself Types of Cheques  Most cheques operate smoothly. However, there are 5 possible complications: 1. Postdated cheques 2. Staledated cheques 3. Overdrawn cheques 4. Countermanded cheques 5. Certified cheques Postdated cheques  Postdated cheque: dated after current date (in the future) o E.g. buying Maserati – I pay cheque today, but I will have funds later (e.g. salary) o Cheque cannot be cashed until due date o Why?  Perhaps we are expecting to receive payment from a client a few days later that would ensure I had enough funds in my account o Bank must obey drawer’s instructions (even if person brings cheque there, bank has to say no until due date) o According to contract between bank and drawer, bank only allowed to debit drawer’s account only if it acts in accordance with his/her instructions  In the case of postdated cheques, his/her instructions does not allow payee to be paid until the the future date on the cheque

Staledated cheques  When the payee does not seek payment within reasonable time o Bank will not cash cheque long after due date o Usually stale after 6 months  Banks normally will not honour a cheque that is presented more than six months after the date that appears on it  In this case, payee would be forced to sue if they want their payment, on either the cheque or sales contract Overdrawn cheques  When the drawer’s account does not hold enough money to satisfy it completely  NSF: not sufficient funds  Bank usually rejects request and refuses payment o Bank would almost certain refuse to honour the cheque  payee would sue drawer for non-payment o But bank could treat drawer’s overdrawn cheque as a request for a loan!  Pay $5000 to payee  seek repayment from drawer!  Would be true as well even if bank failed to realize drawer’s account was overdrawn and paid payee by mistake  Bank may accept, request, pay, and enforce loan

Countermanded cheques  General rule: bank can deal with customer’s money only if it has that person’s authorization o Rule is important when there is a countermand  Countermand: occurs when customer/drawer orders bank to refuse payment on a cheque o Also known as a stop payment order o If payee had not cashed cheque already, drawer could contact bank and tell it to stop payment  E.g. if product received by drawer was not up to expectation/was damaged  plans on returning it  does not want payee to have his/her money  By countermanding the cheque, drawer would remove bank’s authority to deal with his/her account  Since bank would not give the bank’s money to payee  it would just not pay the payee when presented with the cheque o Ability to countermand a cheque is very useful  but limited by two factors:  Bank will not normally accept a countermand unless the drawer gives that order IN PERSON and unless the cheque in question is FULLY DESCRIBED (including the date, the payee, and the amount)  Banks require that level of detail because they do not want to stop payment on a cheque incorrectly  Many bank contracts include a term that allows a bank to debit a customer’s account if a countermanded cheque is honoured by mistake  Otherwise, bank may have to sue the payee if it wants to recover a payment that it made by mistake  Note: a cheque is automatically countermanded if the bank is notified that the drawer has died before the payee receives payment o Exceptions?  Garnishment  You tell them to stop making payments, but according to the law, you are REQUIRED to make payments and then they are informed – bank will probably continue making payments; if bank is not informed and stop making payments and the party you owe payments to finds out - they can sue you!

Certified cheques  Although cheque is a special kind of contract  it is still a promise to pay o Promise may or may not be kept o No guarantee that a cheque will actually be cashed o Cheque may be countermanded or dishonoured by drawee o AVOID THESE PROBLEMS THROUGH CERTIFICATION Certification: when a drawee bank promises to honour a cheque  Certified  stamp “certified” and date on the front of cheque  Takes appropriate amount from drawer’s account, places those funds in “suspense account”  used to honour cheque @ payment  A cheque can be certified by the payee (or holder) o Normally certified by drawer though  if payee was concerned about drawer’s ability to pay, payee might have required the drawer to certify their check first! o Maybe payee travelling, feels safer with carrying certified cheque rather than $5000 cash  Whether a cheque is certified by payee or drawer  consequences are the same! o Law not entirely clear, but courts generally treat certification as “something equivalent to money”  Bank normally owes an obligation only to its own customer  drawer o But when it certified drawer’s cheque, it also owed an obligation to the payee o The bank promised the payee that it would honour the cheque o If it later broke that promise, the payee could sue the bank (drawee)  By certifying cheque, the Bank assured the payee that it would not later dishonour the cheque on the ground that the drawer’s account was overdrawn o Payment even if overdrawn account! o Bank would normally not certify a cheque until it has after transferred funds from the drawer’s account into a suspense account  But in the case it did  payee could still demand payment even if bank mistakenly certified  bank cannot hide behind its own error  must fulfill promise  Certification also assured payee that drawer’s cheque could not be countermanded (exception  if drawer brings it back to bank) o Drawer normally entitled to countermand anytime before cheque is cashed, but since certification is treated as “something equivalent” to payment, Drawer lost the right to countermand once the Bank certified  bank would have to pay the payee even if drawer objected

Bills of Exchange  A Bill of Exchange is created when one person orders another person to pay a specific amount of money to a third person  E.g. Drawer buy steel from Payee for 100000  Drawer orders Drawee to pay the Payee the 100000 because the Drawer has a line of credit with the Drawee o Looks similar to a cheque  cheque is a special type of bill of exchange o Major difference is  cheque must be drawn at a bank (drawee = bank)  Bill of exchange  drawee can be anyone!  Parties to a bill of exchange o Drawer  one who ordered money to be paid from one person to another o Drawee  was ordered by one person to pay money to another o Payee  the one intending to receive money eventually Cheque vs. Bill of Exchange (they are both negotiable instruments0  Cheque o Drawee must be bank o Must be payable on demand  Bill o Drawee can be anyone including bank o May be demand draft, sight draft, or time draft Bills of Exchange (example)  Acceptance: occurs when the drawee promises to pay a bill  writing “accepted”, the date of acceptance, and signature  drawee becomes acceptor instead of just the drawee o Similar to certification of a cheque o Once drawee has accepted a bill, it can be sued by the payee for failing tt make payment on due date o Once a bill is accepted, the drawer loses control of it  cannot cancel  Drawee then seeks reimbursement from drawer (usually with interest)  Drawer holds account with drawee  Drawer orders drawee to pay on date (normally future)  Payee seeks acceptance before due date  Drawee dishonours: drawer is immediately liable  Drawee honours: similar to certification of a cheque  Payee seeks payment on due date  Drawee makes payment to payee, and receives reimbursement from drawer

Bills of Exchange (Additional Info)  Bill of exchange is a contract  not enforceable unless supported by consideration  Cheque must be payable “on demand”  drawer must order the drawee to make payment as soon as the payee presents the cheque (postdated cheque is payable on demand but the payee cannot demand payment before the date that appears on the cheque) o Bill of exchange MAY be payable on demand, in which case it is called a demand draft  payment as soon as it is presented o Could also be a sight draft  Similar to demand draft, except payee is not entitled to receive any money until 3 days after the bill has been presented to drawee o Could be time draft  Payable only on a future date (e.g. 6 months after date)  Bill of exchange usually used for one of two purposes o To safely transfer funds o Because a bill does not have to be payable on demand, it can be used to easily extend credit  Bills of exchange were traditionally much more common than cheques o Reversed now  bills are only used in special circumstances (e.g. international trade between large business enterprises)

Promissory Notes  Cheque or bill of exchange normally involves an order between three parties  Promissory note is usually a promise between two parties  A Promissory note is created when one person gives another person a written promise to pay a specific amount of money (Bills of Exchange Act, section 176(1))  Parties to a note: o Maker : a person who makes the note o Payee : person entitled to receive payment  Picture of a promissory note on page 345  Although payment postponed  payee could SELL the note to someone else and the third party would be entitled to receive the payment + interest from the maker  Common features of a promissory notes: o Used as credit instrument  credit transactions usually require payment + interest  Promissory notes are often payable in instalments (and lump sum as well)  Risk management  maker should make sure that a short receipt was written on the note each time that an instalment was paid  E.g. might have made a payment  then payee sells note to innocent third party  third party doesn’t know about the instalment that the maker had already made  Law usually allows 3 rd party to take negotiable instrument at face value (whatever amount shows on cheque, despite installments already paid)  To avoid  make note on promissory note of amount already paid (e.g. on the back) o Principal payable with interest o Acceleration clause upon default  states that the entire amount of a promise becomes due immediately if a single instalment is not paid on time o If no acceleration clause, payee can only sue for each instalment as they become due

Negotiation  Negotiation: transfer of instrument from one party to another  Process of negotiation depends on whether an instrument is payable to bearer or to order  Negotiable instrument is payable to bearer is any person who holds it is entitled to receive payment  Forms of instrument: o Bearer instrument: payable to holder o Order instrument: payable to named payee  Bearer instrument can arise in several ways o Maker made the note payable “to payee or bearer” or simply “to bearer” o Maker leaves name of payee blank  Bills of Exchange Act s 30-31  payee can fill in their own name o Maker could have made note payable to a fictitious person “to Sherlock Holmes” or to a non-person “to cash”  Bill of Exchange Act s. 20(5) o Order note can become bearer note  bearer note remains a bearer note unless some later party turns it back using a special endorsement  Bills of Exchange Act s. 66(5)  Methods of negotiation: o Bearer instrument: simple delivery, or physical transfer, of the document  Endorsement unnecessary o Order instrument: endorsement and delivery  Order instrument cannot be negotiated unless it is endorsed and delivered to a new party  thereby becoming a bearer instrument  Could change back from bearer to order by endorsing o “Name – Pay to Name”  E.g. payee wants to negotiate the note to her sister  would have to endorse it by signing name her name on the back

Liability on Negotiation  Primary liability under a promissory note falls on the maker o These rules also generally apply to cheques and bills of exchange as well  Cheque  drawer has the primary liability  Bill  drawer has primary liability unless bill is accepted  Drawee/acceptor has primary liability o Bills of Exchange Act, s. 186  General rule: a person who provides an endorsement promises people who later acquire the instrument that it will be paid o Bill of Exchange Act, s. 132 o Even if maker is unable to pay a cent  holder of the note could sue everyone who endorsed the note even if there was never any direct contact between the parties  But cannot sue someone who negotiated a note in bearer form  Bills of Exchange Act, s. 136(2) o An endorser who is held liable can sometimes sue a person who negotiated the instrument at an earlier time  An endorser can sue the person who negotiated the note to them in bearer form  Two possibilities:  The Act would allow a party to sue someone who negotiated instrument by delivery only (bearer) only if the person who negotiated the note gave the party an instrument that o Was not genuine (and knew it) o Had no right to transfer (and knew it) o Knew it was worthless o Bill of Exchange Act, s. 173  Act would allow a party to sue someone who negotiated instrument by delivery on the basis of their sales contract, if in exchange for the party’s asset, the bearer promised that they would pay the note if asked to do so o A party could sue the endorser before them, because they endorsed it before the party acquired it o In the case that the holder collected payment from the first endorser  the first endorser cannot sue the second endorser!  Although the second endorser endorsed the note, they did so after the first endorser did  a person who wants payment must look to an earlier party  Since maker was unable to pay, the first endorser will probably suffer a loss o The ability to demand payment from an endorser is significant  However, subject to important limitation  liability generally cannot be imposed on an endorser unless that person received a notice of dishonour  Bills of Exchange Act, s. 95

 Since primary liability for an accepted bill of exchange falls on the acceptor, the notice requirements apply to the drawer as well as the endorsers  Bases of Liability: o Creation or acceptance of instruments (primary) o Endorsement of instrument (secondary)  Endorsement includes both a signature on back of instrument and assurance of payment  Effect of endorsement o Endorser may be liable to any subsequent party o Endorser’s liability requires notice of dishonour  Normally cannot sue endorser unless received a notice of dishonour  Notice of dishonour: consists of a statement that the person who was primarily liable on the instrument failed to pay (page 349) o Notice normally must be given very quickly  usually within 1 business day  Bills of Exchange Act, s. 96 o Notice does not have to be in writing, but must clearly identify instrument in question  Bills of Exchange Act, s. 97 o Notice must be given by holder who wants payment from an endorser  Notice must also be given by one endorser who wants payment from another o If notice is not properly given, an endorser is discharged and cannot be held liable on the instrument o Notice is not required, however, if:  Endorser cannot be reached through a reasonable effort  Endorser waived the need for notice  by writing “notice of dishonour unnecessary” beside a signature  Bills of Exchange Act, s. 105  Statement that maker failed to pay  Risk management: act quickly when notice of dishonour Endorsement (Page 350-351)  Common types of endorsements o Special  Signing name on the back of the cheque and by indicating that the money should be paid to _________.  Bill of Exchange Act, s. 66  Once _______ received payment from the one who signed, ______ is the only one entitled to receive payment o Identifying o Qualified o Conditional o Accommodation o General

o Restrictive Defences (Page 351)  Excluded from test Defences to Liability  Types of Parties o Immediate parties o Holders o Holders in due course  Types of Defences o Personal defences o Defect in title defences o Real defences Defences – Types of Parties  Immediate Parties: People who interacted directly with each other  Holder: Person who has possession of instrument  Holder in due course: A person who acquired a negotiable instrument under specific conditions (all relate to honesty) Holder in Due Course 1. Instrument was supported by consideration 2. Instrument was complete and regular on its face 3. Received instrument without notice of dishonour 4. Acted in good faith and without notice of defect 5. Received instrument before overdue Personal Defences  Set-off; I never got the Yacht – too bad  Failure of Consideration  Affects the parties (not the instrument)  Available against immediate party only Defect in Title Defences  Arise because instrument improperly obtained o Fraud or duress o Illegal consideration o Drunkenness or insanity o Absence of delivery o Lack of authority o Discharge or renunciation  Available against immediate party or holder

Real Defences  Arise because instrument itself is defective: the instrument is fundamentally flawed o 1. Minority o 2. Material alteration o 3. Forgery

CHAPTER 15 – Real Property: Interests & Leases “Giant Carrot Theory”  The idea that if I own land, I own all of the land from the center of the Earth to the heavens.  This used to be the accepted concept, but not anymore  Modern approach: reasonable depth to reasonable height Real Property – Definition:  Land & anything attached to it  Air space to a reasonable height  Below surface to a reasonable depth Interests in Land  A right that a person can enforce with respect to a particular piece of land  Important distinction between: o Contract  only pertains to the parties to the contract o Interests in Land  your rights can be enforced against anyone  Your rights will apply against anyone in the world; best rights!  EXCEPTION: Government Estates in Land  Definition: An exclusive right to possess land for a period of time  Basically a bundle of rights to the land  3 types: o Fee Simple (best and most common) o Life Estate (smaller bundle of rights) o Leasehold Estate (lease; but ALWAYS has a beginning & end; a time period!) Fee Simple  Definition: largest package of rights that a person can hold in land  NOT absolute ownership though o You have a bundle of rights to it but the government owns it! o All land in Canada belongs to the government/Queen  You can acquire a certain bundle of rights from the government o You don’t OWN it

o You can transfer the bundle of rights though Package of Rights in Fee Simple  Rights are for an indefinite time period  Exclusive possess & use it  Sell it  Lease it  Give it away  Keep it until you die, and then give it away  Generally use or abuse it Limitations on Rights in Fee Simple  No t commit torts o Occupier’s liability o Nuisance o Rule in Rylands vs. Fletcher  Subject to laws & reguations o Zoning & planning regulations o Environmental laws o Etc.  Subject to Expropriation o The government has the right to take your property o The government gives you temporary bundle of rights UNTIL they want it back  Then they enforce their expropriation rights to take it back o Any level of government can do this! (Federal, Provincial, Municipal) o When property is expropriated, they have to pay fair market value. Ethical Perspective 15.1 (page 366)  Is it legal? Yes!  Is it ethical? Debatable. o You have a bundle of rights @ the will of the government o You never owned it, you’re essentially a tenant o Usually just a misunderstanding thinking that you OWN it  E.g. if you had oil on land; check the crown patent to see if government gives you resource/mineral rights in the first place o The government have stopped giving resource rights to private parties (since 1800s/1900s) o If the government owns it, they don’t have to pay for it

Life Estate  Definiton: gives a person exclusive possession of a property for the duration of a particular life (either the life estate holder’s or someone else’s life.  Smaller bundle of rights! o It doesn’t have everything a fee simple does; it’s more limited.  Rare in business, sometimes used in estate planning  KEY THING: Bundle of rights that will exist as long as a named human being is still alive o Doesn’t have to be the person who receives it (but it usually is though) o E.g. Bob gives Life Estate to Karen as long as the Queen of England is alive.  Two examples: o REVERSIONARY  when the property returns to the person who held the fee simple  Bob transfer Lot 3 to Karen as long as Karen lives  Bob has what remains  a future estate (Bob will get it again in the future)  When Bob gets it, it is called a reversionary future estate, because when Karen dies, it reverts back to Bob!  Bob holds the reversion o REMAINDER  when the property goes to a third party named by the person who held the fee simple  Bob transfer Lot 3 to Karen for as long as Karen lives, and then Lot 3 is transferred to George  In this example, Bob gives Karen a life estate, and what remains (future estate) to George  George will get the future estate!  Two people has the bundle of rights to Lot 3; Bob created a life estate AND a future estate  Bob doesn’t have anything left; he gave it all away.  George has the rights to the property, but he has to wait (his heirs gets it after that)  George holds the remainder

Package of Rights  Exclusive Possession & Use  Profits  Lease (but cannot exceed life estate)  NOTE: o No obligation to spend money to keep the building in good condition o No right to dispose of real property upon death  Using previous example (Bob, Karen, George) o Let’s say Karen decides to lease it to somebody, ABC Ltd., for 10 years. o Karen dies suddenly  what happens to her life estate? o It’s gone! It consolidates and crystallizes and goes to George. o Lease is terminated because the lease was based on Karen’s bundle of rights; if her bundle of rights disappeared, then the lease terminates. o George has legally enforceable rights to tell ABC to get off his land/property.  Explaining “dispose” o When Karen dies, her life estate disappears  her heirs don’t get anything o She can’t dispose (leave it to her heirs) because there is nothing to leave for them since her bundle of rights disappeared! Limitations on Rights in Life Estate  Life estate holder cannot “waste”  “Waste” occurs when real property is changed in a way that significantly affects its value negatively  Waste requires an act (not available to omission) o Omission  not doing anything to keep it in good condition/away from harm  Failure to maintain is NOT an act!  Examples of “waste” o Digging pits o Cutting down trees  Wasting is not fair! Intentionally devaluing the property to the detriment of the new owner o You have rights to the property, but so does somebody else! o In our original example (with the remainder to George), George would make a claim to Karen saying that is “wasting” the property

Shared Ownership of an Estate  Joint Ownership (Joint Tenancy)  Co-Ownership (Co-Tenancy or Tenancy in Common)  Shared ownership of a bundle of rights! Joint Ownership (aka Joint Tenancy)  Definition: 2 or more persons share the exact same undivided interest in a property  Right of Survivorship : upon the death of a joint owner, the deceased’s interest automatically passes to the remaining joint owner o E.g. Fee simple to Lot #1 to both Bob & Sally  if Bob dies, fee simple goes to Sally!  What does exact same undivided interest in a property mean? o Exact same meaning equal o Undivided meaning despite everyone owning a portion, they own the WHOLE property (you can’t be like stay on one side I’ll stay on the other)  Example: o Husband & wife in JO buy a house  each would have 50% o A, B, C & D buy a house  each would have 25% o Always has to be equal amongst the joint owners! Co-ownership (aka tenants-in-common)  Definition: 2 or more persons share some undivided interest in a property  Co-owners do not have to have exactly the same interests (e.g. Bob 40% Sally 60%)  No right of survivorship o If Sally dies, her 60% does not go to Bob, it would go to her heirs! o It’s not automatic transfer to Bob.  ELI5: o Can be different percentages as opposed to equal in joint ownership o Undivided interest  different percentages of ownership in the WHOLE property

Severing a Joint Ownership  Severance: a joint owner deals with the property in a way that is inconsistent with the joint ownership  Severance eliminates the right of survivorship  Severance may occur by: o A joint tenant sells/transfers their interest to another person (a third party or even yourself)  This breaks the joint ownership and it becomes a co-ownership o Joint tenant becomes bankrupt o Partition (of property or money) by court order  ELI5: Go to court, ask the court to change from JO to Co-ownership; that is called a partition  Sometimes people want to change their JO  originally they set it up that way but later on, they might want to change it. o An option is getting together, agreeing, and changing it  e.g. let’s change Bob & Sally from JO to Co-owners! No right of survivorship! o They would re-register the title and correct it  In-class example of the concept: o Qui, Ken & Brandon as JO  right of survivorship! o What % do they have? 33/33/33! o Qui decides to sell their interest to Carlo. o They did not have an agreement preventing this, so it is allowed. o What do we have now? Carlo, Ken & Brandon  33/33/33! o There is a joint ownership between Ken & Brandon still o There is a co-ownership between Carlo & Ken and Carlo & Brandon o Between Ken & Brandon, they own 67% and Carlo has 33% o Ken & Brandon has the right of survivorship, so if Ken dies, Brandon gets 67% o If Carlo dies, his 33% goes to her heirs o ALSO, between Ken & Brandon, their % ownership is 50/50 between just the both of them with respect to their 67%... so they each own half of the 67%!

Condominiums  Several people share ownership of some parts (i.e. common elements) of a building while individually owning other parts (i.e. units)  Combination of individual ownership of units in a building and common ownership of facilities  Typically, own your condo in a fee simple.  Individual ownership (typically fee simple) of units  Everybody owns the facilities in co-ownership 3 sets of rights in a Condo  Individual ownership of unit  Shared ownership of common elements , as tenants in common  Small community run by a Condo Corporation (non-profit; manages complex) Non-Possessory Interests in Land  A person has rights in a property, but not the right to possess  1. Easements  2. Restrictive Covenants  3. Mineral Leases  Non-Possessory Interests  you aren’t going to be on the land for long or at all Easements  Definition: a right to use a neighbour’s land in a particular way o e.g. cross neighbor’s land to get to the street on the other side of neighbor’s land  Positive Easement o Common o E.g. the right to drive across my neighbor’s property  Negative Easement o Very rare o Neighbors agreeing to NOT do something o E.g. prohibition from cutting certain trees or constructing a building that obstructs sunlight  Usually seen in conservational reserves; leaving things in natural state

Characteristics of Easement  Dominant Tenement (DT): Land that benefits (from the easement)  Servient Tenement (ST): Land that has/have burden (of the easement)  DT & ST do not need to touch!  “Runs with the land”  easement stays with the DT & ST regardless of who owns the DT & ST  e.g. DT owned by Nick, ST owned by Sally  Path on Sally’s property to get to street  If Nick sells Lot 1 (the DT) to Bob, Bob is the fee simple owner of Lot 1 o Can Bob use this easement? Yes! o Because benefit of easement runs with the land  attached to land, not the person o Likewise, if Sally sells Lot 2 to Karen and Karen is the fee simple owner of Lot 2, can Karen say Bob don’t go on my property again? No! o She can say that, but cannot enforce it because the burden stays with the land, not the person!  With this example, you CANNOT OBSTRUCT it. o You don’t have to spend money on it, but you can’t build a fence blocking it. o You don’t have to clear the snow or keep it in good condition or anything though. 4 Ways to Create an Easement  1. Expressly by Agreement o Where there was never an easement to begin with! o E.g. Nick owns Lot 1, Sally owns Lot 2 o Nick says to Sally “yo fam, it’d be nice if I could use your path to get to the street still! I’ll give you 20gs in return?”  Sally agrees and they register  2. Implied by the Court o On grounds of necessary implication (provided no evidence to the contrary) o Must be necessary & seller must still own abutting land o E.g. means the easement is not there, but Nick is asking a court to say (imply) that it is there!  Not done often, only in certain limited circumstances o E.g. checkerboard example  divide a square into 9 equal parts (sort of like numpad)  Lot 5 doesn’t have access to a street!

 If Lot 5 has the right facts and circumstances (and if you had never agreed to buy it landlocked) o E.g. ABC owns Lot 5 and 6… ABC sells Lot 5; the new owner of Lot 5 can ask the court to put easement over Lot 6’s land.  3. Prescription o In Ontario, if it’s allowed for at least 20 years, you can get a PERMANENT easement by prescription o Used in a particular way (e.g. I’ve been crossing over your property to get to the street) for at least 20 years (in Ontario)  Without secrecy  doing it out in the open  Without objection  you didn’t stop me  Without permission  you didn’t give me permission; I am actually trespassing, but you didn’t stop me so I should be rewarded with this easement  4. Statutory o Government can grant it o Most property has utilities easement o No dominant tenement o Doesn’t fit nicely into the definition of an easement License  Permission to act in a way that would otherwise be prohibited  Not an interest in land  It is a contract  Does not “run with the land” o Because it is a contract and not an interest in land  No DT or ST  Revocable at any time (subject to contract) o License can be ended at any time, unless a contract states otherwise  You can “lease” space to somebody… or you can “license” space to somebody  License  Permission to occupy space! o Lease is a bundle of rights AND a contract o License is not a bundle of rights, just a contract o It will only bind licensor and licensee  contract between the two, dispute is between the two, doesn’t affect anybody else  Previous example; parking lot  owner is allowing you to occupy space  to park your car there o Parking garages  create licenses, they aren’t leasing it to you, they are licensing it to you!

Restrictive Covenants (RC)  Definition: promise to use a piece of land in a way that benefits 1 property and burdens another  Restrictive Covenants  promise; (covenants mean promise)  you are AGREEING TO NOT DO CERTAIN THINGS Characteristics of RC  Dominant Tenement o Land(s) that benefits  Servient Tenement o Land(s) that has burden  ST holder cannot use ST in a particular way o “I will sell it to you if you agree to not do these things” o DT and ST  Lot 1 is the DT, Lot 2 is the ST (the land that agrees not to do these things)  Negative covenants o Starting with a “No”  No factories, no clubs, etc.  Does not allow DT holder to use ST’s land  “Runs with the land” o Ownership of the DT and/or ST can change but the RC stays with the DT & ST  Example: o Let’s say you build dream home  Lot 1 o What would you NOT want to happen next door?  No factories, no clubs, no use for other than residential  Even more specific  no use other than single family residential (probably don’t want an apartment next door)  You probably don’t want a 25,000 square foot monstrosity next door that might dwarf and devalue your property  Could have a restrictive covenant that says no less than 4,000 square feet or greater than 6,000 square feet  Common ones (residential divisions) o No satellite divisions, no fences over 6 feet, no tower antennas, no commercial vehicles/boats in driveways, no exterior colours other than blue or brown, no materials other than brick or stone. o What developers want to try to do is create a community; want to maintain an appeal and enhance the value!

o They want to take things away that are unsightly How to Create a RC?  By Agreement (common in subdivisions  Building Scheme Covenants ) o Developers do this all the time in subdivisions, industrial, or residential o In condos, there are a lot of positive covenants (instead of saying no to everything, they HAVE to do something  pay maintenance fees, maintain certain condition) o Condos are different; separate law to allow for positive obligations to run with the land Mineral Lease (ML)  Definition: allows 1 person to extract & retain minerals from another’s land o “mineral”  virtually every substance contained in the ground (e.g. gold, iron, oil, gas, etc.)  ML is usually granted by the government  ML implies access & occupancy rights (i.e. a small area for purpose of extraction)  No DT  Usually the person owning fee simple does not have mineral rights, which means that the government owns it o But sometimes, they grant ML for companies to extract and in exchange, they would get royalties  E.g. Nick owns land with fee simple, but government owns mineral rights o Maybe government grants ML to mining company to extract, but they have to get onto my property! o ML implies access & occupancy rights  their footprint has to be as small as possible o Usually the company enters into a service lease with the owner to compensate them for that Profit a Prendre (another bundle of rights in estate)  Definition: Right to take something valuable away from another person’s land  Applies to minerals or other natural things (e.g. blueberries, moose, trees)  An interest in land  No automatic right to the things : so things do not belong to you until you actually harvest them  No DT  The verb “Prendre” means to take!

 If I have a profit a prendre, I have the right to go onto your property to take something (e.g. cut a tree, take the timber) and I am NOT trespassing  legal right to!  Profit a prendre is a document  created, registered @ land registry office  No automatic right  profit a prendre for timber in your property but I don’t own it until I actually cut the trees down and harvest it Leasehold Estate (lease)  Definition: a person has exclusive rights to a property for a specific period of time  Definition (lease): property interest created by contract  Landlord: person with an interest in land who agrees to allow someone else to take possession  Tenant: person who receives the right to possess the property  Right of exclusive possession (the tenant gets this)  Limited duration (subject to any rights to renew/extend)  a “time period”  General rule of leases: can be in writing, oral, or implied  Statute of Frauds (Ont.)  goes way back to England in 1677 o Lease must be in writing unless it is for 3 years or less o Oral lease for term greater than 3 years is valid but generally unenforceable o KEY: All leases for a term greater than 3 years must be in writing and signed to be legally enforceable o If you create a 5 year oral lease, landlord can kick you out at some point; you try to sue them and they will bring up Statute of Frauds  case dismissed Duration of Lease  1. Fixed Term o Expiry date is certain at the outset  must have a clear beginning and end o E.g. specific date (Dec. 31, 2015) or formula to create certainty (5 yrs after start) o At end of a fixed term:  L & T may agree to renew or extend the term; or  T may remain & pay rent that L accepts  this becomes a periodic tenancy  2. Periodic Tenancy o is for a fixed period & automatically renews at end of each term unless 1 party gives appropriate prior notice of termination  Most common is a month, renews itself for another month, and so on until tenant gives you proper written notice terminating it o Comm. Monthly Tenancy  notice of termination at least 1 clear month prior to last day of a month o Comm. Yearly Tenancy  notice of termination given at least 6 clear months prior to end of year  3. Tenancy at Will o no set term & either party can terminate at any time (rare - ppl can’t move fast)

 4. Tenancy at Sufferance o T continues to possess premises at end of lease without L’s permission o This is not really a tenancy  T is trespassing o NOTE: Tenant stays beyond end of lease without permission AND landlord has NOT accepted your rent o If T pays rent, L doesn’t not accept, L can evict if you do not leave o But if L accepts rent, he has created a periodic tenancy Assignment & Subleases  Assignment (A)  tenant transfer all their remaining contractual rights in a lease to a third party  Sublease (Sub-L)  tenant grants a lease to a third party (i.e. T transfers part of their remaining rights) 4 Limitations on Assignment  1. T has the right to assign unless lease states otherwise o e.g. assignments prohibited; or L’s prior approval required  2. Assignee only bound by “ real covenants ” o Real covenants: promises that are directly related to the land (not personal obligations)  e.g. Pay rent, repair premises  Not personal promises such as  T to open from 9 am to 9 pm each day; radius clause  3. Assignor is still liable to L unless L releases the Assignor  4. Assignment covers full term Commercial Leases  Definition: rent for a business purpose  Standard Covenants o T must pay rent o L’s covenant for Quiet Possession  Remedies Tenant to Pay Rent  1. Expressed or Implied Amount o Parties normally set the rent in advance  expressed amount o Express amount or “reasonable amount”  2. Calculation of Rent o Gross lease  T pays a fixed amount o Net lease  T pays for rent for space + proportionate share of operating costs (e.g. taxes, snow removal, etc.) o Percentage rent  e.g. shopping mall; 10% of gross profits  3. Rent Review

o Lease may provide for an adjustment to rent every 5 years (e.g. fair market rent, subject to arbitration; Consumer Price Index increase)  4. Independent Obligation o T must pay rent regardless of whether L has honoured its obligations (a promise or keeping the property in good repair)  In this case, have to pay rent and sue the landlord for breach of contract Landlord’s Covenant for Quiet Possession  Definition: L shall not interfere with the T’s enjoyment of the premises  Examples of L breaching Quiet Possession o Premises still occupied by another tenant o Allowing carbon monoxide into premises o Intolerable amount of noise & vibrations o Leasing adjacent premises to an incompatible use  Remedies for breach of Quiet Possession o Injunction o Discharge (i.e. End) lease & get damages o Reduction in rent Remedies  Usual Remedies  Compensatory Damages, Injunctions, Discharge  Eviction o Landlord may re-enter & take possession of premises o Tenant forfeits (loses) interest in premises  Distress o Landlord seizes tenant’s assets & sells them to pay the rent, provided that landlord has not evicted the tenant  Expectation damages are usually reduced if a plaintiff does not reasonably “mitigate” (minimize) his/her losses  “Mitigation” may not be applied to commercial leases o e.g. A landlord may leave premises empty (& not try to find a new tenant) & recover rent for the entire lease term Residential Leases  Definition: provides a place to live  Residential Tenancies Act (Ontario)  Tenant protection  Termination  Rental Rates & Rent Controls  Distress Remedy is abolished  Repair & Maintenance (L has obligation)  L has obligation to mitigate losses)

CHAPTER 17 – Personal Property: Bailment & Insurance Acquiring Personal Property Rights  Real Property  Immovable  Personal Property  Movable o Tangible  can touch (goods or chattels)  CHATTEL = a personal possession o Intangible  cannot touch (intellectual property)  1. By Contract  2. By Gift  3. By Possession (e.g. wild animal; intentionally abandoned bike)  4. By Finding o Subject to rights of true owner o Occupier is entitled to things that are found in the private but not public parts of its premises (refer Case Brief 17.1 (page 417))  5. By Creation (e.g. author) Losing Personal Property Rights  By selling  By leasing (temporarily)  If destroyed  By abandoning (i.e. intention to give up control  NOTE: if you lose something or it is stolen , your rights are not extinguished)  By affixation to land (i.e. fixture) or other chattels Fixture  Definition: a chattel that has been sufficiently affixed, or attached, to land or a building  A fixture belongs to owner of land or building Factors in Determining whether Item is a Fixture  1. Degree of Attachment o Higher the degree of attachment, more likely it is a fixture  2. Purpose of Attachment

o Objective intention  would a reasonable person think it was attached to become part of land (e.g. to add value – fixture) or to better use the item (chattel)  3. Tenants’ Fixtures o Generally, T can remove its own fixtures at end of lease without doing irreparable damage o Commercial Leases  T has right to remove trade fixtures at end of lease, subject to terms of lease Bailment  Definition: when 1 person temporarily gives up possession of property with the expectation of getting it back  Bailor  delivers property  Bailee  receives property  Money does not need to be paid 3 Essential Elements of a Bailment  1. 1 person voluntarily delivers control & possession of property to another  2. For a particular purpose; and  3. With the intention that the property will be returned or disposed of as directed  Note: sometimes not clear whether #1 exists; if it does not, it is a license Examples of Bailment  Consignment  Renting a saw from a hardware store  Shipping furniture with a moving company  Delivering a machine to a shop for repairs  Placing equipment in a storage unit  Leasing a vehicle from a dealership  Borrowing a book from a library  Sending a package by courier  Lending a lawnmower to a neighbour Consignment  Definition: owner gives property to another person for the purpose of selling it  Consignor: owner  Consignee: person selling  When consignee sells property to a third party, ownership passes from consignor to third party Bailment vs. License  Bailment  3 essential elements (including delivery of control & possession)

 License  permission to do something that would otherwise be wrongful; no delivery of control & possession of property to another  Bailment vs. License  would a reasonable person view their intentions to be the delivery of possession & control? Liability of Bailor  1. For failing to use reasonable care in providing appropriate machines o Liable if you knew or ought to have known of defect that caused accident  2. For failing to pay for service/benefit o Bailee has lien  right to retain possession of property until the bailor pays o Lien is lost if bailor honestly recovers property o Lien gives bailee right of sale  proceeds used to pay debt; balance paid to bailor Liability of Bailee  1. To return the property in good condition to bailor at end of arrangement o Usually plaintiff must prove defendant wrongfully caused the loss o However, since the bailee is the only party with all the facts, the burden of proof shifts to bailee o Bailee must prove he/she was not to blame for loss (i.e. not careless) otherwise bailee is liable o If the burden of proof shifts to bailee, bailee must prove it took reasonable care of property in the circumstances , otherwise bailee is liable  Factors: o 1. Contract, Custom & Statute o 2. Benefit of the Bailment  Greater care required if bailment is entirely for the benefit of the bailee o 3. Gratuity (free) or reward  Greater care if bailee receives property free of charge o 4. Value & Nature of Property  Greater care if property is more valuable o 5. Bailee’s Expertise  Greater care if bailee claims to have experience in handling property o If factors 2 & 3 both apply  the bailee’s standards may be extremely high o In some cases, bailee may be liable as insurer (liable even if he/she was not careless)  E.g. common carriers

Common Carriers  Definition: a carrier that offers to delivery any goods for any person in exchange for a standard price (assuming space is available)  Does not reserve right to refuse to deliver some goods while taking others o Does not have the right to say no to you!  e.g. railways  First thing we have to determine when we have a carrier issue o What kind of carrier are we dealing with? Common or Private? Private Carriers  Definition: Carriers that reserve the right to refuse to carry some goods (e.g. moving company, airline)  Can say no provided that it is not for discriminatory reasons Liability  Private carriers o Liable if it does not exercise the level of care reasonably expected in that line of work  Common carriers o Generally liable for any loss or damage, even if it was not careless nor personally at fault (i.e. akin to an insurer ) o Subject to very few defences o Have much higher standard of care, almost the point of insurer  If you acted reasonably, and property was damaged, you’re still on the hook Liabiity of Common Carriers  Shipper only has to prove: o Carrier was a common carrier o Property was given to carrier in one condition ; and o Property was not delivered or delivered in worse condition

Defences Available to Common Carrier  1. War & Act of God (natural catastrophe – earthquake or flood)  2. Inherent Vice & Shipper’s Fault o Inherent vice is a defect in goods (e.g. diseased livestock) o Shipper’s fault  improperly packaged goods  3. Exclusion Clause o Canadian Transport Commission o E.g. “Maximum liability is $1000”  if permitted by the CTC, then that is the max liability  These defences are ALL available to a private carrier as well o BUT they ALSO get the defense of saying “we acted reasonably”  NOTE: Answering Carrier Cases  1. Identify type of carrier  2. Type of defences available  3. Liable or not?

Sub-Bailment  Occurs when property that is already held under a bailment is transferred into a further bailment  You have one bailment already, but you create another one  E.g. Bailment from bailor to bailee o Another bailment from sub-bailor to sub-bailee o First bailee is the sub-bailor in this case  E.g. repairs  you give your property to a mechanic, but they can’t fix it, so they delegate it to a specialized shop (further bailment)  Does the initial bailor have to express/imply consent to sub-bailment? Yes!  Problems that arise  if property is in sub-bailee possession and it gets damaged, who is responsible?  Bailee can create a sub-bailment only if bailor consents , expressly or implicitly  Sub-bailment without bailor’s consent (express or implied) makes bailee liable for any loss & liable for tort of conversion (if their conduct serious interferes with bailor’s ownership)  If property is lost or damaged : o 1. Bailee/sub-bailor can sue sub-bailee for damages (on behalf of original bailor); or o 2. Original bailor can sue sub-bailee if:  Original bailor consent to sub-bailment, expressly or implicitly; and  Sub-bailee knew, or ought to have known, that it received possession of goods that were already under bailment

o If bailee didn’t get consent to create sub-bailment, then bailee/sub-bailor is liable o If bailor gave consent , then bailee/sub-bailor is NOT liable  Refer to Punch v. Savoy’s case Personal Property, Risk Management & Insurance  Risk management: Personal property may be lost, damaged, destroyed or stolen  Options: o Proactive: training, security systems, etc. to minimize probability of damage or theft o Property insurance Insurance  Property insurance: insurance company, in exchange for a premium ($), promises to pay money if the property is lost, damaged, or destroyed. Property Insurance vs. Liability Insurance  Property Insurance – 1 st party coverage o Obligation to pay is triggered by a loss to the insured party (not a third party)  Liability Insurance – 3 rd party coverage o Provides compensation to someone outside the insurance contract o Insurance company’s obligation is triggered only if the insured party is accused of wrongfully inflicting a loss upon someone else

Scope of Coverage  E.g. I have equipment and concerned that it can get stolen/destroyed/damaged  I want to reduce some of that risk  I am the insured (the business)  I would contract with an insurance company (the insurer)  I pay insurance premiums to the insurance company. In return, they provide me coverage in the event my equipment gets stolen/destroyed/damaged (insurance policy)  Now, because I have an insurance policy, I can make a claim to the insurance company; my equipment is destroyed! Pay me! (They won’t give full value, usually depreciated value)  Property Insurance is pretty simple  involves insurer and insured ONLY.  We may also want liability insurance

 Liability insurance covers me for situations where I, or my employees (e.g. commit a tort), and I get sued.  If I have liability insurance in place, the insurance company will do two things : o Defend my lawsuit for me o If necessary, insurance company will pay out the claim (usually there is a limit/cap)  Insured pays the premium, insurer agrees to pay third party liability insurance  E.g. employee is negligent, injures client. This third party (client) sues company o Company calls insurance company, explains what happened, then they take over. Scope of Coverage (part 2)  Coverage is as set out in insurance contract o E.g. fires, floods, storms, and thefts  Exclusions o E.g. losses from storage of explosives or caused by riots Indemnification  Definition: reimbursement for a loss that has occurred  At best, insurance provides indemnification (not a profit)  Property insurance is about indemnifying  reimbursing the insured (business/company) for the loss that they have incurred  it is not about making money off insurance!  If damage to property , the insurance policy may entitle you to be paid: o 1. The value for a new property (not common) o 2. The depreciated value of property; or o 3. The depreciated value minus deductible  Lots of policies have deductibles  e.g. $5,000 deductible  E.g. cost of equipment = $50,000, but a $10,000 deductible; we’d only get $40,000  Deductible: we agreed from the get-go that the first $10,000, we will pay for (usually reduces your premium) Excessive Insurance  No incentive to purchase the same coverage from 2 insurers because of doctrine of contribution  Doctrine of contribution: states that if 2 parties are equally liable, they share the loss among themselves  E.g. We have equipment worth $100,000  go to insurance company A and get a policy o We also go to another insurance company, B, to get another policy! o Both cover that equipment, equipment gets destroyed  do we get paid twice? NO WE WON’T. o Insurance companies aren’t stupid, this would create incentive to have your stuff get stolen or destroyed o Instead, the companies would split the loss  50/50.

Insufficient Insurance  AVOID INSUFFICIENT COVERAGE  Co-insurance clause states that if an insured party does not maintain a certain level of coverage, the insured party may be held partially responsible in the event the actual loss is less than the co-insured amount  This deals with NOT GETTING ENOUGH INSURANCE o Insurance companies want you to insure the property for it’s full value o If you don’t insure your property for the value that they indicate, it will reduce how much of a payout you will get if that piece of equipment gets destroyed/stolen  Co-insurance clause  in this clause, it says that you must obtain a minimum amount of insurance (normally it’s an 80% co-insurance; so whatever the value is, you have to insure 80% of it). o If you get less than that, then in certain circumstances, you will not be fully compensated Example – Co-insurance Clause  Equipment is worth $10,000  Insurance coverage is $6,000  Co-insurance clause requires coverage for at least 80% of the value  $8,000  Accident occurs damaging the equipment ANSWER:  Side-note: the reason why people cover less is because they don’t want to pay as much in insurance premiums  You bought enough insurance to cover 60%  Co-insurance clause requires 80% (minimum you should have insured was $8,000, but you only purchased $6,000)  If the damage is at least 80% of value (at least $8,000) , you will be entitled to receive the FULL amount you insured for ($6,000)  If we plug into the formula, it should be $6,750  but we only bought $6,000 worth, so that’s the max we can get.  If actual loss is more than minimum required co-insured amount (and you paid less than required co-insured amount) , then you KNOW you’re entitled to full amount of insurance that you paid for ($6,000) in this case

 If damage is less than 80% of the value, for example, $4,000, then insured becomes a co-insurer to the extent that you did not buy enough coverage  Since you only bought 75% of protection required under the co-insurance clause ($6,000/$8,000), the insured can only recover 75% of loss ($3,000 of the $4,000) o You are basically your own insurer for the remaining $1,000.  If you had gotten 80% insurance coverage, you would have gotten the full amount ($4,000)  Let’s say you have equipment worth $10,000  you cover 80%; it gets damaged, you’d only get $8,000. If you’re fully insured, you would get full $10,000! Figure 17.3 – Co-insurance NOTE: This formula works if the actual loss is LESS THAN minimum co-insurance amount  If it’s greater, then you are entitled full amount of what you insured (assuming that you insured less than the required amount)  REFER TO CASE #11 (Page 437) Subrogation  Subrogation allows an insurance company to stand in the insured’s place & acquire any rights that it may have against a third party  If insurance company pays the insured, the insurance company, through its subrogated rights, can pursue any third party that caused the insured to suffer a loss  The calculation (formula) that we did is for PROPERTY INSURANCE but not LIABILITY INSURANCE.  Example (using property insurance): o Let’s say neighboring business is negligent/careless, they cause a fire! o Fire spreads and burns down our building and destroys our equipment. o We have property insurance  we contact company, make a claim, and they pay us appropriate amount o Third party caused this though, insurance company doesn’t like paying out money so insurance company will go after them o What gives the insurance company the right to sue the party?  Who has legal claim against the third party? The insured!

 Third party committed tort of negligence to insured  can the insured sue the third party? Yes!  Insurance party pays you the claim in exchange for your right to sue!  Usually the put it in the original policy  can’t deny their right to sue (unless you somehow negotiated it out at the get-go)  Subrogation rights! o NOTE: Co-insurance policy pays you less, but you still have the right to sue the third party for the remaining amount yourself! Other Forms of Business Insurance  1. Business Interruption Insurance o Losses incurred as a result of downtime (e.g. relocation; lost profits) o E.g. fire  can’t operate  no revenue coming in o The insurance company will give you money for property damage, but I can’t operate! May take me 4-6 months to get my business up and running again  For that time period, I have no revenue  If you buy business interruption insurance (usually capped), they will provide compensation for you.  IT IS EXPENSIVE! A lot of businesses don’t get it!  2. Hacker Insurance o Economic consequences of computer hacker  3. Key Person Insurance o If the key people required to run this business dies or becomes incapacitated, replacing him/her might be difficult to do o But if there is compensation (to compensate for lack of key person or allow them to hire new one) o Key person insurance usually ties into life insurance as well  4. Life, Health, & Disability Insurance  5. Fidelity Bond: o when an employee steals money, equipment, or other assets from a business or one of its clients o When employee embezzles  6. Surety Bond o Assures a client that it will be financially protected if a job is not performed as promised o If I don’t finish the job, they can make a claim on this bond, and the insurance company will find a replacement contract to finish the job  REFER TO CASE #9 (Page 437)

Life Estate Case Study (Raj, Ludwig & Elise)  IMPORTANT CONCEPT Facts:  Raj owned fee simple in a piece of land known as Blackacre… contained shopping mall.  Raj created the following arrangement: o Beginning immediately, for rest of Raj’s life (life estate), Ludwig (nephew) was entitled to enjoy a life estate in Blackacre o Upon Raj’s death, Elise (niece) would become entitled to enjoy a life estate in the property (future estate) o Parties initially happy with arrangement; but difficulties arose after economy went into recession and shops had been operating in the mall began leaving the premises. o Within 6 months, entire mall was empty. o Despite protests from Elise, Ludwig did nothing to protect the value of the property, even though vandals were smashing windows and trespassers had begun to use the parking lot as a garbage dump.  Has Ludwig does anything wrong? o No, because waste requires an act; omission is not an act! o From a legal standpoint, he has done nothing wrong.  Aside from Elise, is there anyone who might be concerned about the condition of Blackacre? o Raj & his heirs should! o Raj has a fee simple; he creates a life estate for Ludwig for his own life o AND a subsequent life estate to Elise AND a future estate to himself (reversion)  His heirs would get it afterwards o ELI5: Life estate to Ludwig… after Raj dies, it reverts back to him and life estate starts to Elise… after Elise dies, it reverts back to Raj because he had NOT disposed of his interest, so it would go to his heirs.

Case Study 1 (page 385)  Serena & Douglas This question raises several issues dealing with joint tenancies. The problem is most easily addressed in five points.  A joint tenancy is a form of shared ownership in which the parties share exactly the same undivided interests in a single piece of land.  Because the interests under a joint tenancy are undivided, Douglas had the right (as did Serena) to deal with the whole property, and not just half of it.  Nevertheless, because Serena was equally entitled to the property, she is entitled to share in the benefits that are created by the land. She therefore is entitled to half of the rent that Marcus Inc paid to Douglas during the term of the lease. Douglas would, however, be entitled to deduct any expenses that he incurred in connection with the lease. (The situation would have been different if Douglas had earned a profit through his own labour — eg picking berries or felling timber.) Since Serena has passed away, Douglas must pay the money to her estate, which will, in turn, hand it over to Rumana.  By leaving a will that gave everything that she owned to Rumana, Serena attempted to pass her interest in the land to her sister. She was, however, unable to do so. A key feature of joint tenancy is the right of survivorship. That means that when one joint tenant dies, his or her interest automatically passes to the surviving joint tenant(s). Joint tenants are therefore incapable of passing their interest to another person by way of a will. Douglas will therefore receive Serena’s half interest in the property, and thereby acquire sole ownership over the property.  It might also seem that an issue arises from the fact that the lease that Douglas created with Marcus Inc was oral, rather than written. In fact, however, while a contract for an interest in land is a type of agreement that generally needs to be evidenced in writing (as discussed in Chapter 10), the effect of non-compliance is merely a lack of enforceability. Consequently,

while an issue may have arisen between Douglas and Marcus Inc if either party had attempted to break the lease, the lack of writing is irrelevant now that the lease has been fully performed and terminated. Business Decision 15.1 (page 369) The question is intended to generate student reaction to the apparent rule in Highway Properties Ltd v Kelly Douglas & Co. The precise effect of that case is difficult to determine and the Supreme Court of Canada’s decision has been subject to a number of different interpretations. Depending upon the circumstances, judges and commentators occasionally have stated that the landlord does have an obligation to mitigate. In the present case, that would certainly seem to be the more reasonable conclusion. There is no apparent basis in practical justice for allowing Archer to simply sit back and allow the loss to accumulate. Nor does it make much sense from a societal perspective to inefficiently allow the landlord to sit on a vacant property while the tenant pays money without receiving any real benefit. Nevertheless, while it has been questioned, Highway Properties has not been overruled and therefore should still stand. On that basis, it would appear that Bainsbury is indeed liable for the remaining thirteen years’ rent.

Case Study of RC  Qui owns Lot 1 and Lot 2  Sam interested in buying Lot 2  Qui is concerned that Sam may do something on Lot 2 that reduces the value of Lot 1  Qui agrees to sell Lot 2 to Sam provided that Sam agrees to: o Paint the building on Lot 2 every 2 years and; o Not use Lot 2 as an autobody shop  Sam agrees, under seal, to the above covenants  Situation A: o Qui owns Lot 1 and Sam owns Lot 2 o If Sam breaks either covenant, Qui can sue for:  Damages  Specific performance; or  Injunction  Situation B: o Qui sells Lot 1 to Ken o Sam still owns Lot 2 o Contractual benefits can be assigned (note: burdens cannot be assigned) o If the 2 covenants were intended to “run with the land”, and Sam break either covenant, Ken can sue Sam for breach  Situation C: o Qui still owns Lot 1 o Sam sells Lot 2 to Janet o Does Janey have to comply with the 2 covenants? o Benefits can be assigned but not burden  Positive Covenants o Janet would not be bound to positive covenants (i.e. must repaint)  Negative Covenants o Janet would be bound to negative covenants (i.e. no autobody shop) if:  Original parties intended it to “run with the land” (e.g. protect value of DT)  Janet knew or ought to have known of negative covenant (e.g. registered at Land Registry Office) or she received ST for free

Case Study #10 (Page 387) While most contracts are valid and enforceable even if they are entirely oral, the Statute of Frauds requires that a lease for more than three years is valid, but unenforceable, unless it is evidenced in writing. Since the option to renew was for more than three years, and since only Juliet Hwong signed the document, it is not enforceable against Yip Cheung, notwithstanding his oral agreement. Case Study 8 (Page 386) It is easiest to address this problem in four stages:  The parties’ initial agreement created a fixed term lease. That lease automatically expired at the end of the five year period even though neither party had provided notice to quit.  However, a new tenancy was then implicitly created as a result of the fact that Kostal continued to pay rent and Solomon received those payments without objection.  That new lease was either a periodic tenancy or a tenancy at will. It was not a tenancy at sufferance because Kostal stayed on with Solomon’s implied permission. In choosing between a periodic tenancy and a tenancy at will, a court would look at all of the circumstances. Given that rent was paid and received on a monthly basis, it is strongly arguable that the parties created a periodic tenancy based on monthly terms.  Assuming that the parties implicitly created a periodic tenancy based on monthly terms, either party could terminate the lease by providing one clear month’s notice. A clear month’s notice must be given before the commencement of the month in question. Since Kostal gave notice on the first day of July, he remained responsible for August’s rent.

Case Study 11 (Page 387) The purpose of this question is to stress the fact that an original tenant can still bear responsibility even after assigning a lease to a third party. Students should be pointed to the risk management issues that arise as a result of that rule.  Initially, Wilson was the landlord and Frank was the tenant under the lease.  The lease allowed Frank to assign his interest, but only with Wilson’s consent. Paragraph 5 also stated, however, that Wilson was not entitled to unreasonably withhold his consent. Although it is obvious with hindsight that Janine was an undesirable tenant, there was no basis at the time of the assignment for Wilson to withhold his consent. Consequently, even though the landlord did not expressly respond to the tenant’s request to assign the lease, a court would recognize a valid assignment.  Nevertheless, although Frank’s interest under the lease was (substantially) assigned to Janine, he remained liable to Wilson as a result of the contract that those two parties signed. Consequently, because Janine did not pay the rent or pay the cost of repairs, as required by the lease, Frank remains liable to do so. Case Study 9 (Page 386/387) It is easiest to address this problem in four stages.  Unless they otherwise agree, neither the landlord nor the tenant is required to repair leased premises. The tenant is merely required to act in a tenant-like manner and to avoid intentionally or negligently damaging the property.  In this situation, however, the defective plumbing represents more than a mere failure to repair. Schultz covenanted that he would provide Takahana with quiet possession. Even if Schultz had not done so expressly, the same covenant would have been implied as a matter of law. In either event, that covenant requires, among other things, that the tenant not be substantially deprived of the enjoyment of the property. In this case, the problem with the toilets denies Takahana of effectively the whole purpose of the lease (ie the ability to operate a restaurant).  Consequently, although the lease did not require Schultz to repair the premises, his failure to do so amounted to a breach of the covenant to provide quiet possession.

 The tenant’s obligation to pay rent is normally independent of the other terms in a commercial lease. Given the substantial consequences of Schultz’s breach, however, Takahana had the right to discharge the agreement, thereby bringing to an end his obligation to pay rent. [based on Buttimer v Bettz (1914) 6 WWR 22 (BC Co Ct)] Case Study 12 (page 387) This question is intended to test students’ knowledge of the reules of mitigation as they apply to:  (i) contracts of sale,  (ii) commercial leases, and  (iii) residential leases. Ishtla is clearly not liable for the full value of the book. The duty to mitigate generally applies under a contract for the sale of goods. Consequently, although Igor undeniably suffered a loss as a result of Ishtla’s refusal to fulfill the agreement, his expectation damages are reduced to the extent that he could have reasonably limited his loss. He could have sold the rare book to the first person that Ishtla introduced for $4000. Accordingly, he is only entitled to recover $1000 from Ishtla. The situation is more complicated with respect to the lease. Additional information is required in order to determine whether the parties’ lease was commercial or residential. As often is true, the rules differ in the two contexts because of the need to protect residential tenants from abuse by landlords. The law is more willing, in contrast, to treat commercial parties as substantial equals. If the lease is commercial, then the rule in Highway Properties Ltd v Kelly Douglas & Co arguably applies. Igor therefore would have the option of allowing the premises to sit empty and compelling Ishtla to pay the full value of the lease. However, if Igor did re-let the property to a third party, Ishtla’s liability would be reduced by the amount actually paid by that third party to Igor. If the parties’ lease was residential, Igor would have a duty to mitigate his losses and he could not oblige Ishtla to pay the full amount remaining under the lease. He would be required to make a reasonable effort to find a new tenant. Consequently, unless there was something legitimately objectionable about the person that Ishtla introduced to him, Igor’s rights against her would be reduced whether or not he actually leased the property to that individual.

Parking Lot: Bailment or License?  Business Decision 17.1 (Page 420) 1. This case illustrates the difficulty of distinguishing between a bailment and a license. In the case upon which the question is closely based, the Manitoba Court of Appeal split 3:2. Whereas the dissenting judges focused on the actual fact of possession and control, the majority judges also considered policy considerations. o The majority found that there was a licence (and that the restaurant consequently was not responsible for the theft and damage). It reached that decision on the basis of several factors: (i) the parking lot was usually un-manned and was staffed by attendants only on busy nights, (ii) there was no charge for the parking service, (iii) customers did not receive tickets or receipts, (iv) the parking service was offered merely as a courtesy to customers of the restaurant, and (iv) as a matter of policy, it would be undesirable and unfair to hold the restaurant liable for the intentionally wrongful actions of an unknown third party. o The dissenting judges held that there was a bailment (and that the restaurant, as bailee, failed to exercise the degree of care that was required in the circumstances, and therefore was liable for the damage). It reached that decision on the basis of relatively few factors: (i) the attendant took possession of Miller’s keys for the purpose of parking the car, (ii) Miller could not possibly resume possession and control of his vehicle without first re-acquiring the keys from the attendant at the end of the evening. 2. The likelihood of creating a bailment could be diminished by taking advantage of some of the factors listed in Concept Summary 17.2. For instance: o the restaurant could instruct the attendants to simply direct customers to particular parking spots o the restaurant could instruct the attendants to give the keys back to a customer once a vehicle is parked o the restaurant could erect a large sign indicating that customers merely receive permission to park in the lot and that they do so entirely at their own risk

3. If a court found that there was a bailment relationship, and if the restaurant wanted to continue on with some sort of efficient parking system, it should either: o revise its system so as to create licences rather than bailments, or o protect itself against the threat of liability by charging parking fees and by using that revenue to purchase liability insurance. You be the Judge 17.1 (page 422)  Taylor Estate v. Wong Avilation Ltd. (1969) SCC Shifting the Burden of Proof The facts of this discussion box are based very closely on Taylor Estate v Wong Aviation Ltd. In the Supreme Court of Canada, Ritchie J surveyed the basis for shifting the burden of proof in bailment cases and decided that it would be unrealistic to apply that rule on the facts before him. As he explained, the burden is shifted because, given the transfer of possession that occurs under a bailment, the bailor normally has no way of knowing what happened to the property, whereas the bailee has direct knowledge of the situation and therefore is in the best position to explain the loss that occurred. In Wong Aviation, however, neither party was able to explain the disappearance of the Cessna. The defendant (Taylor’s estate) was as much in the dark as the plaintiff. Ritchie J therefore refused to shift the burden of proof. The result was that, since the explanation for the disappearance remained a complete mystery, the claim failed. There was no shift in the burden of proof and the plaintiff was unable to persuade the court that the accident was caused by Taylor’s lack of care. Although students would not be expected to discuss the point, it is worth noting that the court also rejected a simple claim in negligence based on the plea of res ipsa loquitur. On one view at least, the doctrine of res ipsa loquitur traditionally allowed the court to shift the burden of proof to the defendant if the plaintiff proved that: (i) the defendant had control of the situation, (ii) there was no basis in the direct evidence for establishing the cause of an accident, and (iii) the accident was one that normally does not occur without carelessness. Ritchie J expressly denied that that doctrine could apply on the facts of Wong Aviation. As he noted, there were several possible explanations for the disappearance, some of which (eg unexpected air turbulence) were entirely consistent with Taylor’s lack of carelessness. Finally, although Canadian courts still have the ability to draw inferences of negligence in some circumstances, the doctrine of res ipsa loquitur has been formally abolished: Fontaine v Loewen Estate.

Defences Available to Common Carrier (Case 6, Page 436)  First question?  They are a common carrier  Standard is very high, almost like an insurer  They knew the war was happening before the journey began  they made a conscious decision to travel through the war zone  War is not a valid defense here  you WEREN’T in a war torn area, you made a conscious decision to travel through one. It was not appropriate in the circumstance  OA would be liable for full amount of $500,000! Case Brief 17.2 Punch v. Savoy’s Jewellers Ltd. (Page 426)  LP received a ring from her aunt as a gift  worth $11,000.  Ring needs repair  LP took to local shop, SJ.  SJ realized it can’t perform repairs  sent ring (by mail) to HWJ.  SJ only purchased $100 worth of insurance on the ring.  HWJ fixed ring, prepared to return it to SJ.  B/c of postal strike, it obtained permission from Savoy (but not LP) to send ring by CN Railway’s courier service rather than by mail.  A driver for CN collected the ring and an employee for HWJ signed a shipping form that contained a provision that limited CN’s liability for any loss to $100.  Ring disappeared!  exact cause of the loss was unknown, CN freely admitted that its driver may have stolen (never bothered to discuss matter with its employee)  LP relied on bailment relationship  sued SJ, HWJ and CN.  OCA first held that LP implicity consented to SJ’s sub-bailment to HWJ AND HWJ’s sub- sub-bailment to CN.  Although LP had not discussed the matter with SJ, she knew that a sub-bailment was possible and did not object.  Furthermore, she admitted if she had been asked  still would have consented anyways.  AND evidence that SJ use of sub-bailment was common in the jewellery business.  Next, OCA stated since ring disappeared while on bailment, burden of proof shifted from LP.  Each defendant COULD be held liable UNLESS they established that its carelessness had NOT caused the loss.  No one could do that though.

 Evidence pointed in opposite direction  Savoy careless failed to purchased adequate insurance coverage for the ring… should have been more cautious since it allowed HWJ to return ring by courier service.  CN was careless  allowed ring to disappear while in its possession, probably through theft by its own employee.  OCA held that exclusion clause contained in CN’s shipping document might be effective against HWJ, but not against SJ or LP. (Contractual terms can generally be enforced ONLY between contractual parties  CN and HWJ).  An exception may be createed if a bailor agrees to be bound by a term  But in this case, neither SJ (as the bailor/bailee) nor LP (as og bailor) even knew about the exclusion clause.  Defendants were therefore ALL liable to LP  she was entitled to recover from any OR all of them up to the full value of her ring (she could not recover complete compensation three times over though, obviously).  The defendants were equally liable.  CN tried to limit its liability with regard to HWJ, but OCA narrowly interpreted the exclusion clause and found it ineffective because it did not cover losses created through theft. Case #11 (Page 437) – Co-insurance  NM  tried to keep $60,000 worth of stock on hand at all times  Purchased property insurance from CI, policy contained co-insurance clause that requires 80% coverage  NM chose to pay for only $30,000 worth of insurance (50%)  NM gets flooded; irreparable water damage  How much will NM receive if: o 1. Total loss was valued @ 50,000 o 2. Total loss was valued @ 40,000 o 3. Total loss was valued @ 30,000 with 5,000 deductible?  1. 50,000/60,000 = 83.33%  greater than minimum coverage required o You are therefore entitled to full amount of what you insured  $30,000  2. 40,000/60,000 = 66.67%  Less than minimum coverage required o You share in the risk! What was minimum required? o 80% * 60,000 = 48,000 o You covered only 30,000/48,000 = 62.5% of required o You are entitled to 62.5% of damages! o 62.5% * 40,000 = 25,000  3. Same case above o 62.5% * 30,000 = 18,750 o But you have a deductible, so 18,750 – 5,000 = 13,750

Case #9 (Page 437)  Result of careless manu. Process  fire erupted in Thames’ premis  spread next door.  WP lost $100,000 worth of product (destroyed)  WP purchased from FI first party coverage  entitled it to compensation for losses attributable to fire.  Thames purchased from SI third party coverage that entitled it to complete protection from losses that it careless inflicted as a result of careless manu. Process.  Explain how insurance policies will apply in this case.  Who will ultimately pay for the loss created by Thames and sustained by Western? o Western has FIRST party insurance (property insurance)  property coverage for the insurance premium. o Thames has THIRD party insurance (liability insurance)  liability coverage for the insurance premium.  Tort of negligence was committed  Western can sue Thames for the tort!  But it is easier to make an insurance claim.  Fortress pays Western  but wants their subrogation rights (right to sue Thames)  Fortress sues Thames...  But Thames has liability insurance from Sentinel  so Thames will make a claim to SI  SI defend the lawsuit for Thames and pays out if necessary  Thames was negligent, Fortress wins, Sentinel pays Fortress!  Sentinel will take the biggest hit!

CHAPTER 16 – Sales & Mortgages Registration Systems  Different “ interests ” (e.g. fee simple, easement, restrictive covenants, leases, etc.) may exist at the same time in a single parcel of land  Registration System documents the existence of interests in land  2 Types: o Registry System o Land Titles System Registry System  Older System  Opportunity to inspect & evaluate documents that may affect real property  This system was dominant in the 4 Atlantic Provinces + Manitoba + Ontario  What the government does is record things that people present to them o They do not guarantee if the documents are accurate o They don’t check/review/reject the documents; as long as they are in proper form, they will take it o E.g. If you are interested in buying a particular property:  Check records for Lot 1/2/3, see what’s recorded @ land registry office (can be done online)  Opportunity to inspect & evaluate those documents  40-year title search o Look at the documents registered in the last 40 years  Who owned this property 40 years ago  E.g. John Smith did; but who did he sell it to? Sally? Who did she sell it to?  Make sure that you are at the end of a good “ chain of title ” before you buy  Ensure that the chain was never broken ; that everyone did everything correctly up until the present  Priority of interests are determined by time of registration o NOTE: This is the same under the Land Title system o If taken to court  (my rights are better than yours); this is how it’s determined! o This encourages everyone to record their interest immediately

Land Titles System (LTS)  Superior to the Registry System (infinitely better)  LTS generates certificate of title (C of T) that guarantees validity of interest that are listed  Government guarantees validity (with some exceptions) o Government reviews everything that is submitted for registration, so we don’t have to do long 40-year search ourselves  Indefeasibility (with few exceptions)  interest in the C of T cannot be defeated o E.g. When gov. records Sam owns a fee simple in that property  their interest is undefeatable o Sam has a fee simple and the best rights in that property  The system is based on 3 principles: o Mirror:  in general, all interests listed in the C of T reflect valid interests  The certification reflects reality  E.g. even if chain of title was broken; if it’s listed on C of T, you can rely on that information when buying o Curtain:  Only valid interests are listed in the C of T  no need to look “behind the curtain”  don’t have to check yourself if everyone did everything properly o Insurance:  A person who suffers a loss due to an error in C of T is entitled to compensation  If government makes a mistake, and you rely on that information recorded; and you suffer a loss, the government will compensate  Assurance fund  LTS includes this that helps people who suffer losses (in above example)

 Example (Mortgage Fraud) o Sam owns property in fee simple under the LTS o The C of T shows her as the undefeatable fee simple owner o Neal Caffrey, conman, somehow signed a document that transferred her fee simple to somebody else  Transferred the property (through a lawyer) to “Ozzy” o Now, Ozzy is shown on the C of T as the undefeatable fee simple owner o Ozzy is in cahoots with Neal  goes to a bank and asks to borrow money o Bank checks  it’s all good  lends Ozzy the money in exchange for Ozzy’s promise to repay money + placing a mortgage on the property  The mortgage is in favor of the bank  it’s undefeatable (valid and enforceable) o Ozzy skips town, so bank enforces their right of sale (to sell the house) o Sam finds out he’s been bamboozled  who wins? o Sam & bank are innocent! o But Bank gets the property (concept of indefeasibility) because they relied on the information on the C of T  Sam didn’t rely on anything because he didn’t know about it (Household Realty Corp Ltd v Liu (2005) o This is not fair to Sam! o Deferred Indefeasibility  Ontario Court of Appeals overturned its own decisions  Created new precedent  Most equitable decision was to get Sam his house back  Neal was a conman  who was the last person who dealt with the conman?  The bank did  they were in the best position to catch the fraud but they didn’t do enough  Sam couldn’t because he didn’t know about it  Sam gets his house back!  Bank is the intermediate owner (last person to deal with the conman  therefore they are deferred undefeatable)  NOTE: If the bank did everything they possibly could have, then the mortgage is valid and enforceable.  Only approved lawyers (real estate lawyers) have access to the system to do the transfer now (in the past anybody could)

 Everybody is on high alert for fraud now) Unregistered Interests in LTS  C of T is not entirely indefeasible  If it’s unregistered  the mirror principle was NEVER truly realized  Exceptions: (none of these have to be recorded in LTS) o Short-Term Leases (less than 3 years)  You do not have to record the existence of a 2-year lease  As long as you occupy, you have valid enforceable lease  But if you have a 5-year one, you MUST register it at the land titles office  Otherwise your lease will be defeated by a subsequent interest in that property o Prescription  Easement by prescription; easement is created through usage! o Adverse Possession o Public Easements o Unpaid Taxes o Unpaid Creditors – Writs of Execution  Credit card company got a judgment for 10,000 from Jane Smith  Jane still doesn’t pay  Credit card company can file that judgment with the local sheriff’s office  When it’s filed; it becomes a Writ of Execution  This WoE forms a lean on any real estate Jane Smith owns in the geographical area of that sheriff  The 10,000 she owes to credit card becomes a lean  The WoE does not have to be recorded on the C of T  CC company can compel you to sell that property  It won’t appear on that C of T until sale goes through with the CC company  REMEMBER : If you are going to buy property from Jane, check the local sheriff’s office for any WoE Land Sales  Sale: ownership is transferred in exchange for consideration

Risk Management  Caveat Emptor: o Buyer beware o Generally, a seller does not have to disclose defects to a buyer o Buyer should ask all the questions about any problems/defects  Seller STILL doesn’t have to tell you anything (but there are exceptions for this, however)  Buyer should inspect, make sure they are content  Common Law: o Seller has a duty to disclose all known latent defects that are dangerous, potentially dangerous, or renders a property unfit for habitation  It has to be known , latent, and unfit for habitation o Latent: something a reasonable person would not see (above ceiling, in dry wall, etc.  How can the buyer reduce their risk? o Put it in the contract! Certain clauses o Ask questions o Googling/doing your research  Real Estate Agent o Search market for appropriate properties  Appraiser o Independent opinion as to value  Building Inspector o Inspect & identify defects in the structures  Environmental Auditor o Inspect & identify environmental issues  Surveyor o Depict the size of land & the location of: Structures, Easements, Encroachments  Lawyers o Search title at Land Registry Office o Non-title searches  Municipal tax arrears  Municipal utility arrears (e.g. water)  Government has given themselves more power to collect

 This lean right is very powerful for outstanding property taxes, water arrears  can ultimately sell property if they have to  Zoning & Building Department Compliance  Outstanding Judgments (Writs of Execution search) o Review survey o Review Mortgage Documents o Property & Liability Insurance o Title Insurance o Register Transfer of Land, Mortgages Agreement of Purchase & Sale (APS)  Contract for the sale of land  Contracts for sale of land must be in writing & signed (Statute of Frauds) o NOTE: Proposed legislative change to Electronic Commerce Act (Ontario)  APS often contains conditions/conditions precedent Conditions or Conditions Precedent  A requirement that must be satisfied before the transaction can be completed  A contract is created, but transaction may not be completed  E.g. Conditional Upon: o Buyer obtaining satisfactory financing o Buyer selling their existing home o Buyer obtaining zoning permission o Seller obtaining neighbor’s permission for an encroachment (which is basically intrusion on a person’s territory, rights, etc)  in real estate, by building something on neighbor’s land or allowing something to hang over their property  Basically: A condition in a contract  something else has to happen for the transaction to move forward and be completed o If condition does not occur, transaction not completed  contract ends  Subsidiary Obligation: express or implied obligation to make reasonable efforts to satisfy condition o E.g. APS is condition upon Buyer obtaining satisfactory financing o Buyer’s subsidiary obligation: Buyer must make reasonable efforts to obtain satisfactory financing o Breach of subsidiary obligation: Remedy is damages Closing/Completion  Statement of Adjustments (SoA) o Property Taxes o Utilities o On the SoA  shows the price/deposit/any adjustments for taxes/maintenance fees  Up-date title search  Registration of Deed/Transfer of Land

 Notice of Change of Ownership Remedies for Breach of APS  Expectation Damages o Money to compensate you for the expectation  Specific Performance (SP) o “ I don’t want money/damages, I want the court to order the defendant to fulfill the obligations as stipulated in the contract” o SP is at the court’s discretion o Historically, SP was granted with respect to real property APS o Semelhago v Paramadevan (1996)  SCC held not every piece of land is unique; SP only available if plaintiff has legitimate grounds for saying that money would not be an adequate remedy  Purchaser’s Lien o If APS is not completed due the vendor (seller), the buyer will have lien for refund of deposit o Allows purchaser to sell land to recover deposit  Vendor’s Lien o APS is completed but purchaser has not paid full price o Vendor has lien for balance of price, if not paid o Allows vendor to sell land to pay balance of price Mortgages  Is a loan secured by land as collateral  Mortgage: interest in land as security for the repayment of loan  Mortgagor: borrower that grants interest in land  Mortgagee: lender that receives interest in land  A lender that has collateral is always in a better position  if you default, you can seize the collateral, sell it, take back what you are are owed, and give you the excess (secured loan)  Lenders like real estate collateral  can’t move it! Can’t skip town.

Nature of Mortgages  Land Titles System o Mortgagor charges land as security for loan  A charge occurs when the mortgagor agrees that the land will be available to the mortgagee if the debt is not repaid o One loan is repaid, mortgagee removes charge  Land Registry System o Mortgagor conveys title to mortgagee as security for loan  Conveyance of title  in exchange for the loan, the mortgagor transfers the property to the mortgagee, who then becomes the legal owner  The mortgagor is, however, entitled to have the title reconveyed if the mortgage is fulfilled o One loan is repaid, mortgagee conveys title back to mortgagor (pursuant to mortgagor’s equity of redemption )  Mortgagee acquires the legal title to the property, but the mortgagor isn’t left without anything  has equitable interest in the land  This interest arises because the borrower enjoys the equity of redemption  EoR entitles the mortgagor to recover legal title to the land by repaying the loan even after the due date Subsequent Mortgages  Land Titles System o Mortgagee gets charge on land o Mortgagor retains legal title to land o Mortgagor may grant a subsequent mortgage  Land Registry System o 1 st mortgagee gets legal title o Mortgagor gets equity of redemption (right to get legal title to land back after repaying loan) o Mortgagor may grant a subsequent mortgage

 Second/Third mortgagees always taking more risk (usually reflected in interest rate) Vulnerability of Mortgagors  Mortgagor may lose land Vulnerability of Subsequent Mortgagees  If 1 st mortgagee forecloses or power of sales the mortgagor’s rights & any subsequent mortgagee will be extinguished (wiped out)  Subsequent mortgagee could sue mortgagor Priority of Mortgages  Registration at Land Registry Office is “notice to the world” of your interest in land  Priority determined by time of registration (subject to certain exceptions) o Everyone that comes after, is ranked below Disposition/Sale of Interests by Mortgagee (has the mon-ee to lend)  Mortgagee may sell its mortgage  Mortgagee assigns its contractual rights & its property to third party  Third party must register its assignment  Third party must notify mortgagor & direct mortgagor to pay third party Disposition/Sale by Mortgagor (borrow-or)  Mortgagor can sell its interest in land to a third party  If mortgagor does not repay mortgage, the third party will take ownership subject to mortgage o The land would still be security for the loan  Mortgagor may assign its contractual rights to a third party but not its obligations o Mortgagor will continue to be liable on mortgage  NOTE: almost all mortgages now have a “due on sale, leasing, etc.” clause  Can transfer the benefits, but not released from obligations forever

Terms of Mortgage Contract  Mortgagor repays loan per agreement o Acceleration Clause: full amount immediately due if default in payment  Let’s say you have a mortgage  $200,000  Monthly payments are $1000 a month; and you miss a monthly payment of $1000  If they did not have an acceleration clause, the bank could:  Power of sale (sell the property)  Sue (but would you sue for $1000?)  If they had an acceleration clause  You owe the full amount (or whatever remaining balance is) immediately  Power of sale for the full $200,000 o Prepayment Privilege: early or additional payments with penalty  A mortgage can have this  gives the borrower the opportunity to pay more than $1000 a month if they wanted to  Pay in advance for future payments  But if they don’t have this in the contract, they will not accept it  You can only pay extra if you have this privilege built in the contract  It’s common to have this built in  Maybe they refuse; they don’t want early payment because they want to make money on interest  Penalty: Some may allow you to prepay 10-15% of the debt every year with no penalty at all  Penalty is usually the greater of 3 months interest and interest differential  Mortgagor pays realty taxes (property taxes)  Mortgagor maintains insurance (if there’s a fire; collateral is destroyed)  Mortgagor not commite waste  In the 3 cases above  registered interest can be defeated! The government may be entitled to seize and sell a piece of land If the taxes on that property have not been paid. Also, to ensure that payment actually occurs, maybe mortgagee insists upon receiving appropriate amount of money to pay the taxes themselves.