Problems in Canadian Business Law Pol/Soc Sci A Tuesdays, 2:30-5:30 pm Simon Archer

Announcements See updated sked on web page: doutlinejan04.doc doutlinejan04.doc Dropped a couple of topics, will move more deliberately through remaining topics Note drop date: Feb 6 Papers back: end of January, excepting those handed in late, which may take longer

Last term Court system, legal procedures, constitutional arrangements pertaining to business matters Introduction to administrative law Law of torts Law of contract employment K, collective bargaining consumer protection and sale of goods Law of trusts and fiduciaries income trusts, fiduciary duties

This term How businesses are formed, what forms they take business associations, statutes and rules governing those associations Some ways businesses raise money for their operations securities, rules governing securities Special issues or topics in business (as many as we can get to) Intellectual property International trade Bankruptcy and insolvency Regulation of competition

Today Overview of types of business association Discussion of law of agency

Overview of business associations Four basic types of business relationships Sole proprietorships Contractual relations partnerships, franchises, joint ventures Trusts (discussed last term) Corporations The law of agency is relevant to all forms

Sole Proprietorships Most common method in Canada today. Includes anyone working for him/herself. Can have employees i.e. doctor’s with receptionists. Taxed as income from business. Taxpayer can deduct more items. Full liability for actions of business.

Contractual relations Partnerships Formed when two or more persons “carry on a business in common with a view to profit”, a statutory definition, Partnerships Act (Ont.). Can be set up for a single horizontal project and then called a “joint venture” or a “syndicate” Full liability USUALLY Exception, some LLP forms

Contractual relations cont’d Franchising or vertical arrangements Can be set us as a supplier/ distributor/retail business, then called a “franchise” Top entity sets standards for independent outlets. Pizza Hut IGA

Contractual relations, cont’d Horizontal arrangements Ownership of assets used in business separated from the entity exploiting those assets e.g. author’s royalties from publisher These are all partnerships of some sort

Trusts Used mainly in financial investment vehicles in Canada, such as mutual funds, real estate investment trusts (REIT’s), or Income Trusts. Taxed much like an individual would be taxed on income from a business, to the extent not distributed to beneficiaries. Discussed last term, briefly. Remember the liability discussion.

Corporations Only exist if created pursuant to a statute. Legal concept that has become the central commercial vehicle in our society. Single most useful concept the law has ever invented? Separate legal entity that owns assets and carries on a business. Can also be not-for-profit institutions. Liability limited to investment.

Why Choose One? Statutory requirements (e.g. doctors cannot incorporate). Taxation. Expense of incorporation - ongoing, not just initial - avoid lawyers. Liability issues unilimited versus limited personal liability Corporate and trusts have perpetual succession.

Agency 1. The role of an agent, vocabulary 2. Historical development 3. The nature of the relationship 4. Ratification of contracts by a principal 5. Third parties and the agency relationship

Historical development Expansion of mercantile dealings beyond ones own community spurred need for agents Agent removes need for direct principal- third party contact Agent acts on your behalf within the scope of their duties as an agent and can legally bind you to agreements within that scope, and you are liable for their actions within that scope

Definitions Principal = the person for whom the agent acts Agent = the person designated or deemed to be acting for the principal Third party = the person with whom the agent deals with on behalf of the principal If not an principal-agent relationship, could be A power = a form of authority to manage property you do not own beneficially, a more discretionary power A trustee relationship (where, for e.g., a transfer of property, etc.), greater responsibility re: the property

Nature and duties in the relationship Can be an agent by: express agreement conduct (essentially, an estoppel) Cannot deny fact you represented that the agent was working for you even if it was not true, you will be bound by agreements, you “clothed them with authority” by your actions “necessity” (deemed by law) Not much used -- comes from seafaring days when communications were slow or non existent

Nature and duties Duties To act within scope of instructions Limits on normal or reasonable actions must be brought to third party’s attention, or else principal will be bound by agent even if acting outside the scope of the agency. Difficult area. Agent owes duty of utmost good faith Act in principal’s interest, not your own Not to make profit at principals expense Not to conflict with principal Not to act for third party Exception: consent of both parties Not to commingle trust funds!!!! Cf. fiduciaries and trust law

AGENCY CONTRACTUAL RELATIONSHIPS EXAMPLE: PRINCIPAL THIRD PARTY AGENT Authority to Enter into Contract on Behalf of Principal (Contract Usually Between Principal and Agent) Negotiation of Contract on Behalf of Principal (Within Scope of Authority) RESULT PRINCIPAL THIRD PARTY AGENT Contract

Key elements Ratification of K by a principal Lack of authority by Agent, but ratification sets acceptance at time of contract, not at time of ratification Principal must have been in existence at time of K, and must be contemplated by the K. Within a reasonable time, whole K, deemed by conduct, etc.

Apportioning liability If A acts within authority and follows procedure, rights of TP are only against P If A contracts on own behalf (with view to later assigning to P), the rights of TP are against A If A does not disclose P-A relationship to TP, but acts according to rules, TP rights are against P, not A If A represents a fictitious P, TP has rights against A Could be actions in fraud or deceit If A acts beyond scope of directions, can be TP rights against P and A Could be actions in breach of warrant of authority

AGENCY RIGHTS OF THIRD PARTIES PRINCIPAL DISCLOSED PRINCIPAL UNDISCLOSED PRINCIPAL AGENTTHIRD PARTY Right of Action Authority Contract on Behalf of Principal PRINCIPALAGENT THIRD PARTY Right of Action Against Agent or Principal Authority Contract on Behalf of Undisclosed Principal

AGENCY RIGHTS OF THIRD PARTIES, cont’d PRINCIPAL AGENT HOLDING SELF OUT AS PRINCIPAL AGENT THIRD PARTY Right of Action Authority Contracts as Principal

Liability Vicarious liability for acts within scope of agency agreement, or those ratified by principal Where agent is deceitful, both are liable in tort Principal liable in fraud where allowing agent to innocently make false claims

Termination of the relationship Express termination Specific purpose complete Incapacity of principal or agent Bankruptcy of principal Notification requirements to third parties But, umm, what about reason for having agent? Fairness to TPs - hard to find info about P, so make a rule to make P liable in absence of notice.

Creative problems For a fee, someone provides you with investment advice on an on- going basis, and on your orders, buys and sells some junk bonds on your behalf. Is this person an agent? Is the World Bank an agent of the Canadian federal government?

Advisor or agent? Fees are paid Advice is provided Acts are undertaken on your behalf Why is this an important distinction? Because of the legal liability -- advisors may not have same duties as agents What else could this relationship be? Employee? Independent contractor?

WB an agent? Canada and many other nations are “members” of WB by a contractual relationship (the Articles of Agreement) They provide some money to WB which then raises more money in capital markets and provides members with loans Some members form a “Board of Directors” of the WB that makes broad decisions (only the U.S. has a veto in decision-making) WB makes contracts with needy members to provide loans What else could this relationship be?

Next class Partnerships...