Incorporation by Reference

"The method of making one document of any kind become a part of another separate document by referring to the former in the latter, and declaring that the former shall be taken and considered as a part of the latter the same as if it were fully set out therein."

[Black's Law Dictionary, Fifth Edition, p.690.]

It is not uncommon for contracts to remain short and readable by ensuring that a great deal of the meat-and-potatoes clauses are found elsewhere; it is a good way of avoiding contracts that are unnecessarily long and detailed. The ones that most Canadians will be familiar with are "Standard Charge Terms" in a mortgage. The mortgage itself will only be a page or so -- of very fine print -- but it will have a box indicating which Standard Charge Terms apply; a "Standard Charge Terms" is the often massive document detailing each and every right and obligation under a mortgage: interest calculations, prepayment rights, power of sale, and so on.


NOTE:
PDFs of what appear to be all the currently used Standard Charge Terms have been very helpfully posted by the Orillia Law firm of Lewis Downey Tornosky Lassaline & Timpano, PC, and can be found here.

C-28: How the anti-spam bill may effect your business

David Canton of Harrison Pensa is a lawyer specializing in electronic law. He recently wrote an article for the London Free Press (and also found on his blog) where he brings our attention to some potential problems that businesses large and small will face under the new laws aimed at reducing spam:

The anti-spam bill was recently passed [David Sanders: Bill C-28 is here in Bill form, and the final version is here on the federal e-law site), and here is a one-page HTML version on Canlii], and will be in force this year. It gives new tools to fight spam, but unfortunately defines spam so broadly that it will affect how most organizations conduct business.

Businesses can’t just ignore the legislation. Remedies include fines of up to $1 million for individuals, $10 million for others […]

An e-mail to just one person you met at an event who you consider a potential customer may be considered spam [and] “electronic message” is broadly defined […]

Messages will not be considered spam if the recipient has consented to receiving the message. But it is up to the sender to show the recipient has consented if there is a complaint [...]"

and what constitutes "consent" is a complicated thing. David Canton strongly recommends that all businesses and charities review the consent provisions to determine if their electronic communication policies need to change.

The Act also links consent to purpose:

since my e-mail address is published on my firm’s website and other places, you may be able to e-mail me with anything relevant to the practice of law — but you won’t be able to e-mail me trying to sell me a trip. If I hand you my business card, the same applies.

Canton correctly notes that -- as with many pieces of legislation -- the devil will be in the details of the regulations that the legislature and bureaucracy will create to implement and enforce this Act, and those regulations haven't been published yet.

To keep tabs on e-law issues, keep an eye on David Canton’s blog on the topic.

GAAR

Every now and again an acronym is also onomatopoetic, and I would think that "GAAR" qualifies. The acronym means the "General Anti-Avoidance Rule" and the onomatopoeia comes with the noise made by a taxpayer who has had a tax plan disallowed by the Canada Revenue Agency [CRA] under the GAAR despite the plan's technical compliance with the tax laws.

What is the GAAR, according to the CRA?

The GAAR is really just Part XVI "Tax Avoidance" of Canadian Income Tax Act, (ss. 245 and 246).

In that Part the government creates the concept of an "avoidance transaction", which it defines as "a single transaction or one that is a part of a series of transactions where the single transaction or the series results directly or indirectly in a tax benefit, unless the transaction is carried out primarily for bona fide purposes other than to obtain the tax benefit". (CRA IC88-2, "General Anti-Avoidance Rule - Section 245 of the I.T.", an information circular "to provide guidance with respect to the application of the general anti-avoidance rule". )

What exactly is the GAAR, in non-legalese?

The best description I've ever seen is that provided by Osgoode Hall Law Student Mr. Ankur Bhatt:

A fundamental tenet of Canadian tax law...is that a taxpayer is entitled to make any lawful arrangement that he or she sees fit in order to reduce his or her liability to tax. The General Anti-Avoidance Rule (”GAAR”), at s. 245 of Canada’s Income Tax Act, has greatly confused this once-clear principle. While “tax evasion” is the general term for efforts to not pay taxes by illegal means, what is known as “tax avoidance” is the otherwise not illegal navigation of the tax regime to reduce tax payable. The GAAR, as its name would suggest, stands as a general damper on the latter. The rule entails that, even if one follows to the letter the (other) rules as laid out, the government may feel fit to disregard such compliance and levy the tax that it deems would otherwise have been payable had such (other) rules not been taken advantage of. Specifically, the benefit of a tax avoidance transaction may be denied if, pursuant to s. 245(4), the transaction constitutes a “misuse” or “abuse” of the tax-related provisions it utilized.

Noted tax law scholar Vern Krishna related the gist of general anti-avoidance legislation at a recent lecture competition:

The law allows you to do something. You do it according to the law, and take advantage of the law, and then somebody says, “No… that was not very nice. You went too far.” And you say, “How far is ‘too far’?” And [they] say, “Well, we’ll tell you when we find out.” (Laughter.) But you say, “I need to know, because I need to plan in advance!” And they say, “No, you’ll find out in the fullness of time.” (Laughter.)

Thus, general fairness concerns of uncertainty, unpredictability, and retroactivity arise. Furthermore, having to do with but a property interest, general anti-avoidance legislation is not subject to Charter scrutiny under s. 7. As expected, the courts are left to divine the meaning of “misuse” and “abuse” under s. 245(4), demarcating the line between valid and non-valid arrangements of financial affairs.

[The quote is from "Copthorne Holdings: “Series of transactions” under the GAAR", "The Court", Osgoode Hall Law School, February 2nd, 2010. The "s.7" reference is to Section 7 of the Charter of Rights and Freedoms, which states: "7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice".]

A problem: two not-in-sync SCC cases

The Supreme Court of Canada is there, amongst other reasons, to clarify the law. Unfortunately it has done rather the opposite on the GAAR.

In 2005 the Court, (in Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601) "effectively sanctioned the well-worn practice of tax avoidance, saying transactions structured to minimize what is owed to Caesar, as it were, don't per se constitute a breach of the law" ["General Anti Avoidance Rule - GAAR - CRA Loses Catch-All Case", Wednesday, October 26, 2005 from The Globe and Mail, reprinted at "Canada Offshore"], permitting "aggressive" tax planning. (Truth be told, such complex plans are rarely available to small businesses, who even more rarely have the time, volume of gross income, or piles of cash to hire the platoons of hyper-specialist tax accountants and lawyers necessary to even come up with the avoidance schemes.)

In 2009, however (in Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3) "the Supremes" (as they are often cheekily known) stood for instead of against application of the GAAR: "The approach to determining whether a transaction resulted in a misuse and an abuse for the purposes of s. 245(4) of the Act required the court to first interpret the provisions at issue to determine their essential object, spirit and purpose. The second step in the s. 245(4) analysis was to determine whether the avoidance transaction frustrated the object, spirit or purpose of the provisions. Where a tax benefit resulted from a series of transactions, any individual transaction became relevant in ascertaining whether it gave rise to an abuse of the provisions of the Act. The GAAR applied even where abuse was an indirect result of a transaction. Thus, a court had to refer to the `overall result' of the transactions, rather than the `overall purpose', which may incorrectly imply that the taxpayer's motivation or the purpose of the transaction was determinative."

There are two things of interest to me in the Lipson decision.

First, the decision was an odd and narrow (4-2-1) split decision with a short bench of seven, made without the benefit of the Chief Justice MacLachlan, who is arguably the Court's best tax specialist: please see "Supreme Court Hands CRA Biggest Ever GAAR Victory In A Cliff-Hanger", (19 January 2009, Article by William I. Innes, Chia-yi Chua and Carman R. McNary, Fraser, Milner, Casgrain, LLP) for further details and commentary.

Second and worse: unlike the Canada Trustco case, Lipson was an "aggressive" tax plan that was created by ordinary taxpayers: a taxpayer and his wife who structured a loan transation for a family residence using financing arranged around the purchase of shares in a family corporation; the share loan was $562,500 and the mortgage was $562,500. (Please see the Lexis-Nexis/Quicklaw Digest for the Lipson case to obtain a useful summary. The explanatory quotation above is from that Digest.) Canada Trustco, by contrast, was a "complex sale-leaseback transaction" of high value and potentially wide application. I can't shake the concern that one judicial standard is being applied to rich corporate taxpayers while a more rigid and demanding one is being applied to ordinary people. What will be of interest will be to see whether the harsher Lipson standard will be applied to future corporate tax arrangements such as the one found in Canada Trustco; if it is then the class bias concern will be negated. What will also be worth following is whether or not the law will alter course for a third time: it is possible that the SCC will accept a GAAR case to clarify any uncertainty.

Until the matter is clarified, however, I will be wary of an American-style tax standard where the tax avoidance tune is okay if done with complex scores played by expensive orchestration, and impermissible if done in simple chords.

What can you do to avoid a problem?

If you are engaged in aggressive tax planning, one option is to go to the CRA, where "Revenue Canada, Taxation will issue advance rulings with respect to the application of the general anti-avoidance rule to proposed transactions and will publish summaries of the facts and rulings in those cases that will provide further guidance where the rulings themselves are not published. In order to ensure that the rule is applied in a consistent manner, proposed assessments involving the rule will be reviewed by Revenue Canada, Taxation Head Office." One should, however, consult with a tax law and accounting specialists to ensure that (a) the proposed tax arrangement meets the laws as they stand, and (b) whether it is prudent to obtain a predetermination at all.


Further reading:

"Anti-Avoidance Provisions, Including GAAR" - CA School of Business

"The Year in GAAR", Fasken Martineau Taxation Group presentation by Alan Schwartz and Louis Tasse

When can you not fire an employee?

Well, the truth is you can fire any employee at any time for any reason .... if you are willing to pay the price that a court may award that employee for wrongful dismissal or such other cause of action. Most small business naturally don't have that kind of convenience money, and have better things to spend it on even if they did.

One of the better known and well-published labour law lawyers is Mr. Howard Levitt of Lang Michener, LLP.

He recently wrote a Law Note on "Dealing with Malcontents" in the workplace.

In that article he recommends a number of key points that employers "should consider ... before firing staff for subordination"

Is the order lawful? ...
How reasonable is the directive? ...
Is the instruction within the employee’s job functions? ...
Is the order clear? ...
Is it related to a significant issue? ...
Is there a reasonable excuse? ...

The full article is well worth a read.

Separation Agreements: Full Disclosure and Fair Dealing

The Supreme Court of Canada in Rick v. Brandsema has recently clarified the law regarding what is and isn't fair in the negotiation and contents of a separation agreement.

The SCC headnote found at Canlii gives an excellent summary (the numbers in square brackets being the relevant paragraph of the SCC judgment; the hyperlinks are by the author of this blog):

The parties married in 1973 and separated in 2000. During their 29 years together, they had five children and acquired a dairy farm in which they were equal shareholders, as well as other real property, vehicles and RRSPs. The parties were intermittently represented by lawyers and also used the services of mediators during their negotiation of a separation agreement. Approximately a year after their divorce, the wife sought to set aside the agreement on the grounds of unconscionability or, in the alternative, a reapportionment order under s. 65 of British Columbia’s Family Relations Act.

The trial judge found that the agreement was unconscionable because the husband had exploited the wife’s mental instability during negotiations and had deliberately concealed or under‑valued assets. This resulted in the wife receiving significantly less than her entitlement under the Act, despite the fact that it was the parties’ express intention to divide their assets equally. As a result, the trial judge made an order awarding the wife an amount representing the difference between the negotiated equalization payment and the amount she was entitled to under the Act. The Court of Appeal disagreed with the trial judge’s conclusions about the extent of the wife’s vulnerabilities and concluded that, in any event, they were effectively compensated for by the availability of counsel. [The wife appealed that BCCA decision to the Supreme Court of Canada and won.]

[...]
The singularly emotional environment that follows the disintegration of a spousal relationship means that the negotiation of separation agreements takes place in a uniquely difficult and vulnerable context. Special care must therefore be taken to ensure that the assets of the former relationship are distributed through a process that is, to the extent possible, free from informational and psychological exploitation. Where exploitation results in an agreement that deviates substantially from the objectives of the governing legislation, the resulting agreement may be found to be unconscionable and, as a result, unenforceable. [1] [44] [47]

While parties are generally free to decide for themselves what bargain they are prepared to make, decisions about what constitutes an acceptable settlement can only authoritatively be made if both parties come to the negotiating table with the information they need to consider what concessions to accept or offer. This requires that there be a duty on separating spouses to provide full and honest disclosure of all relevant financial information in order to help protect the integrity of the negotiating process. This duty not only anchors the ability of separating spouses to genuinely decide for themselves what constitutes an acceptable bargain, it helps ensure the finality of agreements. An agreement negotiated with full and honest disclosure and without exploitative tactics will likely survive judicial scrutiny. [45‑49]

Whether defective disclosure will justify judicial intervention, however, will depend on the circumstances of each case, including the extent of the misinformation and the degree to which it may have been deliberately generated. [49]

There is no reason to disturb the trial judge’s conclusion that the separation agreement was unconscionable. His findings about the husband’s defective disclosure and exploitation of his wife’s known mental vulnerabilities, support the conclusion. Although in some cases professional assistance will effectively compensate for vulnerabilities, in this case the trial judge concluded that the wife’s mental instability left her unable to make use of such assistance. [2] [6] [27-28] [31] [36] [58‑60] [62]

The husband’s failure to make full and honest disclosure, his knowledge that the negotiations were based on erroneous financial information, as well as his exploitation of what he knew to be his wife’s profound mental instability, resulted in a negotiated equalization payment that was $649,680 less than the wife’s entitlement under the Family Relations Act. In these circumstances, the trial judge was entitled to award this amount to compensate the wife for the loss caused by the unconscionable bargain. [6] [27-28] [31] [53] [63] [69]

The Canadian Centre for Policy Alternatives Weighs looks at the HST

The Canadian Centre for Policy Alternatives is "an independent, non-partisan research institute concerned with issues of social, economic environmental justice. Founded in 1980, the CCPA is one of Canada’s leading progressive voices in public policy debates".

CCPA recently examined the recently-approved Harmonized Sales Tax (HST)and concludes that the "majority of Ontarians won’t be worse off when the [HST] is implemented. Not A Tax Grab After All: A Second Look at Ontario’s HST examines the Ontario government’s HST plan and finds it's virtually revenue neutral when viewed as part of a total tax package that includes increased sales and property tax credits and a significant decrease in personal income tax rates".

To read CCPA's full paper in PDF format you can right-click and download it from here.

Other Camberwell House posts with further information on the HST:
"The HST and you"
"HST Transitional Rules"

Unjust Enrichment

Unjust enrichment is a doctrine for the compensation of one who has unjustly received a benefit from another in a manner that the law will correct. It is a principle of “equity”.

Thomson-Carswell’s Dictionary of Canadian Law (3d ed) neatly summarizes the doctrine:

“ An action for unjust enrichment arises when three elements are satisfied: (1) an enrichment; (2) a corresponding deprivation; and (3) the absence of a juristic reason for the enrichment.”

Each of these is required for the doctrine to be applied. Only when they are proven is the action established and the court able to grant compensation; from there the court goes on to determine what remedy will be applied: monetary compensation or a judgment finding a “constructive trust” which will result in an order that the claimant has an interest in or title to property.

An example of unjust enrichment would be two companies working together without a written contract on a building project where Company A owns the land and Company B contributes labour and building supplies. Co.A refuses to pay Co.B, so where is B’s remedy? It can allege an oral contract, yes. But it can also allege that Co.A is unjustly enriched. Co.A has been enriched to the value of the contributions in labour and supplies and through any increase in the value of the property. Co.B has suffered a corresponding deprivation, in that it has lost those contributions and the profit (the increase in value) which would have been provided if those contributions had been used elsewhere. Lastly, there is no juristic reason for what happened. If, for example, Co.A had been owed $1m by Co.B and B’s deprivation was roughly the same, Co.A could claim a set-off for that debt, which could be a juristic reason which may be upheld by the court.

For further reading and a discussion of the principle, please see the Duhaime page on unjust enrichment.

HST Transitional Rules

"The 2009 Ontario Budget proposed a comprehensive package of tax changes. Central to this tax package is the proposed Harmonized Sales Tax for Ontario (HST), which, subject to legislative approval, would come into effect on July 1, 2010.

"This Notice provides details of proposed measures that would build on Ontario’s comprehensive tax package and help consumers and businesses transition to the HST.

"The Notice provides general descriptions of transitional rules for the HST that will be proposed to be enacted in the federal Excise Tax Act (ETA). It also provides general descriptions of provincial measures that will be proposed to be enacted to wind down the applicable provisions of the Ontario Retail Sales Tax Act (RSTA)."

For further information please see the Ontario Ministry of Revenue page on the HST at:
http://www.rev.gov.on.ca/en/taxchange/index.html

This PDF is available for download here.

HST Transitional Rules

Watch out for the Limitations Act

Where you suffer a loss and claim against your insurance, beware of the Limitations Act, 2002. It is not unheard of (!) for an insurance company to drag things. In such cases the insured thinks that the insurance company is "handling it". Unfortunately the insurer is -- whether accidentally or deliberately -- exploiting the belief of the insured that the insurance company is acting in good faith. The insured may, down the road, face a very unpleasant situation when a demand for the long-delayed payment is met by the insurance company denying the claim by pointing to the passage of the limitation period. (Note: The relevant section is reproduced at the bottom of this post.)

There are arguments in law which might defeat the insurance company's reliance on the Act in such cases but law must often defer to practicality: a client may not be able to contest the claim because any action to challenge the insurance company's position would have cost many times the amount due under the policy. The result? An insurance company pockets a tidy little profit by saying "you're too late!" to a claimant on a claim that they themselves have delayed. An individual or small business person should consider this very deeply and never forget it if they need to make an insurance claim. Whether the insurance company does this on purpose or merely benefits from its own incompetence is beside the point: they can and might do this to you too.

What can you do to avoid being scammed this way?

1. On any insured matter please remember that the two-year clock starts running as of the date of the damage.

2. Diarize, diarize, diarize. Mark off the six, twelve and fifteen month periods since the date of the claim, and follow up on those days.

3. Do everything in writing, preferably by email or fax. It is difficult for an insurer to take the position in court that they hadn't received a document ("we couldn't process the claim without it and they didn't send it to us so they have no case") if you can prove that they received it. (And please don't kid yourself: whether by accident or design any large organization will "lose" materials or information which help you and hurt them. Anybody who has dealt with a cable or cell phone company for example knows of this: somehow their promises to you rarely seem to make it onto your file!)

4. Watch out for sneaky handoffs. Large organizations of all kinds have learned that they can delay provision of service indefinitely if they keep you uncertain and confused over who really has responsibility for your file.

5. If they have not paid out by your fifteen month point, consult and, if necessary, retain counsel. Have the lawyer put the insurer on notice that failure to pay by a given date will result in a court action.

6. Don't bluff. Sue if necessary to preserve your rights. Once that two-year period has gone by your rights have largely disappeared.

An extract from the Limitations Act showing the basic two-year period:

Basic limitation period

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered....

Discovery

5. (1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a)...

Presumption

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved....

Demand obligations

(3) For the purposes of subclause (1) (a) (i), the day on which injury, loss or damage occurs in relation to a demand obligation is the first day on which there is a failure to perform the obligation, once a demand for the performance is made. ...

Same

(4) Subsection (3) applies in respect of every demand obligation created on or after January 1, 2004. ...

Quebec's insurers will have to be more specific and do so earlier.

The Quebec Court of Appeal has come down with an interesting decision in Lombard Canada Ltd. v. Ezeflow Inc., (decision in French only).

Ezeflow is a manufacturer of pipes for oil-drilling platforms and Lombard was its general commercial liability insurance provider. Flaws showed up in some installed Ezeflow pipes and that company made a claim on its insurance. Lombard refused on four grounds and later relied on another clause in the insurance agreement. The matter went to trial, Ezeflow won at trial and Lombard took the matter to the Court of Appeal, where the appeal was upheld. However it noted that Lombard could not use an exclusion which was not used as a reason for denial at the outset of the action. As Kelly Harris notes [infra], "Quebec courts do not recognize the doctrine of estoppel [fn1], which prevents new defences from being introduced once a case has begun." Jean-Charles René of Ogilvy, Renault notes,

In Quebec, the courts have refused to apply the doctrine of estoppel, but have recognized a similar concept in civil law, the "fin de non-recevoir" which bars an insurer from adding to its reasons for denial of coverage on the basis that it is deemed to have waived the right to do so. According to the case law, such a waiver does not need to have been expressly stated in writing, but may be tacit, provided it is unequivocal, i.e., there is no doubt as to the insurer's intention to waive a clause in the policy. Some writers have observed that it is harder to prove a "fin de non-recevoir" than to prove estoppel because the civil law concept requires proof that, by its representations, the insurer indicated its intention to modify its rights.

Ezeflow has now ended the insurers' practice of reserving a right to bring up any clause later on; they must now commit at the outset of the action. M. René:

[I]nsureds would be well advised to require their insurer to state its position precisely as soon as it is apprised of a situation that could trigger a claim, thereby forcing the insurer, so to speak, "to make its bed and lie in it".

Footnotes:

fn1 - Quebec is the only province which does not use a "common law" system (like that of England or America) for the resolution of non-criminal disputes; it uses a "civil law" system more akin to European models.]

Further Reading

The entry above is only a cursory examination of the case. I strongly recommend that any interested reader read these articles:

“Quebec Court Of Appeal Weighs In On Scope Of Coverage Under Cgl Policy For Costs Of Removing Insured’s Defective Products”. Nicholl Paskell-Mede, Lawyers.

“Quebec Court of Appeal Warns Insurers To Specify All the Reasons for Denial of Coverage.”
Jean-Charles René, Ogilvie Renault.

“Court tells insurers to lie in the bed they made.” Kelly Harris, Canadian Lawyer Magazine, February, 2009. [Note: Canadian Lawyer uses an unusual digital version of its magazine. You will have to go to the link and then flip the pages as if you were reading the magazine in its treeware format.]

The Networkers

Camberwell House is a member of The Networkers.

The Networkers is a dynamic group of business entrepreneurs that meets every Friday morning from 6:55 a.m. to 8:30 a.m. The main purpose of the group is to help grow each other's business by providing leads for new business opportunities.

The group is also a support system for small business operators who are often the sole proprietor/only employee of the businesses they own. Members share information such as where they got business cards for a great price, who built their web site, or how to fill out government remittance forms. Of course, members often use the professional services of other group members.

Our group admits only one member per profession so that group members are not competing against one another. Occasionally, we go out in search of people in specific professions that we think will complement our group.

Keep your eye on the blog for profiles and details of Networkers member businesses.

What is "Rectification" in Contract Law? 4: Evidence Required

Previous posts: Definition of Rectification; unilateral mistake; mutual mistake.

We conclude our four-day examination of the law of rectification with an analysis of how a party actually goes about proving its case, and how the court will determine whether or not they succeed.

The court will consider:

• all the relevant documents [Clarke v. Thermidaire, (fn1), ¶26 and Royal Bank v. El-Bris, (fn2), ¶ 20-22];
• the oral evidence of the parties and/or witnesses, including the key issue of whether the oposing sides are in agreement or have differing versions of the facts [Clarke v. Thermidaire, (fn1), ¶ 26]
• the later conduct of the parties, [Royal Bank v. El-Bris, (fn2), ¶ 32].

Please note that:

1. When the court considers oral evidence it is doing something that it rarely does in contract cases: outside (also called "extrinsic") evidence to contradict or add to the terms of a contract is normally not allowed. (This is called the "parol evidence rule".) However, parol evidence is permitted in rectification cases. [Royal Bank v. El-Bris, (fn2), ¶ 24].
2. A court may order rectification even if the testimony of the party seeking rectification is not corroborated by the documentary evidence. [Royal Bank v. El-Bris, (fn2), ¶ 24; Sylvan, (fn2), ¶ 43.]
3. The judge need not specifically use the word "rectification" to apply the doctrine of rectification. [Royal Bank v. El-Bris, (fn2), ¶ 6.]

A caution!
The doctrine of rectification is not an everyday thing. "[P]arties, especially experienced and sophisticated parties, cannot routinely look to this remedy to correct mistakes in signed contracts." The courts have been consistent in their cautions against "opening the floodgates". [Royal Bank v. El-Bris, (fn2), ¶ 35.]

Footnotes:

fn1 - H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., [1973] 2 O.R. 57 at 64 - 65 (C.A.), [reversed on other grounds 1974 CanLII 30 (S.C.C.), [1976] 1 S.C.R. 319].

fn2 - Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.).

fn3 - Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, 2002 SCC 19 (CanLII), [2002] 1 S.C.R. 678 (S.C.C.)

What is "Rectification" in Contract Law? 3: Mutual Mistake

Two days ago I did a post on the law of "rectification", a legal concept used "to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement"; yesterday I addressed rectification in cases where the mistake lay only on one side.

Today's blog post will address what happens when both parties make a mistake.

The case

We continue our examination of the Ontario Court of Appeal's decision in Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.). In that case the bank sought to collect on a guarantee: a businessman had given a personal guarantee for $700,000 in additional credit, and, as a part of that guarantee, had pledged a collateral mortgage. He repaid the debt, and sought a discharge of the mortgage (which was granted), but the bank pursued him for $700,000 under the guarantee. The businessman took the position that the guarantee had been for only $700,000, not $1,400,000, that the mortgage had been security for the guarantee, and with the repayment of the $700,000 the discharge of the mortgage his personal obligation was now terminated. The paperwork supported the bank's side that his guarantee was not limited to the $700,000; the businessman asserted that such a limitation was what was intended all along and sought rectification.

The trial judge agreed with the businessman, finding that the "parties intended the collateral mortgage to be security for Ellis's guarantee" and that paying off the collateral mortgage entitled him to a discharge of his obligation under the personal guarantee. The Court of Appeal dismissed the bank's appeal, agreed with the trial judge -- and thus also with this Mr. Ellis and not the rather more notorious one(s) -- agreed with the businessman.

The law

First and most importantly, the four-part test for unilateral mistake detailed yesterday does not apply to cases of mutual mistake. In such cases the test is less stringent, and has been laid down by the Court of Appeal in a previous case: Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. 1996 CanLII 1232 (ON C.A.), (1996), 28 O.R. (3d) 327 at 336 (C.A.):

"the remedy of rectification is available only in certain defined circumstances and cannot be invoked to correct every mistake. In principle, rectification is permitted, not for the purpose of altering the terms of an agreement, but to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement. The remedy is normally granted only where the mistake is mutual or common to the contracting parties."

In short, rectification exists to make the mistaken written contract reflect the real agreement of the parties; thus, to obtain rectification in a case of alleged mutual mistake becomes a question of fact and thus one for the presentation and examination of clear evidence. Does the evidence make it clear what the alleged real contract was?

When may the Court exercise its jurisdiction to grant rectification? In order for a party to succeed on a plea of rectification, he must satisfy the Court that the parties, all of them, were in complete agreement as to the terms of their contract but wrote them down incorrectly. It is not a question of the Court being asked to speculate about the parties’ intention, but rather to make an inquiry to determine whether the written agreement properly records the intention of the parties as clearly revealed in their prior agreement. The Court will not write a contract for businessmen or others but rather through the exercise of its jurisdiction to grant rectification in appropriate circumstances, it will reproduce their contract in harmony with the intention clearly manifested by them, and so defeat claims or defences which would otherwise unfairly succeed to the end that business may be fairly and ethically done... (fn1)

Tomorrow: the evidence required to obtain rectification.

(fn1) - H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., [1973] 2 O.R. 57 at 64 - 65 (C.A.), reversed on other grounds 1974 CanLII 30 (S.C.C.), [1976] 1 S.C.R. 319.

What is "Rectification" in Contract Law? 2: Unilateral Mistake

Yesterday I did a post on the law of "rectification", a legal concept used "to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement" (but not for the purpose of altering the terms of an agreement). Rectification can be applied in cases where the mistake lies solely on one side (unilateral rectification) or multiple sides (mutual rectification). Today's post deals with unilateral mistake.

The law in this area has been set by the Supreme Court of Canada in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, 2002 SCC 19 (CanLII), [2002] 1 S.C.R. 678, (often just called "Sylvan"), a case where a party sought rectification of an inaccurately drafted contract, mistakenly and negligently signed by the party seeking the correction. The Supreme Court said that such a party must meet a four-part test:

1. There must be a "previous oral agreement inconsistent with the written document".
2. "[T]he other party knew or ought to have known of the mistake and permitting that party to take advantage of the mistake would amount to unfair dealing", (conduct the Supreme Court called "fraud or conduct equivalent to fraud"
3. "[T]he document can be precisely rewritten to express the parties’ intention".
4. "[E]ach of the first three prerequisites must be demonstrated by convincing proof". (fn1)

Each and every one of these prerequisites must be met for the court to grant rectification on the grounds of unilateral mistake. They are not required for cases of common or mutual mistake; there the “traditional rule,” still applies. (fn2)

Note that the Supreme Court permitted rectification even in the face of applicant party's negligence:

[C]ourts ought to hold commercial entities to a reasonable level of due diligence in documenting their transactions. Otherwise, written agreements will lose their utility and commercial life will suffer. Rectification should not become a belated substitute for due diligence. [...] On the other hand, most cases of unilateral mistake involve a degree of carelessness on the part of the plaintiff. [...] [It is legally significant that the doctrine of rectification] applies "only where there has been an agreement that preceded the writing. In such a case, a party’s negligence in failing to read the writing does not preclude reformation if the writing does not correctly express the prior agreement". [Emphasis added.] [T]he plaintiff seeks no more than enforcement of the prior oral agreement to which the defendant has already bound itself."

Tomorrow: Mutual or Common Mistake.

David Sanders,
Camberwell House

fn1 - The quotations are from Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.), where Laskin J.A gave an excellent summary. ["J.A." is a title used by judges of appellate courts.]

fn2 - Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.), ¶ 17.

What is "Rectification" in Contract Law? 1: Definition

The Ontario Court of Appeal put it very neatly in Royal Bank of Canada v. El-Bris Limited, [2008] 92 O.R. (3d) 779 (C.A.) :

Rectification is an equitable remedy designed to ensure that one party is not unjustly enriched at the expense of another. A court will rectify an inaccurately drawn written agreement so that it conforms to the agreement the parties intended to make. In Downtown King West Development Corp. v. Massey Ferguson Industries Ltd. 1996 CanLII 1232 (ON C.A.), (1996), 28 O.R. (3d) 327 at 336 (C.A.), Robins J.A. explained the remedy’s underlying rationale, while acknowledging that rectification cannot be used to correct every mistake.

"The remedy of rectification is available only in certain defined circumstances and cannot be invoked to correct every mistake. In principle, rectification is permitted, not for the purpose of altering the terms of an agreement, but to correct a contract which has been mistakenly drawn so as to carry out the common intention of the parties and have the contract reflect their true agreement. The remedy is normally granted only where the mistake is mutual or common to the contracting parties."

Rectification can address either a unilateral mistake or mutual mistake. Posts on these will follow after this one. Please come back and review them, or subscribe to this site's RSS feed.

It is important to note that a court may admit parol evidence to determine wither to rectify the terms of a written agreement to confirm to the real intention of the parties. Please see my subsequent post for information on the "parol evidence rule"!

What's "reasonable" on a restrictive covenant?

What's a "restrictive covenant"?

In contract law, a "restrictive covenant" is a part of a contract which limits one party's freedom of action. ("Covenant" is just a fancy word for "bargain" or "agreement", and restrictive speaks for itself.) Common examples of restrictive convenants are non-competition or "no moonlighting" clauses in employment contracts and restrictions on land use in real property sales.

The Staebler case: Restrictive employment Covenants in Ontario

The Ontario Court of Appeal, (Ontario's highest appellate court, subject to being overridden only by the Supreme Court of Canada) in H.L. Staebler Company v. Allan et al.* recently examined whether a restrictive covenant in an employment contract was reasonable

The defendant employees were commercial insurance sales people who left their , left their employer for a competing insurance broker, also named as a defendant. The employees had, with their previous employer (the plaintiff) contracts with a restrictive covenant which mandated that they wouldn't conduct business with any of the plaintiff's clients they to whom they had provided service for two years after termination: a non-competition clause. Over a hundred clients moved their business to the defendants' new employer. The plaintiff sought and obtained an injunction, (which is "an order of the court requiring a person to not do some act or not continue to do some act that the court considers they have no right to do or, in the case of a mandatory injunction, an order that requires the person to do what the court considers they are legally required to do").

The case went to trial where the trial judge found that the restrictive covenant was enforceable, that the defendants had to pay general damages (also called compensatory damages) but not punitive damages. Both sides appealed that decision.

The Court of Appeal allowed the appeal by the defendants, (finding the restrictive covenant unenforceable), and dismissed the employer's cross-appeal which sought punitive damages. Why?

• The restrictive covenant did not meet the test for enforceability set out by the S.C.C.: “only if it is reasonable between the parties and with reference to the public interest”.

" ... This test reflects the competing principles that must be balanced when a court is called on to decide the validity of such a covenant. On the one hand, there is the `important public interest in discouraging restraints on trade, and maintaining free and open competition unencumbered by the fetters of restrictive covenants'. [...] Open competition benefits both society and the affected employees. Society benefits from having greater choice and employees benefit as they have greater employment opportunities. On the other hand, however, `the courts have been disinclined to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power'. [...]"

• "Neither of trial judge's findings that employees knew they would not receive benefit of `gifted' clients unless they signed employment contracts with employer or that employees enjoyed close personal relationship with clients justified trial judge's conclusion that restrictive covenant was reasonable."
• The absence of geographical limit combined with blanket prohibition on conducting business rendered restrictive covenant overbroad and unenforceable.
• The clause unreasonably restricted employees' economic interests and went beyond what was necessary to protect employer's proprietary interest; a "non-solicitation clause" was enough in in conventional employer / employee situations
  

It is also of note that the Court of Appeal, in deciding that the restrictive covenant was not enforceable thus concluded that the new employer (also a named defendant) was not liable for the tort of inducement breach of contract. (Note: that tort will be covered in a subsequent post. Keep an eye out for it by signing up for the RSS feed at lower right.)

Footnote(s)
* "et al." is the abbreviation for the Latin phrase meaning "and the others". It is used in case citation where the "title of proceedings" (also called the "style of cause", which is the proper case name found on the court documents) has multiple parties. Nobody wants to have to write down a many, many names just to name the case, so the first surname or company name found in the title of proceedings is used, followed by "et al." to let you know of all the others. In this case there were seven defendants, the first-named of whom in the title of proceeding was Tim James Allan, hence "...Allan et al.".

Further Reading:
Elsley v. J.G. Collins Insurance Agencies, [1978] 2 S.C.R. 916, 1978 CANLII 7, (S.C.C.): the Supreme Court of Canada's take on restrictive covenants and restraint of trade.

Closely held family corporations and estates

From Eugene Meehan's Supreme Court of Canada L@wLetter
Issue No. 7 - Thursday, February 5, 2009

My thanks to Mr. Eugene Meehan, Q.C., for his kind permission to post this extract in its entirety.

Cheryl Sylvestre and Jack, Donny, Bing and Cam Frye, are five children of the late George H. Frye who died in 1991, leaving the shares of his company, George H. Frye Holdings Ltd., to his children in equal shares. As Donny was a disabled adult, Bing, Cheryl and Cam were appointed trustees of two trusts held for his benefit. The letters patent under which the company was incorporated in 1968 contained a provision restricting the right to transfer shares of the company without the express resolution of the board of directors.

In 1991, the five siblings entered into a shareholders' agreement that was confirmed by a second agreement signed in 1994 containing a clause restricting the transfer of shares, and requiring any shareholder wishing to sell his or her shares to first offer them to the company, and then to the other shareholders on a pro rata basis. The agreement only permitted a sale to a non-shareholder after these offers were declined. The agreement also acknowledged that the intention was to preserve the Frye Group as a family business, and for all of the children to share equally in it.

The Frye siblings feuded constantly over the years over control of the business. In 1994, Bing sold all of his shares back to the company, increasing the interest held by Cam, Jack, Cheryl, and Donny's trusts to 25 percent each. Cam passed away in April 2002 and, pursuant to his will, Cheryl and a friend were appointed as his estate trustees, and all of his shares in the company were bequeathed to Cheryl. Jack brought an action challenging the validity of the gift to Cheryl, alleging that Cam lacked domicile in Ontario and testamentary capacity at the time he made the will; that Cheryl asserted or should have been presumed to have asserted undue influence over Cam when he made his will; and that the shareholders' agreement prohibited Cam from transferring his shares to Cheryl through his will.

The Ontario Superior Court of Justice gave an order declaring the bequest to Cheryl was null and void. The C.A. allowed the appeal. Issues include whether the C.A. erred by enforcing the provisions of the will and ignoring provisions in the shareholders agreement.

John Arthur Frye v. Cheryl Vanessa Sylvestre et al. (Ont. C.A. September 9, 2008) (32886)

[The Supreme Court of Canada the appeal from the Ontario Court of Appeal.]:
"The application for leave to appeal...is dismissed with costs to the respondent Cheryl Vanessa Sylvestre in her personal capacity, payable by the applicant."

Eugene Meehan, Q.C.
Chair, Supreme Court Practice Group
Lang Michener
300 - 50 O'Connor Street
Ottawa ON K1P 6L2
Phone: (613) 232-7171
Fax: (613) 231-3191

Ontario, Alberta, Yukon, NWT & Nunavut
Licenced to Practise Law in the State of Arizona, U.S.A.

The Ontario Superior Court trial decision of Mr. Terrence L.J. Patterson can be found here.

The Ontario Court of Appeal decision which allowed the appeal from Patterson J.'s decision, can be found here.

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