CHAPTER 20: BASIC FORMS OF BUSINESS ORGANIZATIONS & THEIR RISKS

1. SOLE PROPRIETORSHIPS  No separation between small business & individual proprietor

 ADVANTAGES & DISADVANTAGES
o PROS: proprietor entitled to all income, simplicity and ease, possible tax advantages
o CONS: proprietor bears all obligations, unlimited personal liability, problems grow w business
 LEGAL REQUIREMENTS
o No formal registration required
o Must be registered ‘doing business as’ name if name is something other than owner’s name
o May need to acquire business license

2. GENERAL PARTNERSHIPS  2+ ppl pool their resources w/ shared goal of $ (OPA s.2)
 CHARACTERISTICS
o Appropriate for small businesses
o Created automatically when relationship begins
o Terminated (unless partners agree otherwise) based on default 2 termination rules: any
partner may terminate on notice, death/insolvency
CASES  1 & 4 (p. 530)
o Not legally separate from partners – partners accrue benefits/liable for all obligations
o Unlimited personal liability – each partner liable for contracts & torts (OPA - ss 6-19)
o Partnership agreement: contract regarding operation of comp to supplement/modify rule
governing relationship (OPA provides default rules which can be modified by agreement)
 Default rules in partnership statutes: standard form of agreement for the internal
organization of a partnership that applies (unless other arrangements are agreed upon)
Important Rules: (OPA - ss 20-31)
 Equal investment of capital, share of profits & contributions to losses incurred
 Each partner entitled to be indemnified for payments made (in ordinary course of)
 Each partner has right to access books and participate in management
 No partner entitled to interest on capital contributions
 Ordinary partnership decisions – decided by majority vote
 Major decisions about nature of business (e.g. modifying rules) – unanimous vote
 FACTORS INDICATING EXISTENCE OF PARTNERSHIPS
** NO FORMALITIES = risk of unintended partnership**
o Ongoing activity (not just one project)
o Sharing profits/guaranteeing partnership debts (losses)
o Sharing business involvement– especially managerial
o Representing oneself as a partner or *acquiescing* (allowing others to do so)
o Jointly owning property/contributing capital
o Joint authority for contracts & bank accounts
o Equal access to business information
o CASES  Footnotes 8 – 10 (p. 515)… “You be the Judge” (p. 516)
 MANAGING THE RISK OF LIABILITY OF A PARTNER
o Fiduciary duty: require partner to act honestly & in good faith w/ best interest of comp
CASE BRIEF 20.1 (P. 517)
o Ensure the partnership agreement protects interests (e.g. a right to indemnification –
agreement of partners to compensate when liability is caused by them)
o Consider LLP, LP or corporation

3. LIMITED LIABILITY PARTNERSHIPS  No unlimited personal liability

 CHARACTERISTICS
o Only certain professions that cannot carry on business as a corporation are eligible
o The partnership is still liable, to the extent it holds assets
o Individual partners are not personally liable for the professional negligence of partners if
certain requirements are met (OPA s. 10 Rule)
o Liable IF they knew (or ought to have known) about partner’s negligence and didn’t act
o Still responsible for non-negligence liabilities of your partners

4. LIMITED PARTNERSHIPS  Allows “limited” partners to avoid unlimited personal liability

 REQUIREMENTS (CASE  2 & 3 p. 530)
o At least 1 general partner (unlimited liability) and 1 limited partner (limited to investment)
 o Must be registered (partnership declaration is filed w/ appropriate government authority)
o Limited partners can be employees BUT will lose their limited status if minor advising of
management turns into significant control of bus
5. CORPORATIONS  Legal entity w/ separate legal existence from directors, shareholders, etc.
 STAKEHOLDERS
o Directors: responsible for managing/supervising management of corp. & internal affairs
o Officers: appointed by directed and usually exercise substantial management powers
o Shareholders: Own shares – residual claimants (after creditors) to assets of the corporation
 “Bundle of rights”: to receive residual assets when and if corporation is resolved; to
vote for election of directors; to receive dividends when declared by board of directors
 Common shares usually have all basic rights, preferred shares cant elect directors
 Preferred share rights: to receive fixed dividends at regular intervals, to be repaid on
dissolution BEFORE balance is distributed to other shareholders
 Exception to limited shareholder liability: piercing the corporate veil
 In cases of serious fraud, wrongdoing or unfairness
 Courts sometimes disregard the separate legal existence of a corporation to
impose personal liability on a shareholder for a corporation’s obligation
CASES  BRIEF 20.3 p. 526, #7 p. 530
 INCORPORATION PROCESS
o Created upon filing with government agency
o Governed by laws of jurisdiction of incorporation, public vs. private
o Canadian Business Corporations Act requirements:
 Articles of incorporation, name search report (unless numbered company), fee
 name, min and max # of directors, # and class of shares and any restrictions, the
purpose of corporation and any restrictions on activities, registered office address
 CORPORATE FINANCE
o Equity – shareholders’ investment in return for shares
 Value of residual claim depends on value, CANNOT sue
o Debt – loan to corporation by shareholders, lenders, creditors
 CAN sue for breach of contract/put corporation into bankruptcy
 CASE 6 p. 530

CHAPTER 20: CASE STUDIES

GENERAL PARTNERSHIPS  CASES 1 & 4, FOOTNOTES 8 – 11, CASE BRIEF 20.1

ALL PARTNERSHIPS  CASES 2 & 3

CORPORATIONS  CASE 6, CASE BRIEF 20.3

 CHAPTER 7: NATURE & CREATION OF CONTRACTS

CONTRACTS: a legally enforceable agreement to enforce commerce, does NOT have 2b in writing

- 3 REQUIRED ELEMENTS: intention, offer & acceptance, consideration

o Intention to create/enter into a legal relationship
 Presumption of intent in commercial dealings, against intent in social/family context
CASES  FOOTNOTE 7: Balfour v Balfour
 Exception to general rule: presumptions are rebuttable
FOOTNOTES 8 & 9  Rose & Frank Co., Jones v Padavatton “U Judge” 7.1 p. 167
o Meeting of the minds – a mutual agreement through a “process of offer and acceptance”
 Offer: apparent willingness to enter contract on term (words, writing or conduct)
 Offeror – master of the offer, offeree – power of acceptance
 Managing risk: invitation to treat = willingness to receive offers
 Presumed invitations: shelf displays, advertisements, catalogues
FOOTNOTE 15  Blair v Western Mutual Benefit Association
 Life of an offer: offer may be terminated before acceptance in 5 ways:
 Death or insanity
 Lapse of time: if no termination date set by offeror, court infers reasonably
CASES 6 & 7  p. 184
 Rejection: “no thanks” so creation of new offer
 Counter offer: “yes, but…” so offeree modifies the terms
CASE 5  p. 184
 Revocation: offeror can revoke b4 acceptance if communicated reasonably
CASE 3  p. 184
 Firm offer: gratuitous promise to not revoke offer (unenforceable w/o
seal) vs. Options: a contract in which offeror receives smth of value in
return for a binding promise to keep offer open for specific period/time
CASE  7.1 p. 170
 Acceptance: when offeree agrees to enter into contract it is immediately created
 Rules: must conform to any conditions, must be reasonable if no rules set
  Forms: acceptance by words, acceptance by silence (not accepted w/o prior
agreement), acceptance by promise – BILATERAL contracts (courts prefer)
 Acceptance by Performance: Unilateral contract: act is exchanged for a reward
 Acceptance by actually performance
 Offeror can revoke offer before full acceptance
 UNILATERAL contracts
 Acceptance at a Distance:
 General rule states that acceptance by instantaneous communication is
effective when and where it is created
 Postal rule states that an acceptance that is communicated in a non-
instantaneous way is effective where and when it is sent
* cannot revoke while in transit
* applicable to lost letters
* inapplicable if reasonable person would consider risks intolerable
* risk can be eliminated if offeror states acceptable modes of acceptance
CASES  4 & 8 p. 184
o Exchange of value – must enter a bargain by each giving consideration (give up smth)
 CHAPTER 8: CONSIDERATION

Consideration: when party gives/promises to give a benefit to someone or detriment to self

PROBLEMS WITH CONSIDERATION

1. SUFFICIENT VS ADEQUATE CONSIDERATION

 Adequate  exchange of equal value not necessary
 Sufficient  anything that law recognizes as having value
o Forbearance to sue (give up right to pursue lawsuit) = sufficient if valid legal claim
2. PAST CONSIDERATION – promise of payment given AFTER service provided = no mutuality
 Sometimes confused with implied promise: is VALID and requires quantum meruit
CASES  Ethical perspective 8.1, Case 4 p. 208
 Pre-existing Obligation: obligation existed b4 contract but was not performed (3 types)
o Pre-existing public duty is NOT consideration for new contract
 E.g. firefighters, police officers
o Pre-existing obligation to a third party CAN be good consideration for new contract
 Sufficient consideration b/c new benefit for new party under new contract
CASE BRIEF 8.2
o Pre-existing obligation to the same party is NOT consideration for new contract
 Old contractual promise repeated for new contract = no new benefit for party
 Enforcing this is against policy b/c threatening breach of contract for more $
CASES  3 p. 208 & BRIEF 8.3 + Avoiding the rule in Gilbert Steel (4 ways)
 Promise to Forgive Existing Debt: creditor promises to forgive debt in exchange for less
o NOT a new consideration so unenforceable but there are 2 exceptions:
 Place promise under seal (mark on a document proving party’s intentions 2 obey)
 Give fresh consideration in exchange for promise
 Some statues/legislations allow debts 2b extinguished upon payment of lesser $
 E.g. Section 17 of Mercantile Law Amendment Act of Ontario
3. PROMISES ENFORCEABLE WITHOUT CONSIDERATION – seals & promissory estoppel
 Promissory Estoppel: precludes a person from retracted a statement made previously
 o Clear representation that party won’t enforce its rights, representee relies on
statement & did not commit inequitable behaviour, extant legal relationship

PRIVITY OF CONTRACT

Privity: the relationship between contractual parties (ppl who created contract & gave consid.)

- General rule: only parties to a contract can sue/be sued under the contract
o Stranger (third party): someone without privity, even if they are beneficiary of contract
o Exceptions: some jurisdictions abolished rule and some have exceptions to general rules
 Trusts: e.g. I pay you $, you give car to my sis - trustee holds property for beneficiary
 Statute: e.g. life/car/other insurance contracts
 Employment: exclusion clause reduce/eliminate customer’s ability to sue company
 Himalaya clause: special term of contract protecting beneficiary from liability
 Assignment: assignor transfers contractual rights to an assignee
 Statutory assignment: conforms to the requirements of a statute
 Equitable assignment: assignment traditionally enforced by courts of equity
 Subject to the equities: debtor can use same counterclaims against assignee
 Depends when defence/counterclaim arose
CASES 8.1 & 8.2 p. 202
- CASES 2 – 4, 6, 8, 9 p. 207
 CHAPTER 9:REPRESENTATIONS & TERMS

PRE-CONTRACTUAL REPRESENTATION – Statements made during negotiations

- Puffs: mere sales words w/ no consequences

- Terms: contractual promises – certain consequences
- Representations: induce contact – not part of it but possible consequences (i.e. false = tort)
o Misrepresentation: false statement inducing creation of a contract so hearer may leave C
 Innocent – NO damages but restitution possible
 Negligent – restitution and MAY be damages for negligence
 Intentional – restitution MAY be damages for deceit
o Silence as misrepresentation:
 When silence would distort a previous assertion (e.g. blind guy wanna b firefighter)
 When a statement is half-truth (e.g. drycleaner not listing all exclusions of liability)
 When the contract requires a duty of utmost good faith (e.g. applying for insurance)
 When a special relationship exists between parties (e.g. your accountant)
 When a statutory provision requires disclosure (e.g. finance/crown corps, domestic)
 When facts are actively concealed (e.g. building vendor hides evidence of damage)
o Legal consequences of misrepresentation:
 Remedy of rescission: cancellation of contract (by parties/court) aimed at restoring
parties as much as possible to their pre-contractual state, often accompanied by:
 Restitution – taking & giving back on both sides
 Affirmation – misled party declares intention to carry contract or act bound by it,
in which case, victim is barred from rescission
 Right to damages: intended 2 provide monetary compensation for losses caused by M
CASES 2 & 4, p. 236

CONTRACTUAL TERMS – 2 types

- Express term: stmt that reasonable person would believe was intended 2 create enforceable obli
o Proof: parol evidence (not in contract) and collateral contract (agreement made for entry)
 o Interpretation: different methods
 Literal approach – assigns words their ordinary meaning
 Golden rule – words will be given their plain, ordinary meaning unless = absurdity
 Contextual approach – considers parties’ presumed intentions and circumstances
(generally adopted by Canadian courts)
 Contra proferentem rule – ambiguities interpreted against person relying on clause
CASES  Business Decision 9.2, 8 p. 236
- Implied term: E terms may not fully reflect intentions; contract may not have all relevant terms,
in which case, parties’ remaining intentions may be implied by law (either common or statutory)
o Statutory law: some mandatory while others are default and can be modified
 Treated as if expressly included by parties
 Common in commercial agreements: Sale of Goods Act, consumer protection laws
o Common law: implied only when necessary 2 parties’ intentions; following requirements:
 An obvious consequence of parties’ agreement
 Business efficacy test: term required to make commercial sense
 Usage and custom: term reflects standard practice in field
 Previous dealings: parties habitually included in term
 Agreement’s legal character: term necessary in specific field

STANDARD FORM AGREEMENT TERMS

Standard Form Agreements: mass-produced documents usually drafted by a party who is in an

economic position to offer certain terms on a “take-it-or-leave-it” basis (e.g. bank mortgages)
*may lack the consensus as idem if few customers can actually read and understand it

- Signed forms: signature is proof of assent to terms w/ 1 exception – no reasonable time to read
o Boilerplate clause – standard provision that can be reused in various contractual settings
in a virtually unchanged form
CASE  “You be the Judge” 9.2

Boilerplate clauses: exclusion, force majeure, confidentiality, arbitration, jurisdiction, entire agree.

- Exclusion/limitation clause/waiver: contractual term to exclude/limit liability; 4 requirements:

o Term must be clear and unambiguous (ambiguities interpreted against drafter)
 o Reasonable notice for unusual/harsh terms (heavier onus for unusual/harsh terms)
o Assent by affected party (signature is best evidence of acceptance of clause)
o Usually not enforced if unconscionable or unfair
CASE  Business Decision 9.3
- Force Majeure clause: protect parties when part of contract not performed due to some event that
is outside of control and could not have been prevented (should specify what happens to
contractual obligations in this case)
- Entire agreement clause: constitutes the entire agreement between the parties with respect to the
subject matter of this Agreement and cancels/supersedes any prior understandings and
agreements between the parties with respect thereto (there are no representations, warranties,
forms, conditions, undertakings or collateral agreements, express or implied or statutory between
the parties other than expressly set out in this Agreement)
- Confidentiality clause: prevent disclosure of certain info about agreement to third parties
- Arbitration clause: outline who should act to resolve dispute & w/ what method of arbitration
CHAPTER 10: CONTRACTUAL DEFECTS