BLAW 2911: Commercial Law 1

Module 4: Structuring Business Activity

Activity 1: Reading—The Agency Relationship
Chapter 13 “Questions for Review” Solutions

1. What is agency? Give an example.

Agency is the relationship that exists between two persons when one party
represents another party in the formation of legal relations. A common
example occurs when a stockbroker buys and sells shares on behalf of
individuals and companies.

2. Why would a business use an agent to act on its behalf?

A business would use an agent to act on its behalf if the principal did not
have the expertise of an agent. Time constraint on a principal is another
common reason for the use of an agent.

3. How is an agency relationship entered into?

An agency relationship can be formed in a number of ways. The most

common method is by way of contract, i.e., when the parties formally agree
to create an agency relationship. An agency relationship can also arise by
conduct, where, by words or actions, outsiders are led to believe an agency
relationship exists.

4. What is the difference between the actual and the apparent authority of
an agent?

Actual authority is the authority the agent actually has. It can be either
express or implied. Express authority can be granted by the principal in a
written document or orally. Implied authority is present by implication
only.

Apparent authority is the authority that a third party or outsider would

reasonably believe the agent has, given the conduct of the principal.

5. When will an agent have implied authority?

TRU Open Learning

2 Textbook Solutions

An agent will have implied authority when that authority is inferred from
the position the agent occupies and when it is reasonably necessary to carry
out or otherwise implement the agent’s express authority. It also arises by
virtue of a well-recognized custom in a particular trade, industry, or
profession. Implied authority is also an authority that the agent actually has
but is present by implication only.

6. What is meant by agency by estoppel? How does agency by estoppel

arise?

Agency by estoppel is an agency relationship created when the principal

acts in a manner that leads third parties to reasonably conclude that the
agent has the authority to act as agent, thereby leading a third party to
believe that an agency relationship exists. Agency by estoppel arises
through the representations of the principal.

7. How is an agency by ratification created?

Agency by ratification is created when one party adopts a contract entered

into on their behalf by another who, at the time of entering the contract,
acted without authority.

8. Is a principal permitted to ratify any contract entered into by an “agent?”

Explain.

No. A principal may ratify a contract only if he does so within a reasonable

time, the principal had the capacity to create the contract at the time the
agent entered into it and at the time of ratification, and the agent identified
the principal at the time of entering the contract.

10. What are the duties of the agent?

An agent is required to perform in accordance with the principal’s

instructions. An agent also owes a fiduciary duty to the principal, which
requires the agent to act in good faith toward the principal. This usually
requires that the agent fully disclose all information regarding transactions
involving the principal, act only for one party in a given transaction, avoid
any conflict of interest that affects the interests of the principal, not use the
principal’s property to secure personal gain, and avoid accepting or making
a secret commission.

TRU Open Learning

BLAW 2911: Commercial Law 3

12. Do all business advisors owe fiduciary duties? Explain.

No. It depends on the circumstances. For instance, if an individual contacts

a business advisor for advice and, because of this relationship, that
individual places a degree of trust in the advisor to act in good faith and
look out for his best interests, then the advisor has a fiduciary duty toward
that individual.

A fiduciary relationship can arise in any relationship where the facts

indicate sufficient elements of power and influence on the part of one party
and reliance, vulnerability, and trust on the part of the other.

TRU Open Learning

BLAW 2911: Commercial Law 1

Module 4: Business Associations

Activity 4: Reading—Business Forms and Arrangements
Chapter 14 “Questions for Review” Solutions

2. What are the advantages and disadvantages of a sole proprietorship?

The advantages of a sole proprietorship are its simplicity and lower cost of
licensing, that quick and independent decision making is possible, no profit
sharing occurs, generally no legal fees need to be incurred, and tax benefits
are possible as profits or losses are reported on the owner’s personal income
tax return.

The disadvantages of a sole proprietorship are that the risks and costs of the
business are borne entirely by the sole proprietor, the sole proprietor has
unlimited liability, generally there are low commitment levels among
employees, the absence or illness of the sole proprietor can adversely affect
business, the responsibility for all aspects of the business falls entirely on
the sole proprietor, the business has limited access to capital, taxes may be
favourable or unfavourable as there are no special tax rules governing a sole
proprietorship, the business has a limited lifespan, and the business can’t be
transferred or sold as it has no legal status.

3. How is a sole proprietorship created?

To create a sole proprietorship, one simply commences business activity.

The only requirement is that the business be registered or licensed.

4. What are the advantages and disadvantages of a partnership?

The advantages of a partnership relate to simplicity, costs, access to capital,

share in profits, and possible tax benefits. The disadvantages relate to
unlimited personal liability, loss of speed and independence, limitations on
transferability, profit sharing, and possible tax disadvantages.

5. How can a partnership come into existence?

A partnership can come into existence through agreement or by implication,

that is, by conduct that suggests a partnership.

TRU Open Learning

2 Textbook Solutions

6. Does the sharing of profits result in the creation of a partnership?

Explain.

The sharing of profits is one factor to consider in determining whether a

partnership exists. The statutory definition of partnership covers people
who expressly intend to be partners and people who may not but act as if
they were. If people conduct themselves as if they were partners even if
they did not expressly intend on being in a partnership, for example, by
sharing profits, this is seen as a partnership in the eyes of the law.

7. How can a partnership come to an end?

A partnership may end in the manner set out in the partnership agreement.
If the agreement does not address this issue, then the Partnership Act
provides for termination under the following circumstances:

• If entered into for a fixed term, by expiration of the term,

• If entered into for a single venture, by the termination of the venture,

• By any partner giving notice of termination,

• By death, insanity, or bankruptcy of a partner.

8. How can the risks of the partnership form be managed?

The risks of the partnership form can be managed by creating a partnership

agreement, which gives the partners freedom to define the relationship. The
risks can also be managed by choosing partners carefully, educating
partners on their authorities and limits and the consequences of exceeding
these, monitoring the activities of partners, and insuring against liabilities
created by a partner’s wrongdoing.

9. What is the difference between a general and limited partner?

A general partner has unlimited liability for the partnership’s obligations,

whereas a limited partner has liability limited to the amount contributed to
the partnership’s capital. As well, a limited partner has more narrowly
defined rights. For example, a limited partner may not take part in the
management of the partnership.

TRU Open Learning

BLAW 2911: Commercial Law 3

10. Explain the difference between a limited partnership and limited liability
partnership.

A limited partnership has one or more general partners with unlimited

liability and one or more partners whose liability is limited to the amount of
their investment in the partnership. A limited liability partnership is
generally one in which the partners have unlimited liability for their own
negligence and malpractice but limited liability for their partners’
negligence or malpractice unless they are in some way personally involved.

TRU Open Learning

BLAW 2911: Commercial Law 1

Module 4: Structuring Business Activity

Activity 8: Reading—Corporations
Chapter 15 “Questions for Review” Solutions

1. What does limited liability mean?

The term limited liability describes shareholders’ obligations to creditors.

The shareholders’ liability to creditors is limited strictly to assets owned by
the corporation. Creditors may sue the corporation on a debt, but not the
individual shareholders.

2. Who are the corporation’s internal stakeholders? Who are the

corporation’s external stakeholders?

A stakeholder in general is any person, group, or organization that can

place a claim on an organization’s attention, resources, or outputs or is
affected by that output. The internal stakeholders of a corporation are
individuals who make decisions, formulate policy, and enter contracts on
behalf of the corporation. They are those who have either a direct or an
indirect role in governing the corporation and determining its mission and
how it will be achieved. External stakeholders are people who have
dealings with or are affected by the corporation but do not have an explicit
role in governing the corporation. For example, the government, the general
public, employees, customers, and creditors would all be considered
external stakeholders of a corporation.

3. When should a business incorporate federally, and when should it

incorporate provincially?

There is no definitive answer to this question. Federally incorporated

corporations have the right to carry on business anywhere in Canada,
whereas provincially incorporated corporations have a right to carry on
business only in the province in which they are incorporated. This
difference has little practical significance because of licensing procedures
through which corporations incorporated in other provinces can do
business in that province. For corporations that intend to operate in more
than two provinces, federal incorporation may result in lower
administration costs.

TRU Open Learning

2 Textbook Solutions

4. What basic rights must attach to at least one class of shares?

The basic rights that must attach to at least one class of shares are the right
to vote for the election of directors, the right to receive dividends declared
by directors, and the right to share in the proceeds on dissolution of the
corporation, after the creditors have been paid.

5. A class of shares may include a combination of various rights and

privileges. Name three examples of typical rights that may attach to a
class of shares.

Several answers are possible:

• Voting rights: the right to vote for election of directors.

• Financial rights: the right to receive dividends when declared by

directors or the right to receive fixed dividends on a regular basis.

• Preference rights: the right to receive dividends before dividends

may be paid to any other class of shareholders or the right, on
dissolution, to receive investment before any payments are made to
any other class of shareholder.

• Cumulative rights: the right to have a dividend not paid in a

particular year added to the amount payable the following year.

• Redemption rights: the right to have the corporation buy back the
shares at a set price.

6. What is the difference between a widely held and a closely held

corporation?

A widely held corporation may issue its shares to the public whereas a
closely held corporation does not issue its shares to the public.

Chapter 15 “Questions for Critical Thinking” Solution

1. Salomon v Salomon stands for the proposition that the corporation has a
separate existence from its shareholders. This means that creditors of a
corporation do not have recourse against the shareholders’ assets. Is this
fair? Is it fair that creditors of a sole proprietorship can go after the sole

TRU Open Learning

BLAW 2911: Commercial Law 3

proprietor’s personal assets? What is the justification for the difference in

treatment?

This question is an extension to the critical analysis question following the

Salomon v Salomon decision. That question examined the doctrine of
separate corporate personality from the perspective of the shareholder; this
question asks students to consider the consequences of a corporation’s
separate existence from the perspective of creditors.

It can be argued that the Salomon v Salomon doctrine is fair. The

corporation’s debts were created on the basis of the corporation’s credit, not
that of the individual shareholders or corporate officers. Shareholders are
often not involved in the day-to-day operation of a corporation and neither
do they have the authority to manage the company. As such, it would not
be fair if creditors could hold shareholders personally accountable for the
corporation’s debts. If creditors are concerned about the creditworthiness of
the corporation, they should either not deal with the corporation or insist on
a personal guarantee from shareholders.

Sole proprietors, conversely, have complete control over their ventures.

Loans and credit that are extended to a sole proprietorship are based on the
proprietor’s credit and business experience. Therefore, the different
remedies available against sole proprietors and corporations are justified.

Chapter 16 “Questions for Review” Solutions

5. To whom do directors owe duties?

Directors owe a duty of competence and a fiduciary duty to the corporation.

They do not have any social responsibilities. They have no obligation to
pursue policies that are desirable in terms of objectives and values of
society, nor do they have an obligation to consider interests other than those
of the shareholders. Corporate legislation reflects this approach.

6. What is a self-dealing contract?

A self-dealing contract occurs when someone is dealing on both sides of the

contract in different capacities, such as when someone is selling something
in the capacity of an individual and buying it in the capacity of a director.
Many jurisdictions have passed laws to allow this as long as the contract is
fair, the person discloses the contract to the corporation in writing, the

TRU Open Learning

4 Textbook Solutions

person does not participate in the vote concerning the purchase, and the
contract is fair and reasonable to the corporation.

7. What are the duties of directors and officers?

The duties of directors fall into two broad categories: a duty of competence
and a fiduciary duty. The duty of competence requires directors to exercise
the care, diligence, and skill that a reasonably prudent person would
exercise in comparable standards. The fiduciary duty requires directors to
act honestly and in good faith with a view to the best interests of the
corporation.

8. Do directors owe duties to the corporation’s creditors? Explain.

Corporations do not owe a fiduciary duty to their creditors. They do,

however, owe a duty of care to their creditors.

11. What is meant by the term “lifting the corporate veil”? When will courts
“lift the corporate veil”?

Lifting the corporate veil means holding the shareholders of a corporation

personally liable for the corporation’s acts. Courts are generally reluctant to
lift the corporate veil, except when they are satisfied that a company is a
mere facade concealing the true facts.

12. What three main rights do shareholders have?

The three main rights that shareholders have are the right to vote, right to
information, and financial rights.

13. What rights to dividends do shareholders have?

Preferred shares with cumulative dividend rights entitle their holders to

accrue undeclared or unpaid dividends due from previous years. All other
shareholders have a right to dividends only if the dividends are declared.
Shareholders’ rights to declared dividends depend on the order of
preference. All shareholders belonging to the same class have a right to an
equal dividend.

14. When is the dissent and appraisal remedy appropriate?

TRU Open Learning

BLAW 2911: Commercial Law 5

The dissent and appraisal remedy is appropriate when a dissenting

shareholder disapproves of fundamental changes being made to the
corporation. In certain circumstances, the dissenting shareholder may elect
for the corporation to buy his shares at a fair market price. It is limited to
specific actions, such as changes to the restrictions on share transfers or
restrictions on the business a corporation may carry on; the amalgamation
or merger with another corporation; or the sale, lease, or exchange of
substantially all of the corporations’ assets.

15. What is the difference between a derivative action and an oppression

action?

A derivative action is brought by a shareholder on behalf of the corporation

to enforce a corporate cause of action. An oppression action is a personal
action brought by a shareholder (or other stakeholder) to address unfair
corporate conduct and treatment.

TRU Open Learning