Mod 1 - Law

Question 1

Key Elements of an enforceable contract

Answer 1

1) an intention to create legal relations
2) An offer by one party and acceptance by the other
3) Consideration given by one party to, or for the benefit of, the other

Question 2

Define Breach of Contract and give 3 examples

Answer 2

A breach of contract occurs if one or both parties fails to fulfill a contractual term of the contract.

1) Defective performance, including no performance at all.
2) Anticipatory breach, which occurs when a party indicated in advance, by words or conduct, that it does not intend to fulfill an obligation when it falls due.
3) Self-induced impossibility, when a contract becomes impossible to fulfill. Example, I promise to sell you my car in two weeks but then sell it to someone else this week.

Question 3

6 Remedies for Breach of Contract

Answer 3

1) Discharge:
2) Damages
3) Specific performance
4) Injunctions
5) Restitution for unjust enrichment
6) Accounting profits

Question 4

Damages / Expected Damages

Answer 4

This is a Breach of Contract Remedy.

represents the monetary value of the benefit that the innovate party expected to receive under the contract. ie put the innocent part in the position it would have been following the contract.

This differs from Tort law, which places the innocent party in the position they were in before the wrongful act. Example, if you promised to buy a widget off me, under ED I would get back cost plus profit.. under tort I would only get cost back.

Other Damages Remedies:

• Recovery of cost to cure the defect
• Comp for diminution of value
• Reliance damages (monetary value of expenses wasted under contract, similar to tort)
• Liquidated Damages (pre-specified damages value in contract for a breach).

Causes to breach to be non-recoverable:

• Caused by the breach
• Not so remote (aka the “should have known”.

Question 5

Discharge

Answer 5

This is a Breach of Contract Remedy.

If one party breaches a condition of a contract, the innocent party is not expected to uphold its end of the deal and can choose whether to continue or discharge the contract. Innocent party may still choose to sue for damages.

Question 6

Specific Performance

Answer 6

This is a Breach of Contract Remedy.

Courts will force the party in breach to perform the contract. ex. if you contractually agreed to sell me your house and on closing day I bring the money but you don’t provide transfer docs, the courts can force you to fulfill the contract and complete the sale.

Question 7

Injunctions

Answer 7

This is a Breach of Contract Remedy.

An order from the court to a person to refrain from doing something. ie tenant is using rental as a commercial property, so an injunction is passed, directing them to not use the property for commercial purposes.

Question 8

Restitution for unjust enrichment

Answer 8

This is a Breach of Contract Remedy.

used when a transaction was conducted and enforced by a non-enforceable contract. ie, one party was not of sound mind.

In this case, the breacher was unjustly enriched and is required to give back the enrichment that it received through an unenforceable contract.

Question 9

Accounting Profits

Answer 9

This is a Breach of Contract Remedy.

Forces the breacher to tell the plaintiff any benefits that it received as a result of its wrongdoing.

Question 10

What is a Pre-contractual Representation?

Answer 10

a statement made by one party to the other in order to induce it to enter the contract.

Because this was “pre-contract”, the wrongdoing cannot give rise to a breach of contract

Question 11

What is an exclusion clause and examples

Answer 11

used to limit liability, an exclusion clause excludes certainly liabilities.

1) Exclude certain types of breach - ie the party will agree to be found guilty for fraud but can not be found liable for negligence.
2) Defined purpose or usergroup - ie this valuation report was designed and can be used by husband and wife for matrimonial purposes, but can not find the preparer liable for report not adhering to securities regulation for IPO listing.
3) Limit liability to a specified maximum amount.

These clauses can be upheld if

1) the intent is made pain in clear, unambiguous language.
2) Reasonable notice of the clause was provided.
3) There is proof the other party agreed to it.

Question 12

What is a fundamental breach?

Answer 12

One that defeats the purpose of the contract altogether. ie if a trucking company deliberately destroys the goods it was hired to transport safety.

Question 13

What is a Tort and list the 4 types

Answer 13

a breach of a private obligation owed to another period, imposed by the law.

A tort is remedied by compensation to the victim and differs from a crime. However, a crime and tort can both be triggered by the same wrongdoing.

4 types of torts are:

1) Strict liability
2) Intentional
3) Negligence
4) Nuisance

Question 14

Strict Liability Torts

Answer 14

Limited to situations which the defendant is involved in an extraordinarily dangerous activity, such as harbouring a wild animal at their home and it escapes and hurts someone.

Liability is imposed even if the defendant intended no harm and was careful.

Question 15

Intentional Torts

Answer 15

requires intentional, rather than merely careless, conduct.

Includes:

1) Assault (threat of offensive bodily conduct)
2) Battery (actual offensive bodily conduct)
3) Invasion of privacy
4) False imprisonment
5) Trespass to land
6) Interference with chattels (damage, destruction, theft, or unauthorized use of someone’s possession).

Question 16

Negligence Torts

Answer 16

Those for which liability is imposed for careless conduct.

Question 17

Nuisance Torts

Answer 17

Protects against unreasonable interference with use and enjoyment of the owner’s own land.

Question 18

Remedies in Tort

Answer 18

1) Compensatory Damages: put the plaintiff back into the position they were before the tort occurred. This differs from contractual damages, which aims to put the person in the position they’d be if the contract was complete.
2) Punitive Damages: awarded on top of regular damages if the defendant has acted harsh, vindictive, reprehensible or offensively. This is the same for contract damages.
3) Injunctions: requires the defendant to do something or refrain from doing something. ie, construction company may be prevented from conducting concrete work near a residential area after 7pm.

Question 19

What are the 4 basic elements of a Negligence Tort?

Answer 19

1) The defendant owed a duty of care to the plaintiff
2) the defendant breached the standard of care by acting carelessly.
3) the defendant’s conduct cause harm to the plaintiff.

These elements can become void if the plaintiff entered into exclusion clauses or if the plaintiff was injured when engaging in an illegal activity.

Question 20

What is “Duty of Care”?

negligence

Answer 20

Duty of Care is when a party is required to use reasonable care to avoid injuring another.

Components to determine if Duty of Care is required:

1) was it reasonably foreseeable that the plaintiff would be injured by defendants carelessness?
2) Did the parties share a reasonable proximity? (was there a reason that one party owed a duty of care? ie physical proximity, commercial relationship, misrepresentation given, ect).
3) Is there a policy reason to deny the duty of care? (the courts may deny duty of care if they believe it would set bad precedent within legal system and “open the flood gates”.

Question 21

Standard of Care (negligence)

Answer 21

Objective test that asks “How would a reasonable person have acted in similar circumstances?”

Higher standard of care is required by those who possess expertise, such as professionals. This standard is held against the profession’s standards and is not lowered because someone has less experience.

Question 22

Causation of Harm

negligence

Answer 22

It must be proven that the defendant’s (or multiple defendants) conduct caused the plaintiff’s loss and that the plaintiff would not have suffered that loss if it were not for the defendant’s behaviour.

Question 23

Considerations of a Shareholder’s agreement in Valuation

Answer 23

1) Defining Value
- Differing Opinions of FMV
- Valuing Shares of deceased shareholder
- Default
2) Defining Liquidity
3) Liquidity Clauses

Question 24

What is a defaulting shareholder and how many this be handled through the shareholders agreement

Answer 24

A shareholder is defaulting if he/she :

1) Breach of an important provision in SHA.
2) Defrauds the enterprise
3) seriously prejudices the enterprise’s interest.

In any of these scenarios, employee may be terminated, lose voting power, mandatory sale of shares, punitive discount to value, extended payment terms without interest, immediate repayment of SH loans, immediate liquidation of the company, etc.

Question 25

Methods of determining company value for shareholder buy-out

Answer 25

1) Periodic Agreement - regularilty valuing the company (usually annually) that will act as company’s value during tat period.
Pros: value is always know, consistent approach, and regularly updated.
Cons: material change could leave value significantly off until next valuation, and costly for quarterly or annual valuation by 3rd part.

2) Valuation by Formula - pre-determined formual agreed upon by all parties. Strong because can value at any point in time and is cost effective. Challenge is companies often choose simple formula (multiple of rev) but this is not adaptive to a changing company. Process for minority discounts, normalizing adjustments, treatment of goodwill, ect should be detailed.
3) Value by Third Party. Likely to result in fairest value if independent and experienced in the industry. Cons are it is costly and time consuming. Challenge agreeing on the third party and being comfortable with the methods he/she chooses to use.

Question 26

Things to consider when defining liquidity

Answer 26

Treatment of Death of a Shareholder (use of insurance policy proceeds, or, payment terms afforded to the company to purchase from the estate)

2) Permanent Disability (definition of disabled, use of critical illness insurance, payment terms, effective date).
3) Insolvency of a Shareholder (triggering event allowing for company purchase before assets are held by receivership. By law, may not be able to purchase below FMV).
4) Retirement of a SH - Is there a mandatory retirement date or option for early retirement and how are they valued?

Marital Breakdown - Clause that states the shares will not be part of the property pool in a divorce. If not possible, the Company will require a call option on the shares in the event of transfer.

Corporate Divorce - If a shareholder defaults on SHA, a punitive clause will be triggered (sell shares at discount to value, payment terms without interest, ect). If divorce is over disagreement, shotgun close is typically used.

Third Party Offers - transfer restrictions, first right of refusal, drag along and tag along

Question 27

Shotgun Clause Inequities

Answer 27

One party may have more resources
larger ownership which would place a larger burden on the smaller party (ie would have to buy much larger portion than the other if decided to buy)
if one party works in operations and the other doesn’t, the employee may be facing greater risk, like his or her income.
Alternatively, the person working in operations may have an advantage as they will likely have inside knowledge on the company’s upside value.

Question 28

Two types of first refusal

Answer 28

ROFO (hard right) - gathers bids from the market and offers the highest bid to company who can transact at those terms.

• pro to company: get to see what the market is willing to pay
• pro to company: external purchases unlikely to bid if they feel the ROFO will be exercised.
• con to company: if the market knows about the ROFO, they may inflate bids to drive up price.

ROFR (soft right) - First offers to the company and if declined can be sold into the market at the same of higher terms.

• pro to seller: the risk of company exercising is gone before going to the market.
• pro to seller: the fear of the seler selling to an undesirable party make coerce the company to purchase the shares at an above market price.

Question 29

What are Drag along and Tag Along Rights

Answer 29

Drag Along: provision that forces minority shareholders to sell their ownership if majority is transacting.

Tag Along: provision that forces buyers to purchase minority shareholders if purchase majority ownership.

Question 30

Rights of Minority Shareholders

Answer 30

1) Right of access to corporate information (basic SH lists, Articles, Bylaws, USA, Minutes of SH meetings, SH resolutions, accounting records (sent 21 days before AGM), notice of meetings (for voting SH)).
2) To participate in management (attend annual meetings, vote at SH meetings, call a meeting (if SH has 5% of voting or more ownership), make a proposal (5% of voting shares or 1% of total shares), vote on directors, approve bylaws, or changes in articles, right to solicit proxies).
3) Dissent Remedy (gives minority shareholders ability to sells shares back at FMV if majority shareholders make Fundamental change under CBCA.
4) Oppression Remedy (Majority shareholders are acting in an oppressive or unfair way towards minority shareholders.
5) To take Derivative Action (bring legal action against the directors of the company who are acting in their best interest when controlling the company, rather than in the best interest of the shareholders.)
6) Right to set aside contract voting on by a director with undisclosed conflict
7) General Right to enforce CBCA.

Question 31

Remedies in an Oppression case

Answer 31

Undo the oppersive act that took place.
Appoint a receiver-manager.
Amend the corporations articles or by-laws.
Order the Majority Shareholders to purchase the minority shareholder’s shares.
Replace existing directors with new directors.
Financial Compensation.