LAW 315 - BUSINESS ASSOCIATIONS

I. INTRODUCTION:THE PRIMARY FORMS OF BUSINESS ASSOCIATION

Primary Forms of Business organization

-Closely held Private Corporation: A corporation where all the shares are held by individuals and not listed on a stock exchange or publicly exchanged.

-Publicly Traded Corporation: governed by securities regulation. Shares are listed on a stock exchange in Canada or elsewhere.

-Crown Corporations: (public but not publicly traded) Special purpose corporations incorporated under a special provincial or federal statute. All the shares are owned by government, covered and governed by a certain statute. Ex BC Hydro, CBC, BC Ferries

Other Forms of Business Organizations

-Cooperative corporations: Credit unions, buy a share when you open your first account

-Business trusts: mutual fund trusts, unit, trusts, private trust structures

-Unlimited Liability companies

-Limited liability companies

-Joint ventures: can be partnership for limited period, corporation is formed to carry out a venture, or contractual joint venture. No single legal meaning

Non Commercial Entities

-Societies (BC Societies Act, Canada Corporations Act) non-profit and charitable activities, associations, unions, social enterprise organizations

II.SOLE PROPRIETORSHIP

Partnership Act

Sections 88-90, 90.3, 90.4, 90.5

-Section 88: if you’re trading name implies a plurality of partners, must file within 3 months of business name being used.

-Section 89: cannot file a name if it is used by or close to another company. (2) they can file it if the other corporation consents in writing, or the business name was used by the applicant for registration before the corporation first used its name.

-Section 90: Indices – must keep declarations filed under firm index and individual index

  • In firm index must put the styles of respective firms, names of the person composing the firm, and date of receipt by the registrar. In individual index must place the names of each member in and date of receipt in respect of which a declaration has been filed.

-Section 90.3: Anyone can search the register based on name of firm or partner, inspect the records an make copies of all documents.

-Section 90.4: It is an offence to knowingly or assists in making false statements. (2) If it’s a corporation that does this, they director or officer is liable.

-Section 90.5: a person who commits an offence under Section 90.4 is liable to a fine of not more than $5,000 or $2,000 if individual

Sole Proprietorship

-Unincorporated business “owned” by a single individual. Carrying on a commercial activity, solely responsible, don’t form a partnership or incorporate.

-Typically used by farmers, fishers, other small informal family enterprise, professionals, consultants

-Assets: Legal Ownership of business assets (equipment, goodwill) is not separate from the individuals personal assets – the individual owns both, and both are equally available to satisfy the claims of business and personal creditors.

-So why not incorporate

  • Expensive: pay taxes not worth it if small enterprise operating locally
  • If you don’t need to raise capital, then there is no reason to incorporate.

-Employees: may have employees and they are in an employment relationship not partnership. They are the “servant” of the SP, so SP may be VL for the torts committed in the course of employment

-Name: May use a business name that is not the individual entrepreneur’s legal name, but must be registered in accordance with the Partnership Act s. 88-90, 90.3, 90.4, 90.5

-Failure to register

  • SP have an obligation to register their trading name so that people know who is behind the business. In case you need to sue
  • If they use a name other than their own name, or a name that suggests more than one person in business, has to file a registration statement, Section 88.1
  • S. 90.3 allows any person to search the register and S. 90.4 makes making misleading statements an offence, cannot make a name which confuses people into thinking your affiliated with another corporation in some way.

-Why incorporate?

  • Incorporate to have an entity separate from yourself, so that your assets are no longer available to everyone. To be able to raise capital and issue shares.
  • Also if you want money from the bank, normally have to incorporate.

III.AGENCY

What is Agency?

-Agent: a person who affects the legal relationship of another person called the “principal”. Agent represents the principal and can affect their relationship in respect to third party. Can make contracts that bind them, deal with their assets and money may be oral or written

-Fiduciary Obligations: a principal will only choose an agent who they trust and will want that particular person to carry out the agency. Require confidence, confidentially and trust

-It is a way to become more productive, have someone else do work for you so you get more done

Agency and employment

-Employee doesn’t have the right to enter into contractual relations on behalf of the employer and may not owe fiduciary duties to the employer. But employee may be agent

-Employees can often act on behalf of their employer to affect their legal relationship, the higher you are in the company, the more likely you can affect the employers relationship because then have fiduciary relationships

-The agency has to be kept separate from the employee relationship.

-Roles of employees and agents overlap. More authority, more likely you are acting as an agent

-Employment is governed by different acts and common law principles so must be kept separate from employee relationships.

Agency and Trust

-Both have fiduciary duties, but in an agency relationship the acts of the agent bind the principal while in a trust relationship the trustee does not bind either the settlor or the beneficiary.

-Person who is given credit to trustee not involving trust does not have access to the trust assets to satisfy claims whereas in agency, creditors of an agent have access to all the property held by the agent even if the agent is holding that property for transfer to the principal

-In agent and principal, the money is given to agent to carry out the principal’s duty. Not a trustee of the money to hold for another

-When the agent holds the money, he is not a trustee of it, simply holds it for the benefit of the principal and then must give it back.

A.Relationship between principal and agent

Actual authority

-Where the principal intended to give that agent authority to affect his/her legal relations or where the principal and agent would have reasonably expected the agent to have authority, the agent is aid to have actual authority

-Express: Oral or written agreement between principle and agent and the principle tells the agent, in writing or orally, the powers they have

-Implied: actual authority which is not expressed, the authority A would be expected to have

  • Usual: Refers to what this principal has allowed this agent to do in thepast. Certain acts may not have been in the contemplation of the principal at the time, but if they continued and the principal did not stop them, it was within the agent’s authority.
  • Policy:The idea is fairness to the agent, if they are allowed to do certain things in the past, they should not be liable the one time it was detrimental to the principal. But if the written agreement clearly restricts certain behaviour then ratification would not normally be said to result in implied authority.
  • Example of Freeman and Lockyear
  • Customary: Determined by looking at the kind of authority agents of that type normally have.
  • Simms: client asks stock broker to sell shares and the broker sold the shares on credit. It was held that in this business at the time, it was not customary for the agent to sell shares on credit. They had to collect the payment at the time. You would have to have express authority to do this at the time.

Duties of the agent to the principal

-These rules apply unless there is an express removal of any of these particular obligations

-(1) To Perform Agency Obligations

  • Duty to perform the tasks assigned by the terms of the agreement or according to instruction. Do what they were asked or empowered to do by the principal
  • This is breached where agent fails due to their own fault, ex: principal tells agent to buy insurance for ship, they forget and the ship sinks. So then they sue.
  • If no insurance was available then the agent has no failure because they made all the efforts. It is not a failure to preform if the subject matter doesn’t exist
  • Important that the agent does not go beyond their authority. Ex: lawyers accepting settlements without permission of client.
  • Agent not liable if the act they have been asked to perform is illegal. Obligation to perform is negated if illegal act

-(2) To Perform with Reasonable care

  • Standard is the degree of skill and diligence that an agent in his/her position would normally possess or exercise.
  • Have expert evidence to balance whether it’s negligent or not.
  • If it is a professional it is the legal skill and care of someone else in that occupation

-(3) Fiduciary Obligations

-(a) Duty of Loyalty

  • To act in the best interest of the principal. Arises in partnerships and corporate relationship
  • (i) Avoid Conflict of interest in duty
  • Personal interest should never conflict with your duty as an agent
  • The remedy is that the agent cannot keep the proceeds and have to pay profits to principal. Or the principal may obtain damages if they missed a different action which would have been more favourable.
  • (ii) Not to make secret profits (accounting)
  • The agent cannot make profits from two sources, the principal and another party.

-(b) Duty not to delegate

  • For the agent to ask someone else to do what they were empowered to do, is taking the power away from the principal to ensure they have the sense of trust and confidence in the agent.
  • The delegate of the agent will not be able to bind the principal.
  • Can delegate where they have been given express authority to do so, like delivery of minor goods or situations of necessity or simple tasks where it doesn’t matter to the principal does it.
  • Remedy: damages for loss in situations where breach caused by delegation. The principal may also never engage that agent again.

-(4) Duty to keep proper accounts

  • Agent must keep their own money separate from that of principals. The court will make a presumption that if the agent cannot produce clear accounts, any discrepancy belongs to the principal.
  • Must have proper expenses and receipts without which principal can refuse to reimburse
  • Documents and any other property must be returned to the principal at the end of the contract.

Duties of the principal to the agent

-(1) Requirement to pay remuneration: Must be clear and need express agreement on how much the agent is going to be paid.

  • Where no express agreement of commission, court will reward value of work. When it is clear that they did not act gratuitously, court will look at the value of the services and award an amount based on that.

-(2) Requirement to pay the agents expenses and indemnify the agent against losses: Principal is obligated to reimburse agent for reasonable expenses incurred on behalf of agency. Also to indemnify them for any loss. Expenses must be necessary and reasonable in the context. Cannot be reimbursed if illegal use of money.

Termination of the agency relationship

-(1) By the act of the parties: where the agency agreement provides for the termination of the agency relationship. Where no term, can unilaterally terminate on notice. Can be immediate, no need for reasonable time.

-(2) Operation of law: where the principal or agent becomes bankrupt, there is frustration or death

  • Frustration: where the whole purpose of the relationship no longer exists. The whole objective of the agency is no longer attainable in any way, beyond the physical capacity to be fulfilled.
  • Test: it is impossible or illegal or so different that it would be unjust to make the agent perform.
  • Example is if someone enters a relationship and then is drafted in army and sent away. Too difficult to perform the agency now and unjust to let the principal sue.

B.Relationship between principal and third party, and agent and third party

Agency by Estoppel/ Ostensible/ Apparent Authority

-Arise where the agent does not have actual authority or where the P never gave express or implied authority to the agent to act in the way they did.

-Agent has no authority as a matter of law, the principal has never authorized the agent to do what they did but the principal by their actions or representations are estopped from denying the agent authority

-Elements: (1) The Principal must have made a representation or permitted a representation that the alleged agent had authority to act on behalf of the P. (2) The 3P reasonably relies on the representation to his/her disadvantage.

-The representation can be express or impliedfrom words, or circumstances but need evidence to prove it

-Llyod: The clerk was in the office doing work that a conveyance clerk does and despite the fact that he committed fraud, the company gave him that ability, so they are liable for his actions.

  • It was reasonable for her to ask the clerk to give her advice and for her to trust him.
  • Here the firm was the principal who was liable for the actions of the agent.

-Freeman and Lockyer v Buckhurst: There was a partnership of architects and they thought they were retained by the company to do some design work. The guy they had dealt with, Kapoor, had never been officially appointed as managing director but they believed that he was

  • Decision: You allowed him to do things in the past even though he was never appointed, ratified his acts. Therefore they clothed him with ostensible authority and so he exercised the usual authority of what he had done in the past and was customary of what a managing director does
  • The firm was reasonable in believing that he was the managing direction, the principal could have stopped this bad behaviour if they wanted to. They knew or ought to known that he was running around town purporting to have authority. Harder for the third party to know that he did not have authority.

-Reasons for having ostensible authority:

-(1) Protection of Reliance by 3Ps: Where the P could have readily taken steps to avoid potential reliance by third parties on a reasonably perceived authority of an alleged A, then the Ps should not be unfairly surprised.

-(2) Least cost avoidance: the principal ought to know that this person is acting as their agent. They have the ability to decide if this person is trustworthy and appoint them if necessary. It is up to the principal to severe the relationship or make clear that the relationship does not exist. The P has the ability to (1) check the agents trustworthiness (2) monitor their behaviour and (3) dismiss an agent who has acted beyond their authority

Breach of warranty of authority

-This comes up where the alleged agent does not have the authority to perform so the 3P sues the agent in tort for having falsely held themselves out as being something that they are not

-Elements of action

  • Third party must prove the agent represented that he/she had authority
  • Representation must be false
  • Third party acted to their detriment on the claim

-The measure of damages is different than negligent misrepresentation where you get reliance. Here you get expectation damages, this could include lost expected profits.

Ratification

-Where the agent acts beyond their authority the P may choose to accept by ratifying the act.

-It has a retrospective aspect, occurs in cases of usual and ostensible authority.

-Rule: a person who is not in fact the principal, but by ratification becomes the principal can ratify the contract if three conditions are present

-(1) Agent must have purported to act on the part of the person who wants to ratify. A prior idea of who the principal was.

-(2) The person who becomes the principal must be ascertainable and in existence at the time the transactions was entered into by the agent

  • This is in relation to corporations who may not be in existence at the time the contract was made.

- (3) Principal must have the legal authority to do the act both at the time the other person acted and at the time of ratification.

  • Need legal capacity at the time the agent acts with the third party and at the time of ratification

Requirements for Ratification

-(1) Express Ratification: By conduct or acquiescence, any performance or part performance of the terms of the K by the principal may be sufficient to constitute ratification.

  • Conduct: partial performance or acceptance of the third parties actions. By allowing the third party to comply with the agreement can be seen as ratification
  • Acquiesce: within a reasonable time of learning that someone has entered into a contract on your behalf, the purported principal has to reject the transaction or they will be considered to have accepted it by acquiescence. You know about it but do nothing, you let the other person assume that everything is okay.

-(2) Principal has to have sufficient knowledge of the relevant details of the transaction to be able to ratify. If P is consenting to a transaction that the agent had no authority to enter into then the principle needs to know the nature of the deal being accepted.