Western Canada Business Litigation Blog

Alberta Court orders Shareholders’ Vote of Non-Arranging Corporation in a Plan of Arrangement

Posted in Commercial
Comment

On September 14, 2016, Mr. Justice Macleod of the Court of Queen’s Bench of Alberta gave oral reasons for judgment in Re Marquee Energy Ltd. and The Alberta Oilsands Inc. (unreported, Action No. 1601-11071, Judicial Centre of Calgary).  In doing so, he ordered that The Alberta Oilsands Inc.’s (“AOI”) shareholders be required to vote to approve that arrangement in advance of it proceeding for final court approval.  He made this order notwithstanding the fact that the relationship between AOI and its shareholders was not proposed to be “arranged” by the Plan of Arrangement.

An arrangement had been proposed whereby shareholders of Marquee Energy Ltd. (“Marquee”) would be receive shares in AOI in exchange for their Marquee shares and, once the shares were exchanged and Marquee was a wholly owned subsidiary, a vertical amalgamation would occur between Marquee and AOI. A vertical amalgamation does not require a shareholder vote and no dissent rights are granted.  AOI argued that since nothing changes in the relationship between it and its shareholders that AOI’s shareholders were not entitled to vote as they were not being “arranged”.  The interim order, granted ex parte (without notice to any other party), only required a vote of Marquee’s shareholders on the proposed arrangement.

Smoothwater Capital Corporation (“Smoothwater”), which markets itself as “Canada’s Leading Activist Investor”, was a significant shareholder of AOI and had been actively suggesting to AOI that it distribute the significant cash it had on hand to its shareholders. Smoothwater brought an application asking the court to require AOI to hold a vote of its shareholders and to only allow the application for final approval of the Plan of Arrangement to proceed if AOI obtained approval by way of special resolution (66 2/3% approval). After the hearing, the Court granted what it termed Smoothwater’s “unusual” application.

The decision is striking from a number of perspectives. First, the Court reviewed the application on the basis of the Supreme Court of Canada’s decision in Re BCE Inc. (2008 SCC 69). Of course, BCE is a decision which sets out the test for the final approval of a Plan of Arrangement as opposed to an interim application seeking the court to order a vote as a condition for proceeding with the application for final approval.  Other than BCE, the Court cited no authority in support of the application before it or the order it made.

The Court then proceeded to measure the proposed Plan Arrangement against the test for final approval of the Plan of Arrangement – a pre-vetting of the Plan of Arrangement to determine if it could move forward without a vote of AOI’s shareholders. The Court first concluded that the only business purpose of the Plan of Arrangement was the merger of AOI and Marquee but that this purpose was not being accomplished by the Plan of Arrangement, which only made Marquee a wholly owned subsidiary.  The business purpose was not accomplished until the vertical amalgamation was finalized.  The Court was satisfied that the only reason the Plan of Arrangement was proposed was as an attempt to complete this transaction without an AOI shareholder vote and without providing dissent rights, both of which would be required if this was an amalgamation between arm’s length corporations.

As a result of this finding, the Court found that AOI should not be allowed to use the Plan of Arrangement to avoid safeguards that would otherwise be provided by other provisions of the Alberta Business Corporations Act (“ABCA”).

Surprisingly, the Court went further and found that the Plan of Arrangement was not put forward in “good faith” because it was done to avoid a vote of AOI’s shareholders and dissent rights. He found that the “good faith” aspect of the Plan of Arrangement final order approval test would only be met if AOI’s shareholders were given the right to vote and were provided with dissent rights as if this were an amalgamation under the ABCA.

Finally, the Court ruled that approval would not be “fair and reasonable” unless AOI’s shareholders had the right to vote and were granted dissent rights. He rejected the argument that AOI’s shareholders were not being “arranged”.  He found that they were to be diluted as a result of the shares issued to Marquee’s shareholders as a result of the share exchange included in the Plan of Arrangement and that this was sufficient to require the shareholder vote.

This decision falls outside current Canadian jurisprudence as well as current TSX Venture Exchange policies that apply to this transaction. This appears to be the first time in Canada that a court has ordered a vote in these circumstances and a number of the findings of the Judge run counter to other Canadian decisions.

I understand an appeal has been set for November, 2016. If it goes ahead, this is the type of case that may ultimately find its way to the Supreme Court of Canada.

Ledcor Decision Considers Standard of Review and Insurance Policy Exclusion Clause

Posted in Civil Litigation, Commercial, Construction, Insurance
Comment

On September 15, 2016, the Supreme Court of Canada (the “SCC) released its decision in Ledcor Construction Ltd. v Northbridge Indemnity Insurance (2016 SCC 37). In its decision, the Court considered the appropriate standard of review for standard form contracts, as well as the proper interpretation of an insurance policy exclusion clause.

Writing for all but Justice Cromwell, Justice Wagner held that – in most cases – the interpretation of standard form contracts (such as insurance policies) is a question of law and that such contracts thus constitute an exception to the rule in Sattva Capital Corp. v Creston Moly Corp. (2014 SCC 53), which held that contractual interpretation is a question of mixed fact and law. Additionally, Justice Wagner held that an exclusion clause, when ambiguous, is to be interpreted using the general principles of contractual construction, including the reasonable expectations of the parties, and the need for realistic and consistent results.

Though Justice Cromwell agreed with the rest of the Court in its disposition of the matter, he disagreed with its creation of the Sattva exception for standard form contracts. Furthermore, unlike the rest of the Court, Justice Cromwell did not find the exclusion clause to be ambiguous.

Window Washing Gone Awry

Station Lands, the owner of the newly-built EPCOR Tower in Edmonton, hired Bristol Cleaning to clean the tower’s windows while the building was still under construction. As is standard across the construction industry, Station Lands held all-risk property insurance for the construction project. In the course of its work, Bristol damaged the tower’s windows, requiring them to be replaced at a cost of $2.5 million. Station Lands, along with Ledcor Construction Ltd. (its general contractor), claimed the cost of replacement against the insurance policy. The insurers denied the claim, on the basis that an exclusion clause excluded coverage for faulty workmanship.

4(A) Exclusions
This policy section does not insure: … (b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.

(the “Exclusion Clause”)

The Court of Queen’s Bench of Alberta found that Bristol’s work constituted ‘faulty workmanship’, but that the Exclusion Clause did not exclude coverage of the damage resulting from Bristol’s work. However, the trial judge found the Exclusion Clause ambiguous, and only found for Station Lands and Ledcor, i.e.: that only the cost of redoing the cleaning work was excluded, after applying the contra proferentem rule against the insurers.

The Alberta Court of Appeal reversed the trial judge’s decision, holding that the damage to the windows was excluded from coverage under the insurance policy. The Court of Appeal arrived at this decision by interpreting the insurance policy on the correctness standard of review, and creating a new test of “physical or systematic connectedness”.

SCC: Standard Form Contracts – An Exception to the Sattva Rule

In finding that standard form contracts generally constitute an exception to the Sattva rule and that their “interpretation is best characterized as a question of law subject to correctness review” (Ledcor at para 24), the SCC provided guidance on a matter that has divided courts since 2014. In holding thus, Justice Wagner noted that standard form contracts usually have no ‘meaningful factual matrix’ specific to the signing parties, as such contracts are often signed without negotiation or modification. Further, since standard contracts (by definition) are generally standard across parties, their interpretation ought to attract greater precedential value than contracts that have been tailored to the individual parties’ needs.

SCC: Ambiguity and the Exclusion in the Exclusion Clause

In interpreting the Exclusion Clause, Justice Wagner noted the general rules of contract construction ought to be used when interpreting ambiguous language in insurance policies. Finding the Exclusion Clause is ambiguous, Justice Wagner interpreted it by addressing the reasonable expectations of the parties, and the need for realistic and consistent results. Furthermore, he looked to Bristol’s contract to determine that it had been hired to clean windows – and not “to install windows in good condition” (Ledcor at para 87).

Ultimately, Justice Wagner held that the Exclusion Clause only operated to exclude the cost of re-washing the windows from coverage under the insurance policy. The cost of re-installing the windows as a result of the damage done to them by Bristol constituted “physical damage not otherwise excluded” by the insurance policy, and was thus covered.

Takeaways

At first glance, the SCC’s judgment in Ledcor provides much-needed guidance to lower courts on the interpretation of standard form contracts in a post-Sattva age. However, just as Justice Rothstein in Sattva left open the possibility for contracts to be interpreted  as questions of law, in Ledcor, Justice Wagner leaves open the possibility for standard form contracts to be interpreted as questions of mixed fact and law in cases where a meaningful factual matrix exists or where a standard form contract has been modified.

Furthermore, with respect to the insurance policy exclusion clause, the Court appears to come down heavily on the side of the insured. Indeed, through judicial interpretation of the insurance policy and a narrow reading of Bristol’s contract, the Court understands the Exclusion Clause as excluding very little from insurance coverage. However, the Court’s decision on this issue rests on Justice Wagner’s finding that the insurance policy’s language is ambiguous. Were judges to find otherwise, Ledcor would instruct them to read the contract as a whole.

As such, though the SCC’s judgment in Ledcor provides guidance and creates an exception to the Sattva rule and signals the Court’s inclination towards the insured, it leaves open sufficient space for lower courts to interpret standard form contracts and insurance policy exclusion clauses differently.

With thanks to articling student Nabila Pirani for her assistance.

New Real Estate Tax Leads to Collapsed Deals

Posted in Real Estate
Comment

The provincial government’s new 15 per cent tax on foreign purchasers of residential property is the talk of the town in Metro Vancouver.  While many local residents have spent the last several days debating about the likely effect of the tax, others are already facing the consequences as buyers respond to the tax by failing to complete on binding agreements of purchase and sale.

As mentioned in a Vancouver Sun article published August 3, 2016, there are various ways in which the new tax can impact buyers and sellers of local real estate, even if the buyer does not meet the definition of a ‘foreign entity’ in the new legislation (see link at the end of this article).  For example, in addition to foreign buyers failing to complete in order to avoid payment of the tax, binding real estate deals can also collapse as a result of:

  • foreign buyers failing to have sufficient funds to pay the purchase price and the additional 15 per cent tax on closing;
  • local buyers being unable to sell their previous property at the price required to raise the necessary funds to close on the purchase of a new home; and
  • a domino effect of any sale cancelled for the reasons above and affecting another sale that depended on it.

Sellers need to be on guard to protect their legal rights in these circumstances.  If the buyer has removed the subject conditions for the purchase of the sale of a property, the seller has a legal right to enforce the contract which is unaffected by the imposition of the new tax.  If the seller has any reason to believe that the buyer will not complete the transaction, the seller should advise their conveyancing lawyer, who can assist the seller to ensure that the contract remains valid and binding on the closing date.  If the buyer fails to complete on the closing date, the seller then has the option of re-listing the property and pursuing the buyer in Court to claim compensation for the difference between the purchase price in the original contract and the eventual sale price obtained from a new buyer.  When bringing such a claim, sellers can seek to have the deposit paid into Court pending a resolution of the proceedings, which will be of particular assistance to ensure recovery of damages against a foreign buyer who does not have assets in BC.

Realtors and sellers should be aware that the Collapse Release Form, which is provided by the Real Estate Board of Vancouver, is not appropriate in circumstances where the seller seeks to recover compensation from the buyer for their failure to complete the transaction.  If the seller is asked to sign this form or any other forms or documents in relation to the collapsed sale, they should consult with a lawyer before signing it.

More information about the application and calculation of the new tax is available on the Real Estate Law Blog, also published by Lawson Lundell LLP.

Supreme Court safeguards solicitor-client privilege from requests under the Income Tax Act

Posted in Civil Litigation, Tax
Comment

In companion cases released on June 3, 2016, the Supreme Court of Canada (the “SCC”) confirmed the central importance of solicitor-client privilege to the rule of law in Canada. In Canada (National Revenue) v. Thompson, 2016 SCC 21, and Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, the Court considered provisions of the Income Tax Act (the “ITA”) requiring lawyers to disclose their clients’ privileged information without client consent during an audit or tax collection action against the lawyer.

Writing for a unanimous Court in both decisions, Mr. Justice Wagner and Mr. Justice Gascon held that lawyers’ accounting records are subject to solicitor-client privilege and that any intrusion on this privilege is permitted only if doing so is absolutely necessary to achieve the ends of the enabling legislation.  The current “exception” in the ITA in the definition of solicitor-client privilege, which excluded a lawyer’s accounting records, was determined to be constitutionally invalid as was the requirement scheme under the ITA which compelled lawyers to provide these records to Revenue Canada.

Thompson: Client information falls under solicitor-client privilege

During the course of an audit, Alberta lawyer Duncan Thompson received an order from the Canada Revenue Agency pursuant to section 231.2(1) of the ITA requiring the submission of various documents, including his accounts receivable. Thompson refused to submit the names of his clients, arguing that their identities fell within solicitor-client privilege.

Information that is protected by solicitor-client privilege is normally exempt from disclosure. However, the wording of section 231.2(1) is clear in its intention to exclude “an accounting record of a lawyer” from the scope of solicitor-client privilege.

On the point of client identity, the SCC gave a clear ruling: there is no difference between information about a communication with the client and information about the status or identity of the client. While not all communication in a lawyer-client relationship is privileged, facts connected with that relationship must be presumed to be privileged absent evidence to the contrary. Therefore, if section 231.2(1) of the ITA is held to require accounting records detailing the names of clients or the services rendered to them, the provision would effectively require the disclosure of otherwise privileged information.

Chambre des notaires: Fundamental principles of justice require solicitor-client privilege

In Québec, “professional secrecy” is a substantive fundamental right comprised of the obligation of confidentiality arising from the lawyer-client relationship and the resulting solicitor-client privilege.  A client’s right to professional secrecy is protected through various codifications, including in the Civil Code of Québec, the Act respecting the Barreau du Québec, and the province’s Charter of Human Rights and Freedoms. Clients therefore enjoy a reasonable expectation of privacy regarding their information and documents that are in the possession of their notary or lawyer.

In Chambre des notaires, the SCC found that the ITA creates a conflict between legal advisors’ duty of professional secrecy and their statutory duty of disclosure to the tax authorities. In balancing the client’s privacy interest and the state’s interest in carrying out a search or seizure of information or documents, the SCC held that professional secrecy must remain as close to absolute as possible. Though the ITA’s requirements serve the legitimate purpose of collecting amounts owed to the CRA and conducting tax audits, this important purpose could not justify infringing upon the protection afforded the Charter. As such, the impugned provisions – in this case sections 231.2(1), 231.7, and 232(1) of the ITA – were held to be unconstitutional.

The takeaway: solicitor-client privilege is here to stay

In February 2015, the SCC released its decision in Canada (Attorney General) v. Federation of Law Societies of Canada in which the Federation of Law Societies of Canada challenged the constitutionality of provisions in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act that required lawyers to record certain information about their clients’ financial transactions. In that case, I lead the Lawson Lundell team that successfully argued on behalf of the Canadian Bar Association that the Act offended sections 7 and 8 of the Charter by unduly interfering with solicitor-client privilege, thus weakening the independence of the bar.

Again in a unanimous decision, the SCC agreed that the Act’s provisions authorizing law office inspection did not sufficiently protect solicitor-client privilege. Finding that the provisions were unjustified and unreasonable under section 8 of the Charter, the Court declared section 64 of the Act to be of no force and effect, and read down certain other law office inspection provisions to exclude application to lawyers.

The recent decisions of Thompson and Chambre des notaires echo this important confirmation of the stringent limits on intrusions into the privileged relationship between lawyers and their clients. As the Court noted in Thompson, “the obligation of confidentiality that springs from the right to solicitor-client privilege is necessary for the preservation of a lawyer-client relationship that is based on trust, which in turn is indispensable to the continued existence and effective operation of Canada’s legal system.”

Disclosure Obligations in Residential Real Estate Transactions

Posted in Civil Litigation, Real Estate
Comment

The residential real estate market in the Lower Mainland is incredibly active. Prices continue to rise by significant amounts in a matter of weeks, sometimes days. Stories abound of bidding wars and sales without subject clauses. Out of anxiety or excitement, purchasers sometimes forgo viewing the property or having an inspection done.

What happens when the home you bought turns out to be not quite what you expected? Perhaps the roof leaks or there is a rodent infestation. Maybe the plumbing is faulty or the construction defective. What recourse does a purchaser have against the vendor?

The critical question is what disclosure obligations the vendor has when selling their property. As is often the case in legal matters, there are competing principles at play in determining who bears the loss for such defects.  The first is caveat emptor, colloquially know as “buyer beware”.  It has been described as meaning:

Absent fraud, mistake or misrepresentation, a purchaser takes existing property as he finds it, whether it be dilapidated, bug-infested or otherwise uninhabitable or deficient in expected amenities, unless he protects himself by contract terms.

This means there is a fairly high onus on purchasers to conduct a reasonable inspection and make reasonable inquiries in order to discover patent defects. A “patent defect” is one which might not be observable on a casual inspection but may nonetheless have been discoverable upon a reasonable inspection by a qualified person.  In many cases, this means a purchaser should retain an inspector to inspect the property and the failure to do so cannot shift blame to the vendor.

A competing principle is consumer protection. This means the court will intervene to prevent fraud and non-innocent misrepresentation where a purchaser has been lied to about a property’s condition. However, the court may also intervene where a vendor has failed to disclose material (meaning dangerous) latent defects about the property that they knew about or ought to have known about. A latent defect is one that is not discoverable by a purchaser through reasonable inspection and inquiry. But not every latent defect will result in a remedy against a vendor.  It must be a defect of “substance” that makes the property uninhabitable or dangerous.

In reconciling these competing interests, the courts delineate exceptions to the caveat emptor principle.  For example, it will not apply in situations where the vendor:

  1. fraudulently misrepresents or conceals;
  2. knows of a latent defect rendering the house unfit for human habitation;
  3. is reckless as to the truth or falsity of statements relating to the fitness of the house for habitation; or
  4. breached the duty to disclose a latent defect which renders the premises dangerous.

Given these competing principles, determining the outcome of any given case is entirely dependent on the underlying facts. Some cases have held that the subsequent discovery of slope instability, or leaks, mould, and faulty retaining walls will entitle recovery from a vendor.  In other cases, the discovery of a hidden ravine, or faulty plumbing have not been the types of defect that allow a purchaser to shift liability to a vendor.

Most residential sales involve the vendor providing a Property Disclosure Statement (PDS). A PDS is meant to identify any problems or concerns with the property, not to give detailed comments in answer to the questions posed.  A vendor need only say that they are or are not aware of problems.  When completing a PDS, a vendor must correctly and honestly disclose their current actual knowledge about the property, but that knowledge does not have to be correct.  The contents of a PDS are representations upon which a purchaser can rely.

If you are caught up in the residential real estate frenzy, remember that generally it is “buyer beware”. Before you close a purchase, properly inspect the property and, if necessary, retain professionals to help you.  As a purchaser, if you want a promise of fitness for the home you are going to buy, your safest bet is to negotiate express warranties by the vendor to that effect by the vendor.

“Today just got better”… unless you had a prepaid cellphone card from Bell Mobility

Posted in Civil Litigation, Class Actions
Comment

Bell Mobility’s slogan may ring hollow for some Canadians in light of the Ontario Court of Appeal’s decision in Sankar v. Bell Mobility Inc., 2016 ONCA 242, which will likely end the $200-million class action involving as many as one million Canadians. In reasons issued April 4, 2016, the Court upheld the decision of the motions judge who, on a summary judgment motion, found that Bell’s practice of reclaiming unused balances on prepaid cards was not a breach of contract and dismissed the claim. The decision is noteworthy because the class action was dismissed on a summary judgment motion (rather than after a full trial) and because of the way the Court determined what documents formed the contract between the parties.

The class proceeding involved Bell’s pre-paid cellular phone services and the “fate” of the balance remaining in a customer’s account when a customer failed to “top up” the account before the end of its “active period.” One of the main common issues in the class action was whether the prepaid cards expired on the last day of their active period or if they expired the day after. Bell’s practice was to claim any unused funds the day after the end of the active period. For example, if the active period ended on June 30, and the customer had not purchased a top-up in order to extend their active period, Bell would claim any remaining prepaid funds on July 1. The plaintiffs claimed that their contract with Bell required Bell to wait until the second day after the end of the active period before claiming any remaining funds (i.e. July 2).

The motions judge found that at the time it entered into contracts with its customers, Bell intended and customers understood, that the agreement would expire at the end of the active period and unused funds would be reclaimed by Bell after that time unless the account was topped up before it expired. One of the main grounds of appeal was that the motions judge improperly relied on material beyond the initial agreements customers entered into when they purchased these cards to interpret the contract between Bell and its customers.

The Court found that the motions judge was entitled to rely on documents such as the PIN receipts customers received when they topped up their account, phone cards, brochures and websites in addition to the initial agreements customers entered into and that all these documents formed part of the contract between Bell and its customers. The Court made it clear that there is a difference between considering the factual matrix surrounding the formation of a contact and considering the documents that make up the contract itself. In its decision, the Court noted that “it is not uncommon in modern contracts, including contracts made partly on ‘paper’ and partly on the internet, for contract terms to be found in several ‘documents’” and that “where parties enter into interrelated agreements, the court is required to look at all those agreements to determine their construction.”

Although the appellant argued that the motions judge should have considered communications Bell sent customers after they purchased prepaid cards, but before they expired because these were misleading, and suggested customers had an additional day after the end of the activation period to top-up their accounts, the Court found that “these communications were not part of the factual matrix surrounding the formation of the contract” and that “at their highest” were post-contractual representations. While these communications might be relevant for a misrepresentation claim, they were not relevant for the contractual claim that had been certified as a common issue.

Given the manner in which the Court determined what documents formed the contract between Bell and its customers, the Sankar decision may be increasingly significant in light of the rise in internet-based components of service agreements that begin with a customer signing a traditional paper-based agreement.

With thanks to Alexandra Hughes for her assistance.

How to Remove a Certificate of Pending Litigation

Posted in Civil Litigation
Comment

A certificate of pending litigation (a CPL) is a form of charge that can be registered on title to land where someone commences a legal claim in which they assert an interest in that land. CPLs are intended to protect the claimant’s interest in that land. For example, if a plaintiff asserts money they lent was used to purchase or maintain land, they will claim a CPL. Similarly, a purchaser will claim an interest in land where their vendor later tries to get out of the sale.

As a practical matter, a CPL is an effective tool in tying up land and putting pressure on its owner to resolve the dispute. It is unlikely anyone else will deal with the land if there is a CPL on title. For example, no one else is likely to buy the land and no lender will take mortgage security because, if they do, their interest in the land will be subject to the yet-to-be adjudicated rights of the CPL holder.

CPLs are often used as a veiled method of leverage to secure a financial claim or a tenuous interest in land. What, then, happens if there is a CPL on title to your land and you need to get rid of it? How do you go about that?

Absent agreement with the CPL claimant, your recourse is to seek a court order removing the CPL. Section 256 of the Land Title Act grants a land owner the authority to apply to court to remove a CPL. On such an application, the court may cancel the CPL outright, do so on term that security be posted instead, or may refuse to cancel the CPL but require the CPL claimant to either post their own security or give an undertaking to pay damages if their claim ultimately fails.

On such applications, a threshold question is whether the land owner can demonstrate “hardship and inconvenience” as a result of the CPL. The hardship and inconvenience must be more than trifling or insignificant. For example, if the CPL is thwarting a sale, preventing development of the land or stalling a financing, then “hardship and inconvenience” may well exist. The next question is whether or not the land owner can establish that an order requiring security is proper and that damages will provide adequate relief to the CPL claimant rather than the land itself. For example, if the claim is only about monies owed to a contractor, damages will suffice.

However, if the claim is for specific performance of the sale of a unique parcel of land, damages will not be an adequate remedy. Where the claim is for specific performance, it must be plain and obvious that it will not succeed in order to have the CPL cancelled. However, the CPL claimant must also prove readiness and willingness to perform their contractual obligations. This includes continuing of future obligations of the purchaser that are interdependent and to be performed concurrently with obligations of the vendor that the purchaser seeks to enforce. In other words, if you needed financing to complete the purchase but have not or cannot obtain it, the specific performance claim will fail, even if the land is “unique.” In cases like this, the fight over cancelling the CPL will revolve around the issue of whether or not the subject property is sufficiently “unique” that specific performance is an appropriate remedy.

If a purchaser is not entitled to specific performance, then it follows that damages are an adequate remedy. The CPL will be cancelled. If a CPL is cancelled and replaced by posting security, then the court will need to set the amount of the security. It will not always be the amount of the claim. The amount depends, among other things, on the strength of the case.

If you seek to remove a CPL from your property, you will need to analyze the underlying claim and assemble the evidence necessary to convince a judge there is little or no merit to it. You will also need to be prepared, and should consider proposing, an amount of security to post as an alternative.

Who says it’s clean enough? Municipality Appeals Ministry Decision to Issue Certificate of Compliance

Posted in Environmental
Comment

An appeal due to come before the Environmental Appeal Board (the “Board”) may address questions about the intersection between the provincial Ministry of Environment (the “Ministry”) and municipalities relating to the standards to be applied to remediation of contaminated land.

In October 2016, the City of Burnaby is appealing the Ministry’s decision to issue a Certificate of Compliance to Suncor Energy Inc. in respect of lands in Burnaby which include portions of two roads owned by the City.  The Certificate of Compliance (issued in December 2015 under the Environmental Management Act) confirms that the lands have been remediated to the required standard using, among others, a risk-based approach.

A risk-based approach to remediation is generally more economically efficient and less invasive than a numerical approach. It mandates a number of risk controls which must be implemented by the responsible person to prevent the risk of harm to the public, instead of requiring the responsible person(s) to remediate the land to specific numerical standards.

Section 56 of the Environmental Management Act says that a person conducting remediation must give preference to a remediation method which provides a permanent solution to the maximum extent practicable, taking into account, among other things, any potential adverse effects on human health or the environment and risks associated with the different remediation options. This is not to say that a risk-based approach does not strictly afford the relevant mandate as remediation costs associated with alternative remediation options, economic benefits, costs and effects and technical feasibility are also relevant factors.  However, there still often exists a tension between proponents of a risk based or a numerical based method.

The authority to issue Certificates of Compliance lies with the Provincial Ministry. However, as a matter of practicality, it is typically the municipality which the landowner has to deal with in terms of other land usage issues.

An example of this tension is Imperial Oil Ltd. v. Vancouver (City) 2005 BCSC 387, affirmed 2005 BCCA 402. The City of Vancouver had refused to issue Imperial Oil a development permit unless Imperial Oil entered into an agreement to remediate nearby City-owned streets in relation to hydrocarbons which had migrated from Imperial Oil’s land. Imperial Oil had remediated to the extent required by the Ministry: the City attempted to use the development permit process to require further remediation. Ultimately, the B.C. Court of Appeal held that the City did not have power to impose conditions relating to off-site matters and that issues of environmental contamination were for the Ministry. That case, however, depended on the court’s interpretation of the Vancouver Charter and so the issue is not definitively settled.

The appeal will take place in October.  We eagerly await the decision – watch this space for further updates.

With special thanks to articling student Tom Boyd for his assistance with the preparation of this article.

A Cautionary Tale for U.S. Corporations with Canadian Subsidiaries

Posted in Intellectual Property
Comment

If one sets up an American subsidiary to do business in the United States and a Canadian subsidiary to do business in Canada, then only the latter would find itself sued as a defendant in Canadian courts, right? Perhaps not.

The recent decision of the British Columbia Supreme Court in Canadian Olympic Committee v. VF Outdoor Canada Co., 2016 BCSC 238, shows the risk of liability in Canadian courts for American parent or affiliated corporations, notwithstanding the use of a dedicated Canadian subsidiary within the organization.

The Corporate Organization at Issue

The corporations at issue in the case design, manufacture and sell the “The North Face” brand of apparel in North America. VF Corporation, the parent Pennsylvania corporation, holds ownership interests in various “VF Group” companies including VF Outdoor, Inc. (“VF USA”) and VF Outdoor Canada Co. (“VF Canada”), which are each indirectly wholly owned subsidiaries of VF Corporation. VF USA develops, creates, designs, and arranges for the manufacture of all products and merchandise under The North Face brand, including the line of products at issue in the case. VF USA is then responsible for ordering merchandise from the foreign factory for sales and distribution in the USA. VF USA had presented evidence that it does not carry on business in Canada, including no employees, no address, no retail stores, no accounts, etc. in Canada. VF USA does not sell, import, or arrange for the import of North Face products into Canada.

VF Canada places its own purchase orders for North Face merchandise directly with the foreign factory and receives and pays for the merchandise directly with the factory. The products are shipped directly to Canada. These products are then sold by VF Canada to licensed and independent retailers throughout Canada. Orders can also be placed by consumers through websites for delivery in Canada, and VF Canada pays all duties for these shipments and receives all revenues from these online sales. All marketing materials are originally designed by VF USA and printed in the USA, but VF Canada selects what materials will be chosen for Canadian retailers.

The Lawsuit in Canada

The plaintiff, the Canadian Olympic Committee (“COC”), which is a public authority with specific rights in certain Olympic marks, sued VF Canada and VF USA for trade-mark infringement, false and misleading advertising, and passing off with respect to a North Face collection of apparel and accessories that allegedly used Olympic marks and were promoted in a manner likely to mislead the public into believing that the defendants are official sponsors of the COC in Canada.

VF USA applied to have the action stayed on jurisdictional grounds. It argued that the B.C. Court lacks territorial competence or, in the alternative, that the Court should decline to exercise its jurisdiction in favour of the courts of California as a more appropriate forum.

The Court’s Decision

The Court dismissed the application, finding that there was a real and substantial connection to British Columbia (which is the test in Canada for territorial competence) based on VF USA’s role in marketing an online sweepstakes contest that allowed users to “find a store,” including locations in Canada, and treated residents of Canada as eligible entrants. The Court also made the following findings:

On the evidence, the plaintiff has presented an arguable case that VF Corporation through its various subsidiary companies, including VF Canada and VF USA, operates a functionally integrated business group for the joint benefit of the North Face brand. VF USA and VF Canada share parents and common resources such as legal counsel, technical support, designers, and manufacturers. VF USA designed and developed products and marketing materials for the collection with the intention that the collection would be available at choice for all “North Face” distributing companies, including VF Canada. The distribution pipeline created by VF Corporation uses a foreign manufacturer who produces the collection and then receives orders and exports the collection to VF Canada as an indirect subsidiary company. VF Canada uses materials and branding strategies developed by VF USA to sell the collection in Canada. VF USA directly sponsored a contest directed at Canadian residents to promote the North Face brand and the collection in Canada. In these circumstances, it could be concluded that VF USA intended or at least ought to have known that the infringing products and materials would ultimately be sold and distributed in Canada.

The Court went on to consider the relevant factors connecting the dispute to B.C. and California and concluded that California could not be said to be a more convenient forum.

The Take-Away

Even when care has been taken to create and operate distinct subsidiaries according to national boundaries, an American (or any other foreign) parent or subsidiary may nevertheless find itself a defendant in legal proceedings in Canada depending on the facts of the dispute and the coordination amongst the subsidiaries. And small details can matter, as illustrated in this case by the simple inclusion of Canadian store locations on an online sweepstakes operated by the American subsidiary, which now faces the cost and risk of litigation in Canada.

 

Use it or lose it: Restrictive covenants in Franchise Agreements

Posted in Franchises
Comment

A recent case from the Ontario Court of Appeal suggests franchisors may lose the protection of a restrictive covenant in a franchise agreement if, at the time the franchisor wants to enforce the covenant, it can’t establish a “legitimate or proprietary interest to protect” within the territorial scope of the covenant.

In MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168, the Ontario Court of Appeal refused  to enforce a restrictive covenant against a former franchisee, where the franchisor had no intention of operating or granting any further franchises in the territory.

In that case, the respondent franchisor, MEDIchair LP, operates a network of franchise stores that sell and lease home medical equipment. In 2008, the appellants purchased a MEDIchair franchise operating in Peterborough, DME Medequip Inc., and agreed to assume the obligations in a 2005 Franchise Agreement between MEDIchair and DME. The Franchise Agreement contained a restrictive covenant that prohibited the franchisee, on termination of the Franchise Agreement, from engaging in or operating “any business similar to the business carried on by MEDIchair or any of its authorized Franchisees within an area of 30 miles of the nearest MEDIchair Store business in Canada” or the Peterborough store, for a period of 18 months.

In June 2011, the franchise system was sold to Centric Health Corporation, which also purchased Motion Specialties, a group of corporate stores. One of the Motion stores operated in Peterborough and competed directly with the DME store. The franchisee alleges that after acquiring Motion, the MEDIchair franchise system declined as the corporate owners focused more on the Motion stores. Dissatisfied with the level of support of the franchise system, in January 2015, the franchisees terminated the Franchise Agreement on expiry. The now former franchisee removed the MEDIchair signage and continued to operate the same Peterborough store with the same merchandise and the same employees, under the name “Living Well Home Medical Equipment”.

The franchisor sued to enforce the restrictive covenant. In cross-examination, the franchisor acknowledged that it had no plans to open a Peterborough MEDIchair store, and that it would not seek to do so in competition with the existing Peterborough Motion store. The central issue in this case was whether the restrictive covenant could be enforced against the former franchisee given the franchisor’s stated intention not to operate in the territory.

Generally, restrictive covenants in the commercial context (as opposed to the employment context) are enforceable unless the covenant is shown to be commercially unreasonable. The Court in this case acknowledged there is a debate in franchise practice as to whether restrictive covenants in franchise agreements will enjoy presumptive enforceability, given the power imbalance between franchisees and franchisors, but did not have to resolve the issue in this case.

In the court below, the application judge considered the evidence that the franchisor had no plans to open a location or grant a franchise in the territory covered by the restrictive covenant, but was swayed by his consideration that failure to enforce the restrictive covenant could “significantly compromise” the integrity of the franchise system as a whole, and held the covenant was enforceable.

The Court of Appeal found that the application judge erred in law by focusing on the effect of non-enforcement of the covenant on the franchise system as a whole. The court found that the evidence of the franchisor’s lack of intention to operate in Peterborough showed the franchisor had acknowledged it had “no legitimate or proprietary interest to protect within the defined territorial scope of the covenant”, and therefore the covenant was “unreasonable as between these two parties in the circumstances of the particular Peterborough franchise.”

The Court also considered a second aspect of the enforceability of the restrictive covenant. In this case, the decision not to continue to operate in Peterborough arose after the parties agreed to the restrictive covenant in the Franchise Agreement. The Court resolved this “timing” issue by considering the parties’ expectations at the time of the Franchise Agreement as to what might happen in the future. The Court said:

[51] As the reasonableness of the covenant will be interpreted based on the parties’ anticipated expansion of the business when they entered into their agreement, it should similarly be interpreted to take account of the parties’ expectations at that time with respect to the future continued operation of the franchise in the territory. In this case, the clause was reasonable on the assumption and understanding that MEDIchair would want to continue to operate in the protected Peterborough area, but not if it did not.

In this case, the franchisor lost the protection of the restrictive covenant because the present direction of the franchise was not consistent with the expectations of the parties in 2005. The Court did emphasize that each case must be examined on the facts and the particular franchise agreement between the parties.

The Court considered and rejected a number of other arguments by the appellants. In particular, the Court confirmed the application judge’s finding that the franchisor was not required to provide the appellants with a disclosure document under sections 5(1) and (4) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 when the appellants purchased the franchise in 2008. In this case, the franchisor was only peripherally involved in the grant of the franchise – it approved the transfer of the franchise to the appellants, accepted a transfer fee and obtained personal covenants from the individual appellants to be bound by the 2005 Franchise Agreement. The franchisor was therefore exempt from disclosure requirements under the Act. Sections 5(8) of the proposed British Columbia Franchises Act contain the same exemptions from disclosure obligations when a franchise is granted by a franchisee.