Commercial Law – Things to Learn First

Why is Professional Liability Expanding

• The practice of professionals is becoming more complex so there is greater chance of making an error 

• There is a tendency for professionals to take on more clients and files due to economic pressures,
therefore greater chance of error, 

• Instantaneous communication through technology has created an expectation for immediate results so
professionals act more hurriedly and more errors occur 

• Clients are more aggressive, sophisticated and litigious, 

• Normal rules of negligence law are being applied to professionals and thus professional 
liability is
expanding due to various court cases. Example, the Donoghue v. Stevenson case established the
neighbour principle (don’t need a contract to have a duty of care with a party) and the Hedley, Byrne v.
Heller case which determined pure economic loss was deemed sufficient to ground a claim of
negligence against a professional. The only harm recognized previously was if it was physical 

• The advent of contingency fees has made it easier to retain a lawyer and sue professionals
Director Liability
o Directors are in charge with the management of the corporation and do not have to be shareholders
o Duties of directors are owed to the corporation and not the shareholders
o Potential liabilities of director’s have been expanded beyond what the common law duties are
o New variety of director’s liabilities, most of which are called ‘gatekeeper’ liabilities
§ The attempt to control wrong doing of companies by making the director’s liable through duties
o Liabilities consist of financial and penal nature for directors – this protects the governments revenue
from the corporations
o Some of these duties are owed to a series of individuals depending on the statutes: owed to
shareholders, employees, creditors, etc.
o Examples of potential liabilities:
§ Board of directors not remitting EI, CPP or income taxes
§ Debts that are liable to employees for up to 6 month’s worth
§ Environmental legislation that can give you jail time
§ Supreme court has indicated that directors remain liable even if they quit, during a time of crisis
Contracts – gratuitous promise and how it’s manifested in contract law
o A promise without a returning consideration is gratuitous and not enforceable by laws of contract –
needs to be an exchange made of some sort
o Contracts without consideration (missing element) are void
o If you ask for a good or service and you request, there is an implication that you will pay as you asked
Various Manifestations of the Gratuitous Promise
o Past consideration
§ Is no consideration. Reward for an act previously gratuitously done is not binding
§ Has to be an exchange because a contract is based on an exchange – reciprocity does not make
anything binding
o Existing legal duties and consideration
§ When party A is bound by the existing contractual duty to party B, a later promise by B to pay A
something extra to perform the same obligation is not binding
§ Usual common law contract that established this principle: sailors would be hired to make a
transport trip and then decide later that they want to increase their pay, the captain agrees, but
later only pays them the original amount
• If the sailor promises to do another duty then they would be paid higher
§ Seal: element of consideration has been covered
• Nominal (token) forms of consideration are sufficient for common law. Giving a dollar
or a seal to confirm
• For equity law, substantial considerations. Dollar, peppercorn seal is insufficient. If
seeking an equitable remedy you need a transfer of a substantial consideration
§ Convert a gratuitous contract into an enforceable agreement through one of these methods –
courts do not investigate the consideration, but just the fact that it exists. Equity investigates if
the consideration is substantial
o Rule in Foakes and Beer
§ Ratio of that case is that a creditors gratuitous reduction of debt for a payment is not enforceable
• No consideration was exchanged
• Ex: you’re loaned $1000 but the person needs the money badly so they say make one
payment and ill forgive the final two payments. Then the lender can sue the person
for the money. The person who was lent the money must use some form of nominal
consideration to cover their butt; seal the contract and make payment 1 day early.
It’s not the seal itself that has consideration but that the other party has given up
consideration
o If the creditor takes a gratuitous reduction of payment then he is not able to
collect the remaining balance after
Methods of Discharge
o Discharge by performance – everyone follows the contract, but can also occur over time
§ Tender of performance – one party attempts to perform but the other party refuses, this attempt
to perform is the tender whether it is accepted or rejected by the other party
§ One advantage of the tender, to be alleged of breach of contract – primary reason for tendering
is for evidence, but it is dangerous to tender on your own, you should have solicitors because the
money will be guaranteed to come back
o Discharged by agreement:
§ Waiver – formally discharges both parties, the parties agree between themselves that the
contract doesn’t have to perform, if one person has performed then the waiver is ineffective, it
becomes a gratuitous promise that they fulfill
§ Substituted agreement – new agreement; replaces the first where one of the clauses is that the
first agreement is discharged – also novation: substituted agreement with a new party
• Accord and satisfaction – when a party does not want to perform agreed in the terms
of the contract, they can make an offer of cash payment to buy out their contract and
responsibility
• Option to terminate – the ones offering the contract can buy the parties contract and
essentially get rid of them. It is a term in the contract when initially signed
§ The contract provides for its own dissolution – sometimes parties perceive of the possibility of an
inability or unwillingness to perform in certain situations and they include a term for allowing
those circumstances
• Condition precedent – future or certain event which must either happen or not
before the promisors contractual liability is established
• Condition subsequence – uncertain event that happening of which brings the
promisors contractual liability to an end, one or both or all of the parties have
reserved an out in certain circumstances
o Discharge by frustration – courts excuse persons for failure to perform their contracts in a wide
variety of circumstance where the inability to perform is not their fault. This is called frustration
§ Performance is literally impossible
§ Performance is possible but would have a different meaning than which was conceived at the
time of agreement
§ Results of frustration: contract is discharged and parties are relieved of further performance, any
benefits already exchanged fall where they lie
• Frustrated contracts act: which allows for relocation of the benefits already
exchanged
Contract Law - Certainty in Contract
o Parol Evidence Rule
§ Designed to create certainty in contracts
§ About the ability to enter in or submit something to the fact finder to consider
§ In the context, parol means extrinsic to or outside the written agreement
o Negotiable instruments – means to transfer funds between parties to a transaction without physical
exchange of cash
§ Gives greater certainty to certain types of assignments – people can better depend on negotiable
instruments
o Pharmaceutical society of Great Britain vs boosts cash chemists
§ Stands in the propositions regarding displays in stores and advertisements in the newspaper
§ Came to conclusion for policy reasons rather than logic – too many cases otherwise and would
clog the courts
§ The mere fact that a customer picks up a product from the shelf in this case doesn’t mean they
will buy it
§ It is an offer to buy and there is no sale until the buyers offer to buy is accepted by the
acceptance of the price
§ This was created for certainty and efficiency
o Certainty of an offer
§ Wording cannot be vague or it will be void
§ Sometimes there is an agreement to agree, it is uncertain and makes the contract uncertain
§ Courts are generally inclined to accept interpretations to contracts because they want to fill their
objective content
o Written documents increase certainty
§ Written evidence makes it certain that liars cannot win cases
o Literal meaning approach dictates certainty – liberal creates uncertainty
§ Restricts interpreting to the dictionary meaning, which dictates certainty
Discuss Bankruptcy
• Bankruptcy is a federal statute and has a number of functions
o Sets up a uniform practice to make it as inexpensive as possible 

o Sets out methods for reorganizing a debtors business by working out an agreement with 
the
creditors 

o Attempts to provide for an equitable distribution of the debtors assets among the 
creditors 

o Releases the debtor to begin again 

• There are 3 differing procedures:
o Proposal: the insolvent individual is trying to make a deal with the debtors: more time, lower
amount of debt, a lower level of interest, or a combination of the three. There are 2 kinds:
§ Consumer: made only by the individual whose debts, not including the debts secured by
mortgage on a principle residence, total less than $75,000. Formal acceptance by the
creditor is only needed under special circumstances, usually under objection. There are
certain benefits of consumer proposal, no termination of leases, acceleration of
installment of payments and the interruption of services by utility. If creditor rejects the
proposal, the individual is automatically considered bankrupt. 

§ Commercial: if the creditors reject the proposal the individual or business is bankrupt.
Things you need to have to get bankruptcy: majority of each class of secured creditors,
courts must approve the proposal, proposal is then binding on all the unsecured and
secured creditors who accepted the proposal. 

• Place yourself into bankruptcy through an assignment voluntarily. If the creditors put the individual in
bankruptcy, they do so by petitioning the court for a receiving order. If proven bankrupt, orders are put
in the hands of the trustee who will govern the assets and affairs.
o To obtain a receiving order they must prove the debtor has committed an act of bankruptcy in
the last 6 months and that they are due for at least $1,000. 

o Acts of bankruptcy: fraudulent transfer of assets/money, fraudulent preferences, absconding of
funds, failure to pay debts as they come due 

o Role of the trustee: retain the property/assets that the in debtor has gotten rid of, recover
settlements, distribute assets accordingly 

• A way by receiving order, creditors obtain an order by the court placing the debtor into bankruptcy.
Must have committed an act of bankruptcy within the last 60 months. Trustee will sell assets so
creditors can be paid. 

What are Secured Transactions? What is Collateral? What are the advantages of secured transactions? What
are some examples? What did the Personal Property Security Act do?
• Secured transactions mean the lender has security. If the debtor doesn’t pay, the lender can sue or seize
an item. Most common secure transactions is mortgages; if the debtor doesn’t make payments the bank
seizes your home by “foreclosing” on you. Security or collateral, is some insurance to the creditor that
the debt owing will be paid or recovered from certain assets of the debtor. Ie. if the debtor does not
pay, the creditor has some ability to seize property to satisfy the liability of the debt beyond the normal
ability to execute on a judgement.
• Collateral – security is dealt with in a separate contract. When you buy a house there is a contract to
purchase the house and a separate contract with the lender for security, ie. the mortgage. The second
contract is referred to as the collateral contract. The object of security, the house, is known as collateral
• Advantages:
o It is more direct, efficient and less expensive than the court system 

o In courts, after receiving judgement, you still have the hassle of collecting 

o You have priority over general creditors to seize property 

o Interest rate is lower for the borrower because there is less risk for the lender 

• Examples:
o Conditional sales contract – the transfer of title (ownership) to the buyer is conditional on the
buyer’s completion of a series of scheduled instalment payments. 

o Chattel mortgages – title is transferred by a mortgage 

o Share hypothecation – used to secure a private share purchase. The physical shares are 
pledged
and transferred to the lender (often the seller of the business) 

o Floating charges – a general mortgage of all assets owned and future assets except 
those used
in business operations by the borrower 

• Personal Property Security Act: emerged to establish a single unified system with common rules for the
following purposes:
o To define a secured party’s remedies against the debtor
o To create one system of registration for all security interests (doesn’t matter what kind of
security interest)
o To define priorities between a secured party and third party purchasers and indeed to define
priorities between all secured parties and general creditors.
What is a Negotiable Instrument? What are 3 types? What 7 elements need to be present for a contract to be a
negotiable instrument?
• Negotiable Instrument: means to transfer funds between parties to a transaction without the immediate
and physical exchange of cash.
• Negotiable instruments create a debtor-creditor relationship and form a contract. First utility is the
replacement for cash so we don’t need wheelbarrows of cash. It also gives greater certainty to certain
types of assignments. Not all financial instruments are negotiable instruments. The rules that govern
negotiability distinguish the NI from others.
• 3 Types:
o Promissory Notes: prepared by the debtor, a written promise to pay 

o Cheques 

o Bills of Exchange 

• Criteria for Negotiability:
o Promise/order must be in writing. 

o Obligation must be for money payment(s) (can’t be for 3 dozen carrots). 

o Sum of face of instrument must be for a certain fixed sum. 

o Promise/order must be unconditional. 

o Instrument must be payable at a fixed or determinable time or upon demand. 

o The whole instrument (complete sum) must be negotiated (not just part of it). 

o The Instrument must be signed by drawer/payer (the debtor). 

As discussed in the lectures and textbooks for this course, what are the grounds upon which a contract can be
“impugned?” What is the effect of a contract being impugned and how can these grounds be categorized? Also
discuss how each form of invalid consideration is a manifestation of a gratuitous promise.
• Void – To decide that a contract is void is to say it was never in law formed at all; if it is void there is no
contract. Contracts can be deemed void when:
o Missing an element or uncertainty 

o Non est factum (not my doing, illiterate people being misled) 

o Mistake of subject matter or identity 

o Errors in recording contracts or transcription 

• Voidable – Where a misapprehension or misrepresentation would render it unfair if the contract terms
were enforced against him or her. Contracts can be deemed voidable when:
o Misrepresentation – of information 

o Duress – illegitimate pressure such as exertion of physical force, threatening physical 
force or
economic duress 

o Undue Influence – The domination of one party over the mind of the other to such a 
degree as
to deprive the latter of the will to make an independent decision 

o Diminished Capacity – vegetative state or being a minor 

• Unenforceable
o Requirement of Writing – Some contracts in certain jurisdictions require contracts to be in
writing to be enforceable, such as those types of contracts covered under the Statute of Frauds
(however, this was repealed in MB). Also, the Sale of Goods Act requires written documentation
for the sale of chattels in MB over $50 to prove there is a contract. 

o Illegality – the contract is illegal 

• A gratuitous promise is a promise made without consideration in return. It is not enforceable by the
laws of contract. There needs to be an exchange made of some sort. There are various manifestations of
the gratuitous promise:
o Past consideration – is no consideration, a promise made to reward for an act previously
gratuitously done is not binding. There has to be an exchange because a contract is based on an
exchange. 

o Existing Legal Duties and Consideration – when party A is bound by the existing contractual duty
to party B, a later promise by B to pay A something extra to perform 
the same obligation, is not
binding. However the common law will recognize the exchange of nominal consideration from A
to B and the promise by B to pay A something extra would be binding; for example, a pepper
corn, small amount of money, or the seal. Equity however requires a transfer of real
consideration and will investigate if the consideration was substantial. Equity does not consider
the seal substantial.
o The rule in Foakes and Beer – the ratio: “a creditor’s gratuitous reduction of debt for a payment
is not enforceable,” because no consideration was exchanged. The borrower will need to use
some form of nominal consideration. This has been replaced by statute.
Discuss how principles of the law of agency relate to and are manifest within the principles of the law of
business organization.
• Agency is a relationship in which one person, known as an agent, is authorized to bring another party for
whom they act, known as a principal, into contractual relations with third parties. In a sole
proprietorship this may be necessary because they cannot do everything on their own. In partnerships,
all partners are both agents and principals of the partnership and thus have fiduciary duties. As a result
one partner can create liabilities that the other partner will be responsible for. In corporations, the
business is considered a separate entity, but they can’t do much by themselves because they are
artificial. So corporations must act through human agents: board of directors. One of the consequences
is that each director is a fiduciary because they are an agent. Agents can create contractual liability for
their principal and usually exist by contract or through estoppel.
• Principles of the law of agency manifest themselves through agency by estoppel in business
organizations. There are two types; apparent authority and holding out. Apparent authority is acquired
from a past manner of transaction business by the principal or from trade custom. Such circumstances
may make it appear to third parties that the agent has authority for the contract at hand, when in fact
they have no expressed authority for the contract at hand.
• There are 3 areas where apparent authority manifests itself in business organizations.
o The effect of publicly filed documents – the public was deemed to have notice of the contents of
filed documents whether they had read them or not, and thus could not rely upon what
otherwise might be the officer’s apparent authority. However this has since been abolished by
statute 

o Indoor management rule – a person dealing with a corporation is entitled to assume that its
internal procedural rules have been complied with unless it is apparent that such is not the case.
o Pre-incorporation contract
§ The corporation is bound by the contract and is entitled to the benefits thereof as if the
corporation had been inexistence at the date of the contract and had been a party
thereto, and 

§ A person who purported to act in the name of or on behalf of the corporation ceases to
be bound by or entitled to the benefits of the contract. 

Mr. Risktaker is thinking about starting a business as a transporter of nuclear waste materials through Canada,
however, he requires advice as to the various types of business organizations that exist and the advantages and
disadvantages of operating a business using each such type of business organizations. Provide that advice to
him keeping in mind that he may have to secure financing of some variety to start the business, and that he is
considering contemplating marriage in the near future and has substantial assets.
• The Sole Proprietorship:
o Advantages – gives you:
§ The ability to make all business decisions
§ The right to all profits
§ The right to deal with all assets without interference
§ It is simple and very inexpensive to set up and dissolve.
• Disadvantages:
o because the sole proprietorship is not a separate legal entity, he would be liable for all the
liabilities of the business and all non-business assets are exposed to creditors of the business
o The business income is added to personal income and the aggregate is taxed at the appropriate
rate.
• Prophylactic actions should be taken in order for Mr. Risktaker to protect himself. A combination of all
possibilities is best:
o Insurance is the best form
o Place investments in creditor proof assets, however the returns tend to be lower
o Make a legitimate business and estate plan to redistribute your property and if desirable transfer
assets to other individuals; it has to be an absolute transfer done well in advance of going into
business. If you transfer the assets to your spouse then in the case of separation the spouse can
be entitled to 50%. As well, you shouldn’t transfer property acquired prior to the marriage or
property acquired through inheritance because these are exempt from division in the marriage
act. Because he has substantial assets, he could achieve some protection through a prenuptial
agreement; it determines the allocation of property and support payments in the event of
divorce.
• Partnership:
o Advantages:
§ All partners may take part in the management of the partnership
§ A partnership is really easy to get into, but it is really tough to get out of or make
transfers of ownership
§ Partnerships also have strong loyalty because they are not allowed to compete with the
partnership. Along with prophylactic actions, a partnership agreement can refine the
terms of the partnership to his satisfaction.
o Disadvantages:
§ Because it is not a separate legal entity the separate assets of each partner are at risk to
satisfy the contractual and other liabilities of the partnership. Each partner is jointly and
separately liable for the liability of the business
 § Because all partners are agents of the partnership, each individual partner can create
liabilities of the partnership. Thus you should only enter into a partnership if you have to
and the partner should have lots of money because they will be able to cover the
liabilities created.
§ Profits are shared amongst partners. Tax advantages have been eliminated.
• Corporation:
o Advantages:
§ Shareholder has limited liability because the corporation is a separate legal entity and is
thus only at risk of losing his investment.
§ It allows for the use of many investors/shareholders as a means of funding.
§ Transfers of ownership are easy and end your relationship.
§ Corporations also have a continuous existence so if someone dies the corporation does
not have to dissolve.
o Disadvantages:
§ Shareholders have no authority to participate in management
§ Costs more to incorporate
§ Loyalty is lower because shareholders can hold shares in competing corporations. You
can change this through the use of a corporation agreement that brings in aspects of the
partnership act.
§ As well, there tend to be disputes due to the separation of ownership and management,
since the two parties have different interests.
§ Directors are considered fiduciaries and thus owe duties to a number of categories of
persons. If they fail to satisfy those duties then they are liable to someone and thus the
liability of directors is expanding and can include their personal assets.
• In deciding which type of organization to use there are numerous criteria Mr. Risktaker should consider:
o Limited liability 

o Estate planning 

o Tax planning 

o Borrowing requirements and relationship of lenders 

o Employee ownership 

o Flexibility of structure 

o Desirability of perpetual existence 

o Number of proposed proprietors 

o Relationship of proposed proprietors 

o Applicable government requirements 

o Available government grants 

o Costs