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20. Business liability for damages caused by client's fall

On October 24, 2000, the Court of appeal confirmed a Superior court judgment pertaining to damages sustained in a shopping center by a 68 year-old lady we will call Marguerite.

19. Mortgages granted by a company to related persons: non invocation against creditors

[Posting date in the "Articles" section:  16/10/00. Court file number: 400-05-001815-985. Judgment date:09/06/00]

Brought to you by Beaulieu Normandeau, law office in Canada.

18. GST and TVQ: the vender or supplier assumes the risk of ambiguity... 

It is important that business people clearly stipulate as to the taxes which apply to their sales or services.

Two businessmen who had known each other for several years were used to buying and selling luxury cars they loved, either as collectors or as investors. They would do this by the intermediary of companies we will call Deal Inc. et Buy Inc.

In the course of their business relationship, Deal Inc. sold a Lamborghini Countash to Buy Inc. for 120 000$, without the written contract expressly mentioning the applying taxes. Buy Inc. immediately paid the 120 000$ by check to Deal Inc. and took possession of the vehicle.

The contract was drawn up on a form regularly utilized by automobile dealers for rapid sales and its heading indicated that it was a "Sale contract between dealers". The contract then described the vehicle succinctly and mentioned the following:

Sale price:           120 000$

GST:         ____%________

TVQ:         ____%________   (Quebec equivalent of the Harmonized Sales Tax, or HST)

Total:                  120 000$

1.  I/We have read and understand the terms entered on the front and back of this contract and agree to them as if they were printed above my/our signature.

 

2. The terms above and on the reverse include the full agreement between the vendor and purchaser pertaining to this sale, and no other agreement, representation or condition, express or implicit, required by law or otherwise, is part of this sale.

Sale:                         120 000$

GST:                             8 400$

TVQ:                             8 346$

Sub-total:                  136 746$

Check:                       120 000$

Due:                            16 746$

Since Buy Inc. refused to pay this amount of 16 746$, Deal Inc. paid the taxes to the governments and sued Buy Inc. for reimbursement.

In the documents submitted in court, Deal Inc. alleged that the contract was incomplete because of the absence of mention as to taxes payable, while Buy inc. maintained that all taxes were included in the 120 000$ price since it had bought the car "taxes included", as could be deduced from the contract, so Deal Inc. was the one who had to pay the taxes.

The court consulted the guide published jointly by the Canadian and Quebec governments, to the effect that when a vendor sells taxable goods, he or she must collect the applying GST and TVQ at their respective rates by advising the buyer of the fact that these taxes apply by clearly and separately indicating them on the receipt, bill or contract, or by including them in the sale price.

The court also consultant a previous judgment relating to the "Loi sur la taxe de vente du Québec", to the effect that if the vendor of a taxable product does not indicate the applying taxes in a pertinent document (bill, receipt or contract) or does not advise the buyer of the fact that the sale price includes these taxes, the vendor may not sue the buyer as to these taxes.

In noting that the parties to the car sale were experienced people, the court mentioned that the contract's clauses 1 and 2 were clear and, in view of applying law, dismissed Deal Inc.'s legal action against Buyer Inc.

[Posting date in the "Articles" section:  16/10/00. Court file number: 500-22-029077-990. Judgment date:10/08/00]

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17. Intellectual property, copyright, web site and injunction

If somebody sets up your web site without transferring his or her copyright to you in writing, you may end up having certain problems...

In a case decided by the Quebec Superior court, after having had the idea of establishing a web site, Julie talked about it to her neighbor Sam, who had a business specializing in such matters and they agreed that for 3 000$ Sam would proceed with the programming required for the site's setup on a server.

In time, Julie, who was the site's registered owner, wanted it to be improved, which required that Sam execute several modifications to the site's source code and that he transfer the site to a new, more efficient server belonging to a company we will call XYZ Inc.

After having decided to put a term to her business relationship with Sam without paying him for his additional work, Julie instructed another specialist we will call Max to create a new underlining system for the site, which comprised modalities which, according to Julie, were not present in Sam's version (bulletin board, credit card payment, etc.). Then, since she apparently feared that Sam would bring the site down, Julie prohibited him from accessing its underlining data.

In reaction, Sam invoked copyright against the site as a whole and undertook interlocutory injunction proceedings against Julie.

The injunction procedure is provided for in the Quebec Code of civil procedure and consists in a judge's order that enjoins a person or several people to do, not to do or cease doing something determined. This procedure may comprise several steps, depending on the emergency of the situation, and the court order may be only temporary (provisional or interlocutory injunction), in which case it applies until the court hears all the evidence, after which the order may become definitive (permanent injunction).

Furthermore, the Act respecting copyright is a federal law according to which a computer program is a set of instructions or statements destined to be utilized on a computer, such a program constituting a literary work protected by copyright.

According to this law's article 3, copyright comprises the sole right to produce or reproduce a computer program or any substantial part thereof in any material form whatever.

However, according to jurisprudence, this law only protects the expression of an idea and not the idea itself, so in Sam's case against Julie, the court mentioned that even if Julie had the idea for the site, the initial expression of this idea on the site itself resulted from Sam's work, who therefore had a copyright and benefited from the protection provided for by law.

The court also mentioned that the fact that Sam had been partly paid for his work did not change anything to this situation, since he had not transferred his copyright to Julie, whereas article 13 of the law specified that the owner of a copyright may, in writing, assign (transfer) his copyright or grant any interest in it by license.

Since Sam was complaining that Julie was utilizing the site in detriment to his copyright (article 27 of the law, as interpreted by the court, is to the effect that one may not appropriate somebody else's work without his or her authorization), while Julie was insisting that she was operating a different site than the one created by Sam, the court referred to the law's article 34, which is to the effect that if, in any judicial proceedings for infringement of copyright, the defendant contests the existence of a copyright, unless the contrary is proven the subject of litigation must be presumed to be protected by copyright and its author must be presumed to be the owner of the copyright.

Then, since the basis for copyright is the originality of the work and since a work is original if it results from its author's efforts and is not copied on another, the court asked itself if the new site set up by Max constituted an original and distinct work as opposed to the site set up by Sam, or if it was an unauthorized  copy or reproduction of Sam's work.

However, the documents submitted did not allow the court to determine which was the originality of Max's work as opposed to that of Gilles concerning the site's structure and the organization, and although Max's work had its own characteristics, the court could not establish if the differences between the two site versions were sufficient to allow one to consider that Max's version constituted a distinct work. The judge therefore applied the legal presumption in Gilles' favor and considered that the utilization and exploitation of his work by Julie constituted a violation of his copyright.

Consequently, the court, by interlocutory injunction, ordered Julie, her agents, principles, mandatories, delegates, contractors and employees, as well as any and all persons notified of its ruling:

• to immediately remit to Gilles all copies of his multimedia work consisting in the site and all other copies of source code, registers or other elements associated with the work in her possession;

• to immediately reveal the site's secured access code to Gilles, whatever the server harboring the site was, so as to reestablish Gilles' free access to the site, and to withdraw Julie's own access, Gilles having to assume the server's  rental costs for harboring the site and obliging himself not to exploit or harm the site or the work;

• to immediately reveal to Gilles the existence of all and any illegal backdoor entries to the site known to Julie and allowing access to the site, and to abstain from utilizing this method or any similar method in view of illegally accessing the site;

• to not, directly or indirectly, sell, transfer, lease, counterfeit, modify, copy, reproduce, emit or translate the site;

• to not, directly or indirectly, exploit, sell, lease or otherwise utilize the source code or executable programs or copies of the source code pertaining to the site;

• to not undertake and to cease and desist of all and any registration request for a trademark or copyright before any and all certifying bodies as to the site;

• to not communicate with I.C.A.N.N. or Network Solutions, directly or indirectly, in view of modifying any or all aspects of the site, notably including elements associated with its technical specifications, its domain name and its domain address;

• to abstain from disposing of the possession, guardianship or control, or from hiding, erasing or destroying any program, object, document or any other element relating to the production, confection, reproduction, representation, emission or exploitation of the site, by using the site itself or otherwise;

• to remit, within thirty days, all other counterfeit element pertaining to the site.

The court also:

• enjoined Julie to take all measures necessary so that her agents, principles, mandatories, delegates, contractors and employees be notified of the court's ruling and recommend that they respect it;

• allowed Gilles' bailiffs to penetrate into all places belonging to Julie or to XYZ Inc., who owned the server harboring the site, within normal business hours, to seize any and all reproductions or counterfeits of the site, as well as all files, databases, folders or other instruments destined to serve the management, exploitation or functioning of the site.

So whether it be for your personal or business purposes, if you have somebody else set up your web site, remember that copyright!

As mentioned above, an interlocutory injunction order is temporary and is issued for the period until the court hears all evidence, after which it may become permanent. We will keep you posted of this case's developments.

[Posting date in the "Articles" section:  10/10/00. Court file number: 500-05-056478-009. Judgment date:31/08/00]

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16. Loan, preferred shares, company bankruptcy and endorsement

In payment of a 50 000$ debt it had toward a businessman, a company issued him 50 000 category "J" shares of its stock. These were non-voting shares, but they gave their holder the right to an annual, fixed, preferred and cumulative dividend of 10% per year on the capital invested (50 000$).

On the same day, the company, the businessman and each of the company's directors signed a "Share buyback agreement" according to which the company irrevocably obliged itself to proceed to the acquisition of these 50 000 category "J" shares in five equal installments of 10 000$ for 10 000 shares on the first day of August of every year from 1995 to 1999 inclusively.

The company and each of the directors also obliged themselves to the effect that the dividends pertaining to these 50 000 shares would be declared and paid annually, at the same date scheduled for the share buyback installments.

The agreement also contained a provision to the effect that if the company could not pay according to the set schedule and omitted to remedy this within five days following a notice to such effect from the businessman, he could, at his sole discretion, demand:

a) that the directors buy all of his outstanding shares, for the same price, plus all unpaid and outstanding dividends;

or

 

b) that the company immediately convert all of his outstanding category "J" shares into category "K" shares, which each held ten votes as to all of the company's shareholder meetings, which would allow the businessman to take control of the company.

In August of 1995 and of 1996, the company did not proceed with the 10 000$ payment installments and on each occasion, one of the company directors told the businessman that the company's financial situation did not allow for such payment. The businessman then agreed to grant additional delay as to the 10 000$ payments, but his dividends were paid as originally agreed upon.

Then, at the end of 1996, the company went into bankruptcy and the businessman, prevailing himself of his above-mentioned a) option, sued the directors since they refused to buy his 50 000 "J" shares at the 50 000$ price which had been agreed upon, plus all amounts due as to unpaid dividends.

In support of his legal action, the businessman filed the certificate representing his 50 000 "J" shares with the court clerk, duly endorsed for transfer purposes.

In defense to the action, the directors invoked the fact that since the company was bankrupt, the transfer of shares could not be operated since the directors could not adopt a resolution to such effect and hence, the businessman could not demand that they acquire his shares.

The court rejected this argument by mentioning that the company directors had, by resolution, authorized the company to intervene to the "Share buyback agreement" and had agreed that the businessman's shares would be transferred to them if the company did not respect its obligation to pay them. 

As to the company's bankruptcy, the court mentioned that it in no way affected the company directorship's existence, which "remained in function to assure the exercise of certain powers of indoor management, such as the authorization and inscription of share transfers".

The directors were therefore ordered to pay 50 000$ to the businessman, who did not receive anything in addition as to dividends, however, since at the moment of his legal action the agreed upon dividends had all been paid to him.

[Posting date in the "Articles" section:  02/10/00. Court file number: 200-05-006636-976. Judgment date:28/04/00]

Brought to you by Beaulieu Normandeau from its law offices in Quebec City.

15. Right of way: obstruction, nuisance and loss of clientele

Article 1186 of the Quebec civil code is to the effect that the owner of property on which a right of way is exercised may not do anything that tends to diminish such exercise or render it less convenient; however, provided the owner has an interest in doing so, he may, at his own expense, transfer the site of the servitude to another place where its exercise will be no less suitable to the person benefiting from the right of way.

This means, notably, that one may not erect an obstacle on a right of way, render its exercise more difficult or otherwise deprive its beneficiary from using the right.

In a case where a company had a right of way for motor vehicles on a ten foot wide band of land on its neighbor's property, the latter removed the asphalt which was there, installed a shed encroaching on the right of way and erected a fence along it. All of this, according to the company, constituted a considerable nuisance to its operations since it impeded motor vehicle access to its business premises by its representatives, employees and customers.

In the course of the company's injunction proceedings and claims for damages, in view the neighbor's admission to the effect that his  interventions had indeed rendered the right of way "less convenient" than was previously the case, the court ordered him, at his own expense, to restore the asphalt, move the shed and remove the fence. The court also ordered him to leave the passage free from any object, to no longer hinder the right of way and not to render it less convenient.

In addition, the court condemned the neighbor to pay some 4 000$ to the company for the troubles and inconveniences he had caused, including the reimbursement to the company of the costs it had assumed to replace its clients' exterior rear view mirrors, which had been broken because of the neighbor's structures, plus some 3 000$ for the expert fees of the land surveyor who had worked on the case for the company, since his plans and testimony had been useful in solving the case.

However, the court did not grant the company's request for a "buffer zone" along the right of way, i.e. an additional space free of encumbrances for the passage of vehicles, since this would have enlarged the right of way. According to the judge, the company only had the right to ten feet, which the court could not expand.

Finally, the court rejected the company's claim for compensation of loss of revenue and of clientele, since no evidence to such effect was submitted, the company not having filed any financial statements or other statistical data on its clientele or its business, and not having had an expert such as an accountant testify, which could have resulted in the court granting additional damages.

[Posting date in the "Articles" section:  23/09/00. Court file number: 200-05-010147-986. Judgment date:05/03/00]

Brought to you by Beaulieu Normandeau from its Quebec City law offices.

14. The reorganization of a company into an "empty shell" and the non payment of its debts

In light of judgment rendered by the Quebec Superior court, corporate and financial transactions or operations by which business people try to avoid paying debt, when examined closely, may not only be useless, but more costly than paying the debt itself.

In the case considered by the court, two brothers were the only shareholders of a federal company we will call Banner Inc., which in turn was the only shareholder of several other companies that operated more than sixty retail stores.

Thus, Banner Inc. was what is known as a "holding company", i.e. a company that controls other companies which, in turn, operate businesses. Such an organization is perfectly legal and may be advantageous, notably for tax purposes.

After having rented a commercial space from a company we will call Lessor Inc., Banner Inc. changed its name to 123456 Canada Inc. and restructured its business by having its operating companies sell all of their assets (inventory, equipment, goodwill, etc.) to another company we will call Banner 1999 Inc., of which the brothers directly held all shares.

Following these transactions:

- Banner Inc. became 123456 Canada Inc. and its only assets were the shares it held in companies which had no assets since they had sold them to Banner 1999 Inc. (hence, Banner Inc.'s shares were worthless and it was insolvent); and

 

- all assets became the property of Banner 1999 Inc., which was controlled by the two brothers.

Then, since 123456 Canada Inc. was in default as to some 210 000$ in rent owed to Lessor Inc., the brothers put 123456 Canada Inc. into bankruptcy. 

Then, the brothers changed Banner 1999 Inc.'s name for 789123 Canada Inc., sold all of its assets to three other number companies which they also controlled, and also put 789123 Canada Inc. into bankruptcy.

Afterward, the brothers merged the three number companies into Banner 2000 Inc., of which they owned all shares.

Thus, Banner 2000 Inc. became the sole owner of all tangible assets.

In reaction to all of this, Lessor Inc. sued Banner 2000 Inc. and both brothers personally and required that all three be condemned to pay the rent owed, by alleging that the numerous corporate reorganizations mentioned above constituted maneuvers and smokescreens that could not be opposed to Lessor Inc. since they had been undertaken fraudulently in view of making an "empty shell" out of Banner Inc., i.e. an insolvent company, without assets.

The court did not appreciate what it seems to have considered as the "Let's empty the company, put it into bankruptcy, not pay its debts and continue under another name!" stratagem.

Consequently, Banner 2000 Inc. and the brothers were ordered to pay some 210 000$, plus costs (lawyer fees, etc.) to Lessor Inc.

This judgment has been appealed from. We will keep you posted. 

[Posting date in the "Articles" section:  18/09/00. Court file number: 500-11-000729-950.  Judgment date:19/01/00]

Brought to you by Beaulieu Normandeau from its Quebec law offices.

13.Corporate law: the indoor management rule

The Quebec Civil Code specifies, in its articles 311 and following, that a company acts by the intermediary of its directors, who represent it and who must respect its constitution and by-laws in such a way as to act within the limits of their powers, with honesty and loyalty in the best interest of the company.

Thus, when a company intervenes to a contract, it proceeds by the intermediary of its board of directors, which adopts a resolution designating a person, who is usually one of the company directors, to sign the contract in the company's name.

Usually, at the contract's signing, the person designated by this resolution has a "resolution excerpt", which is signed by one of the company's officers (president, vice-president or secretary) and which certifies that the board of directors has authorized this person to act on the company's behalf, such as:

IT HAS BEEN AGREED to authorize John Smith, secretary of ABC Inc., to sign, on ABC Inc.'s behalf, a contract with XYZ Inc. for the sale of equipment.

 

TRUE COPY of a resolution adopted by the board of directors of ABC Inc. on September 11, 2000.

 

____________________

(signed John Smith)

In such circumstances, may XYZ Inc. trust this true copy without undertaking additional verifications as to John's capacity to act on ABC Inc.'s behalf?

Article 123.31 of the Quebec Companies Act specifies that a person of good faith may presume that a company's directors or officers validly occupy their functions, legally exercise their powers and that the company documents emanating from one of them are valid. Consequently, the answer to the question is affirmative. This principle is known as the "indoor management rule".

In a case decided by the Quebec Superior court in May, 2000, over a prolonged period of time a company director, namely its secretary, signed several true copies of resolutions to the effect that he had been authorized to undertake certain banking transactions in the company's name. The implicated bank trusted these true copies and followed the secretary's instructions, which had the effect of causing a loss of some 100 000$ for the company.

By invoking that the secretary had never, in fact, been authorized to act on the company's behalf, and by blaming the bank for having trusted him blindly without verifying if he indeed had authority to act on the company's behalf, the other directors sued the bank in the company's name and asked for reimbursement of the 100 000$.

Since the company's secretary testified at trial to the effect that he had indeed told the bank that he had been authorized to act on the company's behalf, the bank invoked the indoor management rule.

Here is what the court said in throwing out the case against the bank (our translation):

"By certifying, as company secretary, that the document was a true copy of a resolution adopted on the same day by the company, [the secretary] represented to the bank that such a resolution had been adopted on the same day by the board of directors. By subsequently doing nothing to inform the bank that such a resolution had not, in fact, been adopted, [the company's] secretary led the bank to believe that all the required formalities had been accomplished. The bank itself had no obligation to verify if all of [the company's] internal formalities had been followed."

The court thus concluded that the bank could not be blamed for the fact that the company's secretary had deceived his co-directors.

Consequently, if you are a company director, it is important that you fully trust your co-directors!

[Posting date in the "Articles" section:  12/09/00. Court file number: 500-05-002734-950.  Judgment date:23/05/00]

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12. The importance of acting in good faith and reasonably

The Quebec Civil Code comprises the fundamental rules which govern people and property in the province of Quebec inasmuch as civil matters, as opposed to criminal matters, are concerned.

The code contains numerous references to good and bad faith, including the following ones, which are crucial:

Article 6: Every person is bound to exercise his civil rights in good faith.

Article 7: No right may be exercised with the intent of injuring [harming] another or in an excessive and unreasonable manner which is contrary to the requirements of good faith.

These articles serve a very important function by controlling the exercise of rights to avoid their use in marked departure from generally accepted social behavior. They are regularly referred to by the courts to prohibit or punish the abuse of a right, as well as to counter instincts of bad faith, malice, vengeance or spitefulness. They also apply when someone abuses of a right by exercising it in an unreasonable manner, i.e. in a manner inconsistent with the conduct of a normally prudent and reasonable person.

Jurisprudence contains several examples of rights being abused, such as:

• the former airport director who abused of his right of ownership by placing poles on his property to disrupt the neighboring airport's operations;

• the disgruntled businessman who abused of his right to free speech by slandering and smearing his insurer;

• the impulsive and unjustified withdrawal of credit by a bank, or firing of an employee;

• misrepresentations by businesspeople to obtain contracts;

• litigating parties who abused of their right to trial by maliciously multiplying frivolous and unfounded proceedings to intimidate, harass or delay, etc.

Since malicious or unreasonable people often end up as losers in court and are regularly condemned to pay damages for the harm and inconveniences they have caused, articles 6 and 7 put the "Nice guys finish last" motto to the test.

So in view of the long-standing maxim to the effect that ignorance of the law is no excuse for one's actions, acting in good faith and reasonably is just as important as learning about the law and standing up for one's rights!

[Posting date in the "Articles" section: 01/09/00. Court file number: 500-02-077735-996. Judgment date:31/03/00]

Brought to you by Beaulieu Normandeau, attorneys in Quebec City.

11. Contract infringement: bad faith and procedural abuse penalized by the court

Article 1591 of the Quebec Civil Code specifies that if you do not substantially respect your obligations toward another person and if you do not offer to respect them, this person may, in certain circumstances, act the same way toward you and put his or her own obligations aside. This is known in law as the "exception of inexecution".

Furthermore, article 2100 of the Code specifies that the contractor and the provider of services (a consultant, professional, mechanic, etc.) are bound to act in the best interests of their client, with prudence and in accordance with their contract.

These articles were applied by the Quebec superior court in a case where a company we will call Client Inc. retained the services of another we will call Provider Inc. to install industrial conveyor belts for Client Inc.'s production purposes.

Their signed contract specified that Provider Inc. was to install the conveyor belts and have its work approved by an engineer, who was to issue a certificate of conformity to the effect that Provider Inc. had respected the applying norms as to the belts' solidity.

Following installation, Client Inc. was advised of the fact that Provider Inc.'s work was deficient and, in view of Provider Inc.'s refusal to submit the required certificate, Client Inc. refused to pay some 42 000$ which remained due to it unless the required corrections were made and unless the required certificate was delivered.

Provider Inc. reacted to this by advising the CSST (Quebec workers compensation board) of the danger to which Client Inc.'s workers were exposed by the fact that the conveyor belts' solidity had not been verified (!), to which the CSST reacted by prohibiting Client Inc. from using the belts as intended as long as a certificate of conformity issued by an engineering firm of was not produced. Meanwhile, Provider Inc. sued Client Inc. and tried to have the belts seized and returned, which suit was successfully opposed by Client Inc. by the intermediary of its attorneys and experts.

Thus, as the court mentioned, although Provider Inc.'s job was clearly deficient and although it was clear that the required certificate of conformity could not by obtained without correction, Provider Inc. did not act as a reasonable person, nor did it act in the best interests of Client Inc. by neglecting to respond positively to its justified demands (correction to the deficiencies and obtaining of the certificate).

Rather, says the court, Provider Inc. tried to harm Client Inc. by bringing in the CSST, thereby putting the solidity of its own installation in doubt, while knowing that the CSST would most probably interrupt Client Inc.'s production, which could in turn paralyze Client Inc. while harming its reputation.

Following the rejection of its seizure attempt, Provider Inc. modified its suit to claim the above-mentioned 42 000$ from Client Inc.

In response, Client Inc. invoked the exception of inexecution and, in the same court file, by the intermediary of what is called a "cross-demand", in turn sued Install Inc. for damages sustained (delays caused, required correction of deficiencies to render the conveyor belts acceptable, equipment rental, loss of production, abuse of proceedings, court costs, expert and attorney fees, etc.).

The Superior court granted Client Inc.'s cross-demand for 32 000$ and operated compensation, whereby Client Inc. paid 10 000$ to Provider Inc.

Thus, Client Inc. assumed the corrections of deficiencies while obtaining compensation for their cost as well as for additional damages caused to it by Provider Inc., who was penalized for its reprehensible behavior, regarding which we deem appropriate to cite two additional articles of the Quebec Civil Code:

Art. 6:  Every person is bound to exercise his civil rights in good faith.

 

Art. 7:  No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith.

These articles were adopted by the Quebec National Assembly in 1994 in the course of the major reforms that were then brought to the Civil code. They are of great importance since the courts now regularly refer to them against those who adopt abusive or malicious behavior. We will further discuss these articles next week. 

[Posting date in the "Articles" section: 28/08/00. Court file number: 500-17-004276-989. Judgment date:11/02/00]

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10. Company director personally condemned to pay salaries

Article 96 of the Quebec company act (Loi sur les compagnies) is to the effect that the director of a company incorporated in Quebec may be held personally responsible for the payment of the company employees' salary, for the equivalent of six months salary, if the company is insolvent and if the employees undertake legal proceedings against him within one year of the day at which their salary should have been paid.

According to a judgment rendered by the Cour du Québec, this article must be applied even where the director has done nothing wrong and even if he at all times acted sincerely and in good faith.

This judgment reviews in detail jurisprudence from the Supreme court of Canada and the Quebec court of appeal, to the effect:

- that the responsibility for unpaid salary does not necessarily originate from a fault or omission on the director's part, and that the director may not invoke good faith in defense;

 

- that the simple fact of being a company director at the time at which the employees rendered their services renders the director responsible, inasmuch as the employees sue within the one year delay specified by law

 

- that the only excuse available to the defendant is that he was not, in fact, one of the company's directors at the time the salaries should have been paid, or that he was not sued within the one year delay.

As to the notion of "salary", unless a collective agreement specifies otherwise, jurisprudence is to the effect that it does not include, inasmuch as a director's personal responsibility is concerned, indemnities provided for by law in the case of an illegal dismissal (notice of termination), but does include, in addition to salary per se, "all forms of remuneration to be paid to the employee for his work" such as benefits, union fees, pension or collective insurance plans, expenses, commissions, holidays, overtime, accumulated sick days, mobile days off, etc.

As to a company incorporated federally, article 114 of the Canada Business Corporations Act contains similar provisions, which have been interpreted the same way by the courts.

Consequently, a company director must pay particular attention to the company's payroll, especially if the company is in financial difficulties.

[Posting date in the "Articles" section:  21/08/00. Court file number: 500-02-077735-996.  Judgment date:31/03/00]

Brought to you by Beaulieu Normandeau, Canadian lawyers.

09. The seizure of computer data by an ex-employer

The Quebec Code of civil procedure specifies that in certain circumstances, in the course of legal proceedings, one may seize certain things before judgment to put them under the control of the judiciary system until a judge decides of the validity of the proceedings.

Such may be the case, for example, of the owner of a stolen good or of the unpaid vendor, when they wish to recuperate the good in question.

By alleging that two of its ex-employees, who had quit their jobs to establish a business together, were in possession of computer files and of software belonging to the it, a company had these elements seized at their respective domiciles and at their business' premises with the assistance of bailiffs.

To do this, the company had previously obtained the court clerk's authorization  to seize "All software, documents (including all copies of documents), merchandise, materials, diskettes, computerized data, manuals, booklets, assets and any and all other property owned by" the company, including software such as AutoCad and Microsoft Office, as well as the company's project reports.

With this authorization in hand, the company gave the following instructions to its bailiffs:

"1. Open any computer, floppy disk or CDs that is at the premises and use the find feature in explorer. You are looking for the feature that uses keyword (see attached example). You will enter [the company's name] to find all the appropriate files, when the search is finished you select all the files and delete them, once this is done you must empty the trash bin and have the system start a defrag this step is important in that if you do not do this they can recover their documents.

 

2. Look on the hard drive for the following software [follows a list of software and of serial numbers].

 

3. Look for any documents that have [the company's name] written on them.

 

4. Have the bailiff take anything you think would belong to [the company], or was copied from [the company]."

At the time of seizure, nobody was at the business' premises, nor were the ex-employees at home, so after having obtained an additional authorization from the court clerk, the bailiffs had the doors opened by a locksmith.

Then, working with the assistance of one of the company's representatives, the bailiffs, by searching on the computers situated at the business' premises and on one situated at the home of one of the ex-employees, found  data concerning the company. After having copied this data on floppy disks, the bailiffs and the representative deleted it from the computers.

Upon the ex-employees objection, theses seizures were annulled by the Quebec Superior court, which judgment was confirmed by the Court of appeal on June 21, 2000.

It was judged that the seizures were illegal in that:

- the objects to be seized were not sufficiently described in the company's request to the court clerk ("All software, documents...") and the company, rather than limiting the seizure to specified objects, had searched for things to seize, while "fishing expeditions" are prohibited in such matters;

 

- in the course of a seizure, bailiffs receive their orders from the court and not from the person requesting seizure; it is the bailiffs that must execute the seizure, they must not follow such person's instructions and here the company's representative had no right to enter unto the premises nor to search for things to seize amongst those on the premises;

 

- the court clerk's authorization in similar matters is insufficient, and one must previously obtain the authorization of a judge and follow the modalities and conditions that he may determine.

Thus, since the company omitted to precisely describe each of the objects belonging to it and since it did not respect the other parameters mentioned above, its seizure was annulled by the courts.

[Posting date in the "Articles" section:  14/08/00. Court file number: 500-09-009071-994.  Judgment date:21/06/00]

Brought to you by Beaulieu Normandeau, Canadian legal counsel.

08. If your client is a company, what about the payment of your bills?

A Quebec Superior court judgment is to the effect that if your client is a company and if nobody guarantees the payment of your bills, you may well end up working at a loss if the company is insolvent.

Indeed, an attorney we will call Abe was consulted by a Quebec businessman we will call Bob, who was the principal shareholder and president of a company, in relation to the purchase by this company of an Ontario chain of retail stores for approximately 4 500 000$.

Abe and Bob verbally agreed that Abe would be paid for his services on a 150$ per hour basis, but no written agreement was signed to the effect that Bob guaranteed the payment of Abe's fees and disbursements.

Thereafter, Abe prepared and revised a series of legal documents and worked on resolving issues concerning Quebec and Ontario laws. 

However, following intensive negotiations, the purchase failed after the bank withdrew its support in view of the chain's doubtful financial and inventory records. The deal was dead, and Bob's company did not have any assets.

In the course of his interventions, Abe had sent four bills to Bob's company and the first of these had been paid by checks drawn on Bob's personal bank account.

Following the failed acquisition, Bob's company ceased to exist and Abe sued him personally for his accounts, totaling some 63 000$.

In court, Abe testified to the effect that Bob had assured him on many occasions that after the company's acquisition of the Ontario chain, the funds that were to be advanced to it by the bank and other investors would be used to pay Abe's accounts. Abe added that Bob had also assured him "that the payments would be taken care of, by himself if necessary". It is on the basis of these statements that, according to Abe, Bob had made himself personally responsible for the payment of Abe's accounts.

In defense, Bob denied having made such a statement and alleged that he had never personally guaranteed payment to Abe, saying that all of his dealings with Abe were on behalf of the company. As to the payment of the first account by him personally, he explained that the payment constituted an advance on his part to the company, although no documentation in support of this was produced. Bob also argued that this payment did not constitute an admission to the effect that he was personally liable for Abe's accounts, although he admitted that he had assured Abe that his bills would eventually be paid, saying that when he gave such assurances he expected, in good faith, that the chain acquisition would eventually be concluded and that the bank loan would supply sufficient funds for the payment of all outstanding debts.

In view of these facts, the court concluded that since Abe had billed the company and not Bob, there was no doubt that he himself considered the company to be the client for whom he was working.

As to Bob's personal checks in payment of Abe's first bill, the judge considered that this only showed that Bob was willing, for the benefit of his company, to advance money in payment of Abe's fees, which did not necessarily indicate that Bob was thus rendering himself personally responsible for them. The court also concluded that the assurances given by Bob to Abe to the effect that he would see to it that his accounts would be paid by the company did not constitute an undertaking by him to be personally bound to payment, and that in giving such assurances Bob was speaking for and on behalf of the company.

And even if Bob had indeed told Abe that the accounts would "be taken care of, by himself, if necessary", these words, according to the court, could be interpreted as meaning that Bob intended to see to it that the company would pay Abe's accounts, or that Bob would advance additional sums to his company so that it would be in a position to pay the outstanding accounts, but did not constitute a clear and unequivocal undertaking that Bob was binding himself, directly and personally, to pay Abe's accounts himself.

The court then referred to article 2335 of the Quebec civil Code, which is to the effect that "Suretyship [i.e. Bob's alleged personal endorsement, or guarantee for the payments of Abe's fees] is not presumed; it is effected only if it is express" [i.e. be it verbal or written, such a guarantee must be clearly expressed, must be evident, may not be deduced from the circumstances and the slightest doubt must be resolved in favor of the alleged endorser].

Consequently, Abe's legal action against Bob was dismissed.

Upon opening a client account for a company, one may agree with the company's directors that they personally and jointly guarantee the payment of the bills you address to the company. It is preferable that such an agreement be in writing and that it specifically mention that the directors renounce to what is known in law as the "benefits of discussion and of division", which we shall discuss in an upcoming article.

[Posting date in the "Articles" section:  24/07/00. Court file number: 500-05-017841-931.  Judgment date:13/12/99]

Brought to you by Beaulieu Normandeau, Canadian legal services.

07. A bank is not necessarily responsible if it honors a forged check

Upon opening an account with a Caisse populaire, a company's president had signed a "verification agreement" according to which he was the sole person authorized to sign checks for the company, although the company's accountant was authorized to receive the Caisse's monthly statements.

The agreement also stipulated that the company had 30 days from its reception of the Caisse's monthly statements to protest any irregularities, in default of which the Caisse could not be held liable for any such irregularities.

Subsequently, over a period of 15 months, the company's accountant forged the company president's signature and fraudulently emitted some 150 checks to himself and his wife, for a total of almost 80 000$.  Being the one receiving the Caisse's monthly statements, the accountant did not, of course, advise the Caisse of any irregularity, and the company's president did not himself verify the account during this 15 month period, trusting his accountant.

On June 18, 2000, the Court of Appeal rejected the company's action against the Caisse for damages, by mentioning that the Caisse had no obligation to reimburse the company for the forged checks since it had not been advised of the forgeries or other irregularities as required by the verification agreement.

According to the court, in view of the verification agreement, the company could not invoke the legal principle to the effect that just as a bank, a Caisse populaire is deemed to know its client's signature and consequently, that when it pays a check on which the signature of its client has been forged it is responsible for the unauthorized payment and must repay the amount in question to the client.

Hence, since the company had signed the verification agreement and had itself authorized the accountant to verify the Caisse's monthly statements, it could not seek damages against the Caisse for the accountant's illegal behavior.

In its judgment, the court distinguished this case from another one in which the Supreme Court of Canada condemned a bank for damages in similar circumstances, since rather than having a verification agreement duly signed by its client, the bank had simply included a notice on its monthly statements asking the client to verify the statement without delay and to advise the bank of any irregularity within 30 days in default of which the statement would stand as definitive.  Such a notice, said the Supreme court, is insufficient to set the above-mentioned legal principle aside since it does not constitute an agreement, or contract.

[Posting date in the "Articles" section:  17/07/00. Court file number: 500-09-005058-979.  Judgment date: 18/06/00]

Brought to you by Beaulieu Normandeau, law firm in Canada.

06. The owner of a building may not refuse, without motive, to agree to the sublease or transfer of a commercial lease

On June 20, 2000, we published the summary (number 3) of a Superior Court judgment pertaining to a commercial lease and to the effect that in the absence of a clause to the contrary in such a lease, the owner may refuse, without motive, to agree to the sublease or transfer of the rented premises to a third party.

This judgment was infirmed (reversed) by the Court of appeals on June 19, 2000.

In so doing, the Court of appeals referred to the following articles of the Quebec Civil Code:

1870 - A lessee may sublease all or part of the leased property or assign his lease. In either case, he is bound to give notice of his intention and the name and address of the intended sublessee or assignee to the lessor and to obtain his consent.

 

1871 - The lessor may not refuse to consent to the sublease of the property or the assignment of the lease without a serious reason.

 

If he refuses, he is bound to inform the lessee of his reasons for refusing within fifteen days after receiving the notice; otherwise, he is deemed to have consented to the sublease or assignment.

According to the Court of appeals, even if the lease does not mention that the lessor (owner) cannot refuse to consent to the sublease or to the transfer of the lease without motive, this is not important since he is legally bound to justify his refusal, which is to say that he must have reasonable motives for not consenting (which could be the case, for example, if the sublessee was insolvent, or wished to open a butcher shop in a shopping center already containing one that had an exclusivity clause in its own lease).

This means that the law prohibits the owner from refusing to agree in such matters unless he has a serious motive to do so.

The  Court of appeal concludes by saying that the owner did not here have such a motive, since he could not invoke any cause of reproach against the sublessee or transferee of the lease.

[Posting date in the "Articles" section:  10/07/00. Court file number: 500-09-009082-991.  Judgment date: 20/06/99]

Brought to you by Beaulieu Normandeau, law firm in Quebec City.

05. The firing of an employee can be costly for the employer

An engineer who had been working for four years for a company had always done a good job, to the point that his employer had given him a certificate recognizing his "extraordinary efforts above and beyond expectations".

Suddenly, at his return from annual holidays, his employer told him that his post had been abolished in the course of the company's restructuring and asked him to sign a "Receipt, Release, Discharge and Waiver" document drafted by the company's attorneys and to the effect that he accepted this decision in consideration of the payment to him by the company of the equivalent of eight weeks of salary, amounting to some 8 700$, as severance pay.

Following discussions, the engineer signed the document and left the company.

In the course of his subsequent legal action against the company, the engineer testified to the effect that the company director had told him that if he did not sign the discharge document, he would not receive anything and that he had signed it in a state of shock, while thinking of his family's well-being.

As to the company director, she testified to the effect that the true motive of the engineer's dismissal was that he did not communicate well with the company's employees under his supervision.

The court did not give credence to the director's testimony and granted the engineer's action by declaring the discharge document null and void and by condemning the company to pay him the equivalent of eight months of salary as notice of termination , or some 31 000$ minus the 8 700$ mentioned above.

In so doing, the court considered that the company had acted abusively and had demonstrated bad faith and referred to the following articles of the Quebec Civil Code:

Art. 2091: Either party to a contract with an indeterminate term may terminate it by giving notice of termination to the other party.

 

The notice of termination shall be given in reasonable time, taking into account, in particular, the nature of the employment, the special circumstances in which it is carried on and the duration of the period of work.

 

Art. 2092: The employee may not renounce his right to obtain compensation for any injury he suffers where insufficient notice of termination is given or where the manner of resiliation is abusive.

The court also referred to applying jurisprudence, notably that of the Supreme Court of Canada, of which we include the following excerpts:

"[...] the relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power [...].

 

Work is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person's employment is an essential component of his or her sense of identity, self-worth and emotional well-being [...].

 

The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection. In recognition of this need, the law ought to encourage conduct that minimizes the damage and dislocation (both economic and personal) that result from dismissal [...].

 

[When] termination is accompanied by acts of bad faith in the manner of discharge, the results can be especially devastating. In my opinion, to ensure that employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissal, the breach of which will be compensated for by adding to the length of the notice period [...].

 

The obligation of good faith and fair dealing is incapable of precise definition. However, at a minimum, I believe that in the course of dismissal employers ought to be candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.

Finally, the court specified that when an employer acts correctly by respecting his employee's rights as provided for by law, a discharge document as the one here is valid, but that such is not the case when the employer acts abusively in dismissing personnel, in which case the employee is justified in asking that such a document be declared void and that the employer be condemned to pay for damages sustained.

[Posting date in the "Articles" section:  04/07/00. Court file number: 500-17-002602-970.  Judgment date: 15/12/99]

Brought to you by Beaulieu Normandeau, lawyers in Canada.

04. Personal liability of a company director who tendered on a project

In the course of a construction project, a company we will call Debt Inc. had obtained a sub-contract of almost 800 000$ without respecting the rules of the "Bureau des soumissions déposées du Québec" (BSDQ ) and was sued for the 5% penalty provided for by law.

After having filed a defense, Bob, Debt Inc.'s sole shareholder and director, incorporated a new company (New Inc.), whose head office was the same as that of Debt Inc.'s, namely Bob's residence.

Debt Inc., which was also being sued in a related matter, then ceased its activities and sold its tools and inventory, while Bob continued his operations by the intermediary of New Inc. after it had obtained a new contractor license ("license d'entrepreneur") from the Régie du bâtiment du Québec.

At the trial, Bob admitted that he had incorporated New Inc. because he wished to start with a "clean" company which was not being sued and because he did not want to imperil "the new contracts destined to the company".

There was no doubt that Debt Inc. had to pay the penalty, but the evidence was to the effect that only 640$ was left in its bank account...

The Superior court condemned Debt Inc., Bob and New Inc. to pay the penalty, by relying on article 317 of the Quebec Civil Code, which stipulates that "In no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order."

This article is of crucial importance for those of you have a company, since it allows the courts to "lift the corporate veil", which is to set a company's legal existence aside and reach its shareholders and directors personally and condemn them accordingly...

Article 317 is notably applied when a company is used to mask, hide and dissimulate the fraud committed by its shareholder or director.

The court here tells us that fraud must be understood as an act accomplished in bad faith, with the intention of breaching the rights or interests of another, or of avoiding application of the law.

Hence, it was judged that Bob, as sole shareholder, director and alter ego of Debt Inc., had committed a civil fraud entailing his personal liability by utilizing dissimulation maneuvers and subterfuges by way of which he terminated Debt Inc.'s operations, liquidated its assets, annihilated its revenue potential to avoid paying its creditors and replaced it by New Inc. to continue serving Debt Inc.'s clientele.

In view of this behavior, says the court, Bob could not escape legal action by hiding behind the "corporate veils" or screens of his companies, and all of them had to be considered as being one and the same person.

This judgment was appealed in March 2000. We will keep you posted.

[Posting date in the "Articles" section:  27/06/00. Court file number: 705-05-001282-964.  Judgment date: 10/02/00]

Brought to you by Beaulieu Normandeau, lawyers in Quebec City.

03. The owner of a building may sometimes refuse, without motive, to agree to the sublease or transfer of a commercial lease

Although the law protects a tenant's right to sublet a residential apartment, such is not the case for a commercial lease, where the landlord and tenant may agree to prohibit or restrict such a transaction.

In a recent case, a commercial lease mentioned that the tenant could not sublet or transfer his rights in the lease without first obtaining the landlord's written approval.