Author Archives: Ronald McCloskey

Oppression

The oppression remedy provided under the Business Corporations Act confers on a Court broad equitable discretionary power to rectify “oppressive” conduct.  The SCC has recently confirmed in Wilson v. Alharayeri that corporate directors can bear personal liability in the context of corporate oppression.  Obviously, personal liability is not attracted in every case, nor would a personal remedy always be necessary or appropriate.  Where, however, directors (or other shareholders) have been personally involved in the impugned conduct, or have personally benefitted therefrom at the expense of the complainant, there is no good reason in principle why, given that commercial fairness is the touchstone, they should not be liable.  The SCC decision comes as no surprise to practitioners in the field, the only surprise being that the case got as far as the SCC.

Cooperatives Versus Condo Corporations: Liability of Owners

Cooperatives are not generally regulated like Condominium corporations governed by the Condominium Act which spells out the rights of condo owners who own a physical unit in the condominium property.  In contrast, in a Cooperative, the owner does not own a unit but rather a share in the Cooperative corporation, with an exclusive right to possession of a given unit.  The rights and obligations of the owners to each other is generally spelled out in a contract among owners and the Cooperative.  We were recently retained to advise on the rights of an individual owner who had refused at first to pay a disputed plumbing invoice, but later did, under protest.  The Cooperative Corporation, acting through a property manager and its lawyers, purported to lien the owner’s share for 100% of all legal costs incurred by the corporation in seeking the payment for the plumbing invoice, and to enforce that lien by seeking a Court order to sell the owner’s share (and effectively his residential unit).  The plumbing invoice, disputed but paid, was for about $1,700.  The corporation then spent approximately the $40,000 on legal costs (judging by cost summary presented to the Court as the hearing).  Those costs had become the real matter in dispute as the corporation appeared to operate on the basis that however much it spent on legal fees it could just pass them on to the owner by liening his share for the fees and then seeking to enforce the lien through forced sale.  The Court declined to grant the corporation any of the main relief it sought and in fact found that the unit owner had overpaid with respect to one invoice.  The Court did grant a declaration that the unit owner had committed an initial breach, but also declared that he had cured it.  Meanwhile, as a result of the Court decision, the other owners are left to bear the $40,000 in legal costs incurred by the lawyers retained by the property manager. This was a case where hindsight suggests that, if there had been a modest application of common sense by the board, the matter might have been practically resolved at an early stage.

Termination of Commercial Real Estate Contract on Basis of Alleged Breach of Environmental Warranties; Return of Deposit

Representing plaintiff purchaser who terminated an agreement of purchase and sale for a commercial property which, according to environmental reports, could not be developed on a cost-effective basis.  The purchaser demanded return of his deposit.  The vendor refused.  The purchaser sued the vendor and the agent–who acted on both sides of the deal and who refused to return the substantial deposit without the consent of the vendor — for breach of contract against the vendor and for negligence and breach of fiduciary duty against the dual agent.  This strategy resulted in return of the deposit before any defence was delivered.

Employment Termination for Cause

Defence of corporation which fired employee for cause after theft of company property.  Termination for cause is risky business, the onus being on the employer to prove just cause; the failure to so prove can result in higher damages payable to the employee in the form of longer notice periods, aggravated and punitive damages and the now popular “moral damages” which sometime exceed the amount which the employer could have paid in lieu of notice just to rid itself of a troublesome employee.

Alleged Human Rights Code Violations

Defence of large dental practice corporation and of gas companies and their principals for alleged violations of Human Rights Code on basis of gender, marital status and age.  Allegations of this nature are a stretch in many instances but are now unfortunately commonplace by some employment lawyers insofar as they create nuisance value calculated to result in small settlements for the employee, a fraction of the amounts originally claimed, but sufficient to cover the costs of the lawyer or paralegal making the claims.  Such claims must be vigorously contested if the notion of rights is to be left with any integrity and substance.

Resignation and Competition with Former Employer

In a recent matter involving the sale of a business to a large public company, the vendor was required to sign an agreement with typical confidentiality, non-competition and non-solicitation clauses.

 

The acquisition was not a business success. The purchaser succeeded in its goal of acquiring the clients, but managed the new business in a way that financial targets were not met, resulting in a significant downward adjustment in the purchase price. The vendor was unhappy and negotiated an agreement whereby he resigned on the basis of certain fixed amounts payable over time.

 

The public corporation was unhappy with what it considered to be subsequent competitive activity on the part of the vendor/employee who resigned, and retained Ron to advise on the strategy to resolve the matter, on a basis that maximized the scope of permissible business activity on his part as well as the collection of money owed to him. Issues included the past and present conduct of the corporation that gave rise to the dispute, analysis and characterization of the impugned conduct of the now departed employee who was owed money by the corporation, the construction of the resignation agreement with its provisions for confidentiality, non-solicitation and non-competition for a limited period of time, the range of remedies (on both sides) from damages to injunctive relief, and the scope and effect of a release where there had been an arguable failure of consideration.

 

As in most such matters, successful resolution depended on the appropriate combination of the threat of a lawsuit, the issues of cost, delay and adverse publicity, all considered in light of the overall legal merits and equities that would be brought to bear by a judge. Successful resolution was achieved, both parties recognizing that litigation in many commercial disputes can be a scorched earth policy.

Withdrawing from a Partnership

Ron routinely advises partners of law and accounting firms on the strategic management of their withdrawal from professional partnerships. He has done so recently for four separate clients. In the consideration of goals, strategy and tactics, the factors to take into account include whether the partner is leaving voluntarily, or might be expelled, or is being otherwise forced out through the mechanics of reduced compensation, harassment or oppressive conduct. As a general guideline, both the firm and the partner wish to avoid litigation. However, unless managed properly, departures can give rise to lawsuits around transition, the approach to clients, solicitation, competition and the appropriate or unfair use of confidential information. Success must be considered in light of the setting of appropriate goals and getting there without destructive litigation. Litigation itself is the easy part, although more fun for the litigator than the client.

The Oppression Remedy and Commercial Morality

Ron recently successfully resolved a case on behalf of a shareholder, former officer and former director of a privately held company from whom information regarding the anticipated sale of the company had been withheld that directly affected the value of options that he had to exercise in a fixed time frame following his departure from the company.

 

Although the client may have had no contractual right to the receipt of confidential information that could be expected to have a material impact on the value of the options, the deprivation of that information, known to other directors and officers, was not in accordance with his reasonable expectations and effected a result that was unfair to him. He was deprived of the informational base on which to base the investment decision reflected in the exercise of the options. Although the defendant directors may have had a legal right to act as they did, the exercise of those legal rights was argued to be oppressive. Where parties have worked in close association over many years, equitable fairness trumps strict legal considerations. More specifically, the standard of conduct expected of a director in relation to dealings with a shareholder may vary depending on all the circumstances.

The Enforcement of Contractual Penalty Clauses

Ron recently was retained to resolve a case raising the enforceability of contractual provisions which determine in advance the financial consequence of breach. ‎ Traditionally, if the clause could be construed as a penalty, courts have refused to give effect to it. In general terms, a fixed amount payable in the event of breach would be considered a penalty if it was not a genuine pre-estimate of damage. However, there have been numerous instances where courts have upheld clauses providing a financial consequence for breach, such as the return of settlement funds where a confidentiality clause has been breached. The law on this issue has therefore become difficult to rationalize.

 

Two recent cases by the UK Supreme Court have attempted to bring a consistent rationale to the analysis and will have inevitable repercussions on Canadian common law. Addressing the argument that the law regarding penalties had become “antiquated, anomalous and unnecessary”, the Court held that the law remained valid but that it had become too artificially applied. To remedy that defect, the Court called for a more nuanced approach to penalties that takes account of the contract as a whole, having regard to all the obligations “primary and secondary” and interpreted against the overall factual matrix.

 

“The true test [for an unenforceable penalty] is whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion‎ to any legitimate interest of the innocent party in the enforcement of the primary obligation”.

 

A clause that simply punishes the party in breach remains unenforceable. The primary concern of the law is to compensate the innocent party for damages suffered as a result of the breach. Compensation is not necessarily the ‎only legitimate interest. There may be a legitimate commercial interest worthy of protection. The court will look at the nature of the innocent party’s right that the impugned clause was intended to secure, such as the enforcement of a restrictive covenant not to compete, and on that basis what appears to be a penalty (because it bears no relationship to actual loss suffered in the event of breach) may in fact be enforceable. That is because the innocent party has a legitimate interest in the performance of the contractual promises of the defaulting party.

 

A good illustration involves a promise to keep the terms of a settlement confidential: damage flowing from a breach of that promise may be difficult to quantify, but nonetheless, the innocent party may have a legitimate interest in confidentiality and a “penalty” for breach, such as the return of settlement money, may be upheld. The one qualification remains: the “penalty” must not in the circumstances “exorbitant or unconscionable” in relation to the highest level of damages that could conceivably flow from the breach.

 

Similarly, other payments or withholding of money may be upheld even though they bear no reasonable relation to the measure of loss attributable to the breach. Protection of goodwill is a good example. Often, the court simply cannot assess the precise value of an obligation in relation to the overall value of a contract. In such a case the court can be expected to uphold what appears to be a penalty on the basis that the parties to the contract were the best judges of how the consequence of breach should be reflected in their agreement.

 

The UK decision has consequences for all commercial contracts, not least the “delay” penalties in construction contracts and “overstaying provisions” commonly applied by parking lots. Whether the decision has added a level of certainty to the enforcement of contractual provisions agreed to by the parties is more debatable. I expect to see more, not less, litigation to arise in this area. And I expect lawyers who draft the contentious clauses will now add a provision that the clause protects the legitimate business interests of the party imposing the clause and that it is neither extravagant nor unconscionable, thereby creating a contractual “estoppel” designed to prevent a party seeking to escape the predetermined and agreed-upon consequences of breach.

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