By Carman J. Overholt, Q.C., Fraser Milner Casgrain LLP, Vancouver
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Over the years, it has become common for wrongful dismissal litigation to include a tort claim such as intentional infliction of mental suffering, defamation, or inducing a breach of contract. Establishing a separate actionable wrong has long been viewed as necessary to maintain a claim for punitive damages in light of law that has historically restricted the availability of such an award.

In addition to the employer, individuals involved in the termination of employment are now frequently named as defendants in wrongful dismissal litigation.

Related articles Determining the period of reasonable notice of termination (April 2006) How a rushed investigation can double your trouble (December 2005)

In addition to the employer, individuals involved in the termination of employment are now frequently named as defendants in wrongful dismissal litigation. The increasingly complex nature of employment-related litigation often includes allegations of sexual harassment, discrimination on the basis of disability, or other forms of discriminatory conduct. If established, these claims may justify an award of Wallace damages (an extension of the notice period because of an employer’s bad faith in connection with the termination of employment), aggravated damages and punitive damages.

Counsel for employers have argued that Bhadauria v. Seneca College of Applied Arts and Technology, [1981] 2 SCR 181, precludes claims for damages arising from an alleged breach of human rights legislation, and that human rights tribunals have exclusive jurisdiction in this area. As well, employers have argued that wrongful dismissal litigation and simultaneous human rights proceedings constitute an abuse of process because of the duplicitous nature of the proceedings and the remedies sought. Although human rights legislation is remedial in nature, some Canadian jurisdictions have legislation giving tribunals express jurisdiction to award punitive damages in addition to compensatory damages.

The Ontario Court of Appeal, in Keays v. Honda Canada Inc., C43398 (Sept. 29, 2006), confirmed the availability of punitive damages as an appropriate remedy where an employer breaches human rights legislation in the course of terminating employment. The trial judgment in the case, awarding $500,000 to Keays, captured headlines across Canada because it represented the largest award of punitive damages in a wrongful dismissal action in Canadian legal history. Although the majority of the Ontario Court of Appeal reduced the punitive damages award to $100,000, it confirmed the availability of punitive damages where a breach of human rights legislation is established.

Keays was employed by Honda for approximately 14 years. Throughout his employment, he experienced health problems, resulting in occasional absences. Keays was on disability leave for more than two years when the long-term disability insurer terminated his benefits on the basis that he could return to work. Although Keays returned to work, he continued to experience absences due to his sickness. Keays’ physician advised that Keays would miss approximately four days per month because of his condition, known as chronic fatigue syndrome. When Keays was asked to see the company physician, he took the position that he would not do so in light of advice he had received from his legal counsel and until he was provided with “clarification of the purpose, the methodology, and the parameters of the assessment to be done by the doctor.” Honda responded by advising Keays that if he did not meet with the physician, his employment would be terminated. Honda did terminate the employment of Keays, allegedly for just cause, based on their position that the refusal to see the company physician was an act of insubordination justifying his dismissal.

At the trial of his claim, the court found that Keays was entitled to 15 months’ notice of the termination of his employment. Because of the manner in which his employment was terminated, the court held that Keays was entitled to Wallace damages of nine months. In light of the finding that Keays was harassed and that Honda had breached the Ontario Human Rights Code, the court awarded Keays $500,000 in punitive damages. In addition, Keays’ legal costs were fixed at $610,000, including disbursements and GST.

The majority upheld the trial judgment but reduced the award of punitive damages to $100,000 and reduced costs. The majority of the Court of Appeal reduced the punitive damages award on the basis of the principle of proportionality and its conclusion that findings made by the trial judge were not supported by the evidence. The Court of Appeal found that the trial judgment and award of punitive damages were consistent with the decisions of the Supreme Court of Canada in Whiten v. Pilot Insurance Co., [2002] 1 SCR 592, and Hill v. Church of Scientology of Toronto, [1995] 2 SCR 1130, except in terms of the quantum. The majority for the Ontario Court of Appeal in Keays v. Honda Canada Inc. held:

The misconduct for which the appellant must take responsibility took place over a period of seven months, and was simply not on the same scale as occurred in Whiten. At para. 112, Binnie J, listed seven factors, including duration of the impugned conduct, which the court must consider in fixing the quantum of the award. The trial judge made findings against Honda on several of those factors, including the misconduct was planned and deliberate and Honda knew that Keays was particularly vulnerable because of his disability.

Another factor the court must consider, as described at paragraph 117 of Whiten, was whether the conduct towards the victim was malicious and highhanded. Despite the gravity of some of the findings of misconduct the trial judge made against Honda, Honda’s conduct cannot fairly be described as malicious.

The majority of the court agreed with Justice Goudge’s finding that Bhadauria v. Seneca College of Applied Arts and Technology was not applicable. Justice Goudge held:

However, in the context of punitive damages, the appellant’s conduct is not advanced to support a cause of action for breach of the respondent’s human rights, but as an independent wrong actionable by way of wrongful dismissal. What matters is that the appellant’s acts of discrimination and harassment triggered the respondent’s termination. In fact, the trial judge found that the appellant’s course of discriminatory conduct culminated in the most dramatic form of employment harassment, namely the respondent’s termination. This would give rise to a cause of action for wrongful dismissal apart altogether from any question of the respondent’s disobedience. It is in this context that the trial judge found that the appellant’s discriminatory conduct to constitute an independent actionable wrong.

The Keays decision has important implications for employers in how they ensure compliance with human rights legislation. The failure to comply with human rights legislation will continue to be relevant in employment related litigation and provide a basis for large awards of damages, including punitive damages. In this way, the Keays decision represents a harbinger of things to come.

Carman J. Overholt, Q.C., is a senior litigation lawyer with Fraser Milner Casgrain LLP who represents clients in the area of employment, labour relations and human rights issues that arise in the workplace. He has appeared on behalf of employers before the Supreme Court of British Columbia, the Court of Appeal for British Columbia, the B.C. Human Rights Tribunal, the Employment Standards Tribunal, the B.C. Labour Relations Board, the Canadian Industrial Relations Board and the Canadian Human Rights Commission.

By Mark Katz, Davies Ward Phillips & Vineberg LLP, Toronto
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Since she assumed her position in 2004, Commissioner of Competition Sheridan Scott has demonstrated a keen interest in the interaction between competition law and regulated markets. Scott has described this topic as being "near and dear to [her] heart," a natural product of her having worked previously at both the CRTC and Bell Canada.

Commissioner of Competition Sheridan Scott.

Related articles When is it legal to be loyal? Abuse of dominance and Canada Pipe (October 2006) The crackdown on cartels (April 2006) Competition law news and notes (December 2005)

Scott’s philosophy on the relationship between competition law and regulatory policy can be summarized as follows:

• open and effective competition should be the norm and regulatory intervention should occur only where absolutely necessary;
• where regulations are needed, they should be designed to interfere as little as possible with the marketplace; and
• the existence of regulation isn’t an excuse to engage in anti-competitive behaviour and to circumvent the Competition Act.

As part of her focus on regulated markets, Scott has announced that the Competition Bureau will be investigating potentially anti-competitive conduct by certain self-regulated professions. In particular, the Bureau will be examining whether the governing bodies of these professions (self-regulatory organizations or SROs) impose restrictions that create barriers to effective competition. While willing to concede that SROs may have a legitimate role to play in ensuring the supply of quality professional services to the public, Scott has cautioned that "[a]rtificial regulatory barriers can depress the competitive vigour of a market, leading to increased prices, poorer quality and less consumer choice."

The Bureau's study will cover the legislation, regulations, and codes of practice governing six professions – accountants, lawyers, optometrists, opticians, pharmacists, and real estate agents. A draft consultation paper will be published in the next year setting out the Bureau's preliminary analysis and conclusions. The Bureau will then issue a final report with its findings and recommendations for provincial authorities.

According to Scott, the Bureau has decided to investigate self-regulated professions because it considers a competitive service sector to be vital to the future health of the Canadian economy.

The Bureau's interest in self-regulated professions is also consistent with competition authorities in other jurisdictions. As an example, the European competition authority published a study in 2004 examining the rules and regulations governing six professions – lawyers, notaries, engineers, architects, pharmacists and accountants – which recommended that member states review and remove unjustified restrictions on competition. Similar studies have been conducted by competition authorities in the U.K., Ireland, and Australia.

The prospect of heightened Bureau enforcement in the professional sector increases the likelihood of a clash between the requirements of Canadian competition law and the provincial legislation and regulations that apply to self-regulated professions. This, in turn, raises the potential applicability of the "regulated conduct defence" (RCD), a common-law doctrine that provides a form of immunity from enforcement action under the Competition Act when four criteria are satisfied: there is validly enacted legislation regulating the conduct at issue; the conduct is directed or authorized by that legislation; the authority to regulate has been exercised; and the regulatory scheme has not been hindered or frustrated by the conduct or used as a "shield" to engage in unauthorized anti-competitive conduct.

The RCD has been applied to exempt the activities of various provincially regulated professions from review under the Act. Indeed, the leading Supreme Court of Canada decision on the RCD involved a challenge under the Competition Act's predecessor legislation to advertising restrictions imposed by the Law Society of British Columbia. The Supreme Court of Canada upheld these restrictions on the grounds that the Law Society was authorized by provincial legislation to determine what constituted "conduct unbecoming" to a lawyer, which the Court said was broad enough to encompass the power to restrict lawyers' advertising.

The Bureau, however, is currently intent on limiting the scope and applicability of the RCD. This intention is particularly evident in the Bureau's technical bulletin on the RCD, which it released in June 2006. There the Bureau offers the opinion that "RCD case law is underdeveloped," and therefore "cautious application of the RCD is warranted."

Significantly, the technical bulletin expressly casts doubt on whether the RCD should apply to the activities of self-regulated professions falling under provincial jurisdiction. Scott has made the point even more aggressively in several speeches. She has said, for example, that the Bureau is "eager to clarify [its] role in regulated industries," and is particularly open to pursuing provincially regulated conduct under the Competition Act's civil reviewable provisions (such as abuse of dominance). In Scott’s view, "the Bureau's mandate is to enforce the law as directed by Parliament, not a provincial legislature or its delegate.”

In short, it’s no coincidence that the Bureau's revised technical bulletin on the RCD was finalized and released at the same time that Scott was making SROs one of her advocacy and enforcement priorities. Scott and the Bureau are "spoiling for a fight" over the RCD, and they apparently see the potentially anti-competitive conduct of self-regulating professions as a particularly promising casus belli.

Mark Katz is a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, where he is a member of the firm's competition and law and foreign investment review group. He has appeared at every level of court in relation to competition matters, up to and including the Supreme Court of Canada and has acted as counsel on several leading cases before the Competition Tribunal, including the first abuse of dominance and merger cases heard by that body.

By Adam Aptowitzer, Drache LLP, Ottawa
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This past Halloween, the federal government perpetrated the biggest trick in Canada when it broke an election promise and changed the taxation of income trusts in Ottawa. The change in the legislation governing trusts was precipitated by the conversion (or anticipated conversion) of several large corporations to income trusts – a move aimed at allowing the corporations in question to escape taxation at the corporate level. Given the popularity of income trusts, especially among non-taxable entities such as pension plans and non-resident investors, the government felt compelled to impose a tax on income trusts to protect the tax base.

Unfortunately, in trying to “sour the milk” for this group of non-taxable entities, the government has proposed legislation which significantly affects another part of this group: charities, not-for-profits (NFPs), and registered Canadian amateur athletic associations (RCAAAs). Arguably, more Canadians are adversely affected by the recent announcement indirectly through their dependence on these groups than those who actually held investments in income trusts.

Registered charities and other qualified donees under the Act are now missing out on what would otherwise have been a good opportunity.

Related articles Eligible dividends: leveling the playing field between income trusts and corporations (October 2006)

While most charities understand that their investments are now worth significantly less than they were before the announcement, it will remain for advisors (including the many lawyers who serve on boards pro bono) to explain the implications of the announcement to the charity.

The government’s announcement caused a significant drop in the value of income trust units on the market. The impact of this drop on individual investors was well-covered by the media, but the impact on charities was at least as large, and likely more profound. In the near future, charities will be forced to revisit their investment strategy to determine the usefulness of holding income trust units.

Under the old system, investments in the income trust sector were favoured because the cash distributions helped charities meet their disbursement quota obligations (DQ). The DQ requires most charities to expend 3.5 per cent of their capital in a year. As a result, a system whereby the charity receives periodic tax-free cash distributions has obvious benefits. While the new system does not entirely eliminate the advantage of receiving cash distributions, it does slightly reduce the benefit of investing in income trusts, because the amount is now taxed in the hands of the trust.

The obvious intention of the government’s announcement was to end the trend of corporations changing to income trusts. However, the changes also created an unintended consequence for charities, as they were looking forward to the opportunity to convert to income trusts, which in and of themselves affected the way charities were planning on raising funds in the short term.

Even though many shareholders weren’t aware of this fact, the conversion of a corporation to a trust generally created a disposition of the shareholder’s share in the corporation, which, in turn, usually precipitated a capital gain (and therefore capital gains tax) for the shareholder. Some charities were hoping to capitalize on both this fact and recent changes to the Income Tax Act, which allowed for the donation of publicly traded securities to public foundations and charitable organizations by convincing shareholders to donate some of their shares before the conversion.

For example, a disposition of shares of BCE Inc. (the corporation which catalyzed the change by announcing a planned conversion to an income trust) would have caused large tax bills for individuals who had held their shares over a long time frame. Part of the strategy to manage the tax liability for such people would have been to donate part of their shares to a charity for a donation tax credit in order to offset the large capital gains tax. Obviously, registered charities and other qualified donees under the Act are now missing out on what would otherwise have been a good opportunity.

Under the old rules, flow-through entities, such as income trusts, would deduct the amount they paid out to unitholders from their income in the year. The trust would then deduct its distributions of income and taxable capital gains to unitholders from its income in a year, and the tax would be paid by the unitholder directly. Thus, distributions received by non-taxable entities were not taxed either at the trust level or in its hands. Income not distributed by the trust would be taxed in the trust’s hands at the highest combined federal and provincial marginal rate.

Under the new rules, distributions from the trust will be taxed at a rate equivalent to the federal general corporate tax rate, plus 13 per cent due to provincial tax (which will not be applied again at the unitholder level). The receipt of these distributions will be a deemed dividend in the hands of unitholders for the purposes of the enhanced dividend tax credit unveiled by the Liberal government shortly before the last federal election campaign. The chart below, provided by the Department of Finance in its backgrounder released with the minister’s announcement, illustrates quite simply that charities holding income trust units (or other flow-through entities) will go from paying zero per cent tax on income earned by the trust to 31.5 per cent by 2011.

Simplified Comparison of Investor Tax Rates in 2011

Non-portfolio properties will include certain investments in a "subject entity," Canadian resource properties, timber resource properties, and real properties situated in Canada. Without going into great detail, any other property owned by the trust or partnership will be a non-portfolio property if the partnership or trust (or a person or partnership with which it does not deal at arm’s-length) uses the property in carrying on a business in Canada. Effectively, the income trusts, other than real estate investment trusts (REITs) will be caught by the new rules. 

Overall, the new legislation is going to create some very interesting questions for charities and their advisors, and the answers to these questions will not be the same for all charities. Those non-taxable entities that don’t have to consider disbursement quota obligations will likely become indifferent to holding investments in flow-through entities and large corporations. However, in the short term, charities will have to give serious consideration to the effects of the income trust announcement on their investment strategy.

Adam Aptowitzer practices tax and charity law at Drache LLP in Ottawa. He has successfully appeared on behalf of clients before CRA Appeals officers, the Tax Court of Canada and the Federal Court and has helped prepare submissions for the Federal Court of Appeal.

By Susan Friedman, Davis & Company LLP, Toronto
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In its recently released decision in Pro Swing Inc. v. Elta Golf Inc., [2006] SCJ No. 52, the Supreme Court of Canada sent a warning to businesses in Canada that should affect how they respond to proceedings brought against them in foreign jurisdictions. In order to appreciate the implications of this warning, a brief review of the legal history respecting the enforcement in Canada of foreign judgments is required.

Prior to the Supreme Court of Canada’s decision in Morguard Investments Ltd. v. De Savoye (1990), 76 D.L.R. (4th) 256, it was commonly accepted that if a Canadian business that had no assets in a foreign jurisdiction and had not agreed to litigate disputes in that jurisdiction were to be served with a statement of claim or complaint issued by a court in that jurisdiction, it would be best for it to ignore the foreign lawsuit. The traditional rule was that courts of the common-law provinces would not enforce the judgment of a foreign court unless the Canadian defendant had attorned – that is, submitted – to the jurisdiction of the foreign court, either by agreement or by its conduct.

After Morguard, some lower courts began to push the envelope and to suggest that Morguard had abrogated the common-law principle prohibiting enforcement of non-monetary foreign judgments.

However, Morguard changed the status quo. In upholding the decision of both lower courts to enforce, in British Columbia, a default judgment granted by the court in Alberta, the Supreme Court noted that in modern times, countries cannot conduct themselves in isolation. The flow of wealth, skills, and people across borders must be facilitated in a fair and orderly manner.

Accordingly, in Morguard, and in subsequent decisions, the Supreme Court held that the general rule now is that, absent considerations of public policy, fraud on the court, and natural justice, a court in one province should recognize a judgment from another province, if the province whose court granted the order had a real and substantial connection with the transaction at issue or with the parties to the litigation, even where the defendant took no steps to defend the claim. Further, the court in which enforcement of the foreign judgment is sought is usually precluded from re-hearing the substance of the underlying action on its merits, and is primarily concerned only with the proper exercise of jurisdiction by the court that granted the judgment.

Subsequent decisions extended the principles enunciated in Morguard to recognize and enforce judgments granted by courts outside of Canada, where the jurisdiction in which the litigation took place had a real and substantial connection to the action and none of the conditions militating against enforcement existed. As a result, after Morguard, a Canadian defendant ignored foreign proceedings against it at its peril.

There were, however, qualifications as to the type of foreign judgment that a Canadian court (excluding the Quebec courts) would enforce. Quite apart from concerns such as public policy and due process, to be enforceable, a foreign judgment had to be final and conclusive, and had to be an award of a definite sum of money for debt or damages. Non-monetary foreign judgments were not enforceable, although after Morguard some lower courts began to push the envelope and to suggest that Morguard had abrogated the common-law principle prohibiting enforcement of non-monetary foreign judgments.

Then, in Pro Swing Inc. v. Elta Golf Inc., the issue of enforcement of non-monetary orders was squarely raised before the Supreme Court of Canada. In Pro Swing the defendant, Elta Golf, carried on business in Ontario and offered for sale on its website goods that bore trademarks which, Pro Swing claimed, infringed its trademarks, which were protected in the U.S. only.

Pro Swing commenced proceedings in Ohio for trademark infringement and for breaches of various state laws. The action was settled, and the settlement agreement was incorporated into a consent decree, or judgment. That judgment included an injunction prohibiting Elta Golf from selling golf clubs bearing Pro Swing’s marks, or marks confusingly similar to Pro Swing’s marks, and a mandatory order that Elta Golf deliver to Pro Swing all infringing products and marketing materials.

Some years after the grant of the consent judgment, Pro Swing maintained that Elta Golf had breached its terms, and brought a motion to hold Elta Golf in contempt of court. Elta Golf did not appear before the Ohio court. The court granted the contempt order, which repeated the terms of the consent judgment, and then further ordered that Elta Golf account to Pro Swing for all infringing product sold since the consent judgment was granted, pay compensatory damages based on the profits from the sale of the infringing product, pay Pro Swing’s costs, provide Pro Swing with the contact information for purchasers of infringing products and pay the costs of a corrective mailing to those purchasers, and recall all infringing goods. Pro Swing then brought proceedings in Ontario for an order recognizing and enforcing both Ohio orders. This time Elta Golf did appear.

In Ontario Superior Court, the judge did not accept Elta Golf’s position that the two Ohio orders were entirely unenforceable because they were not final orders for a fixed amount of money, or that the contempt order was additionally unenforceable as being quasi-criminal in nature. She found that the consent order contemplated that the injunction apply outside the jurisdiction of Ohio, and that the order was valid and enforceable in Ontario. She severed the portions of the contempt order that were not final in nature from the rest of the order, and determined that the paragraphs requiring the accounting of sales, disclosure of purchasers’ contact information, payment of costs of the corrective mailing, and recall of infringing product were all enforceable in Ontario.

On appeal, the Ontario Court of Appeal overturned the lower court’s decision, on the basis that the terms of the Ohio orders were not sufficiently certain to allow for enforcement in Ontario. However, the Court of Appeal agreed that the time was ripe to re-examine the rules governing the recognition and enforcement of foreign non-monetary judgments.

In the Supreme Court of Canada, the court split four to three, with the majority upholding the Court of Appeal’s decision that the Ohio orders were too uncertain to be enforced, while the minority would have restored the original enforcement decision of the Superior Court judge. However, while Justice Deschamps, writing for the majority, denied enforcement, she too recognized the need for a new rule respecting the enforcement of foreign non-monetary judgments. In short, all members of the Supreme Court panel were willing to enforce a non-monetary order of a foreign court, in the right circumstances and with the right precautions. Such orders could include foreign mandatory injunctions, freezing orders, anti-suit injunctions, orders for accounting and other equitable relief. Accordingly, the Supreme Court of Canada has set in motion a major shift.

Justice Deschamps provided some clues respecting the factors that would affect an enforcement decision. She urged caution, since a change to the principles of enforcement will affect both commercial activity and the nature of cross-border judicial assistance. She noted that comity – the principle which causes one nation to recognize within its borders certain acts of another nation, including judicial acts, on the understanding that the other nation would accord the same recognition within its borders to the receiving nation’s acts – must have due regard both to international duty and convenience and to the rights of the receiving jurisdiction’s own citizens and others who are under the protection of its laws. She stated that a change to the rules respecting enforcement, particularly of foreign orders granting equitable relief, must be accompanied by the ability to exercise judicial discretion. This will enable the local court to ensure that the structure and integrity of the Canadian legal system are not disturbed by the foreign order and that its terms do not conflict with domestic law.

Justice Deschamps also expressed concern that Canadian residents not be made subject to unforeseen obligations imposed by a foreign court, and that the Canadian justice system not be used in a manner that would be unavailable in strictly domestic litigation.

Considerations which will be relevant to the enforcement decision include, but are not limited to:

• the clarity and specificity of the terms of the foreign order, so that the parties will know exactly what they must do to comply;
• the impact that the order will have;
• whether the order is limited in scope;
• whether the foreign court retained the power to issue further orders;
• whether enforcement is the least burdensome remedy for the Canadian justice system or other remedies are available;
• whether third parties will be affected by the order;
• whether the use of judicial resources is consistent with what would be allowed for domestic litigants; and
• whether enforcement of the order outside the granting jurisdiction would raise extra-territoriality concerns.

A proceeding to enforce a foreign non-monetary order may well require an examination of the merits of the underlying claim, at least to the extent necessary for the enforcing court to be satisfied that the order respects equitable principles. This is to be contrasted with a proceeding to enforce a foreign monetary judgment, in which the court of the enforcing jurisdiction does not usually engage in a review of the substantive merits of the claim.

In the few weeks since the Supreme Court of Canada handed down its decision in Pro Swing, a lower court has already applied its principles. In Pro-Sys Consulting Ltd. v. Microsoft Corporation (No. 2), [2006] BCSC No. 1738, Justice Tysoe had before him a plaintiff’s motion to amend its statement of claim, issued in the British Columbia Supreme Court, to plead that the defendant had committed a wrongful act, and thus had wrongfully interfered with the plaintiff’s economic interests and conspired against it. The “wrongful act” alleged by the plaintiff consisted of an act committed in the U.S. which was contrary to U.S. antitrust law, but not to that of Canada. Justice Tysoe granted the motion to amend, on the basis that it was not plain and obvious that conduct that was illegal in the jurisdiction in which it occurred could not constitute the wrongful act required by the claims at issue.

The enunciation and development by courts across Canada of the factors relevant to enforcement of non-monetary judgments will be followed with interest and once they are better understood, are likely to be important both to the initial choice of the forum in which to litigate a dispute and to the decision of how to respond to a foreign proceeding. Given the new rules of the game, a defendant who is faced with a foreign action for non-monetary relief would be unwise to simply ignore the proceeding without obtaining legal advice. Additionally, businesses might well want to have their legal counsel review the choice of jurisdiction provisions in their agreements, to ensure that they are worded appropriately to cover enforcement of any judgment, including non-monetary judgments, in relevant jurisdictions.

Susan Friedman is a senior litigation lawyer in the Toronto office of Davis & Company.
She has a broad corporate and commercial litigation practice before the courts and regulatory tribunals. She has extensive experience as trial and appellate counsel in the areas of shareholder and partnership relations, commercial real estate leasing, banking, bankruptcy and insolvency, products liability, product distribution and franchising.

By Richard F. Devlin and Victoria Rees
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Summary

The Supreme Court of Canada decision in R. v. Neil represents a subtle, but significant, reorientation in the language of Canadian legal ethics. Rather than focusing on the negative “avoidance of conflicts of interest,” the duty of loyalty engenders a more positive regulative ideal. However, the authors argue that a number of recent lower court decisions and commentaries from observers manifest some ambivalence in embracing a duty of loyalty. There is particular concern about the compatibility of a vigorous duty of loyalty with the so-called “business model of the law firm.”

The tension between the business model of the law firm and the professional model is likely to intensify as a result of Neil. Neil reaffirms the ideal of client loyalty and that there is a “price [to be] paid for professionalism.” But there are large structural economic forces at play that complicate the conventional model: the emergence of specialized legal services, the globalization of commerce, the dramatic growth in the size of law firms, a significant increase in mobility within the legal profession, and increasingly competitive legal markets.

Read the full text of the article in Vol. 84, No. 3 of the Canadian Bar Review

Richard F. Devlin is a professor and the associate dean of graduate studies and research at
Dalhousie Law School, a university research professor at Dalhousie University, and a member of the Nova Scotia Barristers' Society's Ethics and Professional Responsibility Committee. Victoria Rees is the director of professional responsibility for the Nova Scotia Barristers' Society.

By Dan Caldarone, Aird & Berlis LLP, Toronto
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While there are no formal statistics available as verification, the franchise industry is widely accepted as having a tremendous impact on Canada’s economy. In fact, the Uniform Law Conference of Canada’s (ULCC) Report of the Working Committee on the Uniform Franchises Act estimated that franchised businesses account for 40 per cent of all retail sales across Canada. With that in mind, here’s a primer on Canadian franchise legislation.

Canadian franchise legislation

Currently, the only legislation in force specifically dealing with franchises are the Arthur Wishart Act (Franchise Disclosure), 2000 in Ontario, the Franchises Act in Alberta, and, most recently, the Franchises Act in Prince Edward Island (certain provisions of which came into effect on July 1, 2006, with the balance of the provisions to come into effect on Jan. 1, 2007).

The Uniform Law Conference of Canada estimated that franchised businesses account for 40 per cent of all retail sales across Canada.

Related articles The Uniform Law Conference of Canada: What you need to know as a business lawyer (December 2005)

In New Brunswick, the Franchises Act received first reading on Dec. 7, 2005. There’s also talk within the franchising community that the government of British Columbia is giving serious consideration to introducing franchise legislation.

Finally, it is worth noting that the Uniform Law Conference of Canada, an organization consisting of lawyers selected by federal, provincial and territorial governments with a mandate to promote the harmonization of Canadian statute law where beneficial, established a project in June 2002 to consider and make recommendations for the adoption of uniform franchise legislation in Canada. In August 2005, the ULCC adopted the Uniform Franchises Act, based largely on Ontario’s legislation, together with uniform regulations.

Many in the franchise community believe this trend will continue, and most, if not all, Canadian provinces will have franchise legislation in force in the near future.

Application and consequences

The Ontario, Alberta, PEI, and New Brunswick legislation are substantially similar. Here’s a brief summary of the main components of the various acts, together with any material differences among them.

What is a “franchise?”

Under all but Alberta’s legislation, “franchise” is defined as a right to engage in a business where the franchisee is required to make a payment to the franchisor and in which the franchisor grants to the franchisee the right to sell goods or services that are substantially associated with the franchisor’s trademark or other commercial symbol, and which the franchisor exercises significant control over, or offers significant assistance in the franchisee’s method of operation, or in which the franchisor grants the franchisee representational or distribution rights to sell goods or services supplied by the franchisor, and the franchisor provides location assistance to the franchisee. The Alberta definition is slightly different in form and narrower in scope.

As a result of the very broad definitions used in the legislation, there’s great uncertainty as to what interpretation courts will give such definitions. There is concern that many types of business arrangements not normally considered as franchises – standard product distributorships, for example – may be caught by such legislation. To date, the courts haven’t made a “tough decision” on this issue.

Each Act applies where a franchise is to be operated partly or wholly in its province. With respect to the Alberta legislation, however, the franchisee must also be a resident of, or have a permanent establishment in, Alberta.

Exclusions

Certain types of relationships are excluded from the application of the legislation. In all but the Alberta legislation, the following are excluded:

• employer-employee relationships,
• partnerships and memberships in prescribed co-operative associations;
• single licence arrangements relating to a specific trade-mark or other commercial symbol; and wholly oral agreements.

Under the Ontario and PEI legislation only, arrangements with the Crown or an agent of the Crown are excluded. And under all but the Ontario legislation, bona fide wholesale arrangements are excluded.

Disclosure obligations

A franchisor must provide to a prospective franchisee a single disclosure document not less than 14 days before the earlier of (a) the signing of any agreement, and (b) the payment of any consideration. The disclosure document must contain all material facts, including certain prescribed information, financial statements and agreements. “Material fact” is broadly defined to include any information about the business, operations, capital or control of the franchisor or certain related parties, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise or the decision to acquire the franchise. This disclosure structure therefore leaves a franchisor to determine what is material and requires disclosure. Notwithstanding the foregoing, under all Acts but the Ontario Act, agreements relating solely to confidentiality and site selection may be signed prior to disclosure; and under the Alberta Act, a franchisor may also take a fully-refundable deposit, to a maximum of 20 per cent of the initial franchise fee, prior to disclosure. There are also a limited number of complete exemptions available from these disclosure obligations.

A franchisor is required to update its disclosure document should a material change occur prior to the signing of an agreement or payment of consideration.

Unlike the laws of some other countries, the Acts do not require registration of disclosure documents, nor are disclosure documents subject to review by any governmental authority.

Consequences of improper disclosure

If a franchisor provides a disclosure document outside the required time frames, a franchisee may cancel the franchise agreement up to 60 days after receiving the disclosure document. In the event that a franchisee is never given a disclosure document, a franchisee may cancel the franchise agreement up to two years after entering into the franchise agreement. Under all the Alberta legislation, a 60-day cancellation right also applies where the disclosure document does not contain the required information.

Under all but the Alberta legislation, upon cancellation, which the franchisee may do without penalty, a franchisor will be required to (a) refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment, (b) purchase from the franchisee any inventory, supplies and equipment that the franchisee had purchased at a price equal to the purchase price paid by the franchisee, and (c) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts in (a) and (b). Alberta’s Act states only that the franchisor must compensate the franchisee for any net losses incurred in acquiring, setting up, and operating the franchise.

If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document or, under all but Alberta’s legislation, as a result of the franchisor’s failure to provide a disclosure document, a franchisee has a statutory right of action for damages against the franchisor, every person who signed the disclosure document, and, in all but Alberta, the franchisor’s brokers and associates.

Duty of good faith and fair dealing

A duty of fair dealing is imposed on each party to a franchise agreement in respect of its performance and enforcement. All legislation but Alberta’s provides that the duty of fair dealing includes a duty to act in good faith in accordance with reasonable commercial standards, and that the breach of this duty gives rise to a right of action for damages.

Governing law and venue

The Ontario legislation provides that any provision in a franchise agreement purporting to restrict the application of the law of Ontario or to restrict jurisdiction or venue to a forum outside Ontario is void with respect to a claim otherwise enforceable under the Ontario Act. The PEI and New Brunswick legislation have similar provisions. The Alberta Act simply states that the law of Alberta applies to franchise agreements.

Waiver

Under the Ontario Act, a franchisee can’t waive or release its rights. The other legislation has similar provisions, but they specifically extend the benefit of those provisions to prospective franchisees.

Dan Caldarone practises general corporate/commercial and securities law and has extensive experience in the franchising industry representing both franchisors and franchisees. Dan can be reached at 416.865.3415 or at dcaldarone@airdberlis.com.

By Sergio R. Karas, Karas & Associates, Toronto
Tag and save to delic.io.us

With certain sectors of the Canadian economy in full boom – especially the oil and gas, mining, and construction industries – labour shortages experienced by companies in many industries have heightened the need for qualified workers. Faced with gaps caused by retiring employees, an aging population, lack of qualified prospects in Canada, and opportunities for growth at home and abroad, many companies are now turning to foreign workers to fill the void.

Employers for whom the hiring foreign workers was a closed book are now in the process of actively recruiting them. And while Canadian employers are now feeling the need to look abroad to recruit qualified skilled workers – a common practice for many years for American companies – this push to attract new workers, while solving some problems, has the real potential to create others.

Faced with gaps caused by retiring employees, an aging population, lack of qualified prospects in Canada, and opportunities for growth at home and abroad, many companies are now turning to foreign workers to fill the void.

The Immigration and Refugee Protection Act (IRPA), in force since June 28, 2002, contains a number of provisions dealing with misrepresentations made by foreign nationals or by other persons with respect to applications for immigration status. When hiring foreign workers, employers should be particularly careful to ensure that no misrepresentation is made to the authorities by any party to an application. Under the current immigration legislation, the spectre of potential liability is very real.

Although there have been, to date, no reported cases of employer prosecution, there is anecdotal evidence that some smaller subcontractors in the construction industry have been cited for contraventions of the Act. Generally speaking, however, Citizenship and Immigration Canada (CIC) and the Canada Border Services Agency (CBSA) have not actively pursued employers who employ unauthorized foreign workers (the Canadian situation is in contrast to the U.S., where large-scale prosecutions of employers for immigration-related employment matters are common).

Generally speaking, when a foreign worker enters Canada, he or she receives a work permit. These work permits could be issued by CIC pursuant to an exemption from the IRPA Regulations (as in the case of intra-company transferees or other exempt categories). Likewise, the permit could be granted after the issuance of a labour market opinion by Service Canada’s Foreign Worker Unit when the employer has demonstrated:

• that there are no Canadians available for the position; or
• there could be a transfer of skills to Canada; or
• to fill a labour shortage; or
• where other benefits could ensue.

In each case, the entry of the foreign worker into the Canadian labour force is governed by the terms and conditions set out in the work permit or in the labour market opinion. For example, a senior manager or a specialized knowledge worker could enter Canada as an intra-company transferee based on his or her status in the corporate structure, seniority, special skills, knowledge, and salary commensurate with the position.

Change in position could lead to change in status

However, if there is a change in the corporate structure which results in a change in the assignment of the foreign worker, employers could find themselves unintentionally contravening the IRPA. Also, where a foreign worker is admitted to Canada to perform duties for an employer at a specific location, but the workplace is changed to another province, a contravention could also take place.

Employers should pay special attention to the provisions of s. 124 of the IRPA:

124(1) Every person commits an offence who

(a) contravenes a provision of this Act for which a penalty is not specifically provided or fails to comply with a condition or obligation imposed under this Act;

(b) escapes or attempts to escape from lawful custody or detention under this Act; or

(c) employs a foreign national in a capacity in which the foreign national is not authorized under this Act to be employed.

(2) For the purposes of paragraph (1)(c), a person who fails to exercise due diligence to determine whether employment is authorized under this Act is deemed to know that it is not authorized.

(3) A person referred to in subsection 148(1) shall not be found guilty of an offence under paragraph (1)(a) if it is established that they exercised all due diligence to prevent the commission of the offence.

Specifically, s. 124(1)(c) may prove worrisome for employers. The provisions that make a contravention of the Act to “employ a foreign national in a capacity in which the foreign national is not authorized under this Act to be employed” are very broad, and could be interpreted to cover any situation where there is a change in the employee’s duties or in the terms of employment.

For example, if a foreign worker receives a promotion during the course of employment in Canada, the conditions of his or her work permit may be violated, and the employer could find itself in contravention of s. 124(1)(c) of the IRPA. Similarly, if an employer merges or is acquired by another company, and this corporate change results in a change in the foreign worker’s duties or reassignment to another location, the employer could also contravene the Act.

The problem of employing a foreign national in a capacity in which he or she is not authorized specifically by the work permit is compounded by s. 124(2)’s attribution of “deemed knowledge” to the employer. Under that section, a person who fails to exercise due diligence to determine whether the employment is authorized is “deemed to know that it is not authorized.” The provision imposes an active duty on the employer to satisfy himself or herself that a foreign national is authorized to work in a specific position, and to determine that a work permit is valid at all times during the employment.

Therefore, to avoid problems, an employer must keep track of all foreign workers in a systematic fashion, including the positions for which they are authorized to perform services, the duration of the work permits, and expiry dates.

Contraventions

Contraventions of the Act carry serious penalties. Pursuant to s. 125, a person who commits an offence may face heavy fines or even imprisonment. Section 125 states:

125. A person who commits an offence under subsection 124(1) is liable

(a) on conviction on indictment, to a fine of not more than $50,000 or to imprisonment for a term of not more than two years, or to both; or

(b) on summary conviction, to a fine of not more than $10,000 or to imprisonment for a term of not more than six months, or to both.

When charged with a contravention, employers could rely on the defence of “due diligence” set out s. 124(3) of the IRPA if they can establish that they have exercised all reasonable care to prevent the commission of an offence. Again, this section places an active duty on the employer to monitor foreign workers in a very detailed manner, and to document their files as extensively as possible.

In cases where Service Canada has issued a labour market opinion, a contravention of the IRPA could have serious ramifications. Labour market opinions are issued after a careful review by Service Canada of all the circumstances surrounding the employer and its request to hire a foreign worker and, in many instances, after extensive national advertising and a thorough search for local candidates. The opinions set out, in great detail, the terms and conditions of employment, including salary, vacation, benefits, place of employment, and other significant factors pertaining to the engagement of the foreign worker. If the foreign worker’s duties change due to reassignment or restructuring, those conditions may trigger a contravention.

For example, where a company hires a foreign worker to discharge his duties as a sales manager and he or she is then promoted to the position of marketing director, the employer may be in contravention of the IRPA, as the company is engaging the foreign worker in a different capacity to that intended when the labour market opinion and the work permit were granted. Conversely, if the same sales manager is demoted to a non-managerial position, a similar difficulty would arise.

Employers must exercise the utmost care when hiring foreign workers. In particular, employers must adhere to the terms and conditions set out in the work permits and in labour market opinions. Failure to do so may result in serious penalties. It‘s prudent for employers to seek appropriate legal advice before reassigning foreign workers to new positions, to avoid the potential for a contravention of the IRPA, which can carry substantial penalties.

Employers who intend to reassign foreign workers to different duties or positions within the organization should obtain legal advice prior to doing so, and take active steps to file the appropriate documentation to obtain changes to the terms and conditions attached to the work permit or labour market opinion, if one was obtained.

Sergio R. Karas is certified by the Law Society of Upper Canada as a specialist in Canadian citizenship and immigration law. He is current Vice-Chair of the Ontario Bar Association’s Citizenship and Immigration Section, and incoming co-chair of the International Bar Association’s Immigration and Nationality Committee, a member of the board of directors of various community organizations, and a regular speaker at international legal seminars. His comments and opinions are personal and do not necessarily reflect the position of any organization.