Archive for the ‘Commercial Litigation’ Category

Businesses engaged in a single undertaking may, in the interest of minimizing their legal risk or tax planning, conduct their business using separate legal entities. For example, a business may hold its assets in one corporate entity but hire and pay employees using a separate corporate entity that does not hold any assets or has only very limited assets. Rarely, if ever, will the employee have any say in how the business organizes itself or what corporate entity it will hold its assets in. While this may leave the employee vulnerable if she is employed by the corporate entity that does not hold assets if she needs to pursue the latter for outstanding wages or termination pay, common law and employment standards statute offer some protection to the employee in such case.

At common law, the common employer doctrine allows the court to treat separate legal entities, in appropriate cases, as a single employer for the purposes of attaching liability for such things as outstanding wages or termination or severance pay. In Sinclair v. Dover[1], the BC Supreme Court delineated the following justification for common employer determination:

As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract. What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings and interlocking directorships. The essence of that relationship will be the element of common control.

In British Columbia, the common employer doctrine has been codified in section 95 of the Employment Standards Act (“ESA”):

Associated employers

95 If the director considers that businesses, trades or undertakings are carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction,

(a) the director may treat the corporations, individuals, firms, syndicates or associations, or any combination of them, as one employer for the purposes of this Act, and

(b) if so, they are jointly and separately liable for payment of the amount stated in a determination, a settlement agreement or an order of the tribunal, and this Act applies to the recovery of that amount from any or all of them.

The legislative objective underlying section 95 is the same as the justification of the common employer doctrine at common law; namely, to protect the employees and ensure their “wage claims are not defeated by niceties of legal form”.

In a recent decision, the Employment Standards Tribunal, after comprehensively reviewing both court and Tribunal decisions, delineated the following, non-exclusive criteria or considerations when determining if two or more entities are common or associated employers under section 95 of the ESA:

• There must be at least two separate entities that are being “associated”;
• The nominal employer is not particularly relevant and there is no need that a formal contract of employment subsist as between the employee and the entities that are being “associated”;
• The entities must be jointly carrying out some business, trade or other activity although the business, trade or activity in question need not necessarily be the only one that each entity is carrying on;
• “common control or direction” may be determined based on financial contributions from one entity to another (although this factor, standing alone, is not determinative); the fact that one entity is economically dependent on another entity, interlocking shareholdings and directorships; common management principals (e.g., corporate officers and other key employees): sharing of resources (including human resources) among the various entities; asset transfers at non-market transfer prices; operational control by one entity over the affairs of another entity; joint ownership of key assets and operational integration.[2]

If you are or contemplating to operate a business through two or more separate legal entities, particularly with a view to curtailing or minimizing the exposure of one or another of your legal entities from legal liability, it is important that you understand what will constitute indicia of associated or common employer so that you do not inadvertently expose yourself to a common or associated employer determination under the ESA or at common law. Conversely, if you are an employee of an impecunious company and owed wages or termination pay that you cannot collect from the company, you may want to investigate if there is any basis at law to properly associate the company with another related company with a view to obtaining a common employer or associated employer determination to successfully collect on your claim. You may also want to consider lodging a claim under section 96 of the ESA, which makes directors, and officers of a corporate employer personally liable for up to two months unpaid wages. Section 96 is the subject of a separate article in our Business Blog.

[1] 1987 CanLii 2692,

[2] Re: 0708964 B.C. Ltd., BC EST #D015/11

Tags: associated employer, common employer, director liability, employment relationship, legal risk, seperate legal entities, termination, unpaid wages

The Employment Standards Act (“the Act”) delineates the minimum standards that apply in most workplaces in British Columbia. It governs the employment of all employees -casual, probationary or temporary- within provincial jurisdiction, whether employed in a full time or part time capacity.

The Act will not apply where the employee is a person excluded from the provisions of the Act under Employment Standards Regulation (“the Regulation”) such as doctors, lawyers, architects and others whose professions are specifically regulated by provincial legislation. Also other non-professionals, under specific circumstances, are excluded from the application of the Act. These include, but are not limited to, persons engaged in government sponsored work programs, sitters, and newspaper carriers.

The Act also does not apply to employees whose work falls within federal jurisdiction such as banking, defence, interprovincial or international transportation, interprovincial and international shipping, air transport as well as employment with the federal government and crown corporations.

If you are or have been a director or officer of a corporation within provincial jurisdiction, it is important that you understand your potential exposure under section 96 of the Act. Section 96(1) states:

Corporate officer’s liability for unpaid wages

96 (1) A person who was a director or officer of a corporation at the time wages of an employee of the corporation were earned or should have been paid is personally liable for up to 2 months’ unpaid wages for each employee.

Under section 96(1) each director or officer of the corporate employer is liable personally to pay up to a maximum of two months’ wages for each employee, even where more than two months’ wages is owed.

This section only comes into play where the employee successfully lodges a complaint under the Act against her corporate employer for the latter’s failure to pay her wages and the Director of Employment Standards issues a determination against the employer which determination is not satisfied by the employer. In such case, the Director of Employment Standards will employ section 96(1) to issue a determination against one or more directors or officers of the corporate employer to obtain payment of wages owed to the employee by the corporate employer.

The director or officer, to be liable under section 96(1), must have been a director or officer of the corporate employer, at the time the wages were earned or should have been paid by the corporate employer.

It is also important to note that where there is more than one director or officer, nothing in section 96(1) or in any other section of the Act requires the Director of Employment Standards to apportion, pro-rate or divide the liability for wages owed to the employee between the directors or officers[1].

Where the employee is owed more than two months’ wages, the Director of Employment Standards may issue a determination against each director and officer of the corporate employer for two months wages. Just because one of the Director’s or officer’s pays the employee two months’ wages under a section 96 determination does not extinguish or discharge the liability of other directors and officers under their section 96 determinations, since the employee is still owed wages. In such case, since the Director of Employment Standards is not required to collect equally from all directors and officers, he may collect from the other directors or officers only that which is necessary to pay the balance of wages outstanding and no more. For example, if the employee is owed 3 months’ wages, once the director has collected from the first director 2 months’ wages, he may only collect one additional month’s wages from the second director.

What constitutes wages for the purpose of section 96? Wages, under section 96, refers to normal wages including applicable vacation pay. It does not include length of service, termination pay or money payable in relation to individual or group terminations, if the corporation is in receivership.[2]

Directors and officers are also not personally liable for (i) wages of an employee if the corporate employer is subject to action under section 427 of the Bank Act (Canada) or to a proceeding under an insolvency Act[3], (ii) vacation pay that becomes payable to an employee after they cease to hold office[4], or (iii) money that remains in an employee’s time bank after they cease to hold office[5].

Pursuant to section 45 of the Regulation, directors and officers of charities are exempt from the liability created in section 96 of the Act, if they only receive reasonable out-of-pocket expenses and no other remuneration for services performed for the charity. If you are not such a director or officer and section 96 of the Act applies to you, you may want to ask the corporate employer whose Board you are serving on if they have a directors and officers “error and omissions” insurance that sufficiently protects you from such liability.  Such enquiry is advisable in advance of getting on the Board of any corporate employer.

[1] Rajinder Brad, a Director or Officer of Skynet Travel Inc., BC EST #D056/07

[2] Section 96(2)(a) of the Act

[3] Section 96(2)(b) of the Act. Section 1 of the Act defines “insolvency Act” to mean “Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada) or the Winding-up and Restructuring Act (Canada)”

[4] Section 96(2)(c) of the Act

[5] Section 96(2)(d) of the Act

Tags: Bankruptcy and Insolvency Act, director liability, employee, employment stadards, employment stadards act, insolvency, officer liability, wages

One of the significant departures between the current B.C. Supreme Rules introduced in 2010 and it predecessor can be found with the addition of Rule 1-3 (2) under the heading Object of Rules which addresses expressly what is meant by the need to secure a just speedy and inexpensive result on the merits:

“Proportionality-Securing the just, speedy and inexpensive determination of a proceeding on its merits includes so far as is practicable, conducting the proceeding in ways that at proportionate to:

(a) the amount involved in the proceeding
(b) the importance of the issues in the proceeding and
(c) the complexity of the proceeding.“

A recent Supreme Court of B.C. decision by Master Caldwell deals with the relative merits of items a and b and suggests that item b may be more significant than a. The decision, Isman v. City of New Westminster et al, 2011 SCBC 1066 involved an application by the Plaintiff for documents relating to a claim for malicious prosecution and wrongful arrest. The documents in question it was alleged may tend to prove the claim for malice and punitive damages insofar as they relate to prior litigation between the Plaintiff’s company and the City of New Westminster involving a contentious by-law regulating the conduct of the pawn broker business in New Westminster, which the Plaintiff’s company was successful in quashing. The Court held that, in effect, the importance of the issues between the parties insofar as it engaged the interaction between the government and a citizen and the role of the police in such an interaction trumped the allegation by Defence Counsel that the amount involved was relatively minor. The gravamen of that aspect of the Judgment can be found at paragraphs 12 to 14 of the Judgment reproduced as follows:

[12] Defence counsel also submitted that the concept of proportionality as contained in the new rules mitigated against the potentially extensive and expensive search for and production of such documents. He suggested that the arrest and incarceration of the plaintiff were of such a brief nature (a matter of hours) that damages were minimal or non-existent.

[13] I am unconvinced by any of the defendants’ arguments.

[14] In my view, the defendants’ argument regarding proportionality provides the spotlight under which all of their arguments should be examined. Proportionality does not only relate to monetary quantification; it also relates to the importance of the issue in question. This case involves potentially very serious questions involving the interaction between a government and one of its citizens and the role of the police authorities in that interaction. In a free and democratic society, it is hard to imagine an issue of greater import.

Tags: civil procedure, document discovery

In the wake of the Supreme Court of Canada’s recent decision in Sharbern Holdings Ltd. v. Vancouver Airport Centre Ltd. [Sharbern], 2011 SCC 23, courts in BC are taking a sober second look at the onus placed on developers when purchasers claim that a disclosure statement contains a material misrepresentation.

In 299 Burrard Residential Limited Partnership v. Essalat, 2011 BCSC 996 [Essalat], Ms. Essalat was a purchaser of a luxurious pre-sale condominium unit in the Residences at the Fairmont Pacific Rim.  On the closing date, she refused to complete the transaction and, through counsel, demanded return of her deposit.

The developer commenced an action seeking forfeiture of her deposit.  Ms. Essalat raised a number of defences, primarily arguing that the contract should be unenforceable pursuant to section 23 of the Real Estate Development Marketing Act, S.B.C. c. 41 (“REDMA”) and that the action was, in any event, barred by section 6 of the Property Law Act.  On this basis she sought an order that her deposit be returned.

Her REDMA defence, focused on the estimated construction completion date set out in the disclosure statement.  Her unit was not tendered to her until 4 months after the estimated completion of construction date and the entire development was not completed until 7 months after the estimated completion date.  She alleged that this constituted a material misrepresentation and therefore the contract was unenforceable pursuant to section 23 of the REDMA.

In recent years, pre-sale purchasers have been successfully able rely on incorrect estimated completion dates in a developer’s disclosure statement to avoid liability under a contract and forfeiture of their deposits.

Up until now, the leading case on the topic was Chameleon Talent Inc. v. Sandcastle Holdings Ltd. [Chameleon], 2009 BCSC 1670, aff. 2010 BCCA 300.  In that case Mr. Justice Rice found that delays in the estimated commencement and completion of construction dates were material facts that required amendments to the disclosure statement.  However, the delay at issue in Chameleon was significant, extending to over a year.

The difficulty this decision caused is that it did not define in anyway how long of a delay was necessary before an amendment was required.  It appeared to suggest that any delay would be material regardless of the length.

This decision was upheld by the Court of Appeal without any further clarification on the length of delay issue.

Ms. Essalat presented no evidence to support why either a 4 or 7 month delay was in fact material.  Instead, she took the position that any delay past the estimated completion date, even if only a few days, constituted a material misrepresentation that required an amendment to the disclosure statement.  She characterized it as a “bright line pass/fail test” and she relied upon Chameleon to support that approach.

Several weeks before this trial, the Supreme Court of Canada released its decision in Sharbern. Though that case was decided under the old Real Estate Act, which is the predecessor to the REDMA, Mr. Justice Rothstein framed his decision as being applicable generally to all disclosure legislation.  He set out the following 5 part test to apply when determining just how significant a fact must be before it should be considered material:

i.  Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor;

ii.  An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available;

iii. The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor’s deliberations;

iv. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and

v.  The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.

In Essalat, the developer argued that this is the test that should be applied in British Columbia when considering a purchaser’s claim that a disclosure statement contains a material misrepresentation.  Mr. Justice Sewell accepted this position and rejected Ms. Essalat’s suggestion that the test is a simple question of pass/fail.

Having presented no evidence of materiality, His Lordship found that Ms. Essalat had not met her burden.

The alternative argument advanced by Ms. Essalat was that because the developer did not hold legal title to the property before the unit was tendered to her, it was in violation of section 6 of the Property Law Act, and therefore could not maintain an action to enforce the sale contract.

Section 6 states:

(1) A person who transfers land, or who makes an agreement, or assignment of an agreement, for the sale of land by which the purchase price is payable by installments or at a future time, must register his or her own title in order that a person to whom all or part of the land is transferred and a person claiming under the agreement or assignment can register their instrument under the Land Title Act.

(2) An action must not be brought on the agreement or assignment referred to in subsection (1) by a person who fails to comply with this section.

In British Columbia, Limited Partnerships (or any partnership at all) cannot be the registered owner of real property.  As is typical in the pre-sale development industry, the developer was a limited partnership and a nominee and bare trustee was set up to hold legal title to the development lands in trust and for the exclusive benefit of the developer and was required to transfer title to the land to whomever the developer directed it to.

This ownership arrangement was disclosed in the disclosure statement and the contract of purchase and sale included the following express term:

The Buyer acknowledges that the Unit is or will be registered in the name of 299 Burrard Management Ltd. (“299 Burrard”), as discussed in the Disclosure Statement, who will hold such title as agent and nominee for the Seller.  The Buyer agrees to accept the Transfer executed by 299 Burrard as transferor, but acknowledges and agrees that 299 Burrard shall have no liability or obligation to the Buyer hereunder, other than to convey legal title to the Unit to the Buyer.

Ms. Essalat argued that the Property Law Act was consumer protection legislation, and thus the protections afforded by it could not be waived even by express agreement.

The developer relied upon the decision of Mr. Justice Edwards in 410263 B.C. v. Poke (1995), 11 B.C.L.R. (3d) 368, which stood for the proposition that a purchaser cannot rely on the protections of section 6, if it has knowledge that the vendor does not hold title to the land in question and has agreed to accept title through an alternative method.  Mr. Justice Sewell agreed with this position and found that the express terms of the contract precluded Ms. Essalat from demanding compliance with section 6 of the Property Law Act.

The developer was successful in the action and Ms. Essalat was ordered to forfeit her deposit as required by the contract.

A seemingly counter-intuitive process has just come a bit closer to being the final law of Canada.

We often act for clients who are asserting or defending claims against multiple parties.  These can arise in a myriad of situations, for instance:

• claims by purchasers of land may target the buyer’s lawyer and realtor as well as the vendor
• developers’ construction claims may assert wrongdoing by contractors, subcontractors, engineers and architects
• actions alleging securities misrepresentations may target the issuer, the issuer’s principals, and the underwriters

In most cases the various defendants will have very different legal positions and, just as importantly, the prospects of recovery against deep-pocketed or insured defendants will be drastically different than against others.

It only makes sense, therefore, that settlements between some, but not all, parties to the dispute should be explored by all parties.    For instance:

• a defendant whose potential liability is minimal may wish to pay a relatively small sum early  to avoid being entangled in the morass of a lengthy dispute;
• a plaintiff may find it advantageous to collect some money from one defendant to fund its claims against the others;
• even where multiple defendants have similar prospects of liability, differences in personality or in the availability of funding may dictate completely different responses to the litigation.

Recently, the Ontario Court of Appeal ruled that settlements involving some but not all parties – sometimes called “Mary Carter agreements” – must be immediately disclosed to level the playing field between the remaining parties: Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (2010 ONCA 898, 328 D.L.R. (4th) 488)    There has been considerable buzz about this ruling and whether it will be applied in British Columbia.

Arguments in favour of immediate disclosure focus on the notion that a plaintiff shouldn’t recover more than the total amount of its losses and costs (except in rare cases involving punitive damages).  People also insist that if a defendant claims “over” against a third party, that party should know whether the defendant is truly fighting the primary claim or is whether its position is a mere fiction.

Consider, for example, the common scenario where a developer claims its prime contractor provided deficient building and the contractor claims that fault actually originated in misleading architectural plans and/or deficient structural steel of its subcontractor.     Even if – leaving aside the possible architect’s negligence – the owner recognizes the source of the deficient steel, it must claim against the party it has a direct contract with.     The contractor wishing to wash its hands of the dispute may pay a small sum upfront and pass on to the owner any recovery against the subcontractor.

Another scenario is that the owner and contractor may be related parties such that the owner’s shareholders will not, in reality, gain anything unless blame can be passed further down the line to the subcontractors.   In this case, it may be argued that the subcontractor should be entitled to be informed of any “sweetheart deal”.

On the other hand, to encourage settlements and minimize litigation there is a strong argument that disclosure of such settlements to remaining parties should not be required, at least until it is time to enter judgment.   One reason concerns secrecy – the settling defendant will almost always wish to protect its own name through a confidentiality clause; if secrecy cannot be assured it will often not be willing to settle.  Another argument is that commercial parties are best left to settle their own disputes in their own ways, without having the court as a big brother.  There is nothing stopping the remaining parties from asking whether there has been a settlement with some parties, and  at what price.

In my own experience, and in that of other litigators I have spoken with on this matter,  settlements of entire cases often follow after partial settlements are made, even if not yet disclosed.  The more  It follows that partial settlements should be encouraged on whatever terms, so long as there is no deceit or subterfuge involved.

It does not appear that the Supreme Court of Canada shares my view on this.  Today in an interim ruling on the Aecon appeal the court moved a step closer to endorsing the requirement for immediate disclosure: http://scc.lexum.org/en/2011/2011scc33/2011scc33.html .

Once this appeal is finally heard and judgment rendered, we will know whether the immediate disclosure principle applies in BC.  In the meantime, parties wishing to enter into “Mary Carter” settlements must beware.  Plaintiffs in particular must know that if they fail to immediately disclose such a settlement to the remaining parties to the dispute, they may well face a stay of the entire proceedings.   For this reason, confidential partial settlements are not currently part of the landscape in British Columbia.

Tags: multiple defendants, multiple parties, partial settlement