24 February 2016

How effective are your agreements?

In all of the management positions I have held, there was responsibility for examining and reviewing a fair bit of corporate documentation either for research or for assessment as to how it would impact decisions to be taken. In addition to documents prepared in Ontario and notarial acts « en minute » from Quebec!, there have been many documents prepared in the USA, the UK France and Belgium! That's given me an interest in keeping up to date with what's going on in the area of commercial law.

I've been gathering a bit of a "cheat sheet" as to what to keep in mind for B2B (business to business) contracts. First of all, we need to remind ourselves as to what a contract is, and Halsbury's Laws of England gives a basic definition, much of which is still applicable in Ontario. Here's the 1909 edition, at paragraph 740:

In brief:
  • a contract may be made either verbally or in writing;
  • if it is in writing, either under hand only or under seal; but
  • certain contracts must be in writing, and of these some must be in the form of a deed (ie, under seal).
The area is horrendously complex, so let's focus on those that need to be in writing between corporations. However, there are certain other statutes that will come up.

The contract is formed when:
  • an offer is made by one person to another, and it is accepted by the person to whom it is made;
  • there has been valid consent by both parties, without duress, undue influence or fraud; 
  • both parties have the capacity to enter into the contract;
  • it is either sealed, or valuable consideration is given by the promisee to the promiser.
The rules governing the use of seals are fairly rigid. The one that can really trip up users is the "sealed contract rule", which states that when it is executed under seal, an undisclosed principal can neither sue nor be sued upon the contract. That's because only the named parties acquire rights and obligations under it. In a simple contract (ie, one with valuable consideration) an undisclosed principal is able to sue and be sued under contracts entered into by his agent. The Supreme Court of Canada confirmed this in Friedmann Equity Developments Inc v Final Note Ltd in 2000.

What, then, constitutes a deed? It is a written instrument that must be sealed and delivered. Signing and witnessing are not strictly required, but are encouraged for purposes of proof.

At common law it is necessary for:
  • the conveyance between living persons of incorporeal hereditaments (eg, rents or rights of way);
  • any power of attorney which authorizes the attorney to execute a deed;
  • gifts or gratuitous assignments of tangible goods (where not accompanied by delivery of possession); and
  • rendering enforceable any gratuitous promise.
In equity, a deed must be employed "whenever any claim is made in a court of equitable jurisdiction of any assurance or alleged assurance made gratuitously of any legal estate, interest or right." This applies with respect to any real or personal property, or any other right.

There are three statutes in Ontario that have modified the application of deeds. The first is the Conveyancing and Law of Property Act, which provided for the following:
  • effectively requiring a deed to be used for any transfer of rights in land; and
  • an execution of a power of appointment by deed must be witnessed by two or more witnesses.
In addition, there is the Statute of Frauds, which reinforces the CLPA's deed requirements, as well as stating that most leases must be under deed as well.

Finally, we have the Land Registration Reform Act, which notably provides that "a transfer or other document transferring an interest in land, a charge or discharge need not be executed under seal by any person, and such a document that is not executed under seal has the same effect for all purposes as if executed under seal."

Now that is quite a broad change, but it does not completely displace the requirements for deeds.They are still useful where it is necessary to declare that the parties are conclusively bound by its terms (subject to the discussion in Friedmann above), or where there are questions of the adequacy of any consideration. Guarantees and indemnities come to mind, as well as conferring rights upon third parties, and deeds conferring a power of appointment by a corporation for executing a deed has certainly not disappeared. Seals may still be necessary on occasion, unless Ontario finally decides to follow the UK's Law of Property (Miscellaneous Provisions) Act 1989. I'm not holding my breath.

Quebec is quite different. Their Civil Code only recognizes contracts, and consideration is not a requirement for validity. Instead, their definition is quite succinct:
1385. A contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties subject the formation of the contract to a solemn form.

It is also of the essence of a contract that it have a cause and an object. 
They can be expressed as authentic acts (the solemn form, in article 2813 et seq.) or private writings (most contracts, in article 2826 et seq.), for purposes of proof. The rules are quite straightforward, and we can learn a lot from their approach. That's a discussion for another day, though.

How does all of this impact the internal administration of a corporation? I haven't even discussed tax consequences, and they do exist in multiple circumstances. The question of intercompany agreements for the handling of goods, services and cost-sharing is another sprawling area as well. However, it is necessary to understand how agreements are formed and become valid, before we can worry about the other myriad details that arise!

12 February 2016

The distinction between innovation and growth

I've been on this topic before, but an op-ed piece in The Globe and Mail today makes the case quite clearly:

"In the 21st century, prosperity comes from ideas commercialization throughout the private sector – high tech to low tech, agriculture to services. Countries that innovate prosper; countries that do not decline. We know that without public intervention to create an ecosystem enabling our innovators to make money here, we will have less innovation than we need for prosperity. By confusing general growth policies with strategic innovation policy, Canada risks falling further behind globally.

"The aim of growth policies is to entice people or companies pursuing specific, well-developed activities to move or create businesses in your jurisdiction. By handing out public money, a government can entice foreign companies to open new campuses and create jobs in "innovation industries." Singapore and Ireland achieved rapid economic development this way, and Canadian governments have tried to. Yet this approach does not help foster domestic innovation.

"The aim of innovation policy is to foster the development of industries, products and services that do not yet exist and whose business models and markets have yet to be created. Organizations and individuals capable of inventing these technologies must be attracted or developed, and the results of their labours must be channelled into economic growth.

"That means we cannot use a process of long-term planning. Instead, we need continuous experimentation. Policy makers must rapidly come up with new initiatives, kill those that don’t work, scale up those that do and then keep changing incentives to keep pace with growing, dynamic industries."
There's nothing here that states anything more than plain common sense. However, too many policy makers tend to conflate these two aims into something that is less than clear, and too many Canadian enterprises confuse innovation and growth with surfing on the next wave that is coming through, as opposed to really determining what will beneficially work for them. That probably also explains why our rate of capital investment is so laughably low.

Let's see if this never-ending debate will finally come to a real conclusion...

11 February 2016

The CBSA wins again: the trouble with cost-sharing arrangements

When related companies reimburse one another for goods or services rendered, it's always important to have written agreements in place to justify the amounts being paid. While it's generally viewed as being important in terms of allocating profits for corporate tax purposes on a fair basis, you must not forget that there are consequences in other areas, such as customs duties.

That's right: duty is chargeable on more than the invoice price of goods. One corporate group found out the hard way, and they struck out in the Federal Court of Appeal last year. This is what happened:

  • The US parent sold goods to its Canadian subsidiary at a price that equalled its landed cost into the US from China, plus markups for US warehousing and an arm's-length profit on the sale.
  • There was also a cost-sharing agreement ("CSA") between the two parties that allocated costs relating to the costs of research, development, design, advertising and marketing activities.
  • A Management Services Agreement covered charges for information technology support, accounting, finance and purchasing support, that the US parent undertook on behalf of the subsidiary.
  • There was also a Canadian Intellectual Property and Proprietary Information Licence Agreement that conferred the right to exploit all intellectual property rights in the brand in Canada, in exchange for a lump-sum payment.
The Canada Border Services Agency assessed further duty on the imported shoes, based on the proportion of the cost-sharing agreement charges that related to research, development and design ("RDD"). The US parent appealed the assessment to the Canadian International Trade Tribunal, and lost.

In the end, the reasons for why the assessment was good were quite simple:
  • The transfer price of the goods did not reflect the RDD that had been incurred to help create it, as the cost was being billed directly to Canada rather than through China.
  • Reimbursement for that activity was effected through the CSA, which made it an adjustment to the purchase price, and the dutiable value must include its full amount.
  • The design portion of the RDD could not be considered as a duty-free "assist", as it was not being furnished free of charge.
There is nothing new about the principles involved here, but it's still a useful reminder of what needs to be kept in mind when establishing a group's structure.

The employment minefield after hiring

The workplace certainly operates in a more complex fashion, compared to what many experienced in these past few decades. Certainly many stupid employers and employees have contributed to this, according to many cases that have been reported in the media, and there's a lot of dust that has yet to settle. However, some observations can be made.

There are several principles that have been enunciated by the courts, some of which may overlap:
 To be sure, this is just a thumbnail sketch. However, it is easy to see that this is an area where all decisions must be well and thoroughly thought out.

That's not all. There is also employer liability for acts during the working relationship. The list is complex, as noted by one of the larger Canadian law firms:
  1. An employer is ALWAYS DIRECTLY LIABLE for its own negligence in hiring, training, or supervising employees.
  2. An employer is ALWAYS VICARIOUSLY LIABLE for the wrongful acts of an employee within the scope of his or her employment.
  3. An employer MAY BE VICARIOUSLY LIABLE for the wrongful acts of an employee outside the scope of his or her employment.
  4. A party hiring an independent contractor is generally NOT VICARIOUSLY LIABLE for the wrongful acts of the independent contractor.
  5. An employer is ALWAYS VICARIOUSLY LIABLE for wrongs committed by an agent in the scope of the agent’s actual, apparent, or usual authority.
  6. An employer MAY BE VICARIOUSLY LIABLE for an employee’s breach of fiduciary duty owed to a previous employer, even if the new employer was unaware of the breach.
  7. The most effective way for employers to limit unnecessary liability is to take PROACTIVE PREVENTATIVE MEASURES. 
All of this arises just from the common law, and there are many statutory obligations that we have not yet touched upon! You'll definitely have questions about many aspects of how this may affect you. It will always be good to have a great lawyer on your side.

07 February 2016

The hiring minefield these days

I've addressed this issue several times before, but the topic just seems to be covering a wider area over time. Here are some current notes:
  • Do your application and interview processes comply with current human rights laws? It may sound surprising to hear that, but there are still some employers out there that just don't get it.
  • If you use agencies to assist you in the selection process, do they actually check out beforehand the candidates they send out to you? Many do not, hoping that the "halo effect" gained during the interview process will cause employers to not insist on finishing off the process, but they have been successfully sued in the courts for failing to do so.
  • Regardless of that, are you conducting reference checks for positions that would involve contact with the public? One company that ran a tavern failed to do that in hiring some bouncers. A customer who was then viciously attacked by them in the tavern's parking lot successfully sued the employer for failure to properly check out the bouncers' background beforehand (which would have immediately raised some red flags). That principle was subsequently upheld in another case at the Supreme Court of Canada.
  • Are you being straightforward in describing the position and its prospects to the candidate, and does he reciprocate in describing his capabilities and achievements, as well as assuring that he would not be in breach of his employment contract with his current employer? Failure to do so may constitute negligent misrepresentation, as noted by the SCC in Queen v Cognos, or potential exposure to suits from the former employer for poaching in breach of contract or fiduciary duty.
  • Given the emergence of the common law in the area of privacy rights, as well as statutory requirements for several provinces and at the federal level, are you getting prior written consent for contacting referees, and are you explaining beforehand the exact purpose for checking such references?
  • Does the employment agreement meet, at minimum, the requirements of employment standards legislation in your jurisdiction, as well as plainly explaining the terms that exceed such requirements? Among areas that many employers take for granted are the entitlement to, and calculation of, vacation pay and overtime.
  • Are you making sure that the employment agreement presented to the candidate has been reviewed by your lawyers, that there are no terms outside the agreement that have not been properly documented, that the candidate has had the opportunity to get independent legal advice, and that it is fully signed off before he/she begins work? All  steps are extremely important in order to ensure the validity of what was intended.
This is an extremely complex area, and you really need to get good advice from a great employment lawyer on this. I wish you all the best of luck.

03 February 2016

A social look at the Canadian profession

It's been interesting to see the heavy promotion CPA Canada has been giving lately for its brand, and fascinating to note that they are promoting a single image of what that is supposed to represent to employers. However, the legacies of the predecessor designations will last for a very long time.

It appears that very little work has been undertaken to examine the effects they have left on the profession. There was one very bad joke going around a while back to explain the differences:

"CGAs do good books. CMAs explain what they mean. CAs bend them to fit GAAP."

But it's not that simple. The former professional bodies were created to serve different needs that arose as time went by:

  • The Chartered Accountants (CAs) were the first to be formed, initially in Montreal (the Association of Accountants of Montreal), and then in Toronto (the Institute of Chartered Accountants of Ontario). The Toronto group appeared to be  more aggressive in extending membership to people of various qualifications, and there was a breakaway movement that formed the Dominion Association of Chartered Accountants in order to raise standards and confer a uniform national designation. That caused a rift that only healed in 1910, with the ICAO being triumphant and the CA designation being conferred province by province. DACA would become the Canadian Institute of Chartered Accountants in the 1950s, and the qualification and reporting standards gradually became more uniform nationally with university degrees required before entry into their programme only in the 1960s.
  • The Certified General Accountants (CGAs) began as a group to provide accounting training for employees of the Canadian Pacific Railway, and it branched out from there. There was a running battle going on for decades between them and the CAs as to the right to audit financial statements, and this was fought out both in the legislatures and the courts. Their final inclusion in CPA Canada is rightfully seen as a miracle of negotiation.
  • The Certified Management Accountants were initially created by the CAs as a subgroup of their members to cover the growing field of cost accounting before the CGAs had a chance to get into it. It then started holding its own examinations to confer "certificates of efficiency" to newcomers, and then created the separate Registered Industrial and Cost Accountant (RIA) designation in the early 1940s. The RIAs became the CMAs in the mid-1980s, and that time they started to required the possession of a university degree before entry into their course of study.
  • The Certified Public Accountants (the original CPAs) came about in the mid-1920s to professionalize the accountants and auditors that worked for the taxation authorities in Ottawa and Queen's Park. The designation originated as LA (Licentiate in Accountancy) during 1926-1931, changing to IPA (Incorporated Public Accountant) during 1931-1936, before becoming the CPA. They merged with the CAs in the early 1960s.
  • There were also the Accredited Public Accountants (APAs) out West, which existed from 1950 to sometime in the 1970s before merging with the CGAs. I have no information as to the reason for their formation in the first place, but it does explain somewhat why the CGA membership tended to be more heavily weighted to the Western provinces.
It's been interesting to see how they all intermixed (or not) over the years. Some companies preferred to hire one group over the other, others were indifferent as long as the candidate did the job, and still others streamed them to fit various pigeonholes (eg, CAs for external financial reporting and tax returns, CMAs for management reporting, and CGAs for monthly reporting and reconciliation). The corporate attitude tended to dictate how they all related to each other.

The different modes of training also have had their effect: the "bullpens" the CA candidates were in while they got ready for the UFE created alumni networks that have helped them out greatly over the years, even if many of them adopted the white-shirt and navy-suit stereotype along the way. On the other hand,  the CMAs and CGAs had to study on their own (sometimes even by correspondence), and have tended to treat the organizations they work for as being the focal point of their social interaction. The latter probably explains why many of them have tended to be introverted in broader settings.

The CMAs also had an influx of membership back in the 1970s and 1980s from the transfer over of British graduates of ICMA (the Institute of Cost and Management Accountants, now the Chartered Institute of Management Accountants), and their superiority complex tended to muddy things up for a while for the homegrown RIAs. However, that is a story that has never been properly explored. Thankfully, the ICMA influx has long since retired.

I generally found the RIAs to be the most sociable of the bunch (conflict of interest disclosure: I'm one of them myself), and more likely to want to go out and relax together over a drink after work. You really learned a lot listening to those fellows in such a setting, and that type of camaraderie has been lacking for a long time among the more recent graduates. Of course, it cost a lot more for the newer CMA grads for funding their tuition compared to what we faced, and the Board Report stage did force some social interaction to take place in order to achieve a goal, so it may not have been that bad. However, I have heard instances of many employers not reimbursing all of the costs involved, or of setting up tracks to assure the progression of such candidates to more deserving positions, as opposed to the CATO system the CAs had.

What will the new CPA graduates face, and what will be the consequences for those that have come before? Those questions are very much open, and it would be interesting to see if someone (most likely an academic) will step up and investigate this.