Letters of credit: Another one does NOT bite the dust

The strength of the letter of credit as a payment mechanism lies in the fact that its beneficiary, the seller of goods, is entitled to be paid as long as it provides to the bank the documents specified by the letter of credit. The bank has an absolute obligation to pay, irrespective of any contractual disputes between the buyer and the seller. Issues as to whether the goods actually meet the agreed upon specifications or any other claim of non-performance cannot be used by the purchaser to avoid paying the seller. It is thus said that the letter of credit is a separate contract, autonomous from the contract on which it is based, e.g. the contract of sale. One of the very few exceptions to this principle of autonomy is a fraud committed by the beneficiary of the letter of credit.

English law is often used between the parties to an international sale of goods, particularly where one or both parties are domiciled in a member country of the Commonwealth. The jurisprudence of English courts is therefore of some importance to those involved in international commerce. The recent case discussed in this blog entry confirms that the fraud exception is to be interpreted narrowly under English law.

In the case of Alternative Power Solutions vs. Central Electricity Board et al., [2014] UKPC 31, the Judicial Committee of the Privy Council (the “JCPC”) clarified the legal principles that are to be applied where the fraud exception is invoked in order to prevent the seller from drawing on the letter of credit. The JCPC’s judgement confirms that the fraud exception will only be available in very exceptional circumstances.

In 2010, Alternative Power Solutions (“APS”) won a tender process launched by the Central Electricity Board of Mauritius (“CEB”) for the supply of 660,000 compact fluorescent light bulbs. The ensuing contract provided that CEB had the right to inspect the merchandise prior to shipment. Disputes between the parties were to be arbitrated. An irrevocable letter of credit was issued by the Standard Bank and notified to CEB. Importantly, there was no requirement for any certificate of inspection or similar document to be presented to the bank in order for the letter of credit to be paid.

Differences of opinion arose between the parties in respect of the identity of the manufacturer of the light bulbs, the modalities of the inspection and the port of shipment. CEB applied for an injunction to restrain Standard Bank from paying under the letter of credit. At the hearing, APS’ representative indicated that it had no objection to an inspection being carried out in accordance with the terms of the contract and that no shipment would take place unless the inspection was carried out to the satisfaction of the buyer. Standard Bank indicated that it would not make payment until shipment was effected. The purchaser therefore withdrew its application; however the bulbs were shipped without the inspection having taken place. It was far from clear that the representative of the seller who made the representation before the court was aware of this at the time he made the representation.

CEB sought to draw an inference from APS’ conduct that it had no intention to provide the light bulbs it had agreed to provide and was acting fraudulently in order to defraud it of the purchase price. For a second time, CEB filed for, and this time obtained an interim (provisional) injunction prohibiting Standard Bank from making any payment under the letter of credit. A few months later, the court made the interim injunction interlocutory, confirming that APS had no right to draw on the letter of credit. The Court of Appeal of Mauritius confirmed the lower court’s decision.

The JCPC reversed the Court of Appeal’s judgement, quashing the injunction. The JCPC agreed with the lower courts’ judges that an injunction should only be granted to restrain a bank from paying under a letter of credit where the fraud exception applies and the bank is aware of the fraud. However, the test to determine whether the exception applies was incorrect. The test applied by the judge at first instance was whether CEB had raised “a serious prima facie arguable case that there might be an attempt to defraud” by APS. He held that the issue of fraud must ultimately be decided by the court or, in this case, the arbitrator.

The JCPC, after canvassing a number of previous court cases, determined that the tests to decide on the availability of the fraud exception at trial and at the injunction stage are not quite the same. At the interlocutory stage of the proceedings, i.e. before the injunction becomes final, the correct test, according to the JCPC, is whether it is “seriously arguable that on the material available [to the court], the only realistic inference is that the beneficiary of the letter of credit could not have honestly believed in the validity of its demands [for payment]”. An interlocutory injunction can only be granted if this test is met. The JCPC then clarified that “the expression “seriously arguable” is intended to be a significantly more stringent case then “good arguable case”, let alone “serious issue to be tried.”

Here, it was not suggested before the lower courts that any of the documents presented to Standard Bank were forgeries or that any of them contained, to the knowledge of APS, any material express misrepresentation. Given that conclusions regarding CEB’S allegation of fraud depended upon a thorough analysis of the true contractual position between the seller and buyer, such conclusions could not form a proper basis for the grant of an injunction against Standard Bank. Also, that the latter was aware of a contractual dispute between the seller and buyer and indeed, even made party to the court proceedings, had no bearing on its obligation to honour the terms of the letter of credit.

While this case is a fine specimen of semiological hair splitting by the English judiciary, it offers a lesson to be learned. Namely, if as a purchaser of goods paid through a letter of credit you have specific requirements that you consider to be a pre-condition to payment and these can be objectively documented on paper, then include them in the documents that must be presented to the bank to trigger payment. Do not count on the courts to take your word that the seller is not adhering to the terms of the deal.

For more information on the above, please call/email Martin Aquilina at maquilina@hazlolaw.com or at 1.613.747.2459 x 308

Canadian case of Kaynes vs. BP - Does Ontario has jurisdiction in a securities class action related to trades of a foreign security

Earlier this year (see blog post of March 15, 2014), we commented on the Canadian case of Kaynes vs. BP PLC, 2013 ONSC 5802, in which a judge of the Superior Court of Ontario ruled that the Province of Ontario had jurisdiction in a securities class action related to trades of a foreign security of a foreign issuer on a foreign exchange.  The decision was appealed to Ontario’s highest appellate court, which confirmed that Ontario had jurisdiction sempliciter. [1]  The Court of Appeal however recently overturned the judgement a quo on the basis of forum non conveniens.

The facts

Briefly, Kaynes, a resident of the Province of Ontario, is requesting the court’s permission to bring a class action for secondary market misrepresentation under s. 138.3(1) of the Ontario’s Securities Act (the “Act”) on the basis that BP made various misrepresentations in its investor documents before and after the notorious Deepwater Horizon oil spill in the Gulf of Mexico in April 2010.  Kaynes seeks to represent all Canadian purchasers of shares of BP in a class action, regardless of where they purchased their shares. In parallel, a proposed class action is also pending certification in the United States, based on the same allegations.

Kaynes purchased American Depository Shares (ADS) in the U.S., which traded on the Toronto Stock Exchange (the “TSX”) until August 2008, at which time BP voluntarily de-listed them.  In conjunction with its delisting, BP undertook with the Ontario Securities Commission (the “OSC”) to continue sending to its Canadian securityholders all disclosure material that it was required to send to its U.S. investors (its ADSs were still listed on the NYSE).

Although BP has several indirect Canadian subsidiaries that conduct exploration and development of energy properties in Canada, BP itself is a company incorporated in the U.K. headquartered in London. It has no property, no offices and no employees in Canada.

BP concedes that Ontario has jurisdiction to entertain the claims of those members of the proposed class who purchased their shares on the TSX, but contends that there is no “real and substantial connection” - the applicable test under Ontario’s rules of private international law as well as under the Act - between Ontario and the claims of Canadian residents who, like the plaintiff, purchased their shares on foreign exchanges

BP’s appeal

On appeal, BP argued that the motion judge erred when she determined that she had jurisdiction based on a statutory tort having been committed in Ontario.  Section 138.3(1) of the Act provides for a cause of action where an issuer “releases a document that contains a misrepresentation”.  BP argued that since it never has had a presence in Ontario, the document allegedly containing a misrepresentation could only have been issued outside of Ontario, thus locating the commission of the tort outside the jurisdiction.

The Court of Appeal upheld the motion judge’s finding of jurisdiction sempliciter, ruling that when BP released the documents containing the alleged misrepresentations, it knew by virtue of the undertaking it had given to the OSC that even if the initial point of release was outside Ontario, the document was certain to find its way to Ontario and to its Ontario shareholders. The Court rejected the “place of acting” test, which it described as being “rigid and unduly mechanical”, for determining the place of commission of a tort for purposes of determining jurisdiction.  In so doing, it referred to Moran v. Pyle National (Canada) Ltd.[2], a product liability tort case that involved a defective light bulb manufactured in Ontario causing injury in Saskatchewan, a jurisdiction where the defendant did not sell or manufacture its products or otherwise carry on business. In holding that the tort was committed in Saskatchewan, Dickson J. wrote:

“[W]here a foreign defendant carelessly manufactures a product in a foreign jurisdiction which enters into the normal channels of trade and he knows or ought to know both that as a result of his carelessness a consumer may well be injured and it is reasonably foreseeable that the product would be used or consumed where the plaintiff used or consumed it, then the forum in which the plaintiff suffered damage is entitled to exercise judicial jurisdiction over that foreign defendant….By tendering his products in the market place directly or through normal distributive channels, a manufacturer ought to assume the burden of defending those products wherever they cause harm as long as the forum into which the manufacturer is taken is one that he reasonably ought to have had in his contemplation when he so tendered his goods.”

Given BP’s undertaking to the OSC, it could not possibly argue that the place of effect of its misrepresentation, i.e. Ontario, was beyond its contemplation.

The Court of Appeal also made a provision-specific determination, indicating that for purposes of s. 138(1), a document’s point of release is to be understood as the place where the document was either released or presented.

BP’s forum non conveniens argument

It is well-established under Ontario law that if a plaintiff succeeds in demonstrating that an Ontario court has jurisdiction, the court retains the discretion to decline to exercise it under the doctrine of forum non conveniens. Quoting the Supreme Court of Canada’s decision in Van Breda[3], to succeed in a plea of forum non-conveniens, “[t]he defendant must identify another forum that has an appropriate connection under the conflicts rules and that should be allowed to dispose of the action” and “must demonstrate why the proposed alternative forum should be preferred and considered to be more appropriate.”

According to the Court of Appeal, the motion judge erred in law by failing to take into account the principle of comity[4] in assessing the effect of Ontario’s jurisdiction over claims arising from foreign traded securities. In particular, in the US: a) there is a  well-established regime governing class actions for secondary market misrepresentation, b) there is a pending class action […] based upon very similar allegations, covering substantially the same period, and embracing the claims of all BP shareholders, including the plaintiff, who purchased their shares on a US exchange; c) the law relating to jurisdiction over such claims is based on the principle that securities litigation should take place in the forum where the securities transaction took place (this is also the case with the U.K.); d) by statute, actions for secondary market misrepresentation under US securities law may only be brought by those who purchased their shares on a US exchange;  e) the Securities and Exchange Act of 1934 stipulates that “the US district courts have “exclusive jurisdiction of violations of this title or the rules and regulations thereunder” including claims for secondary market misrepresentation”; f) US law precludes US courts from entertaining private actions involving securities transactions outside the US; and g) perhaps most importantly, the plaintiff’s claim rests to a significant degree on foreign law, as the impugned document in fact consisted in the material required to be sent or provided to US resident security holders “under applicable US federal securities laws or exchange requirements”.

To further convince the Court that Ontario was not the most appropriate forum, BP submitted that 83,945 ADSs were traded on the TSX, compared with 9 billion on the NYSE and 8.7 billion on the LSE.  The Court agreed “that permitting the plaintiff to use BP’s negligible relative trading on the TSX […] as a toehold for bringing foreign exchange purchasers under the jurisdiction of an Ontario court would be both opportunistic and a classic example of the “tail wagging the dog””.[5]

In our previous blog, we pondered as to “what logic would allow a court to cast aside the substantive application of the very law that gave it jurisdiction in the first place”. We now have an answer:  forum non conveniens.  As a result of the Ontario Court of Appeal’s decision, class action plaintiffs will now likely think twice before using Ontario courts as a forum for secondary market misrepresentation claims against foreign issuers for trades of securities acquired on foreign exchanges.

For more information on the above,  please call/email Martin Aquilina at maquilina@hazlolaw.com  or at 1.613.747.2459 x 308

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[1] Kaynes v. BP, PLC, 2014 ONCA 580.

[2] Moran v. Pyle National (Canada) Ltd., [1975] 1 S.C.R. 393.

[3] Club Resorts Ltd. v. Van Breda, 2012 SCC 17.
[4] Comity can be defined as: “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” (the Court of Appeal, quoting Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 at p. 1096 S.C.R., in which La Forest J. adopted the definition of comity set out in the 1895 American case of Hilton v. Guyot, 159 U.S. 113).

[5] For our foreign readers who may not be familiar with this idiomatic impression, it refers to a minor or secondary part of something controlling the whole.

What is the role of a Business Lawyer??

A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all of the above.

What types of clients do we represent?

On a daily basis, we represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and we advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, our primary focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.

Do I need a business lawyer?

If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.

A business lawyer can advise you of the applicable laws and help you comply with them.

A business lawyer can help steer you away from future disputes and lawsuits.

A business lawyer can help protect your tangible and intangible assets.

A business lawyer can help you negotiate more favourable business transactions.

Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.

Over the years, we have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, we are extremely sensitive to that concern and actively work with you to control legal costs. We believe it is in both our interests to discuss the scope of work and the costs involved before we provide any legal services.

You should seek a business lawyer if you or your company are . . .

- Starting a new business; (partnership, sole proprietorship or corporation)

- Issuing shares, stocks, options, warrants or convertible notes;

- Hiring your first employees (i.e. employment agreement);

- Negotiating a new lease;

- Acquiring another business;

- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)

- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)

- Selling your company;

- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)

- Planning to create and develop new ideas, products and services;

- Seeking to resolve internal disputes. (i.e. shareholders agreement);

- Any other business/legal issues

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Why you MUST have an Holding Company (a.k.a. HoldCo)

Today, I would like to share an excellent article written by Tim Cesnick, clearly explaining the advantages of Holding Companies.  At HazloLaw, we advise clients on a daily basis about the necessity of putting in place this type of structure and we also suggest to add a Family Trust to your current structure.  Read our related blog on Family Trust.

HOLDING COMPANY 
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.

I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.

THE RULES

If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.

How? By establishing a holding company to own the shares of your active business corporation (ABC).

You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.

If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.

It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.

By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.

The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.

THE STRATEGIES

What strategies should you be thinking about?

Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.

Think of each holding company as a tap to control the payment of dividends to each of you personally.

Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.

Splitting income: Your holding company can be owned by more than one person in the family.

Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.

It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.

Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.

The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.

Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."

The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.

Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.

Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Understanding the multiple sources of Financing for your Business

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assets

Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package

BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investors

Depending on your situation and the amount you need to raise, you can seek out venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favorably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors

These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304