Category: Commercial Law

Did you know that electronic signatures are valid in Ontario?

They are and have been for quite some time!

If it is legal, why do many institutions remain hesitant to accept documents executed digitally? Using e-signatures can pose issues with ID verification, capacity to be bound to contracts, authority to execute documents, and duress, among others. Further, they are not legal in all circumstances. However, if handled with care, the use of e-signatures is both legal and efficient, especially in this ever-changing world.

This article provides a general overview of some of the risks and recommendations for businesses who use or are considering using e-documents and more specifically, e-signatures for commercial client offerings.

 

Overview of the Electronic Commerce Act (the “Act”)

In 2000, the Ontario Government enacted the Electronic Commerce Act, S.O., 2000 to modernize commerce and legitimize electronic commerce. Essentially, the Act gives electronic contracts the same legal status as documents signed on paper.

Under the Act, electronic signatures can include documents signed with an electronically formed signature, as well as pushbuttons, i.e., “Accept” or “I agree.” There is no legal requirement that the electronic signature actually look like the individual’s hand-written signature.

The Act does not specify a requirement to accept the use of electronic signatures. If someone uses a system that requires an e-signature, their consent is inferred, and they cannot after the fact refuse to abide to an agreement simply because it was electronic. However, at the outset, prior to moving forward, someone can refuse the use of e-signatures. It is for this reason that it is generally recommended to obtain consent from the other party before drafting documentation, so everyone agrees in advance of the signing stage.

Some legislation requires documents to be “in writing” to be considered legal (i.e. commercial leases, etc.). The Act provides that an electronic document can satisfy the requirement for a document to be “in writing” so long as the electronic document is both:

• accessible by the other person so it can be used for subsequent reference; and,
• capable of being retained.

In other words, a readable/usable saved version of the executed document must be provided to all parties for it to be considered “in writing”.

The Act also provides that electronic documents can be considered “originals.” To be considered an original, documents must be accessible and usable for subsequent reference and there must be assurance that the information contained in the electronic document has been unaltered. Essentially, if there is evidence of an electronic document’s alteration, it will not be considered an “original.”

 

Exclusions under the Act

The Act has effectively legitimized many forms of electronic commerce but it also specifies several exclusions that businesses should be aware of. Under subsection 31(1) of the Act, the following documents are not acceptable in electronic form:

1. Wills and Codicils;
2. Trusts created by wills or codicils;
3. Powers of attorney, to the extent that they are in respect of an individual’s financial affairs or personal care;
4. Negotiable instruments, including promissory notes, cheques and bank drafts, among others; and
5. Documents that are prescribed or belong to a prescribed class.

 

The Act, at subsection 8(4), also limits the use of electronic documents when dealing with chattel papers and the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”). A chattel paper is a document “that evidences both a monetary obligation and a security interest in or a lease of specific goods”. This is particularly important in the leasing and financing business. Effectively, this means that any document evidencing a loan with a security interest that was done electronically, would not be protected under the PPSA.

 

However, on May 29, 2019, the PPSA was revised by adding the term “electronic chattel paper.” Electronic chattel paper is defined as “chattel paper created, recorded, transmitted or stored in digital form or other intangible form by electronic, magnetic or optical means.” Essentially, the PPSA is providing the opportunity to secure electronically signed security interests in a similar manner as wet-ink signed documents. To be considered valid, an electronic chattel paper will have to meet strict guidelines also set out in the PPSA. For more information on this, please review the PPSA (or contact our office).

 

Issues with Electronic Documents

The Act states that a document is not invalid or unenforceable by reason only of being in electronic form. In other words, except for the above noted exceptions, an otherwise legal document that is in electronic form would still be legal, despite being electronic.

If this is the case, if this legislation has been in place for over 20 years, then why are electronic signatures not more widely used? The two biggest issues that most institutions have with e-signatures are:

1. Fraud

First, the potential for fraudulent transactions increases with electronic commerce in the following ways, among others:

• The removal of face-to-face interactions impacts the ability to determine relevant facts such as mental capacity and understanding;
• There may be an increased risk of identity theft; and
• There is a reduced ability to confirm identification.

Though there are higher risks of fraud with electronic commerce, there are also steps businesses can take to mitigate the increased risk. The following methods, among others, could be used to assist in reducing fraud:

• The use of specialized electronic commerce systems that have built in security features;
• Increased computer security;
• Additional training for employees to recognize potential issues/red flags of fraud; and,
• Multi-step processes for document approvals.

While these methods certainly assist in reducing the risk of fraud, an analysis of the benefits of electronic commerce should be undertaken to determine if they outweigh the risks of fraud and the costs of protecting against it.

2. Concerns Based on Contract Law

Second, the fact that a contract is done online or electronically does not remove the general requirements of contract law. The standard contract elements still apply, and it remains necessary to satisfy them for the electronic document to be considered a legal and binding contract. Here are some considerations:

• Accuracy of the Parties Listed: It is important in contract law to know who you are contracting with and organizations should ensure practices are in place to confirm that the person executing the document is the person named.

 

• Capacity of the Parties:
  1. Lack of Capacity to Understand: A contract may not be enforceable if a party is incapable of understanding what they are agreeing to. This risk is increased if there is less face-to-face interaction to ascertain an individual’s mental capacity.

 

1. Duress: Duress is illegal pressure or coercion put on another person to force them to sign a document against their will. Although videoconferencing can alleviate some concern, without in-person meetings, there is increased risk that an individual may be influenced by a third-party to execute a document against his or her will.

 

• Unequal Bargaining Power: Situations may arise where an individual argues that they did not understand what they were signing, because it was too complicated, or too lengthy and no one reviewed it with them. With the use of e-documents, it is more difficult to confirm that a client has had an opportunity to review the information and ask questions to ensure they understand what they are signing. Some options to reduce this risk are again; the use of video-conferencing calls, and online prompts that bring important aspects of the agreement to the user’s attention.

 

• Timing of Acceptance: If offers are time-sensitive, the signatures representing their acceptance are crucial. Under the Act, acceptance occurs when the document is sent back to the offeror. A document is considered “sent” when it enters a system outside of the sender’s control or, if using the same system, when it becomes capable of being retrieved by the other party.

 

Conclusion

In summary, despite not being universally used, electronic signatures are legal in Ontario, with limited exceptions. The most obvious reasons behind the aversion to electronic signatures are the exceptions to the Act, the risk of fraud, and the potential complications with contract law. Further, there may be additional costs associated with an electronic signature platform. While there are methods that can be used to limit the issues with electronic signatures, the risks cannot be eliminated. As is the case for most business decisions, an analysis of the benefits versus the risks of electronic signatures should be undertaken. It may be worthwhile to investigate how use of electronic signatures can be implemented in your organization.

There are many different kinds of business contracts. Standard form contracts such as policies of insurance, are one example. Two business persons exchanging emails is another example. Although you may enter into “oral agreements”, some contracts have to be in writing (when dealing with land) and others have certain statutory requirements (such as franchise agreements).

The following are some general comments on business agreement. It is important to make sure that there is, in fact, an agreement between people. There must be an offer which is sufficiently clear that it can be accepted by the other person. Many disputes arise as to whether or not there was ever any binding agreement. Think of it this way. If someone makes an offer to you that you want to make into a binding contract, then simply communicate to them that you “accept” their offer.

Many times the terms of the contact are so vague as to be unenforceable. So too, an
“agreement to agree” is not enforceable. If someone else reads the agreement, is it clear who is to do what and when?

When looking at an agreement, have a clear starting date and a date when obligations are to be completed and monies paid. Consider putting in the contract a specific right to terminate the agreement for non-performance, after written notice and a failure to perform.

Know who you are contracting with. Are you dealing with a corporation? If so, then you should consider getting personal guarantees, or else contracting directly with the individual.

When looking at the proposed agreement, ask yourself the following question. “What are we about?” Write down in point form what it is in the agreement that is important to you. Then look at the proposed agreement and see whether or not all of those are put into the contract.

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Disputes often arise under contracts when one side says there is more to the agreement than in writing. Everything that is important needs to get into the agreement. Put in a sentence saying that the agreement is the entire agreement and there are no other collateral agreements, conditions or promises other than what is contained in the agreement.

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Many agreements written by lawyers have the words: “time is of the essence”. This really means that if there are times specified for events to happen, then the time lines must be met and they are not just approximate.

Does the person you are contracting have the legal capacity to contract? A person under the age of eighteen years does not have legal capacity. Is the other person under duress, undue influence or some unconscionable conduct that forces them to sign the agreement? Having an independent witness sign the contract will help prove the person’s signature and they may be able to help given evidence on the issuer or duress or undue influence should the need arise.

Often people try and get out of an agreement, saying that there was misrepresentation of relevant information or mistakes. Try and set out in your agreement the reason for the agreement and the factual basis for the contract. These are often called warranties and representations, where one person sets of the factual basis that the other person is relying on for entering into the agreement.

Often there are conditions to an agreement. The conditions are clear. Specify who has to do what within what time period, and indicate if the conditions can be waived by the other side.

Know what your obligations are. If completion of your obligations require some other person to do something, then make it clear in the agreement that this is the case.

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There are many common kinds of contracts. These can include employment contracts, purchase and sale of goods, equipment leases, real estate agreements for the purchase of land, credit agreements, etc. Understand the main points of the agreements  before you sign them.

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Doug Shanks is a partner in the law firm of Cheadles LLP. Doug devotes a substantial portion of his practice to business law, including preparation of commercial agreements relating to the purchase and sale of businesses, shareholders agreements, commercial leases and other business contracts.

For 28 years, Doug has represented franchise corporations, multinational mining corporations and chartered banks in Northwestern Ontario and Central Canada.

WHAT ONTARIO COMPANIES NEED TO KNOW ABOUT CONFIDENTIAL INFORMATION AND NON-DISCLOSURE AGREEMENTS

A non-disclosure agreement (NDA), sometimes called a confidentiality agreement, is a legally binding contract, whereby one or both of the parties agree that information exchanged between them will not be shared with outsiders.  NDAs protect confidential business information, inventions or artistic creations revealed during proposals, discussions and negotiations.  It protects against disclosure to third parties of information not already in the public domain, and usually restricts what use the recipient can make of the information.

Recent Ontario Superior Court decisions have made it clear that the misuse of confidential information will not be taken lightly, and NDAs will be strictly enforced.  In
Certicom Corp. v. Research in Motion Ltd., 2009 CarswellOnt 331, RIM was attempting to buy Certicom through friendly negotiations, which in the end were unsuccessful.  During these negotiations, Certicom disclosed confidential information to RIM pursuant to two different NDAs, which were entered into in 2007, and 2008.

The 2007 NDA enclosed a standstill provision, preventing RIM from making a hostile takeover for 12 months.  Six months after the standstill expired, RIM made a hostile bid for Certicom and admitted it had used Certicom’s confidential information in evaluating the bid.  Certicom was successful in seeking an injunction to stop RIM from making any bids on their company unless they consented.

This decision is significant because even though the standstill agreement had expired, the Court held that it still applied.  Justice Hoy found that the standstill and NDA provisions had to be looked at as separate clauses to be interpreted properly, as they provided different protections for different terms.  She stated that “After the standstill provision falls away, Certicom is left with longer-term protection that, among other things, entails the need of proof of disclosure and proof of use of confidential information…After the standstill provision had expired, it was open to RIM to mount a hostile bid, provided that it had not received, and used, any confidential information in assessing the bid.”

This case is consistent with other recent decisions including Gold Reserve Inc. v. Rusoro Mining Ltd., [2009] O.J. No. 533 (Ont. Sup. Ct.). which also involved a hostile takeover bid.  Despite arguments from the defendants, the Court found that it was not realistic to think that recipients of the confidential information could “compartmentalize” their minds so as to isolate and not use the confidential information given to them in previous dealings.

Many experts believe that the Court in both these decisions were concerned about maintaining a level playing field in the securities market.  Both these cases have made it clear that if NDAs are drafted correctly, they will be stringently enforced.

What does this mean for a company looking to acquire another company?  The Court in both these cases wanted to know if procedures were used by the recipients to prevent misuse of the confidential information.

Knowing this, it would be practical to record what was disclosed at meetings and to whom it was disclosed.  If there is ever an argument about the interpretation of the NDA, it would also be helpful to have records of the negotiations that took place in drafting the agreement.  Most importantly, a standard NDA should not be used, but rather it should drafted to meet the specific needs of the companies involved.

ENFORCING NON-COMPETITION AND NON-SOLICITATION AGREEMENTS: WHAT EMPLOYERS NEED TO KNOW

The Supreme Court of Canada and the Ontario Court of Appeal have made it clear that they are only going to enforce non-competition agreements in the rarest of cases.  When trying to decide whether to enforce these agreements, the courts struggle with two competing interests.  On the one hand, there is the public interest in discouraging restrictions on trade, and maintaining free and open competition which benefits both society and the affected employees. On the other hand, however, the courts have been reluctant to restrict the right to contract, particularly when that right has been exercised by knowledgeable persons of equal bargaining power.

In H.L. Staebler Co. v. Allan, [2008] O.J. No. 3048, the Ontario Court of Appeal made it clear that non-solicitation agreements will nearly always be preferable to non-competition agreements when it comes to protecting former employers.  In this case, two employees became unhappy with management and immediately began working for a competitor.  Their employment contracts prohibited them from conducting business with Staebler clients they had served for at least two years after leaving their employment.

The restriction was not sufficiently limited geographically, nor with respect to the nature of the business that the employees were prohibited from conducting.  This rendered the restrictive covenant overbroad and unenforceable. The clause unreasonably restricted the employee’s economic interests and went beyond what was necessary to protect Staebler.  The Court of appeal found the covenant to be a non-competition clause as it did not purport to merely restrain the Employees from soliciting the clients and customers they had served when they worked at Staebler, but rather, it prohibited the Employees from conducting business with any such clients.  In Staebler a non-solicitation clause would have been sufficient given the fact the employees were not key employees.

The Court confirmed the well established principal from Elsley Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, that non-competition clauses should only be enforced in exceptional circumstances.  A non-solicitation clause, suitably restrained in temporal and spatial terms is more likely to represent a reasonable balance of the competing interests than is a non-competition clause. An appropriately limited non-solicitation clause offers protection for an employer without unduly compromising a person’s ability to work in his or her chosen field.

What does the recent case law including Staebler mean for employers?  You should be careful to strictly define the characteristics of the competitive business, and to strictly define the geographic area of the restrictive covenants.  The Agreement should also be specific for the individual employee and not a one size fits all.  Finally, it would be wise to draft non-solicitation and non-competition clauses separately, so if the non-competition clause is found to be unenforceable, and can be severed, and the non-solicitation clause can still be relied upon.

The Ontario Court of Appeal in Wallace v. Allen, 2009 ONCA 36, recently held that if a letter of intent clearly expresses that the parties intend to be bound by it, and the parties conduct themselves as if they are bound, then neither side will be able to back out of the transaction before closing.

The defendant, Allen was looking at selling his business interests, and the plaintiff, Wallace, expressed a desire to acquire them. The parties executed a letter of intent for the share purchase and the sale of four companies. Both parties acknowledged that all the terms that were essential to the transaction were agreed upon and included in the letter of intent.

It is not uncommon for a Letter of Intent to contain a clause stating that there is no binding contract until a formal agreement is signed. The Court of Appeal did not have to deal with this type of clause in this case, but rather they found that the Letter of Intent contained clauses which contemplated a further agreement. Those clauses read:

IT IS ALSO AGREED BY THE PARTIES THAT THERE WILL BE MUCH LEGAL WORK TO BE DONE UPON ACCEPTANCE BY BOTH SIDES AND THAT THE WORDING OF THIS AGREEMENT MAY ALTER SOMEWHAT

and

THIS LETTER OF INTENT MUST BE REDUCED INTO A BINDING AGREEMENT OF PURCHASE AND SALE BY THE PARTIES WITHIN THE NEXT 40 DAYS

These clauses were critical in evidencing both parties intention to be bound by the Letter of Intent, as they were clear and unambiguous that further negotiations would take place, and a deadline was provided to turn the deal into a binding Agreement of Purchase and Sale.

After much negotiation, a final draft of a share purchase agreement was exchanged between the parties’ lawyers, and shortly before the closing date they met to finalize the terms. On the closing date, Wallace was not present, as he had gone to Florida with the defendant’s knowledge and approval. Wallace had not signed the necessary closing documentation, and so Allen refused to close and elected to terminate the transaction. The trial judge determined that the parties had no intention to create legal relations until the agreed upon share purchase agreement was executed.

The Court of Appeal did not agree and held that the letter of intent plainly expressed the intention of the parties to be bound by its terms. This intention was evidenced by the conduct of the parties after the letter of intent was signed, which clearly demonstrated that both sides considered themselves legally bound by its terms. After signing the letter of intent, Allen held a special employee meeting, announcing his retirement and the fact that he had sold his company. Wallace began working at the business every day to learn how the business operated and to ensure the change of ownership went as smooth as possible. Allen also introduced Wallace to all of the employees as the “new owner”.

What should be taken away from this decision? If an individual or company wants a letter of intent to be binding on other parties involved, the letter of intent should clearly express the intention of the parties to be bound. All the essential or necessary terms of the transaction should be included in the letter of intent. It would also be prudent to insert clauses similar to the ones found in Wallace, providing a timeline for the deal, and stating that it is understood that much more work needs to be done. Finally, they should conduct themselves as if they are legally bound by the terms.

If you are a small business owner, sole proprietor, or are contemplating starting up a business, you have likely considered incorporating.

Sample Standard Incorporating Process

1) Decide if you would like to incorporate a Federal or Ontario Company

Do you plan on operating solely in Ontario, or across the country?

2) Provide us with key pieces of information

You will need to name your company.  We will do a name search to make sure that someone else hasn’t registered that company name.  If you don’t want to come up with a name that no-one else has used before, then in Ontario, you can be assigned a number for your company.

Here are some examples of names of numbered companies: Ontario 100001 Ltd.,  Ontario 100001 Limited, Ontario 100001 Inc., Ontario 100001 Corp.

Give us with the name and address of first director.  After the articles of incorporation are registered, other directors and officers can be added.  Once we have this information we can prepare the articles of incorporation and you need to sign them.  We will need two original signed copies of the signing page for incorporation.

Directors are the individuals who make the major administrative decisions of the corporation.  Ontario law requires that the majority of the directors be canadian residents.  At least one director must be a Canadian resident if you only have two directors.  Directors may also be shareholders as well as officers.

This is a great time to trademark the name of your company.  Protecting this name may be vital to your business.

3) Meet with an accountant 

At some point you will want to meet with your accountant  to discuss financial matters.  You may want to ask about the year end date, or how shares should be held to best maximize tax savings.  This needs to be done before the company is organized, so it is best to get this meeting done early.

4) Documents are sent to the registry office

Once we have the signed articles of incorporation we send them to the registry office and our conveyancer will register and send them back to us.  When we get the registered articles back, we order the corporate minute book and seal, and prepare the organizational by-laws, resolutions, share certificates, etc.

5) Give us even more information

To prepare these documents, we need the following information:

•  Address of registered head office
•  Name and address of shareholders and list of what shares they will be buying
•  Name and address of accountant
•  Information for the President and secretary of corporation
•  Year end date

6) Sign the corporate documents and discuss legal implications

Once we have prepared the minute book, we will set up a meeting to sign the corporate documents (by laws, resolutions, share certificates) and discuss the legal implications and obligations of operating your company.

7) Obtain other permits and Licences

After you have set up your corporation and are maintaining it according to the legal requirements, you must turn your attention to other legal requirements such as the following:

• Register for a federal Business Number.  The Business Number is used by the federal government to identify businesses for a variety of accounts:
• federal corporate income taxes
• import/export account
• GST/HST collection
• employer payroll source deductions
• Register any non-corporate business names (business names other than the exact registered corporate name) used by the corporation in the province in which the business operates.  This is a provincial legal requirement.
• Register for a provincial sales tax account (if applicable)
• Register for provincial Employer Health Tax, & Worker’s Compensation
• Obtain any Provincial and/or municipal licenses

8) Set up a bank account

In order to set up a corporate bank account, you will need to supply the bank with a copy of your articles of incorporation and any articles of amendment.  All authorized signing officers of the corporation must sign on to the account at the bank before they are permitted to sign cheques or access the corporate account.  The bank may also require certain corporate by-laws or other resolutions to be passed before opening the account.

The whole process can be completed very quickly and can provide much protection in terms of providing yourself with limited liability along with providing major tax savings.