The Contracts Nobody Reads

Devouring Phone Contract. Illustration: Valérie DesrochersNobody reads those “end user license agreements” that pop up on your phone or computer, right? We’ve all seen probably thousands of these things. We all just click “Agree”. Who has the time?

So if nobody reads them, do they matter? And if you do read them, what should you know?

Peter Kissick, the course designer for Law 204/704, Corporate Law, dropped by to answer those questions and more. He knows contracts, and we get into the details of all the documents nobody actually reads.

 

Transcript:

00:03 Matt Shepherd: Welcome to Fundamentals of Canadian Law. I’m Matt Shepherd, and I’ve never read one of those end-user license agreements. Who has? We’ve all seen probably thousands of these things, we all just click agree. Who’s got the time? So if nobody reads them, do they matter? And if you do read them, what should you know? Peter Kissick, the course designer for Law 204/704: Corporate Law, dropped by to answer these questions and more. He knows contracts, and we get into the details of all the documents nobody actually reads. This podcast is brought to you by the Queen’s Certificate in Law, the only online certificate in law offered by a law faculty in Canada. You can find out more at takelaw.ca.

00:53 MS: I have probably read thousands or seen, never read. I’ve probably seen but never read thousands of these license agreements in my time. I’ve been using computers for a long time so these little screens have been popping up, and I’ve been agreeing for a long time. Peter, what’s going on with these? [chuckle] What are they? What am I looking at?

01:11 Peter Kissick: We refer to these things as broadly standard form contracts or contracts of adhesion because they actually pre-date computer licenses. And you can think back to a simple agreement when you park a car and there’s a sign that says, “By parking your car, you agree that we, the owner of the parking lot, is not responsible for any damage to your car.” That’s one of the original standard form contracts or contracts of adhesion. And we see them a lot in the consumer context. For instance, your utilities bill, or if you sign up for a cell phone or something like that, there’ll always be, probably pre-printed, a standard form contract like this.

01:54 PK: But I think what you’re referring to is E-U-L-A or EULA, end-user license agreement, that we often see as a pop-up whenever we want to put, oh, I don’t know, say, you could do iOS or something like that or put some operating system onto our computer or a new app or something to that effect. And I’m assuming that’s what you’re talking about, and you probably agreed to them. As you say, you started off by saying you’ve read a thousand of them. I’m betting that you are like 99.9% of the rest of the world and you’ve never actually read one or you don’t read them as you go.

02:32 MS: Sometimes I’ve sort of scrolled through real quick and thought, “Hmm. That’s interesting,” but I haven’t… No, I’ve never actually… Until the other day, for this, I actually printed out and sat down and read one. They’re legal, like they have force in law.

02:44 PK: No… And in fact, I’ve often had, I’ve had students come to me and say, “Well, I click on it, it doesn’t mean anything, right?” Well, to which I answered, “Well, why did you click something that said, ‘I agree’ or ‘I accept’?” Ontario law, in fact, is not inconsistent with the law of the rest of the world that says, “Simply by clicking, ‘I agree,’ whether you read it or not, you are bound by those terms.” So the simple click of a, a mouse click on an icon or some sort of box on your computer screen is going to be synonymous with a signature.

03:20 MS: Right.

03:20 PK: So read it or not, you’re bound.

03:23 MS: And people have done some pretty hilarious things with the fact that people don’t read these.

03:28 PK: Yeah. It is one of those ironies, right? People don’t think they’re bound but they are. Probably many users of these, the people who create these license agreements or consumer contracts probably count on the fact [chuckle] that people don’t read them. But it’s created sort of an interesting sort of a cottage industry of strange and somewhat bizarre and hilarious examples of what has been buried in these agreements. There’s one example, PC Pitstop I think was the name of the company, that buried in its EULA a provision that said, “The first person to get back to us will receive a prize of a thousand dollars.” It was buried in the midst of all the terms, and it took them five months to actually give away the thousand dollars because nobody bothered to read it.

04:27 PK: There was another company, I believe it was an antivirus software company, that on April Fool’s Day changed their license agreement terms and again buried in the midst of all the verbiage was a provision that said, “By agreeing to this license you agree that we have a claim against your immortal soul.” 2500 people apparently signed up for that service and signed away their soul. Fortunately, they amended their agreement on April 2nd to take that away. Yes, it’s… Yes. I guess one of… And sort of a slightly different and somewhat humorous and very celebrated example of this was Van Halen’s performance contract. The rock band Van Halen had a provision in their contract that said or sort of a rider to their standard production contract when they are going to have a concert. It said that the promoter shall provide certain things in their dressing room, and they included a provision that said they shall have a bowl of M&Ms in their dressing room with the brown M&Ms taken out.

05:36 PK: You’d think that’s just the eccentricity and vanity of rock stars. Well, actually it had a true purpose. They said, “We wanna make sure that the promoter actually has read our standard form contract, because if they didn’t see that provision, maybe they didn’t read closely the provision that we need in terms of our setup requirements, stress on floors, lighting, that kind of thing, because that had happened before, where they had actually had a stage collapse on them, so they wanted to use their standard form agreement to catch promoters out.

06:09 MS: Right. So if they see brown M&Ms in the bowl, they know someone’s not paying attention and it’s time to check everything out.

06:14 PK: That’s correct.

06:15 MS: ‘Cause there’s pyrotechnics involved to the Van Halen show.

06:17 PK: Absolutely. Absolutely.

06:18 MS: You wanna be really careful.

06:19 PK: So I think when that did happen, I think David Lee Roth, the singer from Van Halen wrote that when that would happen, then they would do an extra long sound check and double check everything and then they would build a promoter for that.

06:34 MS: Right. Right. So in the realm of the more serious contract, not to say that the aforementioned aren’t serious, but I own an iPhone and so I know I have clicked off on dozens of these over time, so I actually printed out an iPhone end-user license agreement. I don’t have the URL in front of me, but we’ll post it on the blog, when this podcast goes by, it is about, I would say 20 pages long, if that. It’s surprisingly readable. Like I read through it and I thought, you know, this is not… After studying the law in some of these certificate programs, one of the things I noticed about legal writing is that, generally fake legal writing seems more legal than real legal writing a lot of the time. [chuckle] When I read these things, and I read judgments, I’m like, “Oh, this is actually pretty accessible stuff,” and it wasn’t an easy read. It’s long and it’s pretty dull, but it’s a readable contract. You can go through it and understand pretty much what’s going on in here.

07:34 PK: Fair enough, fair enough. I think so. I think if anybody took their time, they would have a pretty good sense of what was in there. It’s pretty dense. There’s a lot behind all of the words, let’s just say, it’s not as long as we might think, although I’m sure it’s longer than anyone who simply wants to get on with playing with their iPhone really wants to go through. But still it’s not as long as you might think, but as I say, what’s behind all of those words? There’s been a fair bit of industry practice plus common law decisions and the like behind what’s written in there.

08:09 MS: Right. And as you go through it, there’s kind of… I’ve noticed there’s themes. It sort of breaks down, and everything kind of… There’s a lot of broad categories, and this won’t be exhaustive, but the first one that leapt out at me is, there’s a number of clauses in here that basically seem to say, there’s stuff that you can do with this phone but we don’t want you to do it and we’re not responsible if you do. So this is kind of like a copyright violation, falls in the category of things that you could do with this phone but you shouldn’t do them. But they don’t have any… Basically, they’re just sort of saying this isn’t our fault. And is that to keep third-parties from kind of… If you use the iPhone to steal music, then Sony can’t come after Apple and say, this is your fault, ’cause they said it’s not their fault in this contract that I had to read.

08:57 PK: That’s very well put. Yeah, that’s exactly right. I think the standard form agreements, it’s a relationship between the individual consumer or user and Apple, in this particular case, but Apple is trying to use this contract to minimize their legal exposure, not only to the consumer but to anybody else out there, including other service providers, other IP providers, intellectual property providers, and governments. So please don’t do that illegal activity ’cause we really don’t want to have to have any criminal exposure, let alone civil exposure. Please don’t use this to steal somebody else’s copyright because we don’t want that person suing us indirectly or facilitating that. So it’s a method of protection, absolutely.

09:50 MS: So this is like a contract between me and Apple, but there’s also they’re considering a lot of third parties when they do all the writing to craft this. Another broad category…

10:00 PK: Actually, before you move on, Matt, if you don’t mind…

10:02 MS: No, absolutely.

10:04 PK: Odds are, Apple has considered who they’re most likely to be sued by, and it’s probably not you, Matt. It’s probably to be Google or somebody of that level of substance, who probably have damages sufficient that it would merit a lawsuit. So, as much as they’re worried about you, or they may not be worried about you, to be honest with you, they are probably more worried about these third parties.

10:32 MS: Right. So they’re protecting themselves from the third parties through the mechanism of the contract.

10:38 PK: Yes. That’s correct.

10:38 MS: Because I can’t do things that will take those third parties off, or if I do, it’s clearly not Apple that did it.

10:43 PK: That’s right.

10:43 MS: It’s me as an individual acting like a jury.

10:45 PK: That’s right. For the record, that is not absolutely fail safe. Because Google is not a party to this contract. If you go ahead and do something that would violate their intellectual property, there is nothing to stop Google from suing Apple. Now Apple could say, “Hey, that wasn’t our fault. Look at this agreement, we said it was Matt’s problem.” And that may or may not be successful, but nothing could stop Google from still suing Apple because they’re not a party to the agreement.

11:15 MS: Okay, the next broad category is something that I’m calling, this might happen, but you can’t blame us if it does.

11:23 PK: That’s right, and this is now, we’re worried about Matt you suing Apple. So if for some reason, you use your phone in a specific way, whether it’s something that was authorized by Apple or not, maybe it’s a completely legitimate use for your phone and you somehow suffer some liability. Still can’t sue us. So, Apple could have done nothing wrong, you can’t sue them. Apple could have done something entirely wrong in the creation of the phone, the creation of the software or installation of software on that, and you still can’t sue them. You’re gonna say, how was that fair? Apple has done something that’s caused me injury, why can’t I sue them? We’re gonna say, well, if we don’t have that provision in all of our agreements, what’s to stop Matt from launching a lawsuit over any small thing? And since we sell millions of iPhones throughout the world, think of all those potential lawsuits. So we’re simply gonna say, “Look, in order to keep the costs of this iPhone down, we’re gonna say no one can sue us if anything bad happens. And if we didn’t have that, and we were subject to that civil exposure, the cost of an iPhone would actually rise.”

12:35 MS: But I mean, they still are to an extent, like I can only imagine if iPhones started exploding and taking people’s heads off, then that clause wouldn’t protect them.

12:45 PK: That’s correct. There are limits on how far some of these provisions can go, these disclaimer clauses for instance or waiver of liability clauses, more precise. How far can they go? Do they actually have any bearing? And the courts will give effect to them, but they will not give effect to something that would be unconscionable. So if it goes to the very heart of what an iPhone should do, and no one should actually suffer third-degree burns by putting a phone to their ear in their ordinary course of business, it’s unlikely that Apple will be able to escape liability.

13:22 MS: Okay, so something like, there’s some clauses in here about distracted driving. Does that fit more into the first case or the second case of, you can do this, but please don’t, or if you undergo harm while doing this, we can’t be blamed for it.

13:38 PK: Yeah, I think it goes a little of both to be perfectly honest with you, but they’re probably more worried about the first case than the second case. They don’t want… Because you’re driving along, texting or using your phone and not paying attention, and you hit some third party, Apple’s probably more worried about that third party coming back against them, yeah.

13:58 MS: Okay, and data overages is another one, where if this happens, this is on you, it’s not on us.

14:04 PK: That’s right, that’s right. And in that sort of situation, they’re saying that’s truly beyond our control, so we absolutely don’t wanna have that. What Apple is trying to do here is, you could say that there are legal justifications behind a lot of things. A lot of these things are business justifications, they are trying to get cost certainty. So they wanna know that when they sell you that iPhone, they know what their costs were in building that iPhone and they don’t want any contingencies going forward.

14:32 MS: Right.

14:33 PK: Yeah.

14:33 MS: And while law suits are definitely a contingency you can’t plan for, so they’re trying to hedge those bets as much as they can contractually.

14:40 PK: That’s right. Right, and which is no different actually than when you think about sort of the waivers that you see or the warnings that you see on any product. A product manufacturer is worried about product’s liability lawsuits. This is sort of the cell phone equivalent of that.

14:55 MS: Okay.

14:55 PK: Yeah.

14:56 MS: And the third broad category that I saw all over the place had a lot to do with data collection. So it’s basically just saying, we are gonna be gathering data from you for a variety of purposes like maps is one where they’re saying, we need your data to provide the service, so we’re gonna go ahead and take your data to provide this service. And there’s a lot, there’s a ton of sort of data use clauses scattered throughout here.

15:22 PK: Absolutely, absolutely. And those fall into a number of different laws. If we set the United States aside for the moment. And for the record, the Apple agreement is probably going to be unique by jurisdiction, they’re probably gonna revise it slightly, jurisdiction by jurisdiction. In Canada, we have private data collection laws, Personal Information Protection and Electronic Documents Act or PIPEDA, actually regulates when someone can collect data. So this is complying with the Canadian statute. That’s true in the European Union, which whose laws are even stronger. The United States doesn’t have such a statute, but they certainly have Tort Law that will apply when someone has some, for instance, could sue for invasion of privacy or something to the equivalent of that effect. And we have a variant of that in Canada as well. So there’s common law reasons for this, but there’s a lot of statutory regulation that Apple’s complying with.

16:21 MS: Right. And the other big piece of language I see in here, it’s mainly sort of licensing stuff. It’s, we use this but it’s a license of that, we use this and it’s a license of this other thing. And I guess they just kind of have to put that in for, well, legal reasons.

16:36 PK: Well, yeah, they are doing it for legal reasons. Again, their iPhone is based on other, to some degree is based on other people’s intellectual property they’ve entered into agreements, as well as there’s some statutory language that protects copyrights, trademarks, that sort of thing, of third parties and are saying, some third-party supplier provides something that is integral to an iPhone, part of the agreement that licenses that material to Apple is gonna say, and you must, we grant you this license and you must tell everybody that you have a license that that’s not proprietary or owned by Apple. And so they’re checking off a box in their contractual obligations really. It doesn’t really impact on you whatsoever and you probably don’t really care, but they are simply making sure that people realize that this is not all owned by Apple.

17:34 MS: So, there is a massive section of this that’s in all caps. Why suddenly the shift from [chuckle] regular case typing to there’s like about, well I would say three pages in total in here where suddenly just shift, is this to denote that this is the most important part of the contract?

17:52 PK: It’s very interesting that you point out that it’s three pages long, it’s supposed to point out the most unusual or most onerous terms [chuckle] in the standard form contract. But yeah, as you say, it’s about 30% of the agreement [chuckle] seems to be in caps. Some of it is not just in caps, but it’s in bold as well. I guess they really want you to notice that. And that’s literally what the law is. The old English law that’s been adopted in common law Canada is that in any standard form contract, the courts will accept that. But usually standard form contracts are one-sided, they are there to protect the service provider, the Apple, Rogers or Bell or somebody to that effect and not you, the consumer. Again, the point being that we’re trying to keep our costs down.

18:36 PK: The courts will enforce those, because you clicked, “I agree.” But there are some things that tick off the courts and say, “We’re not gonna enforce that, we’ve already mentioned the unconscionable clauses.” But the other point under the old Anglo-Canadian law is that you’ve gotta give notice of terms that would be unusual or unexpected by the consumer where the consumer to actually read them or they would be onerous. And, by onerous, we mean we’re flipping the onus. We’re flipping the protection from the, what would typically be borne by the service provider onto you, you’re accepting the risk yourself, so a waiver of any liability.

19:19 PK: A disclaimer saying, “Hey, we Apple, don’t promise that this iPhone will actually do what it says it does and you can’t sue us.” Those things where ordinarily that would be their obligation, those are the provisions that are typically put in capital letters or in bold. Because they’re supposed to be providing notice to you, “Hey, look at this, it’s in bold and caps and sort of, our texts speak now, we put it all in caps, they’re yelling at you.” And that’s the standard form contract equivalent of that. And if they don’t do that, the courts have said, “Well, we’re not gonna enforce that.”

19:54 MS: So, onerousness is kind of a comeback to these contracts, or is it?

20:00 PK: In a sense that they are… From a consumer’s perspective?

20:03 MS: From my consumer’s perspective, they’ve had to do this. Because if they didn’t do this, a court could theoretically say, “No, this contract isn’t relevant because you’ve buried some very important language.” You haven’t made it easy to read and you haven’t made it obvious. Is it possible of contracts that they’re just too big for someone to read?

20:22 PK: It’s interesting that our laws have gone down this road and then they seemed to have stopped. People have made the complaint that some service providers who aren’t as considerate as Apple is here. As you point out, this actually does read grammatically well. There are others who have contracts that are two or three times the length of this and legally, how could you ever actually find this language and is buried. And the courts still seem to have accepted them. I think the courts are probably waiting for governments to come along and say, “In the interest of consumer protection, you must have these particular terms. You must write them in a certain way.” And our federal government has gone down that road a little bit with cell phone contracts now.

21:14 MS: Right.

21:15 PK: Right.

21:15 MS: They have to be, to some extent, understandable to the lay person.

21:19 PK: Correct.

21:19 MS: It’s been kind of weirdly rewarding to read this. [chuckle] I’m glad I did it. I don’t think I’m ever gonna do this again. So, how much does this map, like if I have read Apple’s terms and conditions, can I sort of say that I get the gist of most of these, or are they unique enough that really, I should sit down with my Rogers internet provider contract and read it as well? Or is it just gonna be kind of the same stuff in a different order?

21:45 PK: They are broadly the same. We covered certain categories that you’re certainly gonna see in virtually every standard form contract, a waiver of liability. Even if you somehow manage to successfully sue us, our liability is capped at a certain amount of money. These third-party obligations… You’re gonna see all of those things. I think one of the key things here to take away is where there’s gonna be a variation is what they’re disclaiming from contract to contract and what a cell phone provider is gonna disclaim is gonna be different than what Apple is gonna be disclaiming for instance.

22:27 PK: So, I still think it’s worthwhile. Especially when you’re signing a contract and you’re clicking on terms, or looking at a standard form contract for something where somebody’s providing a service to you. Apple’s providing you with a phone, Bell or Rogers are providing you with a cell phone. Look and see what is in fact disclaimed and what is not. I think that’s quite valuable to you. But otherwise, yes. They’re broadly similar.

22:50 MS: Right. And broadly speaking, I should be able to go through and look for capital letters and bolding to see what’s the most onerous in terms of… What’s the highest burden on me as a consumer should be apparent.

23:00 PK: Interestingly, the burden on you as a consumer is extremely high. You’re deemed to have read these terms and understood these terms simply by clicking, “I agree.” So, the onus is in fact, on you. But you’re right, if you look through and read the bold print and the capital letters, those are going to be the most, shall we say, injurious provisions for you.

23:24 MS: Okay.

23:25 PK: Okay?

23:25 MS: Well, this has been really helpful. Thank you, Peter.

23:27 PK: It’s not often anyone is struck so fancifully by standard form contracts till I get a chance to talk about it. So, thank you, Matt.

23:37 MS: Thanks to Peter Kissick, the designer of our corporate law course. If you’re interested in contracts and business law, you should take a look at Law 204/704: Corporate Law at takelaw.ca. Fundamentals of Canadian Law is recorded at Queen’s University situated on traditional Anishinaabe and Haudenosaunee Territory. Our theme music is by Megan Hamilton, who is also a staff member here at Queen’s Law. You can find out more about our music at meganhamiltonmusic.wordpress.com. Original illustrations for each podcast are created by Valerie Desrochers. You can see them at takelaw.ca. And visit Valerie’s portfolio at vdesrochers.com. Thanks for listening.

Click Yes to Agree: EULA and You

With more and more of our interactions happening online you have probably clicked yes to hundreds of terms of service agreements. It is a running joke that no one ever reads these—recently many commenters made jokes in the wake of President Donald Trump’s summit with North Korea that the Apple Terms of Service prohibit using their products for the “development, design, manufacture, or production of nuclear, missile, or chemical or biological weapons”. For many of us the question becomes: what have we agreed to, and more importantly, are we bound by clicking yes on a Terms of Service contract?

These kinds of contracts are known in contract law as “standard form contracts”—the offeror provides the offer in the form of the final contract and those who wish to accept it are put to what the Supreme Court of Canada describes as a “take‑it‑or‑leave‑it proposition”. You either accept the terms and sign the contract, or you do not, and you try to find similar services by another offeror.

These types of contracts aren’t just found in terms of service; they often take the form of liability waivers, insurance contracts, rental contracts and many others where the person accepting the offer has no ability to negotiate terms.

Because of this factual matrix and the differences in bargaining powers, the courts have recognized exceptions to the general rules of contract when looking at the enforcement of standard form contracts. For example, the general rule is that where a person has signed a contract, it is “immaterial” to their liability under that contract whether or not they have read it—the other party is entitled to rely on their acceptance. There are exceptions to this general rule for standard form contracts, the most important of which are where the signature was induced by fraud or misrepresentation, and where the other party knew or had reason to know that the person accepting the contract was mistaken as to its terms. In those circumstances, a party will not be bound by their acceptance of the standard form contract.

Another important rule is that a party offering a standard form contract does not have to take positive steps to ensure that the accepting party has read or understands the agreement or its terms. The exception to this general rule is that, in circumstances where a reasonable person should have known that the party signing was not consenting to the terms in question, the offering party must take reasonable steps to apprise the accepting party of the contract’s onerous terms and ensure that they read and understand them. This rule is why you may see onerous terms in a terms of service agreement bolded, or you might be required to scroll through the entire agreement before you can click accept. The courts have held that these kinds of procedures can ensure that those offering standard form contracts can rely on your acceptance of them because they have the effect of bringing onerous terms to your attention, and (at least in theory) force you to read the entire agreement.

In reality, most of us (even law students) do not read terms of service agreements. However, even if you don’t read these contracts, it is important to understand the extent to which you will be bound by them and the basic rules that govern their use and enforcement.

– Isabelle Crew

Art: Valérie Desrochers

 

The Most Expensive Comma in the World — Fundamentals of Canadian Law

Comma dreams of moneyWhat’s in a comma? A lot of zeroes, sometimes — Law 204/704 developer Peter Kissick joins us to talk about a legendary case involving a comma, utility poles and $2.1 million dollars. That’s a gateway to a broader conversation about contracts: what they are, how they work, and what most of us are getting absolutely wrong.

Comma in question

The comma in question: this piece of punctuation cost a Canadian company over $2 million.

What Did I Agree To? Contracts in our Everyday Lives

Contracts govern many aspects of our day-to-day lives—they are one of the fundamental ways that society is ordered. You likely engage in dozens of activities governed by contract every day, usually without considering the legal relationships you are entering into and engaging in.

At its most fundamental level, a contract is an agreement that will be enforced because it represents the communication of a commitment to engage in a reciprocal measured exchange – in other words, the exchange of valuable promises that in turn create obligations to do or not do something.

Contracts are everywhere!Communication and exchange are central to the formation of a contract. For a contract to be formed there must be offer and acceptance, and there must be consideration (something of value must be exchanged… contracts are not the same as gratuitous promises, where one of the parties receives no benefit of value).

While there are many more rules that relate to when and how contracts are formed this basic definition can help us understand when we might enter into a contract.

In this post we will discuss some everyday activities you likely engage in, and their contractual nature.

We can consider a few examples from my day today:

The first thing I did when I woke up was to check my phone and respond to emails. I have a contract with my phone company—in consideration for me paying a certain fee every month, they provided me with a phone, as well as with access to their cell towers. I accepted this offer when I signed my phone contract and began using their service.

When I checked my email account, I was in a contractual relationship with Google. When I send or receive content through a Google Service I give Google and its affiliates a worldwide license to use that content for certain purposes, per the Google Terms of Service. As consideration for those licences, Google provides me with access to its Services. Google offers these services publicly and I enter into a contract by creating an account and agreeing to the Google Terms of Service.

Dealing with email is hungry work, so I decided to grab breakfast at a campus coffee shop. I ordered a bagel and a large tea. The cashier told me that the total would be $5.05, which I paid in cash. Two minutes later I was handed a bagel and a large tea.

When I handed the cashier the money, I entered into a contract with the coffee shop. As consideration for a bagel and a large tea, I provided $5.05. I communicated my acceptance of their posted offer to provide tea and a bagel for $5.05 by ordering from the cashier and providing money. They fulfilled the terms of the contract by providing me with my food and beverage.

As you’ve seen, contracts have already been a part of just the very beginning of my day. Take a minute to think about your day so far: what have you done that has involved an offer, acceptance, and consideration? How many contracts have been involved with in the past hour? Can you think of one or more contracts that are allowing you to read these worlds right now?

Contracts are central to the ordering, not only of big businesses, but our everyday lives.

– Isabelle Crew

The Perils of Partnership: Fundamentals of Canadian Law 006

Partnership can be dangerous Is partnership the right business move? Could you be in a partnership without even knowing it? We’re joined by corporate lawyer Peter Kissick, a faculty member here at Queen’s and developer of Law 204/704: Corporate Law for the Certificate in Law. He demystifies one of the central types of business structures, and lays out the advantages — and dangers — of partnership.

Who shares what? Who’s at risk? How can you be in a partnership without meaning to… and how can you get out of it? Peter walks us through all of it in a quick, entertaining overview of what partnerships mean, and why he’s known as the “Angel of Doom” to certain clients, in today’s business context.

 
 

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The partnership primer – is partnering the right business move?

Partnership is a foundational element of the law of business organization. To understand a partnership, you have to consider four simple and foundational questions:

When does the partnership exist?

In Ontario the Partnerships Act establishes the basic rules of partnerships. Other provinces and territories have their own partnership regulations, but the principles are usually much the same as Ontario’s. The Partnerships Act defines partnerships as “the relation that subsists between persons carrying on a business in common with a view to profit”. So a few elements must be present for a partnership to exist:

  1. More than one person must be…
  2. In a relationship with each other that involves…
  3. Carrying on a business together…
  4. With a view to making profit.

This definition is based on the intention of parties, as disclosed by the circumstances. Did two people intend to carry on a business together with a view to making profit? If they did, a partnership will have been created.

The extent of each person’s investment in or, control of the partnership business will not define whether or not the partnership exists.

What is the legal status of the partnership?

A pig carries a bird on its head.

Partnerships can provide an opportunity for people with diverse skillsets to work together… but they are not without risk.

A partnership is not recognized as a separate legal entity. It is not legally distinct from the partners that form it. This means…

  1. Each partner is liable to the full extent of their personal assets for the debts and liabilities of the partnership. This means that if the partnership owes money to a creditor, the creditor can enforce that debt against the personal assets of any partner, not just the assets of the partnership.
  2. A partner cannot be recognized as an employee of the partnership business. This because no person can enter into a contract with themselves. Because a partnership has no legal existence distinct from the individual partners, it is not possible to be an employee and partner at one firm at the same time because it would involve employing yourself.
  3. Except in very particular circumstances provided for in the Partnerships Act, a partner can’t be a creditor of their partnership. Again, this is because it isn’t legally possible to contract with yourself, and this includes contracts to lend money.

What are the rights and responsibilities of the partners?

Under the Partnerships Act, there are eight key rights and responsibilities of partners. These rights and responsibilities emanate from the basic assumption that the partners are equal with respect to their capital contributions, rights to participate in the management of the business and rights to share in the profits of the business.

  1. All partners are entitled to share equally in the capital and profits of the business. They therefore have the responsibility to contribute equally to the losses sustained by the partnership.
  2. Every partner is entitled to take part in the management of the partnership business.
  3. New partners may not be added to the partnership without the consent of all the existing partners.
  4. Changes to the nature of the partnership may not be made without the consent of all the existing partners.
  5. A partner cannot be removed from the partnership without their consent.
  6. A partner is jointly liable with other partners for all debts and obligations of the firm as long as they are a partner.
  7. A partner is an agent of the partnership. This means that they can bind the firm and the other partners when acting in the course of their duties.
  8. As an extension of their agency, each partner owes a “fiduciary duty” – and duty of good faith – to all other partners.

What are the terms of the partnership?

The rights and responsibilities of a partner as set out above are the baseline rule established by the Partnerships Act. However, one of the most important elements of the law of partnership is that a partnership is a contractual relationship. Partnerships can be as varied as the people who are partners – partners can contract their particular rights and responsibilities, which can be different from the baseline rights and responsibilities established in the Partnerships Act. However, where a partnership contract is silent on a particular issue, the Partnerships Act’s terms for that issue will be implied.

– Isabelle Crew (3L, Faculty of Law, Queen’s University)