"An ounce of prevention is worth a pound of cure". Likewise, a well drafted agreement is a sound investment for any business transaction and can prevent many costly future problems.


Contracts & Agreements

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I want to buy a business. Should I buy the shares or assets?
When you buy the shares of a company, you are not buying its assets but the shares held by the seller. The company's business and affairs are not affected by the sale of its shares. When you buy the assets of a business, you will start a new business with the assets and goodwill of the previous business.

If you are the buyer, it is more advantageous to buy the assets. If you are buying the shares of an existing business, then the company continues its existence and is liable for all past obligations whether these were disclosed or not by the seller. As such, a thorough due diligence and verification of the financial, tax and legal affairs of the business is highly recommended. For instance, if there is a tax audit for years prior to the sale of the business, the company will be liable to pay any taxes assessed irrespective of the share sale. Also, when you buy the shares you cannot depreciate the assets at their purchase price and this can be disadvantageous.

From the perspective of the seller, it is preferable to sell the shares of a business. Often a seller can avail himself of the capital gains exemption and pay no or almost no tax on up to $500,000.00. As such, the purchase price is usually reduced in the case of a share sale instead of an asset sale.

A manufacturer wants me to distribute their products. What should I do?
If you are looking to import or distribute products it may be advantageous for you to enter into a distribution agreement with the manufacturer. This agreement will provide things like a territorial exclusivity, maximum prices and warranty obligations that are important for you to address. If the product is new or not presently sold or distributed in your territory, it is to your advantage to obtain exclusivity for the territory and provide for an automatic renewal of the agreement if minimum targets are reached. This way you can secure any investments in the product or goodwill that is created by your future efforts in creating a demand for the product.

Is there a law that says what a commercial lease can contain?
In commercial leasing matters, the lease is the law between the parties. There are generally no limitations or legal requirements as to what a lease may or may not contain and the parties can stipulate what they want providing it is not contrary to the law. The law is only used if the lease is silent on an issue.

What is the maximum amount of interest that can be charged per year?
Section 347 of the Criminal Code states that it is a criminal act to charge interest at an effective rate which exceeds 60% per year and an agreement which is contrary to the provisions of the Criminal Code is not valid. In addition to this, there are laws such as the Consumer Protection Act which limit or impose limits on the interest that can be charged.

What is a creditor?
A creditor is the beneficiary of an obligation or undertaking.

What is a debtor?
A debtor is the person who has to perform an obligation or undertaking.

What is a guarantor?
A guarantor is a person who warrants that a debtor will perform an obligation and if not will perform it for the debtor.

What is a shareholder agreement?
A shareholder agreement is an agreement entered into by two or more of the shareholders of a company that may address matters relating to the sale and transfer of the shares, the administration of the company, the exercising of voting rights, the election of directors and many other aspects. A shareholder agreement is a bit like a marriage contract or a partnership agreement. A shareholder agreement is called unanimous if it is entered into by all the shareholders of a company in which case it is binding on any future purchaser of the shares providing the shares certificates clearly indicate this fact.

How can I secure myself against non payment when selling goods and merchandise?
The best way to secure yourself is to have a written contract that clearly sets out the terms and conditions of the sale. You may also include a provision that stipulates that you will remain the owner of the property until such time as you are paid in full. This stipulation is subject to certain requirements to be opposable to third parties, such as registration within a certain time and the goods sold remaining in the possession of the purchaser.

Can I claim interest on unpaid invoices?
You can only claim interest on unpaid invoices if the contract clearly provides this. It is a good idea to clearly specify in your contract that interest shall be payable on unpaid amounts after a specific time period and the interest rate on an annual basis as well as to ensure that the contract is signed by the debtor. If your contract does not provide this, you can only claim interest at the legal rate of 5% per annum since the date of sending out the demand letter. You may also ask the courts that an additional indemnity be added to the legal rate. The additional indemnity is equal to the difference between the interest rate established pursuant to the provisions of the Quebec Income Tax Act and the legal rate (usually 2-3% more).

Is a verbal agreement legally binding?
Although a verbal agreement is legal the problem is proving the agreement and the terms and conditions agreed to by the parties. In commercial matters you may prove the agreement by testimony and witnesses irrespective of the amount of the agreement. In non-commercial matters you cannot prove an agreement by verbal testimony or witnesses if the value exceeds $1,500.00. This limitation also applies if a merchant wishes to prove an agreement with a non-merchant. In specific cases, legislation like the Consumer Protection Act may require that an agreement be in writing and contain specific provisions failing which it will not be enforceable.

What is an “acquittance”?
An acquittance is a legal act whereby a creditor releases a debtor from certain or all legal obligations. An acquittance is sometimes referred to as a ''elease'' or ''general release''. It is a good idea to obtain a written acquittance when you pay off a debt or accomplish your contractual obligations as this liberates you from the debt or obligation.

What is a contract?
A contract is an agreement between two or more persons or companies to do, or to refrain from doing, a particular thing in exchange for something of value. Contracts generally can be written or entirely verbal. If one side fails to respect its obligations then there's a ''breach" and certain remedies for solving the differences are available.

Does a contract have to be notarized?
Generally a contract does not have to be notarized unless it is for a hypothec (mortgage) or a donation. A notary attests that the signature appearing on the document is that of the person whose signature it purports to be.

Can I change my mind after entering into a contract?
This depends on the type of contract and if the persons are merchants or not. In business matters, a contract is binding and you cannot change your mind.

In non commercial matters certain laws provide cooling off periods for consumers during which consumers can change their minds. Most merchants also allow consumers to return goods when dealing with smaller purchasers.

Is an offer to purchase a contract?
If accepted, an offer becomes a valid and binding contract between the parties although there might be subsequent acts and documents that need to be signed,  such as a deed of sale, to finalize the agreement detailed in the offer.

Is an offer to lease a contract?
If accepted, an offer to lease becomes a valid and binding contract between the parties although the parties will shortly thereafter enter into a formal lease agreement.

Can I cancel a commercial lease on 3 months notice?
No, you cannot cancel a commercial lease unless the lease provides this.

I signed a commercial lease for 5 years and wish to cancel it. How do I do this?
Generally a lease is signed for a fixed term and unless the lease agreement provides otherwise, you cannot cancel the lease without being liable for damages. If the lease does not provide for a right of cancellation, you may try to negotiate a cancellation of the lease with the landlord or try to sublet the premises.

Can I be sued for cancelling a lease before the end of the term?
Yes, a lease is a legally binding contract that cannot be cancelled unless the lease provides this. If you cancel your lease, the landlord may claim damages from you as provided for in the lease agreement. If there is no damage formula in the lease then the landlord can claim from you the loss of rental for the unexpired portion of the term. If the landlord leases the premises to someone else during the unexpired portion of the term then the amount of rent collected will be deducted from his claim for damages. The landlord is obligated to minimize his damages and must diligently proceed to re-rent the premises and the courts will consider this when establishing damages. If the landlord was negligent in diligently proceeding to re-rent the premises then the courts will generally reduce his claim accordingly.

Can I sublet my lease to anyone without the consent of the landlord?
No, lease agreements generally provide specific conditions and procedures to be followed in order to sublet the premises and these must be respected. In addition, the law states that you must inform the landlord and obtain his consent. Subject to the provisions of the lease agreement, you usually have to propose a tenant who is solvent and serious.

What is a personal guarantee?
A personal guarantee is an undertaking given by a person to guarantee the obligations of another person, company or entity should they not respect their obligations. In other words, if the debtor does not honour its obligations you will be called upon to execute them. A bank will generally require the shareholder of a start up company to guarantee the obligations of the company.

Is a non-solicitation undertaking legally valid and binding?
Yes, non-solicitation undertakings are recognised and upheld by the courts. These must be reasonable in regards to time, territory and type of employment to what is necessary for the protection of the legitimate interests of the employer.

Is a non-competition undertaking legally valid and binding?
Yes, non-competition undertakings are recognised and upheld by the courts. Non-competition undertakings given by employees must be reasonable in regards to time, territory and type of employment to what is necessary for the protection of the legitimate interests of the employer. In other words, a lifetime and worldwide non-competition agreement may be struck down by the courts as being unreasonable. Generally a court will not uphold a non-competition undertaking given by an employee if in so doing the employee is unreasonably prevented from earning a living. In the case of non-competition given in other circumstances such as the sale of a business, the courts will be more flexible insofar as the signatory is not unreasonably prevented from earning a living.

What is the purpose of a confidentiality agreement?
A confidentiality agreement is signed with employees, prospective business partners or representatives. Its purpose is to identify what information may be confidential, what the signatory may do with this information and the consequences of divulging this information. A confidentiality agreement is a very important legal document and should be entered into with all employees and whenever trade secrets or confidential information will be divulged to third parties.

What is a franchise?
A franchise is a licence that is granted by a franchisor to operate a business according to a pre-established concept. The person that grants the independent operator the right to distribute its trademarks, products, or techniques is known as the franchisor. The independent, third party business person distributing the franchisor's products or services through retail or service outlets is called the franchisee. The franchisee does business using the marketing methods, trademarked goods and services and the ''goodwill'' and name recognition developed by the franchisor. In exchange, the independent operator pays an initial fee and royalties to the owner of the franchise.

Is a commercial lease automatically renewed at the end of the term of the lease?
No, unless the lease agreement provides otherwise, a lease expires at the end of the term. Often commercial leases will provide a renewal option and if not, it is a good idea to ask for one. If the landlord is willing, it is a good idea to provide for the rent amount for the renewal option.