16 | Atlantic Business Magazine | July/August 2010

TOSERVEANDPROTECT

By Jenny Higgins

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COVER STORY

They may notwear capes and

they certainly don’t have x-ray vision, buta good one can save your company fromthe perils and pitfalls of the businessworld. Take contracts – signing one youdon’t entirely understand can bring apromising start-up business to a grindinghalt, or bog a more established one down

with debts and lost revenues. SarahBradley saw this happen to a youngmanufacturing company that wasbrimming with potential until itsowners signed an agreement with alarge distributor.

Online extras: atlanticbusinessmagazine.com | 17

Lawyers.

“Without legal advice, they entered into a very large contractwith an important customer that relied on them to produce this

product in very large quantities,” says Bradley, a professor atDalhousie University’s Schulich School of Law. “However, their

production method wouldn’t work on a large scale and, because ofthe way the contract was worded, they were unable to get out of itand were on the hook for some very significant damages.”

The company ultimately went out of business, which is somethingthat would not have happened if its owners had sought out legaladvice before signing the dotted line. A lawyer would have identifiedany risks connected to the contract, drafted cautionary clauses toprotect the company and provided some negotiating assistance.“They would have certainly not had the big downside that they ulti-mately had, or at least would have fully understood the risk beforethey entered into the contract,” says Bradley.

It’s a problem that’s all too familiar to Maureen Ryan, StephenWinter and Tauna Staniland – all corporate lawyers with the firm ofStewart McKelvey. Despite the complex language used in a contract,and despite its ability to make or break a business, they say too manypeople just decide to write their own or recycle an old one withoutgetting professional advice. But it’s a decision that can result in futuredisputes, hefty legal fees and, in the worst cases, litigation or bank-ruptcy.

“That’s the danger sometimes in non-lawyers writing upcontracts,” says Ryan. “They don’t always understand the ramifica-tions of how they’ve said something or what they’ve said.Businesspeople take risks all the time and I think that sometimesthey’re afraid that lawyers are too conservative and all we do is pointout all the risks.”

All three say it’s cheaper for businesspeople to visit a lawyer beforesigning a contract – or even before starting a company – than itwould be to fix any mistakes made along the way. “We all see timeand again that when they don’t do that, it ends up costing them morein the long run,” says Staniland. “Whether it’s that you have to goback and re-do what was done or whether it results in litigation.”

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Litigation LimboIf a problem does result in litigation, it

could mean years of court battles and tensof thousands of dollars in legal fees. One ofthe most high-profile and lengthy courtcases to come out of Atlantic Canadainvolves Knowledge House – a Halifax-based educational software company thatwas worth $100-million in 2000 but wentbankrupt one year later. During a singleweek in August 2001, the company’s sharesnosedived from five dollars to a mere 65cents. Investors lost millions virtuallyovernight and the Toronto Stock Exchangeissued a cease trading order on thecompany. Knowledge House announced itcould not meet its payroll and other obliga-tions in September 2001, leaving 70employees suddenly out of work and withno severance pay.

In the wake of the collapse came a floodof lawsuits and counterclaims alleging thatstock manipulation and insider trading hadmade the company’s shares appear to beworth more than they actually were. It’s adifficult case to keep track of – the variouslawsuits have dragged on for years andinvolved more than a dozen high-profiledefendants, including Knowledge HouseCEO Dan Potter, some of the company’smajor shareholders, a corporate lawyer whowas both Knowledge House counsel andone of its directors, and National BankFinancial Ltd., which lost millions when thecompany collapsed.

The heaviest litigation began in August2003, when National Bank Financiallaunched a suit against Potter and 18 otherdefendants alleging they conspired tomanipulate the stock price of companyshares. The institution even named one ofits own former brokers as a defendant,claiming he helped to orchestrate thealleged scheme. In return, Potter, whodenies any wrongdoing, filed a countersuitagainst National Bank, claiming the insti-tution laid charges against him in anattempt to cover up its own operationalfailings and inability to control one of itsbrokers.

Despite the complexity of the case andseverity of the allegations, Potter, a formerlawyer, is representing himself – and he’swon many of the cases he’s appeared in. Amajor victory came in 2005, when thepresiding judge banned three National Banklawyers from the case after finding that theyimproperly acquired and read hundreds ofemails that belonged to Potter or hiscompany and may have contained privi-leged solicitor-client communications. Asecond significant win came in 2008, whenPotter and other opponents of NationalBank blocked the institution from amendingsome of its previous pleadings.

But progress on the case is slow – almosta full decade after the company folded, thelitigation drags on. “I can’t imagine the legalfees that have been incurred in this case bythe various litigants involved,” says StevenEnman, who teaches business law at AcadiaUniversity and is the co-author of CanadianBusiness and the Law, published in 2010. “Ithink it’s fair to say that the wholeKnowledge House case is a finger pointingexercise by the various actors involved.”

“The basic issue is that lots of peopleinvested money in this company and, forwhatever reason, it failed and people losttheir investment. That’s the reality of thesituation and now the investors and thelawyers and the banks and the accountantsand all the constituencies in that litigationare trying to recover money from eachother.”

Although Knowledge House is anextreme example, it illustrates some of the

major problems a business can encounter –bankruptcy, becoming delisted from a stockexchange, and litigation. It can also serve asa cautionary tale about how timeconsuming, expensive and complex litiga-tion can become if a business owner eversees the inside of a courtroom.Unfortunately, there are plenty of legalpitfalls out there – from tax laws to share-holders’ agreements to safeguarding acompany’s intellectual property, business-people must grapple with a wide range ofcomplicated laws and legal issues.

Enman says finding a good lawyer early isone of the safest ways for business ownersto protect their company from future prob-lems, but adds that it’s also important forentrepreneurs to have a general awarenessof the major legal issues and potentialpitfalls that can affect whatever type of busi-ness they’re engaged in. This in turn mayhelp them to decide when to call a lawyer,when to seek advice from another source,and when to proceed alone.

Five Areas of Law AllBusinesspeople ShouldKnow

There are a few key areas of law that willlikely impact most businesses, according toEnman. First and foremost is contracts. Aknowledge of contract law is vital becausealmost every businessperson will have tosign or draft one at some point in his or hercareer. Sign one you don’t understand andyou could wind up in future disputes withyour clients and partners, or, like the manu-facturing company at the start of thisarticle, you could lose you business entirely.

If a business has employees, it must alsobe aware of a host of labour laws that relateto human rights, the hiring and firing ofworkers, and the safeguarding ofemployees’ private information. Ryan saysthe way employers deal with staff canimpact them years down the road if theydon’t handle the situation properly from thebeginning. “Sometimes in the employment

18 | Atlantic Business Magazine | July/August 2010

One of the most high-profile and lengthy courtcases to come out ofAtlantic Canada involvesKnowledge House...

...a Halifax-basededucational softwarecompany that was

worth $100-million in2000 but went bankrupt

one year later.

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FREDERICTONSMSS.COM CHARLOTTETOWN HALIFAX MONCTON SAINT JOHN ST. JOHN’S

Sometimes the best legal solutions don’t travel in a straight line.

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20 | Atlantic Business Magazine | July/August 2010

law context, people – because they don’t getadvice early on in terms of dealing with anemployee who might be a problem – theydon’t realize that as time goes by they’reprobably incurring greater obligations tothe employee than if they’d dealt with some-thing early.”

A third area of law that affects many busi-nesspeople is property law. This may meanreal property, such as land, or intellectualproperty, such as inventions and artisticworks that may need to be patented or trade-marked. Roddy Awad, co-owner ofMoncton-based IT firm Tech KnowledgeSolutions, says protecting intellectual prop-erty that belongs either to his company or theclients he represents is crucial to remainingprofitable. “It is certainly a topic for us beingin a technology field and providing profes-sional services. We typically provide a servicefor some of our clients and allow them tokeep their intellectual property, so it’s impor-tant from a legal perspective that they arewell covered. That’s a piece where legalcounsel is very important.”

Safeguarding intellectual property is notonly paramount in the IT sector, it’s vital forany company that needs to protect theformulas and procedures that make itsproducts unique. An example is TvålSkincare, which produces handmadenatural soaps, bath products, skincare andmineral makeup for its shops in St. John’sand Toronto. “We made up a confidentialityagreement for the employees to sign, justprotecting our recipes and trade secrets andstuff like that,” says company co-ownerBobby Bailey. “We had that drawn up by alawyer.”

Then there are the laws that govern realproperty. These not only address the buying,selling and leasing of land, but also anyzoning or urban planning issues that deter-mine what size or type of structure can bebuilt in different areas. If you’re a developerworking in Atlantic Canada, you may haveto work around some pretty complex regu-lations.

“Whether it’s in St. John’s, or Moncton,or Halifax, or Sydney, or anywhere, thereare urban planning rules and you’re going tohave to navigate your way through that,”says Colin MacLean, president ofNova Scotia’s Waterfront DevelopmentCorporation. “In Halifax, one of thegoverning principals around development inthe downtown is the view from Citadel Hill.The city has developed what are called viewcorridors from that hill, so that you cannotobstruct the view from that hill to HalifaxHarbour, except in certain corridors.”

It is also vital that many businesspeoplehave a good understanding of tort law,which protects individuals who have beeninjured by the negligence or wrongdoing ofothers. “Tort law is obviously relevant interms of the harm that might be caused topeople by business activities, such as pollu-tion or defective products,” says Enman.“The big one in the news right now is theToyota mess and what responsibility Toyotamay have to people who either have defec-tive cars or, in the more serious case, who’vebeen injured as a result of malfunction ofthe vehicles.”

Tort law can be especially important tobusinesses that deal with the public directly,such as shops, restaurants, and pubs.Russell Floren, owner of the Bookery onSignal Hill/Sweet Relic in downtown St.John’s, says having liability insurance is crit-ical if you’re running a retail establishment.

“Someone could come in and trip and sueme for whatever. So it’s good to have a goodliability and insurance policy for a publicspace before you open. That’s the numberone thing.”

A final area of law that businesspeopleshould be familiar with is tax law. ProfessorBradley warns that this is a highly complexfield that would be extremely difficult formost people to understand without seekingexpert advice. “When businesses areengaging in almost any relationship thatinvolves the transfer of money from oneparty to another, tax issues will arise. TheIncome Tax Act is extremely intricate andcontains many rules and provisions thatreally are only well-understood by experi-enced tax professionals and tax lawyers.”

Finding a Good LawyerMost business owners will have to seek

legal advice at some point of their career –whether they’re starting, growing, or selling acompany. Although there are plenty of skilledlawyers in Atlantic Canada, there are avariety of factors that businesspeople shouldtake into consideration before choosing one.A good starting point is to assemble a fewprospective lawyers who specialize in or haverelevant experience with whatever field ofbusiness the company is operating in. Themore a lawyer knows about a business andhow it operates, the more effectively he orshe can provide services to that company.

Fit is also important – this means finding alawyer you can get along with and whosupports your goals and motivations. Bradleysuggests that businesspeople invite prospec-tive lawyers to visit their place of work sothey can watch the daily routines, see whatthe products are, and get a general idea ofhow the company operates. “That’s some-thing that a lot of lawyers would be verywilling to do,” she says. “It might help tocontextualize the advice that they give andprovide them with a better understanding ofwhat the business is doing.”

The big one in thenews right now is theToyota mess and whatresponsibility Toyotamay have...

... to people who eitherhave defective cars or, inthe more serious case,

who’ve been injured as aresult of malfunction

of the vehicles.

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www.capitalmotors.com CAPITALKENMOUNT RD. ST.JOHN’S NL 709.726.0288

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Finally, cost is an important considerationwhen choosing a lawyer. Businesspeopleshould always be upfront about how muchthey are willing or able to spend when shop-ping around for a law firm. “That should besomething that you as a client can simply talkto the lawyer about right off the bat,” saysBradley. “Especially in establishing a newrelationship, many lawyers will be willing tohave an introductory meeting at no cost, andwill give you a sense of what they’re actuallyable to do for you, what their competenciesare, and that’s something a business startingout will want to take advantage of as they tryto find a lawyer and establish a relationship.”

Businesspeople in Atlantic Canada canchoose between large interprovincial firmsand smaller boutique firms. Each has benefitsthat may attract different clients, dependingon their needs. The big regional firms candraw on a large pool of experienced lawyerswho together cover almost every area of legalpractice. Stewart McKelvey’s Maureen Ryan

says this gives clients access to a broad rangeof services. “At our firm we have depth inpretty much everything, which I think givesbusinesses a lot of comfort because they maycome to me on a particular contracts issue,for example, but then if a labour and employ-ment issue comes up, they don’t have to gosomewhere else and re-educate another teamof lawyers about their business.”

On the other hand, there are also clientswho may prefer to deal with a more locallybased and smaller firm. David Melvin is alawyer who practices corporate and commer-cial law in the Dartmouth-based firm ofLivingstone and Company. He says clientswho choose a smaller firm often get to workmore closely with their lawyers than clientsin interprovincial firms. “Smaller firms canoffer more one-on-one contact,” saysMelvin. “Clients are able to interact directlywith the main lawyer on the file as opposedto paralegals or junior lawyers.”

Kenneth Godfrey, who practices business

law with the Charlottetown firm ofCampbell Lea, agrees. “What we offer clientsis a more personalized service and, perhapsmore importantly than that, the assurancethat our focus is on local business. In a smallmarket such as PEI, conflicts can become aproblem for the regional firms and no onewants to be bumped because their lawyer hasconcerns that are more focused on theirnational clients, or their regional clients, orinterests that are at the regional and nationallevel. I think the main thing we offer is thatindependence.”

Melvin also adds that many clients mayfind it more economical to turn to a smallerfirm for advice instead of an interprovincialone. He says the smaller firms tend to havefewer overhead expenses and can thereforecharge lower hourly rates. They also have amore flexible fee structure and may be able toprovide a fee for a service instead of by thehour.

Both men, however, say that the regionalfirms also have their advantages. “Largerfirms have far more resources and tend to bemore specialized in areas like tax law, forexample,” says Melvin. “They may have acore of expertise that other firms may not. IfI don’t have that expertise, I’ll refer a client toone of my colleagues in a larger firm.”

“There’s a place for both in theMaritimes,” says Godfrey. “For clients thatwant a job done that needs to be done acrossthe country, then they might prefer the one-stop shopping aspect of a regional firm.”

Legal Tips toHelp Your Business

Although different businesses willencounter different problems and regula-tions, there are some general legal tips thatcan be applied to most companies. First andforemost is to keep a paper trail of everydeal and transaction that takes place duringthe life of your business and to maintainorderly files so you can retrieve informationfast. It sounds simple, but lawyers knowthat too few businesses keep good corporaterecords. Not only is this an avoidableproblem, but it’s one that can hurt businessowners years down the road when they tryto sell their company.

Stephen Winter, who practices corporatelaw with Stewart McKelvey, saw this first-hand while working with a company thathad no documents in place to identify itsshareholders. “Down the road, when thecompany went to sell some shares and thebuyer wanted to see what had transpired –who are the shareholders? how much didthey acquire the shares for? – those records

22 | Atlantic Business Magazine | July/August 2010

(L-R) Stephen Winter, Tauna Staniland and Maureen Ryan, corporate lawyers with Stewart McKelvey, say it’s always cheaper for abusiness owner to visit a lawyer before signing a contract or starting a company, than it is to fix a problem later.

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your business

The difference is a great relationship.coxandpalmerlaw.com

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24 | Atlantic Business Magazine | July/August 2010

weren’t in place. There was a complete lackof documentation,” says Winter. “Thesepeople buying the shares needed to knowthat the people they were giving money toowned these shares and that wasn’t some-thing that was easily ascertained. We had todo a lot of work to rectify these problems.”

It is also critical for companies to remainfinancially responsible – this means keepingyour liabilities down and paying all of yourtaxes and debts in a timely fashion. Godfreysays the single-most important piece ofadvice he gives all business owners is to geta good tax accountant or tax lawyer. “Mostbusinesspeople understand the businessnature of the transaction, they often do notunderstand the tax details,” he says. “Thatis the number one item that causes pitfallsand problems later on.”

Staniland agrees. She says businessesoften enter into transactions without real-izing the many side effects that their actionsmay have in the future. It’s not uncommon,for example, for clients to consider signing adeal that could change the way they’retaxed or, much worse and less frequently,could cause their company to become

delisted from the stock exchange. “So howthey decide to structure a deal – it’s gener-ally really important that they get thatadvice,” she says.

A piece of advice for businesspeople whodo find themselves in a dispute is to try andwork things out before going to court. Ifthat doesn’t work, then settle wheneverpossible. It’s cheaper, faster, and easier.Floren says he learned this while watchinganother shop owner work through somelegal problems with a contractor. Thecontractor agreed to do some renovationsfor $25,000, but then delivered a bill for$80,000. His client refused to pay morethan the original quote, but had nothing inwriting saying what that was.

“So the contractor goes and throws a lienon the property, which they can do, it’scalled a mechanics lien,” says Floren. “Withthe lien on his property, the shop ownercould never sell the store or do anythingwith it until paying the contractor.” In theend, Floren says the shop owner took thecontractor to court and ended up paying asmuch in legal fees as he would have if hehad just paid the $80,000 to start with.

“What I learned out of that story is: try tosettle, don’t go to court and try to get every-thing in writing,” he says.

Finally, it is important that business-people know how to be good clients.Lawyers can do wonders to keep a companyprofitable and out of trouble, but they needdirection and input. The easier you canmake your lawyer’s job, the faster he or shecan work and the lower you legal fees willbe. Melvin, of Livingstone and Company,says it’s always a great help when his clientsmake their documents readily available andprovide him with contact information for allthe parties involved. He also says it cancreate a lot of delays if the client is out ofreach or slow to return his phone calls andemails.

The single-most important thing a clientcan do, he says, is to never sign any contractsor enter into any transactions without askinga lawyer first. This will help to stave offfuture problems and keep legal fees low.Otherwise, once a client has signed a badagreement or performed another ill-thought-out piece of business, it’s just damagecontrol. |ABM

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