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  • Civil liability and personal injury: A harsh decision for a winter sports centre

    The Court of Québec released an interesting judgment in December in a case involving civil liability and personal injury.1 On February 23, 2013, Plaintiff, Ms. Bourgault, went to Village Vacances Valcartier (“VVV”) to take part in a snow rafting activity. During a descent, she was twice thrown toward the rear of the inflatable boat. The violent impacts caused her to break a vertebra. She sued VVV for damages arising out of the incident. On that day, 6,660 customers slid down the VVV slopes. The conditions were described as perfect, and the trails well maintained. The evidence also was that only two accidents were reported out of the 168,312 people who went to the centre during the 2012-2013 winter season: one on the same day as the plaintiff and the other the following day. Both accidents occurred on the same trail. The terms and conditions printed on the back of the ticket stated that the customer agreed to abide by VVV’s rules of conduct and acknowledged and accepted the risks inherent in sliding, and assumed full liability for any property or bodily damage. Plaintiff had not noticed or seen the signs and instructions.2 She did know that snow rafting involved going over humps and that the route taken might be rougher3 than others. In its analysis, the Court underlined the principles that apply here:4 The victim must prove fault on the part of the defendant and its employees in the operation of the centre, in particular regarding the safety of the users, on a balance of probabilities. The victim must also prove the nature of her damages and the causation between the damages and the fault; The mere occurrence of an accident in the course of an activity does not automatically result in a reversal of the burden of proof; The operator of the centre has a duty of supervision and vigilance, which is an obligation of means. It must act reasonably to ensure customers’ safety and avoid foreseeable accidents. Its trails must have no traps, taking into account reasonable foreseeability; The operator of the centre is not the insurer of customers who suffer an accident while engaging in the recreational or sports activity in question; It is considered to be tacit acceptance of the risks inherent in engaging in the recreational or sports activity in question; However, acceptance of the risks does not extend to exceptional or unreasonable risks that are not foreseeable or that go beyond what is inherent in engaging in the recreational or sports activity; To conclude that there was acceptance of the risks, there must have been a clear risk, express or implied knowledge of the risk, and sufficient information regarding the activity and its inherent risks to enable the participant to make a free and informed choice, and it must be possible to identify the acceptance (formal or tacit) of the risk by the victim. In the case of exacerbated risk, or if an unforeseen risk materializes, the initial acceptance cannot be a defence; Notwithstanding the theory of the acceptance of risks, the operator may be liable if it is established that it did not act diligently and exposed the user to undue risks; The extent of the acceptance of the risks is related to the user’s level of experience and skill and to all of the circumstances and specific warnings given to the user, by whatever means may have been used (signs, etc.). The Court also reiterated the principles relating to the rules governing presumptions of fact, which must be serious, specific and consistent, based on the facts introduced into evidence.5 The Court acknowledged that serious prima facie evidence was presented by VVV regarding the adequacy of the measures in place to ensure the safety of the participants and for the maintenance and supervision of the trails, both for the 2012-2013 winter seasons and for the day of the accident.6 In the opinion of the Court, however, there were certain details that clouded the picture, and it was of the view that the safety instructions were virtually non-existent or vague. The Court also stated that it was troubled by that fact that the only other two accidents recorded took place on the same trail, within a short period of time, in spite of the alleged maintenance.7 It further noted the inconsistency between the plaintiff’s and defendant’s evidence regarding the exact location of the humps that were the source of the accident. The testimony referred to violent bouncing beyond the experience that VVV sought to provide its customers. The Court concluded that there was plainly an irregularity on the trail in question.8 As for the reason that might explain the irregularity, the Court agreed that it was a riddle wrapped in a mystery inside an enigma.9 However, it concluded that the presumptions were sufficient to establish that the raft hit bumps twice, the passengers came off their seats, Plaintiff lost hold of her cord, and she fell into the bottom of the boat and was injured. In the opinion of the Court, the boat should not have lifted off the ground and that is probably a result of a flaw in the design of the humps on the slope.10 With respect to the acceptance of the risks and the limitation of liability, in particular regarding what was printed on the back of the ticket, the Court stated that it could not be argued that Plaintiff had accepted risks of every nature related to the activity. In the opinion of the Court, if the safety instructions had mentioned that violent impacts would take place that could cause injuries, the Plaintiff would not have gone down the slope.11 It also held that Plaintiff had released VVV from liability in relation to the accident. The Court referred to section 1474 of the C.C.Q., which prohibits such exclusion or limitation of liability for bodily or moral injury.12 Finally, the Court made a distinction between activities where the participant is in motion and chooses his or her own direction (for example, downhill skiing or riding on inner tubes, flying saucers or sleds) and activities like snow rafting that do not call for any special ability or require a route to be chosen, in which the participant is virtually immobile.13 In that case, the operator’s obligation of means is more stringent when it comes to the configuration and maintenance of the site. The case has not been appealed. It will certainly be a precedent to be considered for personal injury cases that involve recreational and sports activities.   Bourgault c. Village vacances Valcartier inc., 2017 QCCQ 16300. The other witnesses also had not: paras. 20, 34, 41, and 51 of the decision. Par. 45 of the decision. Par. 99 of the decision. Par. 100-101 of the decision. Par. 103-104 of the decision. Par. 111 of the decision. Par. 107-122 of the decision. Par. 123 of the decision.  Par. 124-125 of the decision. Par. 138 à 140 of the decision. Par. 127-129 of the decision. Par. 142 of the decision.

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  • The contract may remain in force despite misrepresentations or latent defects because the consumer has obligations too

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The duty to inform is one of the main obligations sellers owe to their purchasers. This applies in the context of civil law, business law or consumer law. The duty to inform is based on the good faith obligation owed by any party to a co-contracting party. Case law often mentions it. Two recent decisions of the Court of Quebec provide good examples of it. In the first case1, judge J. Sébastien Vaillancourt ordered a motor vehicles merchant to reimburse to his customer part of the purchase price of a vehicle on the ground that the merchant’s representative, at the time of the sale, had failed to inform the customer of the scope of damages suffered by the vehicle in two accidents which occurred prior to its purchase. Yet, the merchant’s representative had informed the consumer that the vehicle had been involved in an accident and that the cost of repairs had been high. However, judge Vaillancourt held that the reassuring statements of the merchant, to the effect that [TRANSLATION] “the high cost of the repairs was only due to the high cost of replacement parts”, had played a large role in convincing the customer to purchase the vehicle. However, it appeared later than the vehicle had suffered structural damage, which led to the conclusion that the high cost of the damages was not due to the price of parts, but rather to the extent of the damages. The judge concluded that the customer’s consent had been vitiated and that he would not have purchased the vehicle had he known the extent of the damages and been falsely told that their cost was due to the cost of the parts. He relied on section 228 of the Consumer Protection Act  (CPA), which prohibits a merchant from failing to mention an important fact in any representation made to a consumer2. When a merchant engages in such a prohibited practice, it is presumed that had the consumer been aware of such practice, he would not have entered into the contract or would not have paid such high a price3. In the case under review, the consumer was seeking cancellation of the contract. Cancelling a contract requires that the parties be restored in the same position as before the contract was entered into. This involves returning the vehicle to the merchant and the reimbursement of the purchase price to the consumer, which is referred to as restoration. Even if the customer had been misled, judge Vaillancourt refused to cancel the contract. He noted that the customer had travelled in excess of 30,000 kilometres with the vehicle without experiencing any mechanical problem and that he was acknowledging that the vehicle was functioning properly. A consumer cannot request the cancellation of something he used without a problem. Furthermore, an essential condition was lacking: the consumer was not offering to return the vehicle but was continuing to use it. Restoration was therefore impossible. The consumer was maintaining that the value of the use he had made of the vehicle could be deducted from the reimbursed amount. Out of fairness for the merchant, the Court dismissed this argument and refused to apply a deduction equal to the value of the use of the vehicle. He wrote the following: [TRANSLATION] “the evidence is unclear as to the depreciation caused by the use of the vehicle and this would render arbitrary the determination of such value by the Court, thus possibly causing an injustice to the defendant if restoration was to be ordered”. (Emphasis added) However, judge Vaillancourt concluded that the customer was nevertheless entitled to a reduction of the sale price. He refused to follow the opinion of an expert witness who had established at 25% the depreciation caused to the vehicle by the accidents. He rather considered that if the scope of the damages had been disclosed at the time of purchase, the price would have been reduced by 20%. Accordingly, judge Vaillancourt ordered the merchant to pay to the customer consumer an amount equal to 20% of the purchase price of the vehicle, plus the amount of the taxes. This decision well illustrates the importance of the duty of merchants to inform, but also highlights the fact that consumers have their own obligations too. The logic of the judge follows an established case law trend and brings to mind two decisions of the Court of Appeal issued a few days apart in 19954. In these cases, the Court of Appeal had affirmed the decisions in the first instance in which the cancellation of sale contracts had been denied due to the fact that the consumers had continued to use the vehicles. These two decisions of the Court of Appeal are frequently referred to in matters where consumers seek the nullity of sales contracts of vehicles due to latent defects. The use of the sold property by a consumer while he has pending proceedings against the merchant is a very relevant element respecting the validity of his claim. A consumer who seeks the nullity of a contract has the obligation to cease using the property sold and offer it in deposit, as tender. Continuous use of the property sold may result in the consumer losing his right of action or severely hindering same. In another recent decision5, judge Christian Brunelle of the Court of Québec also refused to cancel the sale of a motor vehicle. In this matter, even if the customer had been informed of the fact that the vehicle he had purchased had been damaged during a snow removal operation, he had not been informed that the vehicle had been involved in two accidents and had been damaged. A fact is worthy of note: even if he had purchased the vehicle from a merchant, the customer consumer did know the former owner since it was the former owner who had told him that he was changing vehicles. Therefore, the consumer had had ample opportunity to inquire with the former owner as to the characteristics of the vehicle. In defence, the merchant was maintaining that it was a courtesy sale for which he was not responsible. Judge Brunelle refused to treat the matter as a courtesy sale. In fact, the merchant had not had the consumer fill the form prescribed under section 71 of the Regulation Respecting the Application of the Consumer Protection Act6. The CPA thus applied to the contract entered into between the customer and the merchant. Dura lex sed lex (the law is hard, but nonetheless the law). We note that the consumer’s proceedings could have been avoided by the merchant, by establishing better practices. On the merits, judge Brunelle first noted that the merchant had not failed his duty to inform. For such a failure to occur, the merchant would have had to know that the vehicle had been involved in accidents. No evidence demonstrated such knowledge. To conclude that the merchant fails to reveal an important fact, one must prove that he was aware of it. Such was not the case. Nevertheless, it is on the basis of the presence of a latent defect that the merchant was held liable. The simple fact that the vehicle was involved in two accidents represented, in the opinion of the judge, a deterioration within the meaning of article 1729 of the Civil Code of Québec (CCQ)7, which allowed for presuming the presence of a defect8 : [TRANSLATION] [55] In the opinion of the Court, the used car which had been involved in accidents, then repaired – even according to good practices – exhibits a certain “deterioration”, which is very real, at the time of the sale as compared to a car which is identical or of the same kind. This “deterioration” referred to at section 1729 CCQ may be represented by a repair on the vehicle, which depreciates the property. Such repair, unknown by the consumer, is tantamount to a latent defect, in respect of which the consumer may pursue his remedies. Here again, the customer consumer was seeking the cancellation of the purchase contract entered into with the merchant. As judge Vaillancourt did, judge Brunelle refused to cancel the contract and rather ordered that the purchase price be reduced. He first considered that the customer had been informed of the fact that the vehicle had been damaged during a snow removal operation. He was also of the view that despite all the information he had received from the merchant at the time of the sale, the customer had only very summarily inspected the vehicle prior to purchasing it. Judge Brunelle wrote: [TRANSLATION] “which resulted in him failing to notice apparent defects because of his lack of diligence and vigilance” By this decision, judge Brunelle confirmed that the CPA does not dispense consumers from reasonably inspect property before purchasing it from a merchant. In judge Brunelle’s view, the “ordinary examination” imposed on consumers under section 53 CPA9 must comply with a certain threshold of [TRANSLATION] “diligence and vigilance”. It is to be noted that even if the CPA imposes very strict duties on merchants, consumers have duties too when purchasing goods. Lastly, as in the previous case, judge Brunelle noted that the customer consumer had benefited from the vehicle, having used it on a daily basis until the day of the hearing, having even travelled 26,000 kilometers without any mechanical problem whatsoever. One must understand that in such a case, the damages granted to the consumer were rather limited. The duty to inform is at the heart of the consumer-merchant relationship and a cornerstone of consumer law. The CPA imposes many duties to inform on merchants and provide remedies that are varied and adapted to circumstances when the merchant fails to comply with the provisions of the law. However, the consumer must be in a position allowing him to pursue the remedies provided under the law. The CPA was not passed to allow consumers to claim compensation on the basis of trivialities10.   Gauthier c. 2818876 Canada inc., 2017 QCCQ 11087 (C.Q., Civil Division). Section 228 CPA: “228.No merchant, manufacturer or advertiser may fail to mention an important fact in any representation made to a consumer.” Section 253 CPA. Beauchamp c. Relais Toyota, [1995] R.J.Q. 741 (C.A.); Nichols c. Toyota Drummondville (1982) inc., [1995] R.J.Q. 746 (C.A.). Bilodeau c. Mercedes Benz de Québec (Chatel Automobiles ltée), 2017 QCCQ 9663 (C.Q., Civil Division).  “71. A sales contract for a used automobile or for a used motorcycle is exempt from the application of sections 37, 38, 53, 54 and 155 to 165 of the Act where: the used automobile or the used motorcycle was given in exchange to the merchant by a consumer at the time of purchase of an automobile or a motorcycle; the used automobile or the used motorcycle is sold to a consumer designated by the person who gave it in exchange; and the maximum sale price of the used automobile or of the used motorcycle corresponds to the credit granted for the exchange to the consumer by the merchant. The exemption referred to in the first paragraph applies only to a contract containing written attestation, by the consumer who has given the used automobile or the usedmotorcycle in exchange to the effect that the vehicle has been sold to the consumer designated by him.”  (Emphasis added)  Article 1729 CCQ: « 1729.In a sale by a professional seller, a defect is presumed to have existed at the time of the sale if the property malfunctions or deteriorates prematurely in comparison with identical property or property of the same type; such a presumption is rebutted if the defect is due to improper use of the property by the buyer. (Emphasis added) In CNH Industrial Canada Ltd. c. Promutuel Verchères, société mutuelle d'assurances générales, 2017 QCCA 154, par. 28 (C.A.), Mr. Justice Pelletier writes : [TRANSLATION] “In my opinion, the application of the rule under this section triggers not two but three presumptions in favour of the purchaser, that of the existence of a defect, that such defect was existing prior to the sale and, lastly that of the existence of a causal link between the defect and the deterioration or malfunctioning.” Section 53 CPA: “53. A consumer who has entered into a contract with a merchant is entitled to exercise directly against the merchant or the manufacturer a recourse based on a latent defect in the goods forming the object of the contract, unless the consumer could have discovered the defect by an ordinary examination.”  Crédit Ford du Canada ltée c. Gatien, [1981] C.A. 638, 644 (C.A.). For recent cases, see : Caisse populaire Desjardins du Portage c. Létourneau, 2013 QCCQ 4395, par. 24 (C.S.); Caisse populaire du Cœur des Vallées, c. Robitaille, 2017 QCCQ 3834, pars. 58 & 76 (C.Q.). Also see: Courval (Syndic de), J.E. 89-1256 (C.A.).  

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  • Standing Senate Committee of Canada's Transport and Communications issues report on driving of smart vehicles

    Introduction In January 2018, the Senate's Standing Committee on Transport and Communications (hereinafter the "Committee"), chaired by the Hon. David Tkachuk, published a report on the impact of automated vehicles in the country at the behest of the Minister of Transport of Canada. The first generation of these vehicles are already travelling on our roads, and their increased use will probably have far-reaching social consequences, such as a reduction in the number of accidents 1 and greater transport freedom for the elderly, but also, potentially, the loss of jobs in the country. The Committee issued sixteen (16) recommendations relating to smart vehicles2, in particular on these vehicles' cybersecurity and insurance coverage, urging the government to act now, since "technology will overtake regulations". Automobile manufacturers seem to hold the same opinion. Shawn Stephens, Planning and Strategy Director at BMW Canada, says that "the technology is ready. The manufacturers are ready. It is the laws and the government that are slowing us down [our translation]"3. Plug-in vehicles and automated vehicles Plug-in vehicles are described by the Committee as relying on to two kinds of technologies: the ones designed for “infoentertainement” and the ones relating to communication between vehicles.  These plug-in vehicles can therefore receive information on approaching vehicles, for example on their speed, relevant routes, and on the services available along the selected route. For their part, automated vehicles make different degrees of autonomous driving possible by relying on various technologies. The automation of these vehicles is classified between levels 0 and 5, that is, from no automation at all to complete automation, which refers to a vehicle that is entirely self-driven, without any possibility of human input.4 The smart cars designation encompasses both these categories. Cybersecurity The Committee recommends that a best practices guide be adopted with regard to cybersecurity. Indeed, the threat of cyberattacks targeting smart cars has been worrying the automobile industry for some years, to such an extent that the Automotive Information Sharing and Analysis Centre was established in July 2015, to allow various manufacturers to share their knowledge and cooperate on this topic. A cyberattack against a smart vehicle could target the integrity of its electronic data, and therefore the safety of its passengers, as well as the personal information of the drivers obtained from the vehicle. As a matter of fact, a recommendation for drafting a bill aimed at protecting the personal data of smart vehicles' users was also issued.  Insurance Considering the real threat of cyberattacks targeting smart vehicles, manufacturers must to take out an insurance policy covering cyberattacks. On another note, KPMG deems that, as a result of the use of automated vehicles, accidents will drop by 35% to 40%, while repair costs will increase by 25% to 30%5. So, one can reasonably expect an impact on drivers' insurance premiums. Moreover, it is possible that the liability in an accident involving an automated vehicle be transferred from the vehicle's driver to its manufacturer by means of amendments to the Automobile Insurance Act6, or of new laws specifically relating to the driving of automated vehicles. These changes could have significant consequences on the various laws regulating automobile insurance in the country7. The Committee therefore issued the recommendation for Transport Canada to oversee the impact of plug-in and automated vehicles on the automobile insurance industry.  Some initiatives and challenges The Motor Vehicle Test Centre in Blainville is currently working on establishing whether or not smart vehicles comply with current Canadian security standards. We have also learned from the Committee's Report that the Canadian Regulatory Cooperation Council is currently working with the United States on the various issues connected to plug-in and automated vehicles. Despite the numerous initiatives on record, so far only Ontario has introduced legislation specifically regulating the use of automated vehicles on the province's roads. 8. Québec will have to go down this path in order to fill the current legal vacuum9.  Conclusion As discussed in our bulletin of February 201710, the growing number of automated vehicles on the roads of Québec cannot be taken lightly. A legislative framework specifically providing for this kind of vehicle is of the essence when we consider that, by some projections, a quarter of the total worldwide vehicles will be defined as smart by 203511. Plug-in vehicles are already traveling on the roads of Québec, as are various levels of automated vehicles. It is therefore vital for all levels of government to catch up with these technologies. Regulating the driving of smart vehicles is a hot topic pertaining to the development of artificial intelligence. As such, it needs to be followed closely.   It is estimated that up to 94% of road accidents are caused by human error, see Standing Senate Committee on Transport and Communications, "Driving Change: Technology and the Future of the Automated Vehicle", Ottawa, January 2018, page 29. Standing Senate Committee on Transport and Communications, "Driving Change: Technology and the Future of the Automated Vehicle", Ottawa, January 2018. MCKENNA, Alain, La Presse, « Véhicules autonomes : « Ce sont les lois et le gouvernement qui nous freinent », Montréal, 1 February 2018, online:  http://auto.lapresse.ca/technologies/201802/01/01-5152247-vehicules-autonomes-ce-sont-les-lois-et-le-gouvernement-qui-nous-freinent.php. See GAGNÉ, Léonie, Need to Know, Bulletin Lavery, de Billy, “Autonomous vehicles in Québec: unanswered questions” Montreal, February 2017. Standing Senate Committee on Transport and Communications, "Driving Change: Technology and the Future of the Automated Vehicle", Ottawa, January 2018, page 65. Automobile Insurance Act of Québec, CQLR c. A-25.Automobile insurance falls under provincial jurisdiction. Pilot Project - Automated Vehicles, O Reg 306/15. The Government of Québec is currently assessing Bill 165, which aims at, among other things, amending the Highway Safety Code and regulating the driving of autonomous vehicles. Supra, note 4. Boston Consulting Group, (2016), Autonomous Vehicle Adoption Study.

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  • Directors in the crosshairs of the Supreme Court

    In the context of the case of Wilson c. Alharayeri1 (“Wilson”), issued on July 13, 2017, the highest court of the land confirmed the decision of the Court of Appeal of Québec which ordered a corporate director personally to pay an amount of $648,310 to a shareholder following an abuse he committed in respect of this shareholder. Nearly two decades after the case of Budd c. Gentra2 (“Budd”) in the Court of Appeal of Ontario, the Supreme Court of Canada seized the opportunity to reaffirm this judgment and clarify the circumstances in which the oppression remedy under the Canada Business Corporations Act3 (“CBCA”) may validly be exercised against a director rather than the corporation. The test developed in Budd and adopted by the Supreme Court in Wilson to find a director extra contractually liable is less restrictive than that of the Civil Code of Québec (“CCQ”), which facilitates finding a director personally liable by using the remedy under the CBCA. Furthermore, although the Wilson case had been adjudicated on the basis of the federal CBCA, one may wonder about the possibility of using it in support of an application for remedy in case of abuse of power or unfairness under section 450 of the Business Corporations Act4 (Québec) (“BCAQ”). Background From 2005 to 2007, Mr. Ramzi Mahmoud Alharayeri (“Alharayeri”) was the President and Chief Executive Officer of Wi2Wi Corporation (“Wi2Wi”). Alharayeri was also a significant shareholder of Wi2Wi, holding common shares and class A and B preferred shares. On this subject, Alharayeri was the sole holder of A and B preferred shares, which were convertible into common shares subject to the corporation meeting some of its financial targets in 2006 and 2007, respectively. Wi2Wi had also issued class C preferred shares, many of which were ultimately held byMr. Andrus Wilson (“Wilson”). In March 2007, as negotiations pertaining to the merger of Wi2Wi and Mitec Telecom Inc. (“Mitec”) had been undertaken as a result of Wi2Wi having cash flow issues, Alharayeri simultaneously entered into a share purchase agreement with Mitec, without the knowledge of Wi2Wi, on whose board he sat. Once the board of directors was informed of Alharayeri’s manoeuvre, he resigned and Wilson took control of the corporation’s management. Over the following months, Wi2Wi’s financial woes continued. As a result, the corporation offered to the holders of its common shares secured notes which could be converted into common shares in the context of a private placement. This decision resulted in, among other things, reducing the percentage of common shares held by the shareholders who did not participate in the private placement. Moreover, for the purpose of enabling Wilson to participate, the corporation had previously accelerated the conversion of Wilson’s class C preferred shares into common shares, despite the fact that doubts remained as to the validity of this conversion from a legal point of view. However, no class A and B shares, which were solely held by Alharayeri, was converted into common shares, despite the fact that they could be in the light of the financial tests established in the constating documents of the corporation. Wilson was maintaining that converting Alharayeri’s shares would not be appropriate in light of his conduct. Alharayeri has therefore been prevented from participating in the private placement and the value of his preferred shares, as well as the percentage of the common shares he held, was materially reduced. In view of the situation, Alharayeri instituted an oppression remedy under section 241 CBCA against four directors of Wi2Wi, including Wilson.. The oppression remedy under the Canada Business Corporations Act The oppression remedy under section 241(3) CBCA is an equity remedy which allows the Court to make any interim or final order against a corporation or director to remedy a situation of abuse. The Budd judgment, issued in 1998 by the Court of Appeal of Ontario, established the essential guidelines for analyzing the liability of directors in the context of an oppression remedy by establishing a two pronged approach to directors’ personal liability. Since the Budd case has not been uniformly applied throughout Canada, the Supreme Court seized the opportunity to finally clarify the guidelines applicable in determining the personal liability of directors under the CBCA. Firstly, the oppressive conduct must be attributable to the director because of his or her action or inaction, particularly in respect of the powers conferred on him or her. Secondly, the application for remedy must in itself be a fair way of dealing with the situation and must be relevant in the light of the facts in dispute. In this respect, the Supreme Court notes that the relevance of imposing personal liability on a director must be assessed in the light of four general principles, which may be summarized as follows: The oppression remedy must in itself be a fair way of dealing with the situation. For instance, finding a director liable will tend to be fair when the director derives a personal benefit from the abuse, particularly an economic benefit or increased control over the corporation. To this effect, it is important to note that the existence of a personal benefit is only an indicator pointing towards a director’s liability, it is not a mandatory criterion. Being of a remedial nature, the order must not exceed what is necessary to rectify the situation of injustice or inequity between the parties. The order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. Director liability cannot be a surrogate for other forms of statutory or common law relief. The courts must therefore consider the general context of corporate law in the context of the oppression remedy. In the light of the facts in dispute and the test developed in the Budd case, the Supreme Court has concluded that Wilson had had a lead role in the decision of the board of director of Wi2Wi not to convert Alharayeri’s preferred shares into common shares, which prevented the latter from participating in the private placement. The Court has further ruled that the oppression remedy constituted an equitable manner to remedy the situation of abuse and was relevant in the light of the circumstances of the case. In fact, the abuse provided Wilson with a personal benefit, that is, increased control of the corporation to the detriment of Alharayeri. The order for a payment in the amount of $648,310 to Alharayeri thus constituted an equitable remedy for the abuse since it represented what Alharayeri would have obtained if his preferred shares had been validly converted into common shares. The reasonable expectations of Alharayeri have been respected. The applicability of the Wilson case to the rectification remedy under the Business Corporations Act (Québec) Following the Wilson case, one may wonder about the possibility of relying on its principles in support of a rectification remedy under the BCAQ. First, it must be noted that the wording of section 450 BCAQ is nearly identical to that of section 241 CBCA, which, according to author Paul Martel5, results in the case law dealing with the CBCA being applicable to remedies under the BCAQ. The Superior Court of Québec has already explained that “the courts may draw from the case law developed concerning similar remedies under the CBCA”6 to analyze the remedies under the BCAQ. Accordingly, it is reasonable to believe that the Wilson case may at least guide the reasoning of the judges in implementing the remedy under provincial law. However, some distinctions between the remedies will have to be taken into consideration by the courts when analyzing the rectification remedy under the BCAQ: The CBCA provides for three situations which may give rise to the oppression remedy under section 241, namely, abuse, unfair prejudice and unfair omission to take into account the interests of security holders, creditors, directors or officers. However, section 450 BCAQ only provides for two situations which may give rise to the rectification remedy, namely, abuse and unfair prejudice. The equity remedy of the CBCA, which takes into account the interest of security holders, creditors, directors or officers, does not exist under the BCAQ. Under the CBCA, the order must only satisfy the reasonable expectations of security holders, creditors, directors or officers, while the remedy under section 450 CBAQ does not take into account the interests of creditors, as section 241 CBCA does. The provincial statute only takes into account the interests of security holders, directors and officers of the corporation. As a result, the relevance of imposing personal liability on a director must be assessed without regard for the interests of the creditors. The provincial rectification remedy only exists since February 14, 2011, the date on which the BCAQ came into force, and few decisions dealing with section 450 BCAQ have been rendered by the courts. It will therefore be interesting to note to what extent the Wilson case will be applied in the context of a rectification remedy in case of abuse of power or inequity. Considering the application of the BCE Inc. v. 1976 Debentureholders7 (“BCE”) case in support of many rectification remedies under provincial law8 it is reasonable to believe that the Wilson case will also be relied upon by Québec practitioners in the context of such proceedings, especially in view of the fact that BCE had also been judged on the basis of the CBCA. Comments Did the Supreme Court facilitate finding directors personally liable by establishing a test which is less restrictive than that provided for under the CCQ? In principle, under the CCQ, a director cannot be held liable for the actions and obligations of the corporation he or she administers since the corporation is separate from its members9. Without relying on the lifting of the corporate veil10, proceedings can however be directed against a director when he or she commits an extra contractual fault independent from the corporation’s obligations or is an accomplice thereto. Such a remedy requires the plaintiff to establish the presence of a fault11, prejudice and causal link between the two last elements. However, as it has been demonstrated in the case of Multiver ltée c. Wood12, the burden of proof may be heavy. In fact, a director who commits a fault in the context of his or her mandate is not necessarily found extra contractually liable13. Then, although lifting the corporate veil may be considered, case law14 has established that it is an exceptional remedy which can only be relied upon in cases where a director hides a fraud, an abuse of right or a breach of a public policy rule while standing behind the corporation. In fact, it seems that it will henceforth be easier to find corporate directors personally liable under corporate laws than under the CCQ, to the extent that a situation of oppression exists within a corporation. Lastly, the test developed in Budd and used in Wilson sets out many indicators to assess the fairness of oppression remedy, particularly the existence of a personal benefit. However, the non exhaustive nature of such indicators gives broad discretionary power to the courts for finding a director personally liable. Directors will have to be very cautious and diligent in discharging their duties as it may be easier to find them personally liable in the context of a remedy under the federal and provincial corporate statutes rather than the CCQ. Wilson c. Alharayeri, 2017 SCC 39. Budd c. Gentra Inc., 43 B.L.R. (2d) 27 (C.A. Ont.). R.S.C. (1985), ch. C-44. CQLR, c. S-31.1. Paul Martel, La société par actions au Québec, vol. 1, Les aspects juridiques, Montréal, Wilson & Lafleur, Martel Ltée, 2013, no. 31-506. Gagné Excavation ltée c. Vallières, 2015 QCCS 6223, par.a 44. Also see Groupe Renaud-Bray inc. c. Innovation FGF inc., 2014 QCCS 1683, par.a 56. [2008] 3 S.C.R..560. Particularly see Groupe Renaud-Bray inc. c. Innovation FGF inc., 2014 QCCS 1683 et Langlois c. Langlois, 2015 QCCS 4203. 309 C.C.Q. 317 C.C.Q. As, for example, a breach of the duty of care and diligence in general or of the duty of honesty and loyalty to the corporation (article 322 C.C.Q.). Multiver ltée c. Wood, 2015 QCCS 2847. Ibid, para. 73. Particularly see Avi Financial Corporation (1985) inc. c. Pyravision Teleconnection Canada inc., 1998 CanLII 11474 (QCCS), para. 58.

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  • Arbitration and quasi-judicial tribunals: Must corporations and private bodies necessarily be represented by a lawyer?

    While individuals (natural persons) may represent themselves and need not resort to a lawyer before the courts, a legal person or a corporation must necessarily be represented by a lawyer, both pursuant to the Code of Civil Procedure (articles 23, 86 and 87) as well as by reason of the acts reserved for lawyers under an Act respecting the Barreau du Québec (CQLR c. B-1; see section 128) (hereinafter the “AB”). However, the question has arisen in the past as to whether an individual may represent a legal person or a corporation before a quasi-judicial tribunal, for example the Tribunal Administratif du Québec (hereinafter the “TAQ”), and inter alia validly sign and file proceedings with such a body. Two contradictory lines of authority had existed until recently within the ATQ, some adjudicators having answered the question with yes,1 others with no,2 and no decision of the Court of Québec (sitting on appeal from the TAQ) or of the superior courts had ever settled the matter. The controversy had to do mainly with the interpretation to be given to an exception to the acts reserved for lawyers, such exception being set out as follows in section 129(c) AB: 129. None of the provisions of section 128 shall limit or restrict: […] (c) the right of public or private bodies to be represented by their officers, except for the purpose of pleading, before any organization having a quasi-judicial function; In a decision rendered on March 22, 2017,3 Justice David L. Cameron of the Court of Québec (sitting on appeal from the TAQ) finally settled this matter, namely, to what extent a “private body” may be represented by its officers (rather than by a lawyer) before an organization having a quasi-judicial function. This is the first decision by the Court of Québec, Appeal Division — and indeed by any superior court — on this issue. The Court determined that under section 129(c) AB, supra, a private body may be represented by its officers before an organization having a quasi-judicial function, including for the signing and filing of proceedings, but not however as concerns the act of pleading. To come to this ruling, the Court had to determine five main issues, being the respective meanings to be given to the terms “represent”, “private body”, “officer”, “pleading” and whether the TAQ is an “organization having a quasi-judicial function”. We revisit these issues below, while also summarizing and commenting on the Court’s reasoning. 1. What is the extent of this right “to be represented”? What are the acts, actions and steps in the process that are included and that may be completed without a lawyer? The Court adopts a “[TRANSLATION] broad and inclusive approach [to the effect] that the exception is aimed at all steps of representation, from the preparation and drafting stages to when the case is closed (subject to pleading).”4 2. What types of entity fall under this exception and are considered “private bodies”? Being of the opinion that the expression “private body”, without further characterization, is the least specific and most generic term that the legislature could have used in this exception to the monopoly conferred by the AB upon lawyers, the Court concludes that “[TRANSLATION] the term “private body” is broad enough to encompass legal persons, partnerships or other bodies that do not possess legal personality, in sum, all entities of a private nature that are not individuals.”5 3. Who may be considered an “officer” of the private body? Once again, the Court rejects any formalism and points out, for instance, that it would not suffice to base oneself strictly on entries appearing in public registers (for example, in the Québec enterprise register), where the directors of a company are required to be listed. Instead, the Court decides that the actual roles and responsibilities of the person, in its relation to the entity it wishes to represent, are to be examined in order to establish (or not) the person’s status as officer. The Court characterizes the question as one of “[TRANSLATION] mixed fact and law”.6 4. What does the “except for the purpose of pleading” limitation mean? On this point, the parties were in agreement and the Court notes that “[TRANSLATION] the concept of pleading is very restrictive, meaning the activity of presenting an argument once the evidence is closed in the context of a hearing.”7 However, the Court goes further and specifies that, in the case at hand, the participation or representation by an officer should have been excluded “[TRANSLATION] merely for the purposes of pleading at law after the clarification of factual matters”.8 5. Is the TAQ an organization having a “quasi-judicial function”? In the Court’s opinion, yes; hence it finds the exception in section 129(c) AB is applicable.9 What is the situation with respect to private arbitration? “Private” arbitration is recognized as a private dispute prevention and resolution process in article 1 of the Code of Civil Procedure, whilst article 4 of the Code of Civil Procedure specifies that this dispute prevention and resolution process is confidential. Alternative dispute resolution mechanisms can present certain advantages, including confidentiality, and the legislature encourages parties to resort to them. The same issue is thus likely to arise in the context of private arbitration, seeing as these provisions of the AB are of public order.10 Although the Court settles the matter with respect to cases issuing from the TAQ, the result should be identical as far as private arbitration is concerned due to the quasi-judicial function of an arbitrator,11 based on a combined reading of sections 1 (definition of the word “court”), 128 and 129 AB. More specifically, subparagraphs 1 to 7 of section 128(2)(a) AB present an exhaustive list of exclusions to the monopoly provided for by section 128(2)(a) to lawyers, which list includes inter alia the arbitration of disputes or grievances within the meaning of the Labour Code12 or within the meaning of the Act respecting labour relations (...) in the construction industry13, but not “private” arbitration recognized as a private dispute prevention and resolution process in article 1 of the Code of Civil Procedure. One should therefore conclude that the monopoly created by section 128(2)(a) AB is applicable to private arbitration, as is the exception in section 129(c) AB, which allows a private body to be represented by its officers in this context, except for the purpose of pleading. Except as concerns the act of pleading. See, for example, 3639886 Canada Inc. c. Commission de protection du territoire agricole du Québec et als, 2002 CanLII 54567 (QCTAQ). See, for example, Raven c. Montréal (Ville), 2015 QCTAQ 04983. Ville de Longueuil c. 9128-2405 Québec Inc., 2017 QCCQ 2191. At the time of writing, no appeal had been initiated, but the time limit for appeal had not yet expired. We recommend that the reader follow up on this case or contact us. Ville de Longueuil c. 9128-2405 Québec Inc., 2017 QCCQ 2191, para. 181. Id., see paragraphs 210-214. Id., see paragraphs 225-226. Id., see paragraph 232. Id., see paragraph 232 in fine. Ville de Longueuil c. 9128-2405 Québec Inc., 2017 QCCQ 2191, para. 250-251. Fortin v. Chrétien, [2001] 2 S.C.R. 500, p. 516 (para. 21). AR Plomberie chauffage inc. c. Institution royale pour l’avancement des sciences, 2007 QCCS 2998, para. 45; Maçonnerie Demers inc. c. Lanthier, J.E. 2002-1335, AZ-50127879 (C.S.), para. 226; Hubert REID, Dictionnaire de droit québécois et canadien, 5e éd., Wilson-Lafleur, Montréal, 2015, p. 484 (definition of “pouvoir quasi judiciaire” [quasijudicial power]). See also, wherein the function of an arbitrator is considered analogous to a judicial function (thus quasi-judicial by nature): Zittrer c. Sport Maska Inc., [1985] C.A. 386, AZ-85011217, para. 54-55, reasons of Justice Lebel, as he then was (reversed by the Supreme Court of Canada but not on this point: [1988] 1 S.C.R. 564), this opinion of Justice Lebel being authoritative, see, for example: Charbonneau c. Industries A.C. Davie Inc., J.E. 89-759 (C.S.), p. 10; Promutuel Dorchester, société mutuelle d’assurances générales c. Ferland, J.E. 2001-26, AZ-01021003 (C.S), p. 6 and footnote 2; Marie-Josée HOGUE et Patrick FERLAND (dir.), Guide de l’arbitrage, Lexis Nexis Canada inc., Montréal, 2014, para. 1-8, 1-9 and 1-10. (CQLR, c. C-27), see paragraph 128(2)(a)[1] AB. (CQLR, c. R-20), see paragraph 128(2)(a)[6] AB.

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  • Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

    The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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  • Disqualification of a law firm: the Superior Court broadens the spectre of conflicts of interest

    In a decision rendered on December 1, 2016, the Superior Court of Québec had to rule on a situation which, until that time, was completely novel, and to determine whether lawyers can act in a court action against former employees of a client whom they still have to work with in connection with another related proceeding. The Court declared that the lawyers were disqualified. The dispute The construction of a vast sports complex in Trois-Rivières, the Complexe sportif Alphonse-Desjardins (“CSA”), has been the source of a political and legal soap opera since 2010. The Commission scolaire du Chemin-du-Roy (the “School Board”) is one of the partners involved in this project, developed in phases since 1999. After the construction of the second phase, an Olympic arena, and the discovery of various problems related to the facilities’ operations, in 2011, the School Board instituted an action for more than $3 million against the project engineers and certain contractors and subcontractors. The services of the law firm, Morency, Société d’avocats, were retained to represent the School Board. In the course of the proceeding, two of the School Board’s employees, Michel Morin and Michel Montambeault, helped the lawyers with their preparation, were examined as representatives of the plaintiff, and attended the examinations of the adverse parties. In the following years, the School Board learned, contrary to what it had believed, that the various phases of the CSAD were resulting in financial losses. It believed that there were irregularities in the financial picture that was being presented to it. Moreover, the Auditor General of Québec provided its insight into these irregularities. In 2016, the School Board brought an action in damages against some of its consultants and former officers, including Messrs. Morin and Montambeault (who were no longer in its employ). The claim amounted to nearly $6 million. The lawyers from the firm of Morency were once again chosen to represent the School Board. It was in the context of this second action that Michel Morin and Michel Montambeault presented an application for a declaration of disqualification. Thus, the existence of an apparent conflict of interest was raised not by the lawyers’ client, but by former representatives of the client. Grounds The Superior Court acknowledged that there was a potential conflict of interest in this case which could result in the lawyers’ disqualification. In his reasons, Justice Daniel Dumais noted that the Québec legislator has codified, in article 193 of the new Code of Civil Procedure, the three most common situations that can give rise to a declaration of disqualification: where the lawyer has disclosed or is likely to disclose confidential information to another party or third person; the lawyer is called to testify in the proceeding on essential facts; or the lawyer is in a conflict of interest situation and does not take steps to remedy it. The judge quickly dismissed the hypothesis that the lawyers from the firm of Morency could be called to testify. Nothing of the sort had been considered in the case. Nor was the disclosure of confidential information an issue, since it was clear that the law firm’s client had always been the School Board. The confidential information which Messrs. Morin and Montambeault, as representatives of the School Board, may have disclosed to the lawyers in connection with the action in 2011, belonged to the School Board. There could be no declaration of disqualification on this ground. The Court therefore based itself on a conflict of interest in deciding to restrict the School Board’s right to counsel of its choosing. Justice Dumais wrote as follows: [Translation] The Court is of the view that there is the appearance of a conflict of interest here (…) based on the combination of the following three factors: 1) the important role given to the applicants in the two cases, 2) the simultaneousness of the two actions, and 3) the connection between them. The judge noted that “a relationship of trust was probably forged” between Messrs. Morin and Montambeault and the lawyers from the firm of Morency during the proceeding instituted in 2011. The lawyers got to know Messrs. Morin and Montambeault. They would likely call them to testify as witnesses in the upcoming trial. The situation [translation] “is far from reassuring”, wrote Justice Dumais, if they have to face another lawyer from the same firm a few weeks later in connection with the proceeding instituted in 2016. Since both actions dealt with the issue of financial management and the allegations made against Messrs. Morin and Montambeault in the 2016 case could affect their credibility as witnesses in the 2011 case, the Court found there was a connection. [translation] “The discomfort and apprehension (of Messrs. Morin and Montambeault) will probably be reduced if it is a new firm that is suing them,” the Court noted. In obiter, Justice Dumais added that even if he had concluded that there was no conflict of interest in this case, he would have declared that the lawyers from the firm of Morency were disqualified in the name of the higher interests of justice. What do we learn from this case? In matters involving a declaration of disqualification, each case must be considered individually. The free choice of counsel remains the principle. However, the Superior Court has indicated in this case that the scope of the search for conflicts of interest should be broadened. They can arise not only when lawyers have to act against clients or ex-clients, but also against their important representatives. And yet, in 2000, the Court of Appeal decided to permit a law firm to act against the former representative of one of its clients.1 Before dismissing the motion to disqualify, Justice Forget wrote as follows: [translation] “The effect of the respondents’ submission would be that every time a law firm communicates with an employee of its client, it would never be able to act again for that client in the event of a dispute between the client and that employee.” Justice Dumais of the Superior Court refused to reach the same conclusion given that the two files at issue in the case were connected, active and simultaneous, and that Messrs. Morin and Montambeault, as important representatives of the School Board, still had to work with the lawyers from the firm of Morency. It will be interesting to see whether the Québec Court of Appeal also makes such a distinction, since it has agreed to hear the School Board’s appeal. École Peter Hall inc. c. Fondation Eleanor Côté inc., 2000 CanLII 11376 (C.A.).

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  • The judicial review of a decision rendered by the Court of Québec in civil matters: an unusual remedy, although possible in some circumstances

    The superintending and reforming power of the Superior Court of Québec over the decisions of the Court of Québec is indisputable. It is furthermore confirmed by article 34 of the Code of Civil Procedure1, which grants to the Superior Court powers to judicially review decisions made by the Québec courts, with the exception of the Court of Appeal. However, an appeal to the Court of Appeal is the means generally used to challenge a decision of the Court of Québec. There is an exception to this principle in administrative matters, whereby the Court of Québec sits on appeal of decisions made by an administrative body or tribunal. In such circumstances, the decisions rendered by the Court of Québec are often final and cannot be appealed, thereby excluding the jurisdiction of the Court of Appeal. The only possible remedy then is to apply to the Superior Court for judicial review. The situation is different with regard to decisions rendered by the Court of Québec in civil matters. Indeed, in view of the right specifically provided for in the Code of Civil Procedure to appeal judgments of the Court of Québec that put an end to a proceeding, an appeal before the Court of Appeal is the appropriate remedy. However, practical considerations may militate against the appeal in specific matters. For example, where the financial stakes are of a lesser nature, the costs and time involved in an appeal may be disproportionate to the objective being sought. Does that mean that no remedy remains available? Not necessarily, as shown by the decision issued recently by the Superior Court in the case of Côté c. Cour du Québec2. In this decision, the honourable Justice Bernard Godbout concluded that the trial judge exceeded his jurisdiction who, while recognizing the existence of a transaction settling the claim before him, nevertheless allowed the plaintiff’s claim without explaining or giving reasons for his decision. Noting that the decision did not fall within a range of possible, acceptable outcomes which could be justified when taking into consideration the facts and law, Justice Godbout allowed the application for judicial review of a decision of the Court of Québec rendered in a civil matter and reviewed the decision despite the existence of a right to appeal upon leave to the Québec Court of Appeal. The facts of the Côté c. Cour du Québec case were rather unusual: there were obvious inconsistencies between the reasons and the operative part of the judgment at first instance. Although the Court of Appeal would certainly have had the necessary jurisdiction to correct the situation, however subject to granting leave to appeal, Justice Godbout concluded that the situation constituted an exception to the principle whereby a party must exhaust his or her remedies as stipulated in article 529 of the Code of Civil Procedure: [translation] [33] That a transaction has, between the parties, the authority of res judicata is not something which has to be recognized or declared by the court. The law, more specifically article 2633 C.C.Q., provides for it. This is a rule of law. [34] Article 529 (2) C.C.P. specifies that “[e]xcept in the case of lack or excess of jurisdiction, judicial review is available only if the judgment or the decision cannot be appealed or contested.” [emphasis added] [35] Taking into account article 2633 C.C.Q., it would be difficult for one to conclude that the decision ordering the plaintiffs, including Mr. Côté, to pay to Ms. Plourde an amount of money for services rendered does falls “within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.” In so doing, the court exceeds its jurisdiction, thus allowing the Superior Court to intervene in the context of an application for judicial review despite the existence of a right to appeal upon leave to the Court of Appeal, this, without distorting the judicial review process. Justice Bernard Godbout exercised his discretion and allowed the application. He set aside the conclusion of the judgment which was criticized by the applicant, noting that the review of lawfulness of decisions in pursuit of the rule of law is an important component of the principle of access to justice. Moreover, as the Québec Court of Appeal had previously indicated, judicial review where there is a right to appeal on leave is only possible in exceptional circumstances. Indeed, case law clearly shows that judicial review must not be used as a de plano appeal, thereby superseding the leave required by the legislator in article 30 of the Code of Civil Procedure. Only the absence of jurisdiction, the violation of the rules of natural justice or a decision contrary to reason may justify such remedy3. As noted by the Court of Appeal, [translation] the demonstration of such an illegality, committed by a professional judge, will be rather rare4. Judicial review of a decision of the Court of Québec in civil matters is therefore possible, albeit in very exceptional cases. Code de procédure civile, CQLR, c. C-25.01. Côté c. Cour du Québec, 2016 QCCS 5539. Trudel c. Re/Max 2001 MFL inc., 2013 QCCA 1396, para 6, 7, 13 to 15; Mondesir c. Asprakis, 2010 QCCA 1780, para 13 and 14. Trudel c. Re/Max 2001 MFL inc., 2013 QCCA 1396, para 15; Mondesir c. Asprakis, 2010 QCCA 1780, para 13.

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  • Changes to the Code of Civil procedure (Quebec) - Small claims: From $7,000 to $15,000

    On January 1, 2015, the jurisdictional threshold of the Small Claims Court will be raised from $7,000 to $15,000. This constitutes a first step toward the modernization of civil procedure, explained the Minister of Justice, which will be followed by the coming into force of the new Code of Civil Procedure in January 2016. On February 28, 2014, the National Assembly passed Bill no. 28, An Act to establish the new Code of Civil Procedure, the product of 15 years of reflection on the reform of civil procedure in Quebec. With a view to increasing access to justice, this bill, amongst other measures, would significantly raise the jurisdictional threshold of the Small Claims Division of the Court of Québec. Indeed, the coming into force of the new Code, set for January 2016, was to bring the cap from $7,000 to $15,000. The increase was accelerated however by the recent adoption of Bill no. 14 1 by which the National Assembly amends the current Code of Civil Procedure to raise the jurisdictional threshold at the Small Claims Division on January 1, 2015. According to Stéphanie Vallée, Minister of Justice, [TRANSLATION] “[t]he increase will provide Quebeckers with better access to this tribunal where citizens represent themselves, without a lawyer.” Lavery is of the view that this legislative amendment may have a significant short-term impact on the business community as regards the management of these litigation files where representation by a lawyer is generally prohibited. The change has no retroactive effect on matters currently pending nor on their execution. Lavery will keep you apprised on a regular basis on the evolution of this civil procedure reform. _________________________________________ 1An Act to amend the Code of Civil Procedure and other provisions, SQ 2014 c 10.

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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 24

    CONTENTSNominees in the context of litigationUse of a nominee by limited partnerships and trusts for holding immovablesVoluntary registration for GST and QST purposes by a nomineeImmovables held by a nominee: Issues with respect to consumption taxesNOMINEES IN THE CONTEXT OF LITIGATIONLéa Maalouf In commercial matters, it frequently happens that two persons agree to hide their true intent from third parties and express such intent in a secret contract (or counter letter), while publicizing another contract, known as a fictional or apparent contract. This process is called simulation. This practice is entirely legal unless it is used to break the law or allow a party to avoid liability, for instance, by removing an item of property from his patrimony in order to avoid the execution of a judgment. Simulation is governed by articles 1451 and 1452 of the Civil Code of Québec. A counter letter is subject to no condition as to form: it is valid whether it is in the verbal or written form. A nominee agreement is one of the forms under which simulation may be carried out: when a person uses a third party to enter into a contract with another person, the third party is called a nominee. With as many players at the table, it is interesting to review the issues related to the liability of the parties and the precedence of the contracts in the event a dispute occurs. If a dispute occurs between the parties to the nominee agreement, the law is clear: the counter letter, whether verbal or written, prevails over the apparent contract. Either party cannot refuse to give effect to the nominee agreement. It is interesting to note that proof of the existence of a counter letter may be made by any mean, including testimony. This is rather exceptional, considering that the rules of evidence do not allow the parties to a written contract to use testimony to contradict or vary its terms. The reasoning of the courts is that the nominee agreement constitutes a contract by itself, which is separate from the apparent contract. This being so, testimony is not used to contradict the apparent contract but rather to establish the existence of a new contract. However, if a third party institutes proceedings while being in good faith – meaning that the third party is unaware of the existence of the secret instrument, the Civil Code of Québec provides that the third party may, according to his interest, avail himself of the apparent contract or the counter letter. In principle, third parties do not need to prove fraudulent intent of the parties to the counter letter to rely on the secret instrument. However, according to some judgments, third parties should at least prove that they suffered some kind of harm as a result of the simulation. Once again, proof of the simulation may be made by any mean. Conversely, parties to a counter letter may decide to publish it to end the simulation: in that case, it will be more difficult for third parties to rely on the apparent contract. However, in a recent case1, the Superior Court found liable both the nominees and true owners of an immovable, concluding that the parties had deliberately created confusion tantamount to abuse of right and that the theory of alter ego had also to be applied. In closing, although it may look surprising at the outset, a fictive instrument, such as a nominee agreement, is entirely legal unless it is used for improper purposes. However, parties to that fictive instrument must remember that a third party in good faith may set such instrument aside and rely on the apparent contract as being the true agreement between the parties, even if this does not constitute the initial intent of the contracting parties. _________________________________________1 9087-7135 Québec inc. c. Centre de santé et de services sociaux Lucille-Teasdale, 2013 QCCS 3856. USE OF A NOMINEE BY LIMITED PARTNERSHIPS AND TRUSTS FOR HOLDING IMMOVABLESDominique Bélisle Several legal arguments justify the practice that has developed in Quebec and in the common law provinces of registering the ownership title to immovables or real estate, acquired by a limited partnership or a real estate investment trust (“REIT”), in the name of a nominee. One of these arguments is based on the fact that partnerships and trusts created under the Civil Code of Québec (“Civil Code”) do not benefit from legal personality and therefore are not separate «persons» distinct from their members, partners or beneficiaries. Indeed, historically, under the civil law, the patrimony was always considered to be attached to a natural or legal person. Over time, the concept developed which attributed a distinct patrimony to the partnership from the patrimonies of the partners, and which attributed a patrimony by appropriation to the trust, autonomous and distinct from the patrimonies of the settlor, trustee or beneficiary thereof. In the case of trusts constituted under the Civil Code, including REITs, nominees have not been consistently used in practice and are less common. Indeed, article 1278 of the Civil Code states that the titles relating to the property of the trust are drawn up in the trustees’ names. On this basis, it is common to see the title to property held by a REIT registered in the land registry under the names of all the trustees acting in their capacity as trustees of the trust. Other legal advisers still register the title to the property directly in the name of the REIT, despite article 1278. For the time being, nothing indicates that this practice affects the validity of the property title. In the above cases, however, a nominee is not used on the basis of the lack of legal personality of the trust because the Civil Code expressly recognizes that the parties involved have no real rights in the distinct patrimony. This recognition helps resolve the ambiguity caused by this lack of personality. The advantage of a nominee for a REIT therefore lies elsewhere, such as, for example, in the flexibility offered for transfers of title between parties related to the trust, and in relation to the transfer duties that are triggered when these transfers are registered in the land register. Indeed, the exemptions provided for in section 19 of the Act respecting duties on transfers of immovables (Quebec) with respect to a corporate restructuring do not apply in the cases of a trust or partnership. Some exemptions contained in section 20 of that statute do apply to trusts, but in very specific cases. In the case of a partnership, however, the use of a nominee is more common and warranted not only in connection with the Act respecting duties on transfers of immovables, but also due to the uncertainty caused in relation to the holding of title to property because of the partnership’s lack of legal personality. Indeed, in contrast to the situation pertaining to trusts, the Civil Code does not directly provide for the autonomous nature of the patrimony for partnerships, or that the partners hold no real right in the partnership’s property. Furthermore, in the case of Ville de Québec c. Compagnie d’immeubles Allard ltée 1, the Court of Appeal stated that since the limited partnership did not have a distinct legal personality from its members, it did not hold the partnership’s assets, and therefore found that the partners held an undivided real right in the property. In that case, the Court determined that the transfer by a partner of his interest in the partnership constituted a transfer of his undivided share, thereby triggering transfer duties (the parties having had the bad idea of registering the transfer…). This decision has created some uncertainty surrounding the identity of the property owner. Is the property title really held in undivided co-ownership by each of the partners? And what about limited partnerships? The argument relied on by the Court of Appeal to justify its conclusions applies equally to limited partnerships. In practice, however, the partners in a limited partnership would certainly not intend to trigger a transfer in undivided co-ownership of the property each time a unit is transferred. This uncertainty has led to the commercial practice of registering the property title in the land register in the name of the general partner, or a nominee corporation. _________________________________________1 [1996] RJQ 1566 (C.A.).  VOLUNTARY REGISTRATION FOR GST AND QST PURPOSES BY A NOMINEEDiana Darilus In an immovable property context, a person can act as a nominee for another person for the purpose of holding title to the property and handling the property management. This type of structure implies the existence of a mandatary-mandator relationship that is not disclosed to third parties. In the context of this type of relationship, the mandator is the person considered to be carrying on commercial activities involving the property, and is therefore generally required to register for GST and QST purposes. However, a nominee corporation holding title to immovable property on behalf of the true owner may wish to register voluntarily for several reasons, such as the following: use of the nominee’s GST and QST registration numbers in the legal and administrative documentation, such as invoices or commercial leases, in order to preserve the confidentiality of the true owner of the property; joint election by the mandator and mandatary provided for in subsection 177(1.1) of the Excise Tax Act (“ETA”) and section 41.0.1 of An Act respecting the Québec sales tax (“AQST”), which allows the mandatary to remit the GST and QST collected to the tax authorities on the mandator’s behalf; and joint venture election provided for in sections 273 ETA and 346 AQST, which enables the co-venturers to designate an “operator” responsible for remitting the GST and QST collected to the tax authorities and claiming the input tax credits and input tax refunds (ITCs/ITRs) on behalf of the co-venturers. A nominee corporation can only register voluntarily for GST and QST purposes if it carries on a commercial activity in Quebec. The definition of “commercial activity” is very broad and includes the carrying on of a business by a corporation without a reasonable expectation of profit, except to the extent to which the business involves the making of exempt supplies. As for the definition of the term “business”, this includes any undertaking of any kind whatever, whether or not engaged in for profit. In light of these definitions, it seems that a nominee corporation whose activities are limited to holding title to property on behalf of the true owner without receiving compensation for doing so, could be considered to be carrying on a commercial activity. However, Revenu Québec has raised doubts in the past few years about the voluntary registration of certain nominee corporations in the form of “shell corporations” on the basis that they did not carry on any commercial activities, and retroactively canceled their registration numbers. To avoid such a dispute with the tax authorities, one should in our view be cautious when setting up a nominee corporation as part of a structure for holding immovable property in Quebec. We recommend that the following minimum measures be taken to reduce the risk of contestation by Revenu Québec: monthly fees (plus applicable taxes) should be paid to the nominee corporation pursuant to terms of a written nominee agreement; and the nominee corporation should open a bank account to receive its compensation. We believe that if such measures are taken, it is more reasonable to consider that the nominee corporation is in fact carrying on a commercial activity, i.e., the taxable supply of services as a mandatary on behalf of a mandator or participants in a joint venture. IMMOVABLES HELD BY A NOMINEE: ISSUES WITH RESPECT TO CONSUMPTION TAXESJean-Philippe Latreille In the last few years, tax authorities have intensified their auditing efforts aimed at corporations holding immovables as nominees. In this context, the validity of some elections pertaining to joint ventures in respect of GST and QST has been questioned. These elections allow the participants in a joint venture to designate one of them as “operator”, whose role is to remit taxes and claim input tax credits and input tax refunds in the name of the other participants. Now, in some circumstances, tax authorities adopt a position whereby a corporation which is solely used as a nominee is not a participant in the joint venture and thus, cannot validly be appointed as “operator”. However, tax authorities recently announced that they gave instruction to their auditors not to assess when such a situation occurs. This administrative tolerance is conditional to all returns having been filed and all amounts due having been paid. This measure is temporary since it only applies to reporting periods ending prior to January 1, 2015. Furthermore, tax authorities expect all participants in a joint venture relying on the tolerance to make valid elections in the future. Owners of immovables relying on a nominee should therefore now review their holding structure in the light of the positions published by tax authorities.

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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 23

    CONTENTS The 2014 Federal Budget Plan sounds the death knell for two family tax planning measures much appreciated by entrepreneurs and some professionals The Expert and the Court You signed a contract for services... with an employee? How to properly identify the relationship between the parties and what are the consequences of a wrong categorization ? Application of GAAR to a cross-border debt “clean-up” transaction: The Pièces Automobiles Lecavalier Inc. CaseTHE 2014 FEDERAL BUDGET PLAN SOUNDS THE DEATH KNELL FOR TWO FAMILY TAX PLANNING MEASURES MUCH APPRECIATED BY ENTREPRENEURS AND SOME PROFESSIONALSMartin BédardINCOME SPLITTING THROUGH A TRUST OR PARTNERSHIPFirst, the 2014 Federal Budget Plan (the “Budget”) ends the possibilities for splitting the income of trusts and partnerships in respect of business and rental income attributed to a minor child.Such income will henceforth be considered as being part of the split income of the trust or partnership and taxed at the marginal rate.As described in the Budget, the conditions of application of this new measure are as follows: the income is derived from a source that is a business or a rental property; and a person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership) The structures affected by these new measures could be used by professionals conducting their activities through a partnership of which their minor children or a trust established for their benefit were members. Such structures allowed for directly or indirectly allocating a portion of the income of the partnership to the minor child and thus benefit from progressive tax rates.As of 2014, the rules governing split income will apply to these structures, which will no longer offer a tax benefit. However, it is still possible to split such income with related persons who have reached the age of majority.POST-MORTEM INCOME SPLITTING: THE TESTAMENTARY TRUSTThe Budget also puts an end to the progressive tax rates applicable to a testamentary trust, a measure which was announced in the 2013 Federal Budget Plan.Up to now, testamentary trusts were allowing their beneficiaries to benefit from several progressive tax rates. Among the tax planning possibilities associated with the availability of such progressive tax rates were the use of numerous testamentary trusts, the postponement of the completion of the administration of an estate for tax purposes or the avoidance of the Old Age Security Recovery Tax.Testamentary trusts will henceforth be uniformly taxed at their marginal tax rates. However, progressive tax rates will remain applicable in the following two cases: (i) for the thirty-six (36) first months of an estate which is a testamentary trust and (ii) in the case of a trust whose beneficiaries are eligible for the federal disability tax credit.The Budget also provides that the tax year-end of testamentary trusts must henceforth be December 31 of each year starting December 31, 2015.These measures will apply to taxation years 2016 and following.THE EXPERT AND THE COURTDominique VallièresIn the context of litigation, lawyers frequently require the testimony of experts, particularly accountants. Well presented, this evidence may have a decisive influence on the outcome of a trial. In the contrary situation, a debate on the quality of the expert or the weight to be given to his or her testimony may occur. This is why we review in this bulletin the role, qualification and credibility of the expert.THE ROLE OF THE EXPERTThe role of the expert is to express an opinion based on his or her scientific, economic or other knowledge, which exceeds that of the judge and without which it is impossible to draw from the facts the correct conclusions. In other words, when the judge is able by himself to understand the facts and draw the correct inferences, an expert is neither necessary nor admissible. For example, the calculation of the gross profits from a contract, which only constitute a mathematical operation, will not require a particular expertise and an accountant called upon to testify on that matter will be at best considered as an ordinary witness. The role of the expert is to enlighten the Court in as objective or impartial a manner as possible.THE QUALIFICATION OF THE EXPERTTo express his or her opinion, the expert must first be recognized as such by the Court. The expert will therefore be first examined respecting his or her training and experience. If the expert qualification is contested, and the Court considers that the expert is insufficiently qualified, it may refuse to hear him or her. The qualifications of the expert must be related to the matters about which he or she testifies.The training of the witness and his or her practical experience, will be considered. Although either may be enough, a really convincing expert will generally have solid training and experience, failing which, even if the Court accepts to hear him or her, less weight may be given to his or her testimony.THE WEIGHT GIVEN TO HIS OR HER OPINIONAs is the case with any other witness, the Court will have to assess the credibility of the expert, particularly in the presence of contradictory opinions. The Court may review the seriousness of the steps taken by the experts. It will give more weight to the opinion of a witness who directly noted the facts and reviewed the data than to the opinion of another witness who only relied on what he or she has been told. A mostly theoretical opinion or an opinion which only describes principles will also be given less weight. It is important for the witness to explain why the particular facts of the case allow for drawing a particular conclusion. Furthermore, in the presence of diverging schools of thought on a particular item, the Court appreciates that the expert considers them and explains why one should be favoured over the other in the situation at hand. Dogmatism, the absence of justification and the out of hand dismissal of a recognized approach will also generally be negatively perceived.This is consistent with the very basis of the role of the expert, which is to impartially and objectively enlighten the Court. The Court will want to ensure that the expert keeps the required distance and independence to issue a credible opinion. If the Court perceives that the expert is taking sides or “pleads the case” of the party who retained his or her services, his or her credibility will suffer. Thus, even though it is admissible, the testimony of the expert and his or her conduct will be more closely scrutinized if it is demonstrated, for instance, that he or she is employed by a party or expressed in the past an opinion on similar issues.Although this situation is rarer, the Court could even refuse to hear the witness if it is convinced that he or she will be unable to be impartial. Such may be the case when the expert personally advocates in favour of the position defended by a party or the fact that he or she was personally involved in similar litigation. The animosity or the closeness which may exist between the expert and a party may also negatively affect the expert. In this respect, it is important for the expert to be transparent to the party who retains his or her services.CONCLUSIONThe really useful expert is the one whose conduct may be summarized by these three words: competence, thoroughness and objectivity.YOU SIGNED A CONTRACT FOR SERVICES… WITH AN EMPLOYEE? HOW TO PROPERLY IDENTIFY THE RELATIONSHIP BETWEEN THE PARTIES AND WHAT ARE THE CONSEQUENCES OF A WRONG CATEGORIZATION?Valérie Korozs and Martin BédardThe Court of Appeal of Québec recently issued an interesting decision on this subject in the Bermex international inc. v. L’Agence du revenu du Québec case1 (“Bermex”).It must be noted that regardless of the fact that the parties have described their agreement as a contract for services or an agreement with a self-employed person, a court is not in any way bound by such a description.The courts have developed certain criteria for analyzing the legal status of a person in order to determine whether that person is an employee or a self-employed person. Among these criteria, the relationship of subordination, that is, whether a person works under the direction or control of another person, has always been decisive.What about when a person is not, strictly speaking, “under the direction or control of another person”,2 due to the fact that he or she runs the business? This is the question the Court of Appeal had to answer in the Bermex case.The Court adopted a broad interpretation of the concept of the subordination relationship by considering the degree of integration of the worker into the company, a criterion derived from the common law.THE FACTSFollowing a tax audit of four companies, the Agence du revenu du Québec (the “Agency”) concluded that Mr. Darveau, their main director and officer, did not have the status of a self-employed person but rather that of an employee. Accordingly, the Agency was of the view that the management fees paid to Mr. Darveau had to be considered employment income and therefore, had to be included in the companies’ payroll.The four companies targeted challenged the Agency’s assessments before the Court of Québec but to no avail.THE DECISION OF THE COURT OF APPEALJust like the trial judge , the Court of Appeal concluded that the intent of the parties to enter into a service contract was not clear from the evidence in the case.The fact that Mr. Darveau was a shareholder of the appellant corporations allowed him some freedom of action, giving the impression that he acted as a self-employed person. It is not surprising that as an officer, Mr. Darveau managed his own schedule, work and compensation nor is it surprising that he was not under the direct supervision of another authority. This freedom resulted from his status as an officer and not from the contract for services upon which he was relying.The Court of Appeal placed a particular emphasis on the fact that it was the appellant companies who assumed all risk of loss and who profited from the activities: [translation] “Yet, a company does not assume the errors of an external consultant”.3 Mr. Darveau did not bring any [translation] “expertise requiring the intervention of an external person in an area that he knows better than anyone, he simply deals with the day-to-day problems of his companies, as he so acknowledges.”4CONCLUSIONAccording to the line of case law followed by the Court of Appeal in the Bermex case, one shall take criteria such as control, ownership of tools, expectation of profits and risks of loss, as well as integration into the company into consideration for the purpose of determining a person’s status as a self-employed individual or an employee.An erroneous categorization of the nature of the contract may have significant financial impacts on the company and the individual in question, both from a tax and labour law perspective. It is therefore essential to undertake a careful analysis of the true status of the person involved before the beginning of the contractual relationship._________________________________________1 2013 QCCA 1379.2 Article 2085 of the Civil Code of Québec.3 Para 59 of the Court of Appeal’s judgment.4 Para 60 of the Court of Appeal’s judgment.APPLICATION OF GAAR TO A CROSS-BORDER DEBT “CLEAN-UP” TRANSACTION: THE PIÈCES AUTOMOBILES LECAVALIER INC. CASE LAVERY, AN OVERVIEWÉric GélinasThe Tax Court of Canada recently rendered a decision dealing with the general antiavoidance rule (“GAAR”) in the context of the elimination of a cross-border debt between Greenleaf Canada Acquisitions Inc. (“Greenleaf”) and Ford US, its American parent company, prior to the sale of Greenleaf’s shares, who owed the debt, to a third party. In the case under review, Ford US subscribed for additional Greenleaf shares and Greenleaf used the proceeds from the subscription to repay its debt to Ford US.The purpose of the transactions in question was to avoid the application of section 80 of the Income Tax Act (“ITA”) upon the forgiveness of a portion of the debt. Without the debt repayment, the rules pertaining to debt parking contained in paragraphs 80.01(6) to (8) ITA would have resulted in the application of section 80 ITA in such a way as to reduce Greenleaf’s tax attributes and even add to its income the portion of the “forgiven amount” not being sheltered.The Minister of National Revenue (“Minister”) was of the view that GAAR applied to the “clean-up” transaction in such a way that Greenleaf had to realize a capital gain of $15 million on the forgiveness of the debt. Greenleaf’s tax attributes were accordingly reduced and certain adjustments to its taxable income were made pursuant to section 80 ITA.ANALYSIS OF THE COURTFrom the outset, the taxpayer acknowledged that the transactions provided it with a tax benefit, namely, the preservation of Greenleaf’s tax attributes through the avoidance of the provisions of section 80 ITA.As to whether these transactions constituted “avoidance transactions”, the taxpayer attempted, particularly through the testimony of the accounting expert, to prove that they had been carried out only for US tax and accounting purposes, and that they therefore had bona fide non-tax purposes and did not constitute avoidance transactions. The Court did not rely on this testimony because it constituted hearsay. Furthermore, the Court applied the negative inference doctrine since no representative of Ford US had testified and that the testimonies provided were deemed not to be credible.With respect to the issue of abuse, the Court agreed with the Minister’s argument to the effect that the “clean-up” transactions were abusive since they circumvented the purpose and spirit of section 80 ITA: if the debt had not been repaid using the proceeds from the subscription, the rules governing debt parking would have applied and Greenleaf’s tax attributes would have been reduced pursuant to section 80 ITA.CONCLUSIONThis decision is particularly important in a context of debt reorganization within a corporate group. The type of transactions discussed in the decision under review is frequently used. Practitioners will have to pay particular attention to the tax impact of such a transaction. When it is possible to do so, it will obviously be preferable to simply convert a debt into shares of the debtor corporation to the extent that paragraph 80(2)(g) ITA is applicable so that no forgiven amount will result from the conversion.

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  • Norwich orders recognized by the Court of Appeal of Québec - Financial institutions subject to duty to lend assistance in potential fraud files

    On June 12, 2013, the Quebec Court of Appeal rendered a decision in the case of Fers et Métaux Américains S.E.C. et als v. Picard et als1 (“Fers et Métaux Américains S.E.C.”) confirming that the courts can issue Norwich-type orders in Quebec. This decision is consistent with the judgment rendered by the Quebec Court of Appeal, in 2002, in Raymond Chabot SST inc. v. Groupe AST (1993) inc.,2 which recognized that Anton Piller-type orders could be validly issued in Quebec.In the Fers et Métaux Américains S.E.C. decision, the Court of Appeal issued Norwich orders authorizing several financial institutions to disclose confidential banking information, without the knowledge of the clients concerned, to enable the applicant to find and trace funds alleged to have been fraudulently misappropriated. Both the order and the entire court file remain sealed until December 6, 2013 to ensure the confidentiality of the enforcement of the order.In this decision, the Court of Appeal of Québec adopted the criteria for the issuance of such orders developed in 2000 by the Court of Queen’s Bench of Alberta,3 which were confirmed by the Court of Appeal of Alberta,4 and cited with approval by the Court of Appeal for Ontario.5THERE ARE THREE KEY POINTS TO REMEMBER:  The criteria developed in the common law jurisdictions to justify the issuance of a Norwich order are applicable in Quebec; The conclusions sought in an application for a Norwich order must be carefully drafted and not go beyond what is necessary to achieve the legitimate objective sought by the application; Where the goal of the application for a Norwich order is to obtain information and documents from a third party, the conclusions sought should request the appointment of a firm of outside experts to receive and assess the information and documents obtained as a result of the execution of the order, and require the outside firm to prepare and submit a report to the court within a specified time.OVERVIEW OF THE ORIGIN OF NORWICH ORDERSThe Norwich order is an order issued by a court authorizing a person who is not a party to an existing or potential litigation to disclose the identity of an unknown party, or to communicate information or documents, in order to enable the applicant to verify the existence of a cause of action or to trace and secure evidence or assets.Similarly to the Anton Piller order (requiring the defendant to permit the plaintiff to conduct a search of its premises and secure evidence in a private dispute) and the Mareva injunction (prohibiting the disposition of assets during a legal proceeding), the Norwich order was originally developed in English law for the purpose of promoting the effective conduct of a proceeding that was already instituted or envisaged.The name comes from a decision rendered by the House of Lords in 1974 in the case of Norwich Pharmacal Co. v. Commissioners of Customs and Excise.6 In that case, the House of Lords recognized Norwich’s right to obtain the disclosure of the identity of a person - who had imported a chemical compound that was patented by Norwich, without its knowledge - from a third party, i.e. the Commissioners of Customs and Excise. The purpose of the disclosure of the importer’s identity by the Customs and Excise Commissioners was to allow Norwich to institute legal proceedings against the offending importer.A Norwich order was first issued in Canada, in 1998, by the Federal Court of Appeal in the case of Glaxo Wellcome PLC v. M.N.R.7 The facts in that case were similar to those in the Norwich case. The Federal Court of Appeal ordered the Minister of National Revenue to disclose the identity of importers who had allegedly infringed Glaxo’s patents.In 2000, in the case of Alberta (Treasury Branches) v. Leahy,8 after conducting an extensive review of the English and Canadian decisions dealing with Norwich orders, the Court of Queen’s Bench of Alberta summarized the situations which can justify the issuance of such an order, and the five criteria which the court must consider (hereinafter the “Norwich Test”), as follows:«[106] The foregoing review demonstrates that:a. Norwich-type relief has been granted in varied situations:(i) Where the information sought is necessary to identify wrongdoers;(ii) To find and preserve evidence that may substantiate or support an action against either known or unknown wrongdoers, or even determine whether an action exists; and(iii) To trace and preserve assets.b. The court will consider the following factors on an application for Norwich relief:(i) Whether the applicant has provided evidence sufficient to raise a valid, bona fide or reasonable claim;(ii) Whether the applicant has established a relationship with the third party from whom the information is sought such that it establishes that the third party is somehow involved in the acts complained of;(iii) Whether the third party is the only practicable source of the information available;(iv) Whether the third party can be indemnified for costs to which the third party may be exposed because of the disclosure, some refer to associated expenses of complying with the orders, while others speak of damages; and(v) Whether the interests of justice favour the obtaining of the disclosure. »These were the same criteria considered by the Court of Appeal for Ontario in 2009 in the case of GEA Group AG. v. Flex-N-Gate Corporation,9 and which have now also been adopted by the Court of Appeal of Québec.10NORWICH ORDERS IN QUEBECThe Civil Code of Québec contains no provisions dealing either with applications for Norwich-type orders, Anton Piller orders or Mareva injunctions. Instead, one must turn to the provisions of the Code of Civil Procedure (particularly articles 20 and 46), which grant general powers to the court, as the basis for incorporating these recourses into our substantive law.11 The Norwich order is an extraordinary recourse that is heard ex parte (without notice), and the conditions for the issuance of such an order are therefore strict.12 It must not be used to circumvent the rules of procedure already provided for in the Code of Civil Procedure.13Norwich orders usually contain conclusions requiring the court file to be sealed and providing for the confidentiality of the order itself for a specified time period. Because of the confidentiality surrounding this type of recourse, it is difficult to give an exhaustive review of the orders issued by the Superior Court of Québec in such matters over the past few years.14Since the criteria for the issuance of a Norwich order adopted by the Court of Appeal of Québec in Fers et Métaux Américains S.E.C15 are the same as those accepted by the common law provinces, the decisions rendered in those jurisdictions are relevant and useful to us in providing a framework for and defining the scope of the orders which can be issued in Quebec.For example, the Court of Appeal for Ontario recently heard a case involving an application for a Norwich order which sought to obtain the disclosure of the identity of the sources of a journalist for the Globe and Mail.16 In that case, the Court of Appeal for Ontario had to assess the criteria for the issuance of a Norwich order in the context of a journalist’s privilege with respect to the confidentiality of his sources, as pleaded by the respondent journalist.17Firstly, the Court decided, under the first criterion of the Norwich Test, i.e. the existence of a reasonable claim, that it was not necessary to require that there be a “ prima facie case” in situations in which the journalist-source privilege is invoked.18Secondly, the Court held that the actual assessment of the journalist-source privilege must take place under the fifth criterion of the Norwich Test, i.e. whether the interests of justice favour the disclosure of the information. At this stage, this privilege must be analyzed according to the criteria under the Wigmore test, which therefore intersects with the Norwich Test. The Court stated that the respondent journalist had the burden of proving that the Wigmore test had been met, while the appellant had to show that the interests of justice favour the disclosure of the information under the fifth criterion of the Norwich Test. The Court noted that where it is shown that the Wigmore test is satisfied, the disclosure of the journalist’s sources will probably not be in the interests of justice, on the other hand, if the Wigmore test is not satisfied, it probably will be in the interests of justice to order disclosure.19In the event a Quebec court is seized of an application for a Norwich order seeking the disclosure of journalistic sources, it will be relevant to consider the decision of the Court of Appeal for Ontario in 1654776 Ontario Limited in deciding whether a Norwich-type order can be issued in Quebec in a similar context.In addition, since Norwich orders are similar in nature to Anton Piller orders, one would be well advised to apply the guidelines issued by the Supreme Court of Canada in Celanese Canada v. Murray Demolition20 (“Celanese”) concerning Anton Piller orders, with the necessary adjustments, particularly where the Norwich order is required to obtain the disclosure of information or documents to enable the applicant to verify the existence of a cause of action, or to trace and secure evidence or assets.In fact, in the Fers et Métaux Américains S.E.C. case,21 the Court of Appeal of Québec based itself on the guidelines laid down by the Supreme Court of Canada in Celanese22 to order the appellants to file either a personal report, or a report prepared by a firm of forensic accountants, in the Superior Court record, within a specified time period, concerning the information obtained from the financial institutions.Finally, with respect to Anton Piller orders, the Court of Appeal of Québec23 recently noted once again that, at the stage of issuing the order, the judge can only base himself on the allegations and exhibits filed in support of the application. Therefore, the motions judge must necessarily rely on accurate and full disclosure by the deponents as well as the professionalism of the lawyers involved in the order.24 One would likewise be well advised to follow the same approach in proceedings for a Norwich order.CONCLUSIONThe Norwich order is a recourse that can be highly effective, particularly in files involving fraud and misappropriation of funds, or when it is necessary to identify an unknown wrongdoer.In 2002, the Court of Appeal of Québec recognized the application of the principles relating to Anton Piller orders under Quebec law.25 Over the past ten years, there have been significant developments in the case law on these types of orders, which have been subject to strict guidelines since the decision by the Supreme Court of Canada in Celanese.26 Those guidelines served as the basis for the criteria applicable to Norwich orders.Since this is an extraordinary recourse which is brought ex parte, and which, furthermore, seeks the issuance of an order against parties who are not involved in the dispute, the applicant must draft the allegations in support of its application with candor. The order sought should:  Be carefully drafted and specifically identify the information and documents to be disclosed as well as the time period covered and, where necessary, provide the applicable guarantees, particularly with respect to the treatment of privileged or confidential documents or information; Be clearly defined in duration and, where relevant, order the court record to be sealed as well as the necessary measures to provide for the confidentiality thereof for a defined and sufficient period of time to ensure the effective execution of the order being issued; Provide, where relevant, for the appointment of a firm of outside experts to collect the documents and information received and prepare a report for the court; Specify that the use of the information and documents disclosed is limited to the legitimate objective of the application (for example, locating and tracking the movement of funds) and that they can only be used in legal proceedings instituted to achieve this objective; Provide for adequate compensation to the third parties for the costs incurred by them in gathering and disclosing the information and documents in fulfillment of the order._________________________________________ 1 Fers et Métaux Américains S.E.C. et al c. Picard et al, C.A.Q. 200-09-007991-133, June 12, 2013.2 Raymond Chabot SST inc. v. Groupe AST (1993) inc., [2002] R.J.Q. 2715 (C.A.).3 Alberta (Treasury Branches) v. Leahy, 2000 ABQB 575 (CanLII).4 Alberta (Treasury Branches) v. Leahy, 2002 ABCA 101 (CanLII), leave to appeal to the Supreme Court of Canada denied.5 GEA Group AG. v. Flex-N-Gate Corporation, 2009 ONCA 619 (CanLII).6 Norwich Pharmacal Co. v. Commissioners of Customs and Excise [1974] A.C. 133.7 Glaxo Wellcome PLC v. M.N.R. [1998] 4 C.F. 439, leave to appeal to the Supreme Court of Canada denied.8 Alberta (Treasury Branches) v. Leahy, supra, note 3, para. [106].9 GEA Group AG. v. Flex-N-Gate Corporation, supra, note 5.10 Fers et Métaux Américains S.E.C. et al c. Picard et al, supra, note 1.11 Daniel Jutras, “ Culture et droit processuel : le cas du Québec “, in the McGill Law Journal/Revue de droit de McGill, 2009, Vol. 54, 2009, page 273, at pages 288 to 292; see also Lac d’amiante du Québec ltée v. 2858-0702 Québec inc. [2001] 2 S.C.R. 743, paras. 35, 37 and 39; Raymond Chabot SST inc. c. Groupe AST (1993) inc., supra, note 2; articles 20 and 46 of the Code of Civil Procedure.12 Alberta (Treasury Branches) v. Leahy, supra, note 3, para. [106].13 Lac d’amiante du Québec ltée c. 2858-0702 Québec inc., supra, note 11.14 See, in particular, Gestion d’hôtel Sherbrooke Ltée (Proposition de) 2011 QCCS 7232 (CanLII), Corbeil c. Caisse Desjardins De Lorimier, 2011 QCCS 6867 (CanLII), GE Canada Equipment Financing G.P. c. T.D. Canada Trust, 2010 QCCS 7128 (CanLII), PricewaterhouseCoopers Inc. v. Bank of Montreal, S.C. Montreal, no. 500-17-063626-116, Empire, compagnie d’assurance-vie v. Thibault, S.C. Montreal, 500-17-029064-063, 500-17-030305-067 and 500-17-029680-066.15 Fers et Métaux Américains S.E.C. et al c. Picard et al, supra, note 1.16 1654776 Ontario Limited v. Stewart, 2013 ONCA 184 (CanLII), leave to appeal to the Supreme Court of Canada denied on September 19, 2013.17 On the journalistic sources privilege and the Wigmore test, see R. v. National Post, [2010] 1 S.C.R. 477 and Globe and Mail v. Canada (A.G.), [2010] 2 S.C.R. 593.18 1654776 Ontario Limited v. Stewart, supra, note 16, see, in particular, paras. [49] and [75].19 1654776 Ontario Limited v. Stewart, supra, note 16, para. [78].20 Celanese Canada v. Murray Demolition, [2006] 2 S.C.R. 189.21 Fers et Métaux Américains S.E.C. et al c. Picard et al, supra, note 1.22 Celanese Canada c. Murray Demolition, supra, note 20.23 IMS Health Canada Inc. c. Th!nk Business Insights Ltd., 2013 QCCA 1303 (CanLII), application for leave to appeal to the Supreme Court of Canada pending.24 Celanese Canada c. Murray Demolition, supra, note 20, para. [36].25 Raymond Chabot SST inc. c. Groupe AST (1993) inc., supra, note 2.26 Celanese Canada c. Murray Demolition, supra, note 20.

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  • Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 21

    CONTENTS The Pros and Cons of Arbitration Clauses in Commercial Contracts Pirating and Using Software Without a Licence: The BSA | The Software Alliance Case Interprovincial Taxation: The Importance of Severing Residential Ties on Departure Security Under Section 427 of the Bank Act: Do the Rights of a Bank Rank Ahead of Those of the Holder of a Retention Right? THE PROS AND CONS OF ARBITRATION CLAUSES IN COMMERCIAL CONTRACTSCatherine Méthot and André PaquetteArbitration clauses are increasingly finding their way into commercial contracts. However, the fact that arbitration is a frequently chosen path nowadays does not necessarily mean that it is always the best solution. One must know its advantages and disadvantages and be wary of standard clauses which may be ill-adapted to one’s situation.Generally, the main advantages and disadvantages of arbitration clauses which are most often mentioned are the following:Advantages: (i) simplified procedure; (ii) less documentation to file; (iii) obtaining a decision is quicker than in the context of the judicial process; (iv) generally reduced costs compared to the judicial process; (v) absence of a right to appeal; and (vi) the confidentiality of the process and the decision, subject to an application for homologation of the arbitral award or a recourse to cancel the decision.Disadvantages : (i) the absence of a right to appeal, with some exceptions; (ii) the risk of the arbitration clause being ill-adapted to your particular situation; (iii) costs beyond the expectations of the parties, particularly when three arbitrators are appointed, some authors even maintaining that in such a case, arbitrators’ fees are sometimes almost multiplied by four because of the delays caused by time management and communications between three arbitrators;(iv) the impossibility to access items of evidence in the hands of opposing party outside of the judicial process; and (v) the exclusion of this decision from case law while the issue in dispute may constitute an important law issue.Before inserting an arbitration clause in a contract, one must assess these advantages and disadvantages and, if arbitration is chosen, the terms of the clause must be adapted, particularly with respect to following items : (i) things and situations covered under the clause; (ii) applicable law, making sure to verify whether such law limits or prohibits arbitration (for example, section 11.1 of the Consumer Protection Act,1 which prohibits stipulations whereby the consumer is obliged to refer a dispute to arbitration or restrict his right to go before a court, particularly by prohibiting him from bringing a class action or being a member of a group exercising such a remedy); (iii) the opportunity to provide for a right to appeal; (iv) the confidentiality of the arbitration process (subject to an application for homologation or a recourse for cancelling the decision); (v) the arbitration process (number of arbitrators, rules for submitting evidence, etc.); and (vi) the opportunity to provide for mediation meetings prior to arbitration.In all cases, the objective sought should be to ensure that in the event a dispute occurs, your interest will be better served by arbitration rather than the judicial process. If such is not the case, avoid inserting an arbitration clause in your contract._________________________________________1 C. P-40.1.PIRATING AND USING SOFTWARE WITHOUT A LICENCE: THE BSA | THE SOFTWARE ALLIANCE CASEBruno VerdonThe claims of the BSA | the Software Alliance (the “BSA”) against Quebec and Canadian businesses seem to be increasingly frequent.The BSA is a U.S.-based non-profit organization operating in more than 80 countries. Its members include companies such as Adobe, Apple, IBM and Microsoft.According to the information it publishes on its website, the BSA particularly fights copyright infringement when software has been installed by users without acquiring the necessary licence. It would appear that most investigations of the BSA target businesses and are conducted further to calls on its anti-piracy line or anonymous reporting via its website. Most reports come from current or former employees. In principle, after receiving information alleging software infringement, the BSA contacts the business to investigate the matter further and invites it to negotiate a settlement where it concludes that there is actual infringement. If a settlement cannot be reached, the BSA assigns the file to its attorneys and ultimately, if they cannot negotiate a settlement, the case goes to court.In Quebec and elsewhere in Canada, the BSA bases its claims for use of software without a licence on the provisions of the Copyright Act.1 this Act particularly provides that “When a person infringes copyright, the person is liable to pay such damages to the owner of the copyright as the owner has suffered due to the infringement and, in addition to those damages, such part of the profits that the infringer has made from the infringement and that were not taken into account in calculating the damages as the court considers just.”2In addition, since the Act to amend the Copyright Act,3 assented to on June 29, 2012, came into force, the holder of the infringed copyright may elect to claim, instead of damages and profits made by the person who infringed the copyright in question, an award of statutory damages which are not less than $500 and not more than $20,000 per violation if the infringements are for commercial purposes and not less than $100 and not more than $5,000 in the case of violations for non-commercial purposes.4Therefore, since 2012, a business which uses software without having acquired the required licences is liable to a claim of not less than $500 and not more than $20,000 per licence which it failed to acquire.In the case of Adobe Systems Incorporated et al. c. Thompson (Appletree Solutions),5 the Federal Court was called upon to apply this new provision of the Copyright Act. the Court noted that in awarding statutory damages, the following must be taken into account: (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question.Having concluded that proof had been made of the intention of the defendant to infringe and that severe deterrent measures were warranted, the Federal Court issued an injunctive order to prevent defendant from continuing to violate copyrights. On the issue of damages, the Court declared:“ I find no reason not to award maximum statutory damages in the amount of $340,000, being $20,000 per work infringed for each of the three Plaintiffs.”Proof the (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question being easier to make than that of the damages, it is anticipated that the BSA and its members will not hesitate in invoking the statutory damages provided for in this new provision of the Act in support of their claims.As these statutory damages can be well beyond the value of each non-acquired licence, it goes without saying that a negotiated settlement of the claim will constitute a preferred approach.The BSA usually publishes on its website the settlement agreements entered into with businesses.However, nothing prevents the parties from agreeing that the settlement of the claim and the settlement terms will be kept confidential, which will avoid he business concerned having its name associated with the settlement of a BSA claim._________________________________________1 R.S.C. (1895) c. C-42.2 Ibid., sec. 35.3 S.C. 2012, ch. 20.4 Ibid., sec. 38.1.5 2012 CF 1219 (CanLII).INTERPROVINCIAL TAXATION: THE IMPORTANCE OF SEVERING RESIDENTIAL TIES ON DEPARTUREJean-Philippe LatreilleThe place of residence of an individual is a fundamental tax concept which determines, among other things, his liability for provincial income tax. under the Taxation Act,1 an individual is subject to tax for a given year if he resides in Quebec on December 31 of that year. the tax base then consists of the individual’s income from all sources, except for business income from a Canadian establishment situated outside Quebec.The fact that an individual moves from a province to another usually results in a change of his place of residence for provincial tax purposes. However, it may happen that some residential ties with the province of origin remain, with unanticipated and unwanted results, as shown by a recent decision of the Court of Quebec in the case of Perron c. L’Agence du revenu du Québec.2In that case, the taxpayer was challenging assessments made by revenu Québec for taxation years 2005 to 2007, arguing that he was a resident of Alberta during the relevant period. the taxpayer, an engineer, had held various positions in Quebec prior to moving in Alberta in May 2005 after finding permanent employment there. From that time on, the taxpayer had rented a dwelling unit in Alberta and had purchased furniture for it. He also had opened a bank account and became a member of the Association of Professional engineers and Geoscientists of Alberta.However, the taxpayer had retained several residential ties with Quebec during years 2005 to 2007, particularly the following:a) His spouse, to whom he was married since 1985, and his son had continued residing in Quebec despite the departure of the taxpayer for Alberta. the taxpayer was neither divorced or separated under a judgment or a written agreement. b) the taxpayer had remained co-owner with his spouse of the family residence located in Beauport. c) the taxpayer had continued to provide for the financial needs of his son and to assume certain maintenance expenses of the residence located in Quebec. d) the taxpayer had stayed in Quebec every three months for periods of four or five days. When doing so, he was staying at his residence in Beauport. e) the taxpayer had retained his Quebec driver’s licence and maintained is eligibility to the Quebec health insurance regime. f) the taxpayer had remained a member of the Ordre des ingénieurs du Québec. g) the taxpayer had continued to use the postal address of his Beauport residence, particularly with respect to his credit cards. h) the taxpayer was the owner of a vehicle registered in Quebec, which he had given to his son in 2009. The Court determined that the taxpayer had provided prima facie evidence that his tax residence was located in Alberta during years 2005 to 2007, particularly by establishing the permanent nature of his position in Alberta and the low frequency of his visits in Quebec. the tax authorities thus had the burden to prove that the residence of the taxpayer had remained in Quebec.After reviewing the case law, the Court concluded that revenu Québec had established, by preponderance of evidence, that the taxpayer had retained his tax residence in Quebec during the disputed period by reason of the absence of severance of residential ties with Quebec.The judge particularly noted the absence of evidence corroborating the separation between the taxpayer and his spouse. According to the Court, several factors rather indicated that the spousal link was maintained between them. In addition, the taxpayer failed to establish sufficient connection to Alberta, except for his employment.This decision of the Court of Quebec, which was not appealed, underlines the importance of severing all residential ties with Quebec when moving to another province, particularly if the tax regime of the other province is less onerous. the place of residence is a complex issue which has to be decided according to the legislation in force and applicable case law. Any individual who maintains a more or less important presence in more than one province would be well-advised to consult a professional in this respect._________________________________________1 RLRQ RSQ?, c. I-3.2 2013 QCCQ 3271.SECURITY UNDER SECTION 427 OF THE BANK ACT: DO THE RIGHTS OF A BANK RANK AHEAD OF THOSE OF THE HOLDER OF A RETENTION RIGHT?Mathieu Thibault, Étienne Guertin and Jean LegaultFor financing its activities, a Quebec-based business may grant to a Canadian chartered bank a security under 427 of the Bank Act. This security interest allows the bank to exercise its rights on the borrower’s inventories as well as on the debts resulting from their sale while avoiding the formalities and notices which would otherwise be required under the Civil Code of Québec upon the exercise of a hypothecary remedy.1For its part, article 2293 of the Civil Code of Québec allows the holder of a retention right to retain the stored property until the depositor has, among other things, paid him the agreed upon compensation.In the Levinoff-Colbex, s.e.c. (Séquestre de) et RSM Richter inc.,2 the Superior Court had to decide whether the rights of National Bank of Canada (“NBC”) resulting from a security granted to it under the Bank Act, a federal statute, ranked ahead of the retention right relied upon by another creditor under the Civil Code of Québec following the failure of the debtor to meet its contractual commitments respecting the payment of the storage and refrigeration costs of its inventories.According to the Superior Court, the rights of a creditor under section 427 of the Bank Act may be described as a sui generis ownership right, according to the wording used by the Court of Appeal in the case of Banque Canadienne Nationale v. Lefaivre.3However, this sui generis ownership right does not constitute a true ownership right within the meaning of the Quebec civil law on property covered by such security interest. Section 427 and following of the Bank Act rather establish a security interest regime focused on ownership and confer on the bank which holds such security interest rights as a secured creditor and not as an owner of the property covered by such security interest.In this context, NBC could not be bound by the retention right created in favour of another creditor. In fact, the determination of the priority of these rights did not derive from holding an ownership right within the meaning of civil law: the NBC was rather a secured creditor of the debtor.The priority of creditors’ rights must be determined by applying and interpreting the Bank Act in accordance with the doctrine of paramountcy and the judgment issued by the Supreme Court of Canada in the case of Bank of Montreal v. Innovation Credit Union.4Since section 428 of the Bank Act contains an express provision resolving this priority conflict, one has simply to apply the rule provided in this section whereby the rights of the BNC had “priority over all rights subsequently acquired in, on or in respect of that property” covered by the security interest._________________________________________1 Banque de Montréal v. Hall, [1990] 1 S.C.R.2 2013 QCCS 1489. It must be noted that an appeal of this judgment has been filed with the Court of Appeal under number 500-09-023539-133.3 [1951] B.R. 83, at page 88, referring to Landry Pulpwood Co. v. Banque Canadienne Nationale, [1937] S.C.R. 605, page 615.4 [2010] 3 S.C.R.3

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