Background

David and Elizabeth planned to go skiing at resorts north of Toronto. When they were purchasing their tickets, they signed the ski resorts’ respective waivers of liability for injuries they might suffer at the resorts. They went skiing but both had accidents. They sued the ski resorts for their damages.

The question became whether the waivers of liability that David and Elizabeth had signed were valid.

Two competing pieces of legislation applied to their circumstances. David and Elizabeth were consumers as defined under Ontario’s Consumer Protection Act (“CPA”). They were also persons entering the resort premises for which the ski resorts were responsible. Therefore, Ontario’s Occupiers’ Liability Act (“OLA”) also applied.

The Court of Appeal’s Decision

The two statutes could not be reconciled: the CPA states generally that waivers of liability or warranty are void with respect to consumers. The OLA permits waivers of liability with respect to certain premises onto which other persons enter.

The Court of Appeal decided that because the language used in the OLA was more specific than the CPA, the OLA should govern. Therefore, the waivers of liability were valid under the OLA and not void under the CPA.

In making its decision, the Court of Appeal considered the original legislative intent underlying the waivers provision in the OLA. The goal was to encourage private landowners to make their properties available to others for recreational use without allowing the fear of liability to get in the way. On the other hand, the Court found no intent in the history of the CPA to show that the legislature intended to ban a waiver of the duty of care towards visitors of premises that are captured by the OLA.

Significance of the Decision

The Court’s decision will have significance for many businesses especially those offering play, sports, and recreational services. If properly drafted and presented, waivers that are given by the consumers of such activities will provide a defence to owners or operators of such businesses. Lawyers at Sotos LLP regularly advise business operators in the restaurant and hospitality industry as well as sports and recreational enterprises on all aspects of their liability towards their customers and staff.

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A. A Case Study[*]

The Facts

Two parties intended to start a franchised restaurant business together. We’ll call them Joe and Hank. Each owned 50% of the shares of the company that was to operate the restaurant. They signed a unanimous shareholders’ agreement regarding the operating company. In negotiating this agreement, they turned their minds to whether a ROFR would be a good option for the disposal of shares.

Initially, their lawyer drafted a ROFR that made no provision for a partial take-up of shares by the non-selling shareholder. In other words, under that proposed clause, when and if either of Joe or Hank decided to sell his interest and leave the business, the other one would have the option of buying all or none of the offered shares.

The parties ultimately decided to have a ROFO instead. The ROFO provided that the selling shareholder must offer to the non-selling shareholder all of its shares. However, it also provided that the non-selling shareholder “may accept the Offer for its Proportionate Percentage of the Sale Shares or any other number of Sale Shares”. In other words, the ROFO, as drafted, gave the non-selling shareholder the discretion to purchase none of the offered shares, only a portion of them, or all of them.

Not long after commencement of business operations, tensions arose and Joe decided to sell his share and leave the business. He found a third-party purchaser to buy his entire interest in the business. Joe gave notice to Hank of his intention to sell. Under the ROFO in their agreement, Hank had the option of buying some or all of Joe’s shares before Joe could sell to a third party. Hank decided to purchase only 10% of the offered shares. This situation placed Joe at a very disadvantaged position. First, he would lose the third party offer, which would have given him a clean break. Second, it converted Joe’s remaining share of the business into a less appealing minority position. As for Hank, the partial pick-up eliminated the prospect of deadlocking in the future with a business partner that he did not know.

Litigation ensued.

The Arbitration & Appeal

Under the shareholder agreement in the case under consideration, the parties had agreed to arbitrate any disputes. The party that we called Joe commenced the arbitration process arguing that the ROFO led to a commercially absurd or unreasonable result in providing for a right of partial pick-up. The arbitrator disagreed and dismissed the claim.

Joe then appealed to the Ontario Superior Court of Justice, which also dismissed the appeal. The right of partial pick-up was not a commercially unreasonable term. One of the biggest disincentives of a ROFO for a non-selling shareholder is the loss of control over the identity of the purchaser. In fact, under the appropriate circumstances, a ROFO that permits a non-selling shareholder to purchase the offered shares partially can promote a sensible commercial result. Nor did the fact that this ROFO led to unequal partnership interests render the ROFO unreasonable or commercially absurd.

B. How Joe Lost the Case: ROFO vs. ROFR

Both the ROFO and the ROFR relate to exit plans in various commercial contexts such as shareholder agreements, leases and joint land ownership. The goal in drafting such exit plans is often not so much to protect the selling party, such as Joe, but to give the remaining parties some assurance that the sale of that party’s interest will not impose on them inappropriate business partners in the future. However, as was seen in this case study, the rights of the leaving party can also be impacted in unexpected ways by the choice of clause.

In shareholder agreements, a ROFR requires a shareholder who has already received an acceptable purchase offer from a third party to give the other signatories the chance to match that offer before concluding any sale with the third party. The third-party offer has to be in good faith and non-collusive. On the other hand, a ROFO typically requires a party who wishes to sell his or her shares to offer to sell the shares to the other party or parties to the agreement before looking for potential buyers beyond the existing parties. Therefore, a ROFO enables the exit provision to be triggered without the selling party first having to secure a third party buyer.

Nonetheless, as the saying goes and the above case shows, the devil is in the details.

C. Conclusion

The selection of a ROFR or ROFO provision in an agreement should be driven by the business objectives of the parties. The parties need to understand the implications of their choice because when applied to future events and considerations the outcomes can be quite different from those expected.

Counsel can play a critical role in assisting a party to an agreement in understanding these choices and in ensuring that relevant clauses are drafted properly to protect the party’s interests. At Sotos LLP, we represent parties getting into franchised and other businesses and apply our leading experience to this exercise.

[*] This case study is taken with some modification from recent litigation reported as 2293611 Ontario Inc v JSegal Holdings Ltd, 2016 ONSC 7577.

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CASL protects Canadians from spam and electronic messaging that lead to problems such as identity theft, harassment, and fraud. CASL requires that persons who are sending a commercial electronic message to an electronic address must obtain the recipient’s consent, identify themselves, and offer an unsubscribe option. It also requires that advertising messages not be false or misleading.

The suspended provisions would have allowed private lawsuits against individuals and organizations for violations of the legislation. The provisions were originally scheduled to come into force on July 1, 2017.

The question that arises is: what does this suspension mean for businesses in Canada?

Importantly, this suspension does not mean that you no longer need to comply with CASL. All businesses must have a CASL compliance policy in place and take positive action to be ready for July 1, 2017. Apart from the private right of action, the balance of CASL and the obligations that apply under the legislation remain in place. As of July 1, 2017, the legislation will no longer presume the implied consent of the recipients of commercial electronic messages in business relationships that already existed as of July 1, 2014. For that reason, organizations that do not comply with CASL requirements face risks of significant regulatory enforcement and high penalties. For example, the Canadian Radio-television and Telecommunications Commission can investigate violations of CASL and impose various penalties. Therefore, the suspension does not affect such risks, and all businesses that are governed by CASL must take immediate steps to ensure compliance by Canada Day 2017.

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