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Future Electronics v. Chubb Insurance: The Insurer Prevails in Canada’s First Ruling on the Social Engineering Fraud Endorsement

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By Nick Krnjevic and Maro Coric, from our Insurance Law Practice Group

October 15, 2020 — The Quebec Superior Court ruling rendered on September 29 in Future Electronics Inc. (Distribution) Pte Ltd. v. Chubb Insurance Company of Canada, 2020 QCCS 3042 is the first Canadian decision, and only the second North American ruling, that has analyzed the interplay between the Social Engineering Fraud, Computer Fraud and Funds Transfer Fraud insuring agreements of a Commercial Crime Policy.[1]

The multi-million-dollar loss arose out of a vendor impersonation e-mail scam, which is a typical example of “social engineering” fraud. There is currently a lack of coherency among certain US appellate courts as to whether “social engineering” losses are covered under a Crime Policy’s Computer Fraud and Funds Transfer Fraud coverages. No US appellate court, and only one US trial court, has interpreted a policy which contained a Social Engineering Fraud insuring agreement.

The Quebec Superior Court [Court] agreed with Chubb Insurance Company of Canada [Chubb] that the loss clearly fell within the ambit of the Crime Policy’s Social Engineering Fraud Endorsement, which was subject to $50K limits. The Court rejected Future Electronics Inc.’s [FEI] attempt to secure coverage under the Crime Policy’s Computer Fraud and Funds Transfer Fraud insuring agreements, which had $25M limits.

Per the Court, when considered in the context of the Crime Policy read as a whole, including, in particular, the Social Engineering Fraud insuring agreement, neither the Computer Fraud nor the Funds Transfer Insuring Agreements afforded coverage for loss that was directly caused by the deceitful representations contained in emails the impersonator sent to the insured’s accounts payable employees.

The Court further held that the Voluntary Parting exclusion would have applied had either the Computer Fraud or the Funds Transfer Insuring Agreements been triggered.

This is an important case for Crime insurers. Unlike hacking attacks, which can be managed by robust technical defences, “social engineering” fraud is a risk that is particularly difficult to effectively control given the natural human tendency to trust other people, and take their representations at face value. Future Electronics Inc. v. Chubb confirms that coverage for this risk is limited to that afforded under Social Engineering Fraud endorsements, which contain, inter alia, fraud scenario restrictions, and which typically provide substantially lower limits than are available for the far more manageable risks covered under Computer Fraud and Funds Transfer Fraud Insuring Agreements.

The Fraud

A Singapore subsidiary [FESG] of Future Electronics Inc. [FEI] was the victim of a multi-million dollar vendor impersonation scam: an impostor [Impostor] masquerading as the CFO of a California-based supplier, Exar, persuaded FESG’s accounts-payable employees to change the banking instructions for the wire-payment of Exar’s invoices. FESG instructed its bank accordingly, and the payments ended up in bank accounts controlled by the Impostor. The Impostor, who communicated with FESG’s employees via email, and, on a few occasions, via telephone, never contacted the bank.

The Problematic Nature of Social Engineering Fraud Risks

Vendor impersonation scams are a typical example of “social engineering fraud”. Cyber-criminals increasingly engage in “social engineering” — which is a 21st century version of the classic “con game” — in order to avoid having to directly attack the robust technological cyber defenses adopted by many corporations. Law enforcement agencies have described this subset of cyber-criminals as “social or human hackers who specialize in exploiting personal connections through social networks. Social hackers, sometimes referred to as ‘social engineers,’ manipulate people through social interactions (in person, over the phone, or in writing)”.[2]

Because trusting humans are vulnerable to being duped by a sophisticated fraudster, the latter can infiltrate even the best-managed and most secure businesses by deceptively posing as a trusted vendor, client or employee and induce an insured or an insured’s employee to divert assets.

Unlike such cyber-risks as a direct computer attack on an insured’s technological systems, “social engineering” fraud is a risk that is particularly difficult to effectively control because its victims innately want to trust other people, and take their representations at face value. Consequently, the coverage insurance companies are willing to offer for “social engineering” fraud is typically subject to, inter alia, fraud scenario constraints and restricted limits.

The Claim for Coverage

FEI benefited from an Executive Protection Insurance Policy [Policy] issued by Chubb. The Policy included a Social Engineering Fraud Endorsement, which had limits of $50K. It also afforded $25M of coverage under the Computer Fraud and Funds Transfer Fraud insuring agreements.

Chubb agreed that coverage existed under the Social Engineering Fraud Endorsement, but concluded that the loss did not trigger either the Computer Fraud or the Funds Transfer Fraud coverages.

FEI disagreed. It declined to accept the $50K check issued by Chubb, and filed suit in Quebec Superior Court.

The Ruling

The Social Engineering Fraud Insuring Agreement covered loss that directly resulted from “Social Engineering Fraud committed by a person purporting to be a Vendor, Client, or an Employee who was authorized by the Insured to instruct other Employees to transfer Money or Securities” [par 102]. “Social Engineering Fraud” was defined as “the intentional misleading of an Employee, through misrepresentation of a material fact which is relied upon by an Employee, believing it to be genuine”. [par 100]

The Social Engineering Fraud Endorsement did not apply to loss covered under, inter alia, the Policy’s Computer Fraud and Funds Transfer Fraud Insuring Agreements.

The Court agreed with Chubb that the loss, which stemmed from a classic social engineering fraud scenario, clearly, and exclusively, fell within the ambit of the Policy’s Social Engineering Fraud Endorsement.

The Court rejected FEI’s attempt to secure coverage under the Policy’s Computer Fraud and Funds Transfer Fraud Insuring Agreements. The Court held that these insuring agreements had to be interpreted in the context of the Policy as a whole, including, in particular, the Social Engineering Fraud Endorsement.

The Court concluded that the Computer Fraud insuring agreement, which afforded coverage for “direct loss” resulting from “unlawful taking […] through the use of a computer”, protected the insured from losses it suffered when a third-party used a computer to directly and illegally seize the insured’s assets.

The Court held that the Computer Fraud Insuring Agreement was not triggered if the computer was simply a passive conduit for sending “social engineering” email communications in order to manipulate employees into voluntarily transferring assets of the insured to the fraudster. Per the Court, FEI’s loss was directly caused by the deceitful representations made by the Impostor, and did not constitute “direct loss” resulting from “unlawful taking […] through the use of a computer.”

The Court distinguished recent US appellate case-law — including Medidata Sols. Inc. v. Fed. Ins. Co., 729 Fed. Appx. 117, 2nd Cir. 2018) [Medidata] and Am. Tooling Ctr., Inc. v. Travelers Cas. & Sur. Co. of Am., 895F.3d 455; 6th Cir. 2018, rehearing en banc denied) [ATC] — on the ground that the policies in issue in those cases did not limit coverage to “direct loss” resulting from “unlawful taking […] through the use of a computer”.

For example, Medidata covered “the unlawful taking or the fraudulently induced transfer of Money, Securities or Property resulting from a Computer Violation”, while ATC defined “Computer Fraud” as “the use of any computer to fraudulently cause a transfer of Money, Securities or Other Property from inside the Premises or Financial Institution Premises”.

Since email is the 21st century’s default mode of business communication, the Court, citing US appellate case-law,[3] further held that the Computer Fraud coverage would be transformed into General Fraud coverage if, as FEI argued, it encompassed any and all fraudulent schemes involving email communications.

The Court therefore concluded that the loss FEI sustained when its employees were duped by the Impostor was clearly and exclusively covered under the Social Engineering Fraud Endorsement, and did not trigger the Computer Fraud coverage. The Court further held that FEI’s contention that the claim could be covered under both the Social Engineering Fraud and the Computer Fraud coverages was contrary to the clear wording of Policy. Per the Court, the coverages were mutually exclusive.

The Funds Transfer Fraud Insuring Agreement afforded coverage for “direct loss” resulting from “the fraudulent written, electronic, telegraphic, cable, teletype or telephone instructions issued to a financial institution directing such institution to transfer, pay or deliver Money or Securities from any account maintained by an Insured at such institution, without an Insured’s knowledge or consent.” [par 88]

FEI’s bank had issued payments on the basis of instructions it had received directly from FEI’s duped employees. The Court rejected FEI’s assertion that the coverage was triggered because the deceived employees had not knowingly issued fraudulent instructions to the insured’s bank. Citing the majority line of US case-law, which was followed in the only relevant Canadian common-law decision,[4] the Court held that the loss did not trigger the clear wording of the Funds Transfer Fraud coverage since the only payment instructions received by the bank had been approved and sent by the insured, which necessarily had knowledge of same.

The Court reiterated that such claims were exclusively covered under the Social Engineering Fraud Endorsement.

Both the Computer Fraud and Funds Transfer Fraud Insuring Agreements were also subject to a Voluntary Parting Exclusion which precludes coverage for “loss due to an Insured knowingly having given or surrendered Money, Securities or Property in exchange or purchase to a Third Party, not in collusion with an Employee. This exclusion shall not apply to Money Orders and Counterfeit Currency Fraud.” [par 97]

This Exclusion was specifically deleted from the Social Engineering Fraud Endorsement.

The Court held that the Voluntary Parting exclusion would have applied had either the Computer Fraud or the Funds Transfer Insuring Agreements been triggered. The Court rejected FEI’s assertion that the clause was ambiguous and should be limited to transactions in which there were simultaneous exchanges of funds for goods/services. The Court concluded that on its plain wording the exclusion applies to any exchange/purchase transaction, simultaneous or otherwise, in which the insured voluntary parts with money/securities/property, regardless of whether the monies are paid to a legitimate third-party or a fraudster.

Conclusion

Social engineering fraud, the success of which depends on the inherent human inclination to trust other people, is a particularly difficult risk to control. Future Electronics Inc. v. Chubb confirms that coverage for this risk is limited to that afforded under Social Engineering Fraud endorsements, which contain, inter alia, fraud scenario restrictions, and which typically provide substantially lower limits than are available for the far more manageable risks covered under Computer Fraud and Funds Transfer Fraud insuring agreements.


[1] RSS attorneys Nick Krnjevic and Élisabeth Laroche successfully argued the case on behalf of Chubb.

[2] US Department of Justice, Federal Bureau of Investigation: Internet Social Networking Risks, <https://www.dni.gov/files/NCSC/documents/campaign/internet-social-networking-risks.pdf>.

[3] Apache Corp. v. Great American Ins. Co. 662 Fed. Appx. 252 (5th Cir. 2016) [Apache], and PestmasterServs., Inc. v. Travelers Cas. & Sur. Co. of Am. 656 F. App’x 332 (9th Cir. 2016) [Pestmaster].

[4] See, inter alia, Taylor & Lieberman v. Federal Ins. Co., 681 Fed. Appx. 627, 628 (9th Cir. 2017); Pestmaster, The Brick Warehouse LP v Chubb Insurance Company of Canada, 2017 ABQB 413.

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The Warranty Against Latent Defects: The Importance of Presumptions

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By Mariella De Stefano, from our Insurance Law Practice Group

October 6, 2020 — The Superior Court’s decision in Compagnie d’assurances AIG du Canada c. Kenworth Québec inc., 2020 QCCS 1377, is a reminder of the principles applicable to the warranty against latent defects.

In April 2014, a Kenworth vehicle belonging to the City of Shawinigan [City] and insured by Compagnie d’assurances AIG du Canada [AIG] caught fire and was severely damaged. AIG indemnified its insured and instituted subrogation proceedings against the vendor of the vehicle, Kenworth Québec inc. [Kenworth], invoking the warranty against latent defects. Kenworth in turn filed a claim against the manufacturer, Paccar du Canada ltée [Paccar], also invoking that warranty. AIG filed an expertise report which concluded that most of the damages caused by the fire were in the motor compartment of the vehicle. The expert also underlined that there was a recall by the manufacturer in relation to risks of fire with Kenworth vehicles of the same model but assembled during a period that began a few days after the damaged vehicle was manufactured. Paccar’s expert underlined that the vehicle showed signs of excessive corrosion and that when such vehicle is used in a hostile environment, such as snow removal, particular attention is required to assure that the components of the motor are exempt of salt.

First, the Court underlined the provisions of the Civil Code of Québec governing latent defects affecting goods sold by a professional vendor and stated that this regime creates a presumption of liability when the purchaser establishes that the goods were acquired from a professional vendor or a person who is obliged to such a warranty as a professional vendor, and that the goods deteriorated prematurely in comparison to similar goods. This presumption of liability is triggered without it being necessary to prove the cause of the defect or the cause of the damages. The Court stated that it is a triple presumption of liability, namely:

  a. A presumption of the existence of a defect;
  b. A presumption that the defect existed at the time of the sale;
  c. A presumption of existence of a causal link between the defect and the deterioration of the property.

The presumption may be rebutted if the professional vendor establishes:

  1. Misuse of the property; and
  2. That the improper use is the cause of the premature deterioration or the improper functioning of the property.

After having analyzed the evidence, the Court noted that on the balance of probability, the vehicle had perished because of an electrical problem originating in the motor compartment. Although the Court concluded that the exact point of origin and the cause of the fire had not been established on the balance of probabilities, it underlined that this did not have to be established in a precise manner by the plaintiff in order to trigger the presumption of liability. Since the two conditions for the application of the presumption were satisfied, the causal link between the default and the damage was presumed.

The Court then proceeded to analyze whether the defendants had rebutted the presumption. In order to do so, it had to establish misuse and that the misuse caused the fire. The defendants alleged that the City could have prevented the fire by providing better maintenance for the vehicle. The Court ruled that the City had behaved appropriately by following the procedures dictated in the vehicle owner’s manual.

Accordingly, the Court granted the action and ultimately held Paccar liable.

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COVID-19: RSS’s Responses (updated October 6)

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From day one of the crisis that we are living, RSS has sprung to action to face the situation.

We have explored the legal aspects of the situations arising from the pandemic. The legal system is surely hit by the pandemic; but it also brings solutions. RSS wishes to bring to your attention the results of some of these analyses.

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COVID-19: Home Renovations in the Red Zone

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By Sydney Warshaw and Sara Laraichi, from our Business Law Practice Group

October 6, 2020 — Since October 1, Greater Montreal, Québec City and several parts of Quebec are plunged into the “red zone”. This represents the highest alert level for COVID-19 and came with several accompanying restrictions. Unlike in March, when the provincial lockdown was imposed uniformly across most sectors of society, this lockdown features a series of unique rules depending on economic sector and housing arrangements.

Notably, there are no restrictions in place for maintenance, repair, or renovation of a private residence. This may be surprising given the prohibition on allowing any individuals into one’s home, balcony, or yard for social reasons. The government’s September 30th Order in Council is clear, however, that individuals offering service or support are permitted in a private residence, and this includes the abovementioned work.

What remains confusing is whether or not the work done under the above law must have been planned before the shutdown. While the Order in Council makes no mention of this requirement, the government’s website states that what is allowed is “labour for planned work”. It will be interesting to see if the government clarifies this discrepancy in the coming days. Should you have any other concerns or questions relating to the new government regulations in the province, feel free to reach out to the team at RSS who would be happy to assist you in navigating these uncharted times.

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Notice to Employers: Economic Recovery Benefits and New Protection for Employees in the Event of Absence Related to COVID-19

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By Eliab Taïrou, from our Labour and Employment Law Group

October 2, 2020 — On October 1, 2020, An Act relating to certain measures in response to COVID-19 (Bill C-4 — formerly C-2) was passed by the House of Commons of Canada and now awaits Senate support and Royal Assent before coming into force.

This legislation comes following the expiry of the Canada Emergency Response Benefit (CERB) program and includes three financial support measures to assist workers as part of the country’s economic recovery:

  • Canada Recovery Benefit (CRB)
  • Canada Recovery Sickness Benefit (CRSB)
  • Canada Recovery Caregiving Benefit (CRCB).

This memo is not intended to provide an in-depth analysis of these newly introduced benefits, but employers should, at the very least, be aware of the terms and conditions of the Canada Recovery Sickness Benefit (CRSB).

This benefit can be claimed by a worker for one of the following reasons:

  • The worker has contracted or might have contracted COVID-19;
  • The worker has underlying conditions, is undergoing treatments, or has contracted other illnesses that, in the opinion of a medical practitioner, nurse practitioner, person in authority, government or public health authority, would make them more susceptible to COVID-19, or;
  • The worker has isolated themselves on the advice of their employer, a medical practitioner, nurse practitioner, person in authority, or government or public health authority, for reasons related to COVID-19.

The worker must also certify in their application that for the given week, they were unable to perform their job for a minimum of 50% of the time that they would otherwise have worked, for one of the three reasons mentioned above.

This benefit will be in the amount of $500 per week and may be claimed for one or two weeks up until September 25, 2021.

The worker will be able to apply for this benefit from the Canada Revenue Agency through the online portal.

Other criteria are also set out in the Act, such as the requirement that the worker has not received paid leave from their employer for the week in question.

In parallel with the CRSB, any employer under provincial jurisdiction should be aware that an employee covered by the Act respecting labour standards benefits from new legislative protection related to COVID-19 that has been in force since September 10, 2020.

This protection provides that it is prohibited for an employer to dismiss, suspend, retaliate against, or impose any other sanction on an employee if the employee is absent from work for a maximum period of 14 continuous days and the absence results from the fact that the employee is isolated pursuant to a recommendation or order of a public health authority and is unable to work.

Briefly, and in a similar manner in part, employees under federal jurisdiction are entitled to a leave of absence related to COVID-19, which was amended by the Act relating to certain measures in response to COVID-19. This right to a leave of absence related to COVID-19 may be the subject of a complaint relating to reprisals in the event of dismissal, suspension or if the employee has been the subject of a disciplinary measure related to the exercise of their right to such leave.

For more information or for any questions related to these new economic recovery benefits or these new labour standards, please contact our Labour and Employment Law Group.

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Coverage Under a Wrap-up Policy May Be Excluded When the Work Is Not Completed

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By Mariella De Stefano, from our Insurance Law Practice Group

September 15, 2020 — In Constructions Reliance inc. (Constructions Reliance du Canada ltée) c. Compagnie d’assurances Temple, 2020 QCCA 947, recently rendered by the Court of Appeal, the Court concluded that the judge of first instance had not committed any error in deciding that the wrap-up policy issued by Temple did not cover damages caused by a painter since the paint work had not been completed when the loss occurred.

Essentially, Reliance acted as general contractor for the construction of a condominium complex. In turn, it retained the services of J&K Peinture to carry out the paint work. On November 14, 2011, one of J&K’s employees struck a sprinkler head causing water damages to the condominium complex. La Compagnie d’assurance Missisquoi (“Missisquoi”) indemnified its insured, Syndicat Lofts Wilson, for the water damages and instituted subrogation proceedings against defendants, Reliance, J&K and its insurer Société d’assurances générales Northbridge (“Northbridge”) as well as Temple in recovery of the sums paid. The proceedings against J&K were suspended given the latter’s bankruptcy.

Both Reliance and Northbridge argued that only Temple could ultimately be responsible for the damages as they were invoking the benefit of the wrap up coverage issued by Temple which covered completed renovation works to the immovable. Temple denied liability arguing that the loss was not covered by the wrap up policy given that the paint work had not been completed on the date of the loss. There was an admission that the wrap up policy contained an exclusion for damages caused to the insured project which occur during the work. However, the exclusion contained an exception which covered a loss occurring when the work was completed.

The relevant exclusion reads as follows:

PART I – INSURING AGREEMENTS

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay, or for any liability assumed by the Insured under Contract (as defined herein), for damages arising out of the Insured’s Work in connection with the Insured Project, because of:

[…]

2. Coverage B – Property Damage (as defined herein)

[…]

PART VII – EXCLUSIONS

This policy does not apply to any liability:

[…]

2. Under Coverage B for:

Injury to, or destruction of, or loss of use of:

[…]

(d) property of every kind and description either forming part of or to form part of the Insured Project. This exclusion does not apply during any extension beyond the expiry date of the policy with respect to the Products Hazard and Completed Operations Hazard as defined herein;

PART VIII – DEFINITIONS

[…]

3. Completed Operations Hazard

As used in this policy means liability arising out of the Insured’s Work in connection with the Insured Project because of Bodily Injury or Property Damage, but only if such Bodily Injury or Property Damage results from an occurrence after the Insured’s Work has been completed or abandoned.

The Insured’s Work shall be deemed completed at the earliest of the following times:

(a) when all of the Insured’s Work to be performed under the Insured’s Contract is completed;

(b) when all of the Insured’s Work to be performed for the Insured Project is completed;

(c) when that portion of the Insured’s work out of which the Bodily Injury or Property Damage arises has been put to its intended use by other than another Contractor or Subcontractor engaged in performing operations for the named Insured as part of the same Insured Project.

(d) when the Insured’s Work has been accepted by or on behalf of the owner.

[Bold added by the Court]

The judge of first instance maintained the action against Reliance and Northbridge and condemned them solidarily to pay to Missisquoi $169,000. She then concluded that the wrap up policy did not apply and dismissed the warranty proceedings against Temple.

When the loss occurred, 80% of the condominium complex was occupied by co-owners and the architect surveying the work had issued the certificate of substantial conclusion of work. Consequently, appellants were of the view that the work was reputed completed within the meaning of paragraphs (c) and (d) of article 3 and the exception should apply. Appellants argued that the judge of first instance committed an error in law by interpreting the exception to the completed operations hazard as requiring in all cases that the work be completed without taking into consideration the fact that the policy underlines certain circumstances in which they are presumed completed.

The Court of Appeal dismissed the appeal. Essentially, it reviewed the reasons of the judge of first instance stating that there was no proof which demonstrated that the paint work had been accepted by or on behalf of the owner adding that at the time of the loss the certificate issued by the architect contained a list of deficiencies which underlined that several of the paint work was incomplete or had to be corrected, which was contrary to the idea that their work could have been accepted. The Court of Appeal stated that the reasons of the trial judge indicate that she dismissed the argument based on paragraph (d), not because the work was not completed as the appellants maintained rather because the architect had mentioned them in a list of work to be completed and to be corrected. Consequently, one cannot conclude that the work had been accepted.

With respect to the appeal based on the trial judge’s understanding of paragraph (c), the Court of Appeal concluding that the trial judge dismissed the argument due to the nature of the work carried out by J&K. After having identified the meaning of the expression “has been put to its intended use”, the judge of first instance focused on the paint work which was in the course of execution at the time of the loss. As long as the paint work had not been completed and the painters were still painting, it was reasonable to conclude that the work was not being put to its intended use. The comments made by the Court of first instance do not include all types of work as argued by the appellants, rather the paint work in the course of execution in this case. The judge of first instance does not exclude the possibility that incomplete work of another nature may be reputed as being completed when such work is put in service.

The Court of Appeal could not intervene as there were no manifest errors.

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An Order to Enforce a Restrictive Covenant Is Not Automatic

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By Normand Laurendeau, from our Labour and Employment Law Group

September 2, 2020 — Non-competition and non-solicitation clauses are commonplace in employment contracts and are subject to rules that have been well defined by the courts. However, as illustrated by the recent Superior Court decision in FLS Transportation Services Limited v. Fuze Logistic Services Inc., 2020 QCCS 2604, their prevalence does not mean that courts will enforce them unconditionally.

A classic case of default under a restrictive covenant

The case involves two companies in the customs brokerage and transportation field. On July 1, 2020, the plaintiff receives emails from several employees announcing their resignation. Within a few days, a dozen employees abandon their job. During the weeks that follow, the plaintiff learns that they have become employed by the defendant and continued to provide services to the plaintiff’s customers.

On July 21, the plaintiff launches proceedings before the Superior Court to obtain a provisional injunction compelling its competitor and its former employees to abide by the non-competition and non-solicitation clauses that bound them. The defendant, taken by surprise, failed to appear before the court to defend its rights. The injunction is issued the next day.

Do the employees have grounds to be freed from their obligations?

On August 5, the parties are back before the court to obtain a safeguard order. On that occasion, the defendant reveals the plaintiff’s high staff turnover: within a span of around four years, whereas the plaintiff’s Montréal office had 23 employees before the July departures, no less than 115 people had come and gone, an indication of a toxic workplace. On the national scale, 254 employees out of 300 had come and gone.

The initial provisional injunction is extended. However, the judge is aware that the proviso in article 2095 of the Civil Code of Québec could apply: “An employer may not avail himself of a stipulation of non-competition if he has resiliated the contract without a serious reason or if he has himself given the employee such a reason for resiliating the contract.”

The judge then asks the plaintiff to adduce evidence explaining that high turnover: should it fail, and a toxic work climate be proven, the defendants might be released from the restrictive covenants.

Conclusion: The former employer is denied a safeguard order

When the proceedings resume, on August 20, the plaintiff fails to adduce such credible evidence, merely presenting general statements on the duties of branch managers and the company’s policies.

The judge ruled that the plaintiff had not complied with the requirements made on August 5, and that, accordingly, a safeguard order should not be issued.

True, as the judge noted, the case is still at the interlocutory stage. The conclusions could be different when the case is heard on the merits. Still, this decision illustrates that even clearly compelling clauses will not be enforced unconditionally.

In this case, the author was representing the former employees.

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A Snapshot of our Recent Activity — Business Law

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Assembled by Herbert Z. Pinchuk, Head of our Business Law Group

August 10, 2020 — Just like countless businesses and individuals all over the world, RSS was hit by the COVID-19 crisis. As numerous sectors of the economy ground to a halt, our activities were significantly reduced.

Significantly, but not completely!

Since legal services were promptly declared essential services by the government, we washed our hands, donned our masks, and continued to respond to clients’ needs.

In addition to advising numerous clients, particularly landlords and tenants, on the impact of COVID-19 and “force majeure” clauses, RSS lawyers have been involved in a number of transactions, notwithstanding the economic effects of the pandemic, including acting for one of the syndicated lenders in a multi-million dollar secured real estate loan, the representation of Silver Paw (a Montreal-based designer, manufacturer and distributor of specialized pet products) and its founders upon the entry of a major fashion-based investor, the publication of a lease for aircraft spare parts, acting on behalf of several debtors in connection with the renewal of their financing arrangements, and the preparation of shareholder and other agreements for various clients.

Tax, Estate Planning and High-Net-Worth Individuals

Marilyn Piccini Roy was re-elected as Secretary of The International Academy of Estate and Trust Law.

Advised on the migration of a US trust to Quebec by means of a change of trust situs and governing law. Marilyn Piccini Roy.

Advised on the amendment of four Quebec trusts with US beneficiaries to resolve tax problem with respect to the application of US “throw-back rules” to undistributed net income. Marilyn Piccini Roy, Martin Lord, William Dion-Bernard.

Provided a legal opinion concerning civil and tax law implications of maintaining status both as legal spouse and de facto spouse. Marilyn Piccini Roy, William Dion-Bernard

Advised on a change of matrimonial regime during the marriage and on a hybrid marriage contract, where the matrimonial regimes of partnership of acquests and separation as to property would govern different property. Marilyn Piccini Roy.

Provided a legal opinion on the meaning of the term “issue” and “descendant” in a trust agreement with respect to the filiation of children born of assisted procreation in the context of a parental project. Marilyn Piccini Roy.

Real Estate and Leasing

Advising the owner of an apartment building on the measures to implement to avoid the propagation of COVID-19. Martin Côté, Sara Laraichi.

Representing a tenant sued by the lessor for the payment of rent on the basis of the construction of a challenged clause in the lease. Sara Laraichi.

Insolvency and Restructuring

Successfully defended a creditor before the Court of Appeal of Quebec against the appointment of an interim receiver under s 47 of the Bankruptcy and Insolvency Act. Annie Claude Beauchemin, Jean-Yves Fortin, Elyssa Leiberman.

Intellectual Property

Represented Magnolia IP Holding, LLC, holding of Magnloia, a US company in the decoration industry, to have the MAGNOLIA trade-mark expunged under s 45 of the Trademarks Act after it had been registered by a third party. The proof of use provided by the owner of the trademark did not meet the recognized criteria. François A. Raymond.

Applications for expungement of trademarks for non-use under s 45 in relation with sweaters, shirts, and other men’s clothes; with beds, mattresses, pillows, blankets and related goods; and with hair care preparations, hair shampoos and conditioners. Richard Uditsky, François A. Raymond, Sydney Warshaw.

Labour and Employment

Defended an advertising company against a claim before the Administrative Labour Tribunal by a vice-president dismissed for his unsatisfactory performance. David Paradis, Jean Denis Boucher.

Defended a transport brokerage firm against threats of an injunction based on alleged violations of non-solicitation clauses by ex-employees of the plaintiff hired by our client. David Paradis, Normand Laurendeau.

Defended a pharmaceutical company against a complaint to the Human Rights Tribunal by an individual who falsely submitted his application. David Paradis, François A. Raymond.

Advised and represented SMEs that had to make layoffs and dismissals due to the COVID-19 pandemic. David Paradis.

Acted for mid-managers dismissed without just and sufficient cause in the negotiation of their severance pay. David Paradis.

Drafting employment contracts and non-competition and non-solicitation covenants for SMEs. David Paradis.

Advised to a unionized SME in the food business: advice and follow-up in connection with multiple grievances (disciplinary matters, layoffs, union dues, etc.) filed by the union. Eliab Taïrou.

Advised a national unionized bus transit company on the impacts of COVID-19: changes in working conditions, layoffs of both unionized and non-unionized workers, and advice on the required postponement of the return-to-work date for unionized seasonal workers. Eliab Taïrou.

Acted for a national freight company in an arbitration under the Canada Labour Code relating to the termination of a trucker’s employment (broker). Provided advice to this client regarding employees having a second job in relation to the risk of COVID-19 contamination. Eliab Taïrou.

Provided advice and follow-up to a worker placement company in relation to the various financial assistance programs offered by the federal government to combat the consequences of the pandemic. Eliab Taïrou.

Acted for a multinational insurance company in connection with the allegedly unjust dismissal of a worker holding the position of Senior Manager. Eliab Taïrou.

Acted for the employer in an application to issue an order to maintain certain activities of a longshoremen’s union in a labour dispute. Federal legislation. Jean Denis Boucher.

Represented an employer against a complaint for psychological harassment, which was dismissed because the worker failed to report the facts to the employer. Eliab Taïrou.

Acted for the employer in a proceeding to determine whether a worker has suffered an occupational injury in the form of an industrial accident or recurrence, relapse or aggravation of a previous injury. Eliab Taïrou.

Represented the employer against a worker’s application to be relieved from the consequences of the late filing of her complaint for prohibited practices under s 122 of the Labour Standards Act. Normand Laurendeau.

General Litigation, Arbitration and Mediation

The Quebec courts, including the Superior Court, Commercial Division, District of Montreal, resumed their activities in progressive fashion as of Monday, June 1. On that very day, RSS attended court on behalf of a shareholder involved in a dispute within a family company. RSS obtained an order forcing the other shareholder/director to cease unilaterally declaring dividends, withdrawing funds from the company’s bank accounts and using the company’s credit facilities. Defendant’s signing authority on behalf of the company was temporarily suspended, including for all transactions with the company’s financial institutions. Defendant was also ordered to cease making certain false statements to the company’s suppliers and clients to the effect that the company had ceased operations. Jean-Pierre Sheppard, Lauren Flam.

Represented a co-owner, one of family members who were partners in co-proprietorship of several buildings for many years and could no longer get along. There were issues of revenues being diverted by one of the family members, failure to account as to the management of the buildings and other issues which made continuing with the co-proprietorship unfeasible. Despite the above, one of the co-owners refused to agree to sell the buildings. Given this refusal, RSS obtained a judgment ordering the sale of the buildings and distribution of the net proceeds of sale. Jean-Pierre Sheppard, Sara Laraichi.

Defended the University of Montréal against applications for interlocutory or provisional injunctions and safeguard orders filed by a dentistry student and a former law student who were challenging disciplinary measures imposed by the University. One of these cases, where the plaintiff alleged having been the victim of discrimination for his language and his political opinions, was also filed with the Human Rights Tribunal, where RSS challenged the Tribunal’s jurisdiction by pleading for a restrictive construction of the individual right of action under s 84 of the Charter of Human Rights and Freedoms. Martin Côté, Béatrice D’Anjou.

Represented a stockbroker in proceedings for an interlocutory injunction and a safeguard order to bring an end to a slander campaign by his former employer. Jean-Pierre Sheppard, David Paradis, Marianne Poliquin.

Represented the lessor under a commercial lease in an application for a safeguard order and an arbitration to recover rents owing by a tenant who fled after trying to steal goods under a hypothec. Normand Laurendeau, David Paradis.

Provided advice and representation to a multi-university student union to enforce the Act respecting the accreditation and financing of students’ associations. Martin Côté, David Paradis.

Represented a real estate developer who was suing the owner before an arbitration tribunal for the payment of his fees. Annie Claude Beauchemin, Geneviève Goulet, Sara Laraichi.

On June 10, 2020, the Court of Appeal confirmed that the unjustified refusal by a controlling shareholder/director to honor a verbal promise to issue shares constitutes oppressive conduct. RSS represented an individual who was promised shares by the controlling shareholder/director of a corporation for which he had worked for over three years without receiving pay. The Superior Court found that the refusal to issue the promised shares unfairly disregarded our client’s expectations, thereby entitling our client to one of the many remedies available to minority shareholders under the Canada Business Corporations Act. The Court decided to award our client a sum of money equivalent to the current value of the promised shares, or the value of the services rendered, whichever is higher. The Court ordered that the value of the shares be determined at the corporation’s sole cost and expense by professional valuators. The Court’s decision to award a sum of money as compensation was intended to prevent future litigation between the parties, which would have likely occurred had the Court simply ordered the corporation to issue the promised shares. Jonathan Feingold, Sydney Warshaw.

Successfully recovered over $200,000 in damages from an investment firm after clients suffered a loss based on faulty or negligent investment by their financial advisor. Jean-Pierre Sheppard, Elyssa Leiberman.

Successfully represented a former player of the Montréal Canadien hockey team in a claim for the repayment of a term loan that he had granted. Martin Côté, Sara Laraichi.

Professional and Social Involvement

In May, RSS announced the launch of the Regroupement des firmes de services professionnels indépendantes — the RFSPI. Today, the Regroupement is an alliance of 225 Quebec-owned firms united to promote their expertise with Quebec decision-makers, who will have to make crucial judgments over the coming weeks in the interest of their businesses.

Through its website, firmesindependantes.com, the RSFPI brings together the business community and local service providers who have made it their goal to prepare businesses to resume operations.

Geneviève Goulet has completed the University Certification in Corporate Governance programme, thus becoming a Certified Corporate Director (Administratrice de sociétés certifiée, ASC). The only programme of its kind in Quebec, it was designed for corporate directors and officers sitting on corporate boards aiming to reach the highest standards of corporate governance.

Martin Côté was the guest speaker for a Webinar hosted by the Bar of Quebec on solicitor-client privilege for in-house counsel, and on litigation privilege.

He took part in another activity hosted by the Bar when he presented a lecture on “SLAPPs : Where do we stand ten years after the coming into force of the rules in the Code of Civil Procedure to counter SLAPP proceedings”.

Finally, Martin was elected Chair of the Board of directors of the Fondation des Camps Odyssée, a charity that promotes development and education of youngsters through the experience of nature in vacation camps.

Sharon G. Druker wrote a paper in the Estates, Trusts & Pensions Journal: “The Impact of the Act Respecting the Transfer of Securities and the Establishment of Security Entitlements in Determining the Validity of a Gift under Québec Law: A Case Comment on Labis v. Labis”, (2020) 39 ETPJ 213.

William Dion-Bernard took part in two professional education activities related to private client matters:

  • On Thursday, February 6, he summarized recent cases on trusts and estates as part of a seminar on trusts hosted by the Association de planification fiscale et financière;
  • On Tuesday, February 11, he presented an introduction on estate law at a breakfast conference hosted by RSS, in association with the Canadian Bar Association, Quebec Division.

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Landlords Should Reconsider Mitigating Damages with COVID-19 Relief Programs

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By Sydney Warshaw, from our Business Law Practice Group

August 7, 2020 — A series of recent Superior Court decisions demonstrate that participation in the federal government’s financial relief programs to help tenants and landlords in the wake of COVID-19 may not be as discretionary as landlords initially thought.

Failure to apply for CECRA may limit landlords’ recourses (at least on an interim basis)

On July 13th, in Investissements immobiliers G. Lazzara inc. c. 9224-5455 Québec inc., 2020 QCCS 2176, the Superior Court refused to grant a landlord’s safeguard order against its tenant seeking unpaid rent, termination of the lease, and eviction. In this case, the landlord’s refusal to apply for the Canada Emergency Commercial Rent Assistance [CECRA], as suggested by the tenant, found little sympathy with the court.

CECRA provides assistance to a tenant: 50% of the monthly rent is subsidized by the federal government, the landlord forfeits 25%, and the tenant only pays 25%. The court found that the landlord was partially responsible for its loss of 100% of expected rent as a direct result of its unwillingness to accept only 75%, and could therefore not benefit from a safeguard order at this time.

In Tubes et Jujubes Centre d’amusement familial inc. c. 8937974 Canada inc., 2020 QCCS 1934, the Superior Court granted a provisional interlocutory injunction to a tenant to stop the termination of a lease. Here again, the court found that the landlord’s refusal to apply for CECRA rendered it unable to terminate the tenant’s lease for unpaid rent.

Finally, in Rocco Taverne Italienne inc. c. Fiducie Marcon-Campeau inc., 2020 QCCS 1949, the court again granted an interlocutory injunction allowing a tenant to continue to occupy the leased premises, despite late and unpaid rent, given, among other things, the pandemic. In assessing the balance of inconveniences, the court noted that the landlord’s refusal to apply for CECRA had unfairly put both parties in unfavourable positions.

These decisions were all rendered on an interim basis, and while the final outcome could very well be different, they do show that although CECRA is an optional program for landlords, should they find themselves in the context of litigation, a refusal or even neglect in applying could negatively impact their ability to obtain the results sought in court.

Tenants may be able to argue against paying rent altogether

While the court ruled against landlords in these decisions, they have generally still recognised the tenants’ obligation to pay rent despite reduced or restricted occupation. However, this was not the result in Hengyun International Investment Commerce Inc. c. 9368-7614 Québec inc., 2020 QCCS 2251. In this case, the Superior Court found that superior force made it impossible for the landlord in question to provide the tenant with peaceable enjoyment of the premises. This was especially the case given the lease stipulated that the space could only be used as a gym, and gyms were not permitted to open in the province until late June. As a result, the court held that “no rent can be claimed from [the tenant] for the months of March, April, May and part of June, 2020.” [par 94]

This decision is significant for a number of reasons. Not only does it begin to answer the question of how superior force will be considered in the context of COVID-19, it also raises issues for tenants and landlords who have set up arrangements with the federal government for CECRA and may now be questioning their obligations altogether.

The takeaways from these decisions are myriad but most importantly they serve as a cautionary message to landlords in their negotiations with tenants struggling in the current economic landscape.

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Preliminary Measures to Exercising a Hypothecary Right and Appointment of a Receiver: The Court of Appeal of Quebec Sheds Light on a Dispute

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By Annie Claude Beauchemin, Jean-Yves Fortin, Ad. E., and Elyssa Leiberman, from our Business Law Practice Group

August 6, 2020 — On July 20, 2020, the Court of Appeal finally ruled on a controversy that had existed for several years in Quebec regarding the respect of the delays set out in the Civil Code of Québec [CCQ] for the surrender of property, in the context of a recourse undertaken by a secured creditor under the Bankruptcy and Insolvency Act [BIA] (Séquestre de Media5 Corporation, 2020 QCCA 943). It is now clear that a secured creditor who wishes to appoint a national receiver under section 243 BIA in order to enforce its security, will first have to ensure that the prior notice period set out in article 2758 CCQ has duly expired. However, it will remain possible to plead that urgent circumstances require the appointment of an interim receiver under sections 46, 47 or 47.1 of the BIA.

This question has been subject of fervent debate among insolvency practitioners in Quebec. Some argued that the delays for the prior notice of the exercise of hypothecary rights set out in the CCQ (i.e. 20 days for movable property or 60 days for immovable property) should be respected when a secured creditor wished to enforce a security interest through the mechanism of appointing a receiver under the BIA. On the other hand, the majority maintained that compliance with the provincial delays for the surrender of property did not have to be respected when aiming to enforce a security under the federal BIA. This debate ultimately stemmed from a controversial decision rendered by the Honourable Gaétan Dumas in 2011 (Média5 Corporation inc. (Séquestre de), 2011 QCCS 6874), which affirmed that the pre-determined delays concerning the surrender of property had to be respected before the creditor could proceed with the appointment of a receiver under the BIA. The Court of Appeal has just put an end to this debate by determining that the minority opinion must prevail in Quebec.

This recent decision follows the majority decision rendered in 2015 in Lemare Lake (Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd., 2015 SCC 53), in which the Supreme Court of Canada [SCC] ruled that there was no impediment to juxtaposing the delays required by the BIA (i.e., a 10-day delay limit under s. 244 BIA) with those set out in a provincial statute. Moreover the SCC clarified that underlying goals of section 243 BIA, notably those of flexibility and efficiency, were not sufficient to circumvent the delays provided by a provincial statute. The SCC determined that when there is no operational conflict, and no frustration of purpose (where the provincial law thwarts the purpose of the federal law), a harmonious interpretation of federal and provincial laws should be favoured. Since the case originated in Saskatchewan, some argued that this authority was not applicable in Quebec. The Court of Appeal recently put an end to the debate by determining that, on the contrary, the principles outlined by the SCC in Lemare Lake should also be followed in Quebec.

Furthermore, the Court of Appeal clearly and thoroughly reiterated the required criteria for the appointment of a receiver under section 243 BIA.

RSS (Ms. Beauchemin, Mr. Fortin and Ms. Leiberman) represented the debtors Media5 Corporation and Essagal Acquisitions Inc. in the above-mentioned appeal.

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