Jeremy Costin

Protect ecommerce ventures

(image from pxhere.com)

Many businesses are shifting their focus to ecommerce, and many new ecommerce businesses are popping up due to the COVID-19 pandemic. British Columbia has recognized this by launching a plan to support these businesses.

Whether your business operates its own ecommerce site or operates through a service like Shopify or Etsy, how you deal with conflict in the ecommerce environment is up to you. I always caution people against finding website policies and legal documents online, as I’ve yet to see one that adequately deals with the concerns of the business.

There are two major areas fraught with risk when using out-of-the-box or cobbled together online legal documents. Not surprisingly, one of them is privacy law. Unlike the United States, Canada has strict privacy laws that are similar to those in the European Union. You know those prompts you get now to “accept cookies” on websites? Those are to make the site compliant with the European GDPR – a set of regulations dealing with the collection and use of personal information. If you are operating a business in British Columbia, any information you collect from visitors to your website, from a visitor’s computer’s ID address (automatically collected by the web server) to the personal information they submit to buy things from your site, is governed by the Personal Information Protection Act (PIPA). Right away, that should tell you that you need a privacy policy that’s made in British Columbia or you risk penalties under PIPA.

The other areas that I find suffer from a one-size-does-not-fit-all problem are dispute resolution and intellectual property.

Dispute resolution is an often-overlooked part of any agreement, especially ecommerce terms of use. Clients often tell me that disputes won’t happen or they’re not worried. I remind them that lawyers get a lot of our work from situations that no one expected. And that solving a messy dispute is much more expensive than anticipating it and being prepared.

There are many types of disputes that can arise and many types of resolution tools. No one tool is the best for all situations.

Ecommerce businesses have certain aspects that make arbitration the best path, and some that would be more appropriate for the court system.

For example, intellectual property disputes often have to be tried in Supreme Court, not Small Claims. The cost of making a claim in Supreme Court is often higher than the cost of arbitration.

Arbitration is often used for ecommerce disputes because you can select an arbitrator with the specialized knowledge needed to understand the claim. If arbitration is an appropriate dispute resolution tool, you should discuss with your lawyer what set of rules and what type of panel will be used.

I recently advised regarding a dispute involving a breach of contract related to intellectual property in an ecommerce situation. I looked at the contract and the situation and thought about it from the perspective of a solicitor drafting terms of use.

Let’s say you craft custom mezuzot and you sell them through Etsy. There are two main areas where I see disputes arising.

One of them is sale completion, like payment, delivery, etc. This is pretty standard business stuff, such as, who is responsible for the mezuzah after payment is made but before either the payment is received or the product is delivered? There is a wealth of case law dealing with this, and it’s important that you understand what kind of insurance you’ll need in case it’s stolen or lost during that interim period.

Another type of dispute arises from the originality of your artwork. The mezuzot themselves are covered by copyright law, as are the photos of them, but how will you deal with someone who makes unauthorized copies of either the mezuzot or the photos? If the copies are slightly different, who will be the best person to determine whether there is infringement?

What if someone takes an idea that is clearly yours and makes their own mezuzot that are similar but definitely not the same? Is there a style that identifies them as part of your business? That might be a trademark issue, which cannot be dealt with in Small Claims in British Columbia. If they’re not copies of the mezuzot but inspired by them, is there infringement? Likely not. This brings us back to the terms of use.

Let’s say you have a site called TeleSeder. You sell an app and run a course to help people run their Passover seders through videoconferencing software, like Zoom or Skype. Someone signs up for the course, pays for everything, and then turns around and creates VirtuaPesach. It does almost exactly the same thing – it’s clearly using your idea, including a similar app and course, right down to the course materials. But the person running VirtuaPesach has done their homework on copyright and made sure that they’ve made enough changes to escape a claim for copyright infringement.

Copyright doesn’t protect ideas; it protects the specific works expressing those ideas. But that’s not fair, you say. They came to my site, even paid for my materials, and then ran off with them to create a competitor!

This is where a made-for-you ecommerce agreement can help. It’s true that VirtuaPesach probably doesn’t infringe your copyright, but the person behind VirtuaPesach did sign an agreement when they paid for TeleSeder. When they paid for your product, there was an exchange, and that exchange can have more terms than just “pay money, receive product.” What if you included a clause in the terms of use saying that they agree not to create a competitive product based on yours? There are limits to how far you can go with that, but it’s definitely an option. Now, you have them for breach of contract. Choosing whether to use court or arbitration to settle the dispute will be based on a discussion of certain details with your lawyer, but why not build some of the resolution right into the agreement?

You can put remedies – as long as they’re not excessive and they’re realistically tied to the problem – right into the agreement. There’s a way that the agreement can say, “Not only will you not steal my idea, but if you do, whatever you create with it will be mine.” Enforcing that could put the brakes on VirtuaPesach and hand over all of its assets to TeleSeder. The extent to which you can do that depends on circumstances, of course, but this is something to consider when transitioning to an online business.

Using carefully crafted online documents for your ecommerce business helps protect you and your business. From securing what’s yours to controlling dispute resolution before a dispute arises, an ecommerce venture has new challenges and new spins on old challenges that can be managed by getting the right advice.

Jeremy Costin is a business and estates lawyer practising in Vancouver. He sits on the board of directors and is the chair of the governance committee of the Vancouver Holocaust Education Centre, and is a frequent guest instructor at the Law Society of British Columbia.

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Disclaimer: This article should not be construed as legal advice. Only your lawyer can give you proper advice specific to your needs.

Making a will during COVID

For hundreds of years, the basic rules for making a valid will have been the same: the person making the will has to sign it in the company of witnesses, and the witnesses have to sign, too. How can that requirement stand when we’re supposed to stay apart? Is it OK to sign and witness a will with everyone two metres apart from one another and wearing masks and even gloves?

Signing with COVID-19 precautions like distancing and wearing safety gear is legally valid, but not always practical. You’re passing around a paper document, and possibly sharing a pen. As we move into the winter months, it becomes less likely that you’ll all gather outside to sign. Signing indoors, despite social distancing and personal protection equipment, is still considered a greater risk than staying home.

Many of us have become far more familiar with videoconferencing technologies this year than we ever expected to be. How many of us had a Zoom seder or a Skype Rosh Hashanah dinner? Why can’t we update a centuries-old practice for the 21st century, especially given the COVID-19 crisis? We can.

The British Columbia government, as part of the emergency measures brought in this year, made changes to the rules for executing wills to accommodate pandemic precautions, and has also made those changes permanent. The Wills, Estates and Succession Act, which governs how we make wills, was amended to include two new sections on something called “electronic presence.”

The basic rules are still the same – the will has to be signed by the person making the will and by two witnesses, all witnessing one another more or less simultaneously, but they can sign separate paper copies – to be put together and treated as one original document – as long as they are in each others’ “electronic presence.” In other words, it should be the “witnessing a will” version of that Zoom seder.

Like everything with a will, there are technical details and you should always get professional guidance, but it is reassuring that you can remain safe, while attending to your critical planning needs.

Jeremy Costin is a business and estates lawyer practising in Vancouver. He sits on the board of directors and the governance committee of the Vancouver Holocaust Education Centre, and is a frequent guest instructor at the Law Society of British Columbia.

(Disclaimer: This article should not be construed as legal advice. Only your lawyer can give you proper advice specific to your needs.)

Do we care about being fair?

In its decision on Uber Technologies Inc. v. David Heller, the Supreme Court of Canada determined that the freedom of contract is not so absolute in its technical application as to undermine its purpose of allowing people to craft their own destinies. (photo from wikipedia)

Does fairness play a role in how we interpret and apply law? After all, doesn’t a person have the right to make bad decisions?

The Torah gives us the written law, similar to legislation, and the Talmud gives us the oral law and commentary, similar to the doctrines and jurisprudence of common law.

So, are we to interpret and apply law strictly, even if it seems unjust? Is there authority to temper the interpretation of law based on the circumstances? The Talmud tells us, yes. In June, the Supreme Court of Canada agreed.

Every businessperson knows that it’s a good idea to get an agreement in writing. We use written agreements to make a record of what the parties have agreed is their shared vision of their business relationship. Part of that shared vision might include agreeing that certain rights ordinarily afforded by the law of the land won’t apply to this relationship. The right to give up a right is central to the freedom of contract.

The freedom of contract is based on the idea that a person knows what’s best for them and wouldn’t agree to something if the bargain weren’t to their liking. The law doesn’t protect you from your own bad decisions, but it is supposed to protect you from bad decisions that you didn’t make freely.

In June of this year, the Supreme Court of Canada decided the case of Uber Technologies Inc. v. David Heller. Heller was an Uber food delivery driver. As such, he signed a standard agreement with Uber – the kind of agreement that is a “take it or leave it” proposition. Very few people read such contracts and, even if they do take the time to read and understand them, they don’t have the opportunity to create the “shared vision” that the freedom of contract is supposed to protect.

One of the terms of the Uber contract was that any dispute would be dealt with through a mediation and arbitration process in the Netherlands, rather than through the court system in Canada. Doing so would require up-front fees of $14,500 US, not including the cost of lawyers and travel. Heller’s annual earnings from Uber are between $20,000 and $30,000 Cdn. In other words, it would cost at least half of his annual earnings just to file his dispute, let alone pursue it.

The Supreme Court of Canada found in Heller’s favour.

If this had been a freely negotiated contract, Heller would have made a bad decision, but it would have been his decision to make and thus enforceable. However, it was clear to the court that Uber put this clause into the contract to make sure their drivers simply could not bring any dispute against them.

The court could have said that, according to the strict letter of the law, Heller agreed to the contract and is, therefore, bound by it. It doesn’t matter if you now find unfair a contract that you freely agreed to.

Instead, the court said the law in its strictest form is not always applicable, and we must determine whether it is inhumane to apply it strictly or whether circumstances demand we temper it. The court found that, rather than providing an alternative means to justice (i.e. arbitration), Uber imposed an unreasonable barrier to justice; they found a way to make sure that their drivers could not access justice no matter the merit of their complaint.

Many of us are familiar with the first three verses of parshat Shoftim in Devarim (Deuteronomy 16:18-16:20). First, a system of judges is established. Second, the judges are commanded to judge fairly on the merits of the cases. The third verse contains one of the most well-known phrases in the Torah: “Justice, justice shall you pursue.”

Why is the third verse there, and why does it use the word “justice” twice? The second verse has commanded the judges to follow the law without prejudice. Why then tell us to pursue justice? Isn’t that implicit in the establishment of a rule-of-law justice system? And what is “justice, justice” as opposed to “justice”?

In Chapter 2 of tractate Avot in the Mishnah, we are told, “warm thyself by the fire of the sages, but beware of their glowing coals, lest thou be burnt, for their bite is the bite of a fox, and their sting is the sting of a scorpion, and their hiss is the hiss of a serpent, and all their utterances are like coals of fire.”

At the distance where coals keep you warm, you can learn. At this distance, you can also see the coals in the context of providing warmth. If you are close enough that they can bite, sting and hiss, you lose sight of their purpose (warmth) and will be burnt. This applies to law.

Chapter 1 of Avot provides three interpretations of law’s purpose in the olam, world – olam also means the universe and everything in it.

Verse 2 of Chapter 1 says that the world stands on Torah (law), work (the practice of law) and kindness.

Verse 12 directs us to love peace, to pursue peace and to love all creatures bringing them closer to the Torah (law).

Verse 18 tells us that the world stands on justice, truth and peace.

The inclusion of kindness and peace alongside law tells us not to get so close to the coals that we forget their purpose is warmth.

“Justice, justice” is not only law, but law with purpose. Law without purpose may wear a badge of justice, but it is not truly just. Law used for the purpose of subverting justice is not just.

The court determined, in the Uber decision, that the freedom of contract is not so absolute in its technical application as to undermine its purpose of allowing people to craft their own destinies. In this case, Uber’s contract precisely contradicted that purpose: Uber imposed a contract that expressly denied Heller the right to craft his own destiny without his freely given consent.

Basics of writing a contract

The other day, I finished the contract for an interesting project. There are half-a-dozen people involved in the project. Each of them has something to put in and is getting something out, but there is no direct relationship between one thing in and one thing out. In other words, I couldn’t say, “Mrs. Schwartz pays $100 and Mrs. Goldfarb treats her sciatica.” We were working with a pool of things being exchanged. It was more like, “Mrs. Schwartz pays $50 and provides physiotherapy equipment. Mr. Rosenblum takes $20 and provides a physiotherapy space. Mrs. Goldfarb treats Mrs. Schwartz, takes $30, and tells her other clients that she has space and equipment for physiotherapy.”

In Genesis, Chapter 9, we have the Covenant between G-d and Noah and with all of his descendants, being humankind; it also includes obligations between people. It is not set out as an item-by-item exchange, such as you pay your fare and the bus takes you along its route. It is a pool of obligations, promises and considerations among several parties, being G-d, Noah and each of the people who will descend from him.

This concept of a collection of promises was the structure I needed to put that project to paper the other day. It reinforced a basic technique in writing contracts that makes it possible to write a contract on a napkin.

A binding agreement is made by answering the questions, “Who’s doing what, and when are they doing it?”

The Torah distinguishes between the agreement (brit) and the token – or evidence – of the agreement (ot-habrit).

The agreement itself is the exchange of obligations: humankind will multiply and replenish the earth, will not murder (directly or indirectly) and will not eat meat that is still alive; G-d will provide to humankind the right and ability to hunt and eat meat, will establish the foundation of a justice system and will not flood the earth again.

The token of the agreement is the rainbow. This serves as a reminder both to G-d (verses 14 and 15) and to humankind and all creatures of the earth who can see it.

Today, we make this distinction by using a signed, written contract. The signed, written contract is evidence of the agreement between the parties. This brings us back to the napkin.

You’ll notice that, in my description of the arrangement between Mrs. Schwartz, Mrs. Goldfarb and Mr. Rosenblum, I state what each person does and expects to receive. Nothing happens without someone doing it. The only critical statement missing is the “when.” There are also a few details that would be quite helpful, such as where the money is being exchanged, what equipment is involved, the location of the therapy space, and the length of the therapy session.

In the questions “Who’s doing what, and when are they doing it?” the “what” also includes the “how” and the “where.” In this example, we could say:

“On the 15th day of Kislev, 5780, Mrs. Schwartz will put $50 in the old pickle jar behind the desk at Mr. Rosenblum’s office, which is at 12345 Oak St. She will also deliver, at the same time, an electric stimulation machine and the gel and pads needed for it. She won’t pick it up until the end of Chanukah.

“Mr. Rosenblum will take $20 of the $50 now in the pickle jar and let Mrs. Goldfarb use the therapy cubicle in his office for physiotherapy until the end of Chanukah.

“Mrs. Goldfarb will take the remaining $30 from the pickle jar and will treat Mrs. Schwartz’s sciatica for an hour on the 19th of Kislev and an hour on the 21st of Kislev.

“Mr. Rosenblum and Mrs. Schwartz will let Mrs. Goldfarb use the equipment and space for her other clients until the end of Chanukah.”

In this example, we now know who is responsible for what, when they’re going to do it, and how they’re going to do it.

There are far more details that we could put in, but this would be enough to move forward on its own if Mrs. Schwartz, Mrs. Goldfarb and Mr. Rosenblum don’t get around to writing out something more complicated.

If they expanded from a napkin to a couple of pieces of paper, they could also add in the kinds of details that lawyers argue over: what happens when things go wrong?

The first part of dealing with things going wrong is having everyone promise that it won’t. These are called, in Legalese, the representations and warranties.

Mr. Rosenblum will promise that he has an appropriate space for the therapy, including whatever licences and permits are needed. He also might promise certain details about what is an appropriate space, such as size, privacy, therapy bed, etc.

Mrs. Goldfarb will promise that she has the training, skills, certification and the valid licence required to carry out her obligations. She will also promise to do the therapy in a professional manner to the standards expected by her profession.

Mr. Rosenblum and Mrs. Goldfarb will both promise that they have the appropriate insurance.

Mrs. Schwartz will promise that she has the equipment needed for her therapy and that it works properly.

Now that we know who is going to do what, when and how they’re going to do it, and that they’ve all promised that everything is above board, we can discuss what happens if something goes wrong. Here we get into things like limitations of liability and indemnities. We also might have dispute resolution tools built right into the agreement.

If something goes wrong, no one wants to pay for someone else’s mistakes.

If Mrs. Schwartz trips on the doorstep, Mrs. Goldfarb doesn’t want to be responsible for Mr. Rosenblum not having a smooth entrance to his office.

If Mrs. Goldfarb injures Mrs. Schwartz during treatment, just because it happened in his office, Mr. Rosenblum doesn’t think he should be responsible.

If the electrical equipment causes a fire, neither Mr. Rosenblum nor Mrs. Goldfarb wants to be responsible for the damage caused by Mrs. Schwartz’s faulty machine.

Each will indemnify the others for liability arising from his or her own actions or negligence. In other words, each person promises to pay for the others’ damages for anything that is his or her own fault, whether or not it was intentional.

Dispute resolution is often overlooked because, when people are excited to enter a project together, they tend to think fights aren’t going to happen. But thinking about how to deal with an argument not only makes it easier should an argument arise, it also reduces the likelihood of the argument getting serious.

There are many flavours of dispute resolution tools, but here’s an easy one: the people involved pick an outside person whom they all trust, perhaps their rabbi, and they write in the agreement that, if they can’t resolve an argument between themselves, they’ll ask Rabbi Fogel to help them resolve it.

Remember that a good contract is a clear, written statement of a shared vision.

Jeremy Costin is a business and estates lawyer practising in Vancouver. He sits on the board of directors and the governance committee of the Vancouver Holocaust Education Centre, is a founding director of the Jewish Lawyers Association of British Columbia and is a frequent guest instructor at the Law Society of British Columbia.

How to avoid tax trap

(photo from pxhere.com)

One of the last problems you’d expect in creating a power of attorney is to find your company losing a bunch of tax advantages because the Canada Revenue Agency (CRA) decides you and the person you appointed in the power of attorney have related companies.

If your company is small and Canadian-controlled, it gets certain tax advantages; however, CRA doesn’t want you to break a large company into a bunch of small pieces to multiply those tax advantages. If you give each of those pieces to a different person, but maintain control through powers of attorney, CRA will still consider all those pieces to be one company.

Unfortunately, CRA doesn’t recognize the difference between a general power of attorney used to control a company and an enduring power of attorney used to help someone when they’re incapacitated. Here’s an example of the trap that can happen if you’re not careful with a power of attorney.

(Disclaimer: this is not tax advice; it is a simplified illustration of the small business tax rules and how they’re applied with respect to control and powers of attorney.)

I’ll give you two scenarios. The first one illustrates what CRA is trying to avoid, and the second one illustrates what it catches by accident.

First scenario: avoiding multiplication of the small business deduction

Patricia Hindenburg has three adult children: Roberta, Paulina and Bradley. She runs a clothing company, Whole Lotta Cashmere Fashions Inc., with stores in the Kitsilano, Yaletown, Commercial Drive and Marpole neighbourhoods.

Whole Lotta Cashmere Fashions is doing very well. Last year, it earned $2.4 million before tax. The company is a Canadian-controlled private corporation and is eligible for the small business deduction. The deduction means that, instead of paying about 35% income tax on $2.4 million, Whole Lotta Cashmere Fashions only pays that on $1.9 million. The first $500,000 is taxed at about 10%. (Again, these are not the real tax rates and I’m simplifying the calculations.)

Patricia realizes that, if she split the company into four companies, each owned by a different person, the companies would together pay 10% on $2 million and only $400,000 would be caught by the higher tax rate. So, she splits the company into four, giving one to each of her children and keeping one for herself. This way, each of the four companies will be eligible for the small business deduction – each will only pay 10% on its first $500,000 of earnings.

To make sure that the companies remain successful and operating just the way she likes, Patricia asks her kids each to grant her power of attorney over their voting shares in their companies.

She now has control over all four companies. Their combined income is still around $2.4 million, but she believes the collection of companies has a small business deduction of $2 million instead of $500,000. She expects to pay 10% on $2 million and 35% on $400,000.

CRA does not allow this, however. Because of the powers of attorney that give Patricia control over all of the companies, CRA taxes them as one big company the same way it did before the split.

This seems fair. If the companies are truly independent, they should each get the small business deduction but, if you split a big company into a bunch of smaller ones and you maintain control over them, you don’t get a bunch of small business deductions.

Second scenario: getting tax-trapped in incapacity planning

Stephanie Edwards has a metalworks shop, Icarus Metalworks Inc., that is doing very well. She has apprenticed each of her five children, Adriana, Murray, Nicole, Dickens and Jan, in the art and trade of blacksmithing.

A few years ago, Adriana and Dickens decided they prefer ceramics, and they opened their own company, Can I Play With Porcelain Ltd.

Last year, Icarus earned $700,000. Can I Play With Porcelain did pretty well too; it earned about $450,000.

Icarus should pay 10% on the first $500,000 and 35% on the remaining $200,000. Can I Play With Porcelain is under the limit for the small business deduction, and should only pay 10% on all $450,000 of its earnings.

Unfortunately, after all these years of literally bending iron and steel to her will, Stephanie has serious joint problems. She is finding it hard to write. This has her thinking about making sure her kids can take care of things for her if (and when) she’s unable.

Stephanie thinks carefully about her kids, and who would be in the best position to help her. She decides to grant an enduring power of attorney to her eldest, Adriana. The power of attorney is, as is the case with most enduring powers of attorney, unrestricted and it is effective from the moment it is signed. Stephanie wants to make sure that Adriana can help her even while she is still capable, because she doesn’t know for how much longer she’ll be able to sign cheques, etc., given her joint problems.

Here’s the trap: the CRA determines that the power of attorney allows Adriana to use Stephanie’s shares to control Icarus. This is true – Adriana can do anything on behalf of Stephanie that has to do with finances (including business, real estate and legal matters). Therefore, Icarus Metalworks Inc. and Can I Play With Porcelain Ltd. are now considered related companies. Can I Play With Porcelain Ltd. loses its small business deduction. Between the two companies, the first $500,000 is taxed at 10% and the remaining $650,000 is taxed at 35%.

Is there a way around this? Yes.

Two powers of attorney are prepared, both enduring, both restricted – in exactly opposite ways – and one is made “springing.”

In the first instance, Stephanie grants an enduring power of attorney to Adriana, effective immediately and without any limits or restrictions except that Adriana may not use it to vote or in any other way act on Stephanie’s shares of her company, Icarus Metalworks Inc.

This will probably cover about 95% of what Stephanie needs Adriana to do.

Eventually, Stephanie may lose capacity and need Adriana to take control of her company. At that point, the benefit of Adriana controlling Stephanie’s shares will outweigh the tax consequences. There’s also the slim hope that by then, the Income Tax Act will be amended so as not to catch enduring powers of attorney anymore.

Stephanie grants a second enduring power of attorney to Adriana, but this one has two limitations in it. It only applies to Stephanie’s shares of her company, to avoid any confusion regarding which power of attorney applies in any given situation. Also, it is not effective until Stephanie loses capacity – this is called a “springing” power of attorney. It springs into effect only when Stephanie is no longer capable of managing her affairs. This prevents CRA from considering the companies to be related until it’s absolutely necessary, and this is a recognized technique among lawyers who practise regularly in the areas of estate and incapacity planning.

Jeremy R. Costin, JD, is a business, estates and ecommerce lawyer at Costin Law. He can be reached at 604-742-0717 or jeremy@costinlaw.ca.