ACTG 2P40 FALL 2020 ASSIGNMENT NO. 3 Chapters 9, 12 and 13 Assignment is due one (1) week from the date upon which it is distributed to the class. Late Assignments shall be penalized at the rate of 10% per day up to a maximum of one (1) week following the due date. Assignments handed in later than one (1) week will not be accepted. Question 1 Andy was the President of Topical Inc., a pharmaceutical company which was developing a pain relieving medical cream. All clinical trials had been completed over a three (3) year period and Topical Inc. was awaiting final approval from Health Canada to produce and market the product. At the annual shareholders meeting on June 1st Andy had told the shareholders that all studies had been completed and submitted to Health Canada and final approval should come "any day". There were 25 million shares of Topical Inc. outstanding which were trading at $2.00 per share on the Toronto Stock Exchange. Despite Andy's upbeat message to the shareholders, Topical Inc. was in dire financial straits. Although the product was extremely promising, no money was coming in to the company. The money raised from the initial share offering had been spent over the past three (3) years developing the product and constructing a manufacturing facility. The bank would not loan the company any further funds. On June 15th, Andy received a letter from the company's lawyers, Smarter and Smarter ("SS") demanding immediate payment of $200,000.00 for overdue accounts. SS knew of the company's financial position and wanted to ensure they were paid prior to numerous other creditors. Andy was distraught and had no idea what to do. An outstanding lawsuit, particularly if issued by the company's own lawyers would be disastrous. The publicity and effect of a lawsuit on the company's reputation would be fatal. Andy contacted SS and requested further time to pay since final approval would be received any day. SS refused. The next morning, after a sleepless night, Andy decided to send an email to SS, offering to settle the account by having Topical Inc. issue 100,000 shares to SS. Unfortunately, the email incorrectly set out the number of offered shares as 1,000,000. SS replied accepting the offer. On June 25th, Health Canada approved the sale of Topical Inc.'s product. Shares of Topical Inc. trading on the Toronto Stock Exchange rocketed to $10.00 on the news. Topical Inc.'s bank immediately increased its credit lines. On July 4th, SS requested the issuance of 1,000,000 shares. Andy refused, indicating that the offer had only been intended to be 100,000 shares. He then delivered a cheque for $200,000.00 in full payment of the outstanding legal accounts. SS commenced legal action for specific performance to compel the issuance of the 1,000,000 shares by Topical. Required: (i) Discuss the defence(s) that will be raised by Topical Inc. and the likelihood of success. Be certain to discuss the applicable legal principles in detail as part of your answer. If SS successfully establishes that there was a contract for 1,000,000 shares could Topical Inc. raise a defence of undue influence or economic duress? Question 2 Assume that a contract was formed June 16th between Topical Inc. and SS for the issuance of 100,000 shares in settlement of the account and the following scenario occurred. On June 7th, Health Canada had requested that Topical Inc. complete a further six (6) month study to confirm the safety of its product. Andy did not disclose this request to SS or to anyone other than the employees who would conduct the study. Details of the request were posted on Heath Canada's website, although there was no other public notice of the additional requirement for approval. Upon publication of this news by a reporter on June 20th, the shares of Topical Inc. plummetted to $.01 per share. SS wishes to set aside the agreement to accept the shares and pursue its claim for the outstanding legal fees. Required: Explain the basis upon which SS will proceed and whether the application will be successful. Make sure you discuss the applicable principles as part of your answer. Question 3 Assume that the sale of Topical Inc.'s product was approved. Topical Inc. then entered into an exclusive distributorship agreement with Salesco Inc. to market and sell the product for a period of two (2) years. The agreement provided that Salesco Inc. would spend $1,500,000.00 on a massive marketing campaign, would submit orders 30 days in advance of the required delivery date and that Topical Inc. would manufacture and deliver the product to Salesco Inc.'s warehouse within the thirty (30) day period. Topical and Salesco agreed that Topical would supply and Salesco would purchase a minimum of 500,000 units per month during the term of the agreement. The agreement also included the following paragraph: "Although Topical Inc. will make every effort to supply product in accordance with orders submitted, the parties agree that if, as a result of manufacturing delays, the product is not available, or for any other reason whatsoever, Topical Inc. will not be responsible for damages of any nature. Topical Inc.'s total liability in any event shall not exceed $10,000.00." On September 1st, Salesco Inc. placed an order for 1,000,000 units at $4.00 per unit for delivery by September 30th. Salesco Inc. had convinced People's Drugs, the largest Canadian pharmacy chain 2 to stock the product and to purchase the units at $5.00 per unit for delivery on October 1. On September 204, a COVID outbreak at Topical's manufacturing facility resulted in the closure of the facility for 2 weeks. No product could be manufactured or shipped during the shutdown period. Since the product was not available on October 1, People's cancelled their order and decided to stock a competitive product. Salesco Inc. commences an action to terminate its agreement with Topical Inc. since they no longer have a purchaser for the product and also requests damages of $1,000,000.00. In its defence Topical Inc. claims that: (i) Salesco Inc. cannot terminate the contract and is still obligated to act as it's distributor for the full two (2) year period; (ii) damages in any event are limited to $10,000.00; (iii) in the alternative, the contract was frustrated as a result of the COVID outbreak and no damages are payable. Required: Examine the issues that have been raised, discuss the applicable legal principle and likely result 3 ACTG 2P40 FALL 2020 ASSIGNMENT NO. 3 Chapters 9, 12 and 13 Assignment is due one (1) week from the date upon which it is distributed to the class. Late Assignments shall be penalized at the rate of 10% per day up to a maximum of one (1) week following the due date. Assignments handed in later than one (1) week will not be accepted. Question 1 Andy was the President of Topical Inc., a pharmaceutical company which was developing a pain relieving medical cream. All clinical trials had been completed over a three (3) year period and Topical Inc. was awaiting final approval from Health Canada to produce and market the product. At the annual shareholders meeting on June 1st Andy had told the shareholders that all studies had been completed and submitted to Health Canada and final approval should come "any day". There were 25 million shares of Topical Inc. outstanding which were trading at $2.00 per share on the Toronto Stock Exchange. Despite Andy's upbeat message to the shareholders, Topical Inc. was in dire financial straits. Although the product was extremely promising, no money was coming in to the company. The money raised from the initial share offering had been spent over the past three (3) years developing the product and constructing a manufacturing facility. The bank would not loan the company any further funds. On June 15th, Andy received a letter from the company's lawyers, Smarter and Smarter ("SS") demanding immediate payment of $200,000.00 for overdue accounts. SS knew of the company's financial position and wanted to ensure they were paid prior to numerous other creditors. Andy was distraught and had no idea what to do. An outstanding lawsuit, particularly if issued by the company's own lawyers would be disastrous. The publicity and effect of a lawsuit on the company's reputation would be fatal. Andy contacted SS and requested further time to pay since final approval would be received any day. SS refused. The next morning, after a sleepless night, Andy decided to send an email to SS, offering to settle the account by having Topical Inc. issue 100,000 shares to SS. Unfortunately, the email incorrectly set out the number of offered shares as 1,000,000. SS replied accepting the offer. On June 25th, Health Canada approved the sale of Topical Inc.'s product. Shares of Topical Inc. trading on the Toronto Stock Exchange rocketed to $10.00 on the news. Topical Inc.'s bank immediately increased its credit lines. On July 4th, SS requested the issuance of 1,000,000 shares. Andy refused, indicating that the offer had only been intended to be 100,000 shares. He then delivered a cheque for $200,000.00 in full payment of the outstanding legal accounts. SS commenced legal action for specific performance to compel the issuance of the 1,000,000 shares by Topical. Required: (i) Discuss the defence(s) that will be raised by Topical Inc. and the likelihood of success. Be certain to discuss the applicable legal principles in detail as part of your answer. If SS successfully establishes that there was a contract for 1,000,000 shares could Topical Inc. raise a defence of undue influence or economic duress? Question 2 Assume that a contract was formed June 16th between Topical Inc. and SS for the issuance of 100,000 shares in settlement of the account and the following scenario occurred. On June 7th, Health Canada had requested that Topical Inc. complete a further six (6) month study to confirm the safety of its product. Andy did not disclose this request to SS or to anyone other than the employees who would conduct the study. Details of the request were posted on Heath Canada's website, although there was no other public notice of the additional requirement for approval. Upon publication of this news by a reporter on June 20th, the shares of Topical Inc. plummetted to $.01 per share. SS wishes to set aside the agreement to accept the shares and pursue its claim for the outstanding legal fees. Required: Explain the basis upon which SS will proceed and whether the application will be successful. Make sure you discuss the applicable principles as part of your answer. Question 3 Assume that the sale of Topical Inc.'s product was approved. Topical Inc. then entered into an exclusive distributorship agreement with Salesco Inc. to market and sell the product for a period of two (2) years. The agreement provided that Salesco Inc. would spend $1,500,000.00 on a massive marketing campaign, would submit orders 30 days in advance of the required delivery date and that Topical Inc. would manufacture and deliver the product to Salesco Inc.'s warehouse within the thirty (30) day period. Topical and Salesco agreed that Topical would supply and Salesco would purchase a minimum of 500,000 units per month during the term of the agreement. The agreement also included the following paragraph: "Although Topical Inc. will make every effort to supply product in accordance with orders submitted, the parties agree that if, as a result of manufacturing delays, the product is not available, or for any other reason whatsoever, Topical Inc. will not be responsible for damages of any nature. Topical Inc.'s total liability in any event shall not exceed $10,000.00." On September 1st, Salesco Inc. placed an order for 1,000,000 units at $4.00 per unit for delivery by September 30th. Salesco Inc. had convinced People's Drugs, the largest Canadian pharmacy chain 2 to stock the product and to purchase the units at $5.00 per unit for delivery on October 1. On September 204, a COVID outbreak at Topical's manufacturing facility resulted in the closure of the facility for 2 weeks. No product could be manufactured or shipped during the shutdown period. Since the product was not available on October 1, People's cancelled their order and decided to stock a competitive product. Salesco Inc. commences an action to terminate its agreement with Topical Inc. since they no longer have a purchaser for the product and also requests damages of $1,000,000.00. In its defence Topical Inc. claims that: (i) Salesco Inc. cannot terminate the contract and is still obligated to act as it's distributor for the full two (2) year period; (ii) damages in any event are limited to $10,000.00; (iii) in the alternative, the contract was frustrated as a result of the COVID outbreak and no damages are payable. Required: Examine the issues that have been raised, discuss the applicable legal principle and likely result 3