COMMERCIAL LAW

Question 2: 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. 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.