Sidney Greenwood and Nancy Fitzgerald had worked for National Business Systems, an

international computer repair service, for ten years. It therefore came as a surprise when they

both received lay$-$off notices on a Friday afternoon late in December $2020.$ Both were given

severance packages that matched their seniority so they decided that this might be a good

opportunity to launch their own business repairing computers and related equipment for

businesses in their community. Both were single, so no one else would be affected if the

business failed. Sidney had graduated from a community college with a diploma in computer

technology while Nancy had left high school after grade twelve, having taken several business

courses prior to graduating.

They decided to establish a partnership and to call their firm Compact Business Systems, closely

resembling a large successful firm in another city called Compaq Business Systems. Since they

had no plans to expand their business beyond their own community, they did not think that the

similarity in names would pose a problem. In fact, Sidney and Nancy so admired the colours

used in the Compaq Business Systems$$ logo that they used similar gradient tones of red on all

their signage and advertisements. Sidney and Nancy also named their premium same day

service: $$Presidio Service$($a name similar to$,$ but not exactly the same as$,$ one already

trademarked by Compaq Business Systems$)$ and this became their most popular standard of

service far outselling their three day $$Invest Service.$$

Sidney and Nancy had signed a non$-$competition clause with National when they were hired but

they forgot completely about that and did not consider it at all. All employees of National were

required to sign a non$-$competition covenant stipulating that they would not work for a

competitor or start up a competitive business within three years after leaving National Business

Systems. There was no geographic restriction contained in the non$-$competition clause, as

National Business Systems had customers all over the world.

In considering their start up costs, the pair determined that they would need a small shop to

conduct their business from, some testing and repair$-$equipment, a modest inventory of electronic

components and a delivery van to pick$-$up and return equipment they would repair. They would

also need to do some advertising in the local newspaper to get their name in front of the public.

Pooling their resources they found they had a shortfall in start$-$up capital of about $$50,000.$

Because neither Sidney nor Nancy owned a home or had any major assets, the bank would not

lend them the money without a guarantor. Nancy$$s uncle Fred was fairly well off and agreed to

sign a continuing guarantee for the necessary funds, insisting that $$$$50,000$ was as much as he

was prepared to $$be on the hook for$,$ so they better make do$.$ This limitation however, was not

written into the agreement with the bank, nor was the bank made aware of it$.$

Compact Business Systems opened for business on March $1,2021.$ In the first couple of months

after start$-$up the business was going extremely well. On April $15,2021,$ one of Compact$$s

$3$

customers $-$ Lucky Accounting $$ delivered one of its $($Lucky$$s$)$ desktop HQ computers to

Compact. Compact was asked to upgrade the computer and install a new operating system

known as Vulnerable. When Lucky$$s employee returned to Compact on April $21$st to pick up the

HQ computer, Compact informed the Lucky employee that he couldn$$t have it back because the

HQ computer had been stolen in a break$-$in the night before. Neither Compact nor Lucky had

any insurance coverage on the HQ computer. Compact had installed surveillance cameras in the

store and there was a sign on the door identifying an alarm company. In order to save money,

however, Compact had stopped paying for the alarm monitoring and the surveillance cameras

were not real. Compact$$s desk clerk calmly explained to the Lucky employee that the loss was

not Compact$$s fault. The Lucky employee became very angry but Compact refused to offer any

compensation for the lost computer.

When Compact upgraded computers, this often involved not only changing the hardware but also

adding additional software. Shawna, a mature looking$17$ year old high school student, brought

her computer into Compact$$s$.$ Shawna$$s computer had not being working well lately and she

had absolutely no idea why that was the case. Compact$$s desk clerk advised Shawn that the only

way to improve the computer would be for her to purchase Compact$$s Deluxe Upgrade Package

for $$750\mathrm{.}00$ and that there was no other solution to her computer problem. Shawna, under the

urging of the desk clerk, agreed and signed the work order. Shawna picked up her computer a

few days later. Once she had her computer at home it worked perfectly. When her parents

returned home and found out how much she had spent to repair the computer her mother called a

friend in the computer repair field who advised her that the repairs should have cost no more

than $$200$ and that the upgrade package had not been necessary at all.

About a week after Shawna had visited the store, Nancy, who happened to be working at the

counter, spotted a customer behaving strangely. Upon closer observation she saw him slip some

small computer components into his pocket and move towards the exit. Nancy got another clerk

who was in the back working on some computers and, after the customer had left the store,

Nancy and the clerk approached him and demanded that he empty his pockets. The customer

refused and Nancy demanded that he come back into the store while she called the police.

Intimidated by the other clerk $($whose nickname was $$Moose$)$ and believing that he had no

choice but to comply he accompanied them into the store. He was placed in the break room and

the door was closed. When the police arrived, he emptied his pockets and they found the

computer components. He was arrested and charged with theft.

Later that day a long term customer, known to his friends as $$Shady$,$ brought his computer to

Compact. Shady had heard that Compact would install software $($named FreeFromITunes$),$

created by a company called Sketchysoft, which would allow Shady to download music and

movies from itunes.com without payment. Compact installed this software and Shady paid the

$$400\mathrm{.}00$ fee. When Shady got his computer home he realized that FreeFromITunes did not work

at all and, in fact, resulted in Shady being charged double for each download.

Sidney and Nancy called on several of National Business Systems customers and persuaded

several to switch their business with offers of reduced service charges and faster turn$-$around.

$4$

Sidney and Nancy were particularly proud that they were able to persuade the regional office of

International Tire Inc. to bring all their computer repair work to Compact. International Tire

Inc., who was National Business Systems largest customer, was in the $3$rd year of a $5$ year service

contract with National Business. Nancy was also quick to point out to those she called on that

she had long suspected National Business Systems of overcharging its bigger customers and

using off$-$shore components of inferior quality in their repairs. Needless to say, many of

National$$s customers were eager to switch their business in favour of the lower prices offered by

Compact.

On June $1,2021,$ Compact Business Systems signed a three year agreement with International

Tire Inc. Terms of the contract included the requirement that Compact would repair all of

International Tire$$s computers in a timely manner and that International would send all of its

computer repairs to Compact during the $3$ year period and pay an agreed amount for the repairs.

The contract was signed by the President of International Tire $($on behalf of International Tire

Inc.$)$ and by Sidney Greenwood. Another term of the contract required Compact to pick up$,$

repair and return the computers within an $$average time of approximately $4$ business days.$$

Sid and Nancy were fortunate to get a large contract from another tire manufacture $$ American

Tire Corporation $$ based in Nova Scotia. This contract was fixed price contract. Sid and Nancy

negotiate a deal that would pay $$100,000$ per year for $4$ years for keeping ATC$$s computers

working in tip top shape. The contract contained Sid and Nancy$$s cost exposure because ATC$$s

was limited to having Sid and Nancy repair or upgrade a maximum of $1300$ computers a year. A

contract covering this work was signed by both parties. A few days after the contract was

signed, Nancy noticed that the contract stated that the annual payment would be $$10,000$ per

year.

Around Thanksgiving $2021,$ things started to go wrong. Nancy, who had agreed to take care of

the administrative end of the business, had fallen behind in paying the firm$$s bills and several

suppliers were becoming impatient. At the same time, payments were not coming in from their

customers and Nancy was too busy to spend time chasing the delinquent accounts. Mainly as a

result of this, cash flow was tight.

By this time, Sidney and Nancy$$s business had paid $$15,000$ of the initial loan. The pair

approached the manager of the bank for an additional $$40,000$ in order to pay off the remainder

of the initial loan and have an additional $$5,000$ to get them through their $$tight spot$.$ The bank

manager agreed and provided the needed funds with all of Compact$$s business assets to be

secured against the additional funds.

One night a couple of weeks later, Sidney was delivering a computer to a customer on his way

home from work and had an accident. A young woman in the other car, Freda Schmidt, was

seriously injured, suffering serious neck and back injuries. It was determined that Sidney had

made an improper lane change and he was charged with dangerous operation of a motor vehicle.

As it turned out, Freda was a highly paid administrative assistant and when her boss learned she

$5$

could be off work for at least three months, was going to sue for the loss of her services and the

cost of replacing her on a temporary basis.

By early November, the average time Compact took to repair a computer had slipped from $4$

business days to $7$ or $8$ business days. After several complaints from International to Compact,

International advised Compact that it was cancelling the contract because Compact had breached

the contract. International Tire Inc. stopped sending its computers to Compact for repair.

In addition, during the last two months of their first year, the economy went from bad to worse.

Orders dropped off, suppliers were screaming for payment in full on their overdue accounts, and

the bank was threatening to seize the collateral posted as security for their loan. Sidney and

Nancy decided that they had had enough and decided to declare bankruptcy. Believing that

uncle Fred was in the clear, it seemed like they had nothing to lose. The bank could $$go pound

salt$.$

In the week before the pair were to visit their lawyer to discuss the bankruptcy process, Sid and

Nancy wrote cheques to three of their suppliers whom they felt had treated them well and who

they did not want to leave with nothing. They also arranged to sell off some unused inventory to

a discount warehouse for $30\%$ of its original value. They pocketed the cash they received from

the sale, believing that they were entitled to it as compensation for all of their hard work.

In early January $2022,$ they met with their lawyer to start bankruptcy proceedings. They

disclosed their financial situation, including the most recent loan arrangement they had with the

bank. Although the lawyer only gave the initial loan agreement with the bank a quick look, he

assured them the inventory was the only security the bank was entitled to$.$ The delivery van,

which was leased, could be returned to the leasing company without any additional costs and

they would simply abandon the lease for the building they were using as a workshop.

Meanwhile, the leasing company, having heard about Compact$$s troubles, decided to try and

recover their van, fearing that bankruptcy proceedings could see it tied up for weeks once the

trustee in bankruptcy put a lock on Compact$$s premises. They ordered their agents to break into

Sidney & Nancy$$s shop late one night to recover the van. In doing so$,$ the agents broke the

padlock on the door and, while moving through the dimly lit premises, one of the agents tripped

over an electric heater which ignited a puddle of solvent Nancy had spilled and failed to clean

up$.$

The solvent ignited immediately causing a fire that quickly spread through the shop.

Serious damage was done to the shop and one of the agents sustained serious burns while putting

the fire out. He was out of work for three months recovering from the injuries List and define the main remedies for breach of contract available to International

Tire. For each of them indicate whether it is useful in this case and why you said

why it is or is not. $(12$ marks