THE CASE

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 2010. Both were given

severance packages that matched their seniority so they decided that this might be the catalyst 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

mimicking 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 believe 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 outselling their three day "Invest Service" by a margin of two to one.

Sidney and Nancy gave no thought to the non-competition clause they had signed with National

when they were hired. 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 some $50,000.

Because neither Sidney nor Nancy owned a home or had any appreciable assets, the bank would

not lend them the money without a guarantor. Nancy's uncle Fred was fairly well established

and agreed to sign a continuing guarantee for the necessary funds, insisting that "this 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, 2011. In the first couple of months

after start-up the business was going extremely well. On April 15, 2011, one of Compact's

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

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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 was out of luck 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 just dummies. 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 she was not able to obtain

any satisfaction from Compact.

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

adding additional software. Shawna, a mature looking17 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 $750.00. 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.

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. He waited until the police arrived and was subsequently 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

$400.00 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.

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

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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, 2011, 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. 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

ability to utilize their services was limited to having Sid and Nancy repair or upgrade a

maximum of 1300 computers a year. A contract covering this work was executed by both

parties. A few days after the contract was signed, Nancy notice that the contract stated that the

annual payment would be $10,000 per year.

Around Thanksgiving 2011, 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 subsequently 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 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.

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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

a condition of 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 holding the bag. 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 2012, 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 cursory 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 the firm'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.

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QUESTIONS FOR ANALYSIS

PART ONE

(TOTAL 40 MARKS)

1.

Is there a valid contract between Compact and International Tire Inc.? Explain

fully with specific reference to the key elements. (6 marks)

2.

ASSUMING THAT THERE IS A VALID CONTRACT, was the contract

breached? Which party (or parties) breached the contract? How specifically was

the contract breached? At what point in time could legal action be started by each

party that you have identified as breaching the contract? (8 marks)

3.

How would the court approach the question of damages relating to the Compact

and International Tire Inc. contract? What factors would be considered? (8

marks)

4.

Is there a valid contract between Compact and American Tire Corporation? Will

Compact be able to successfully bill American Tire Corporation for $100,000 per

year? What arguments can Compact bring forward? Will it be successful? (6

marks)

5.

Does Shawna have any action that she can take against Compact? What steps can

she take (assuming her parents let her out of the house)? Will she be successful?

In a court action, who would be the plaintiff and who would be the defendant? (8

marks)

6.

Can Shady successfully sue Compact in court for the return of his money based

on the fact that the software did not work? Why, or why not? (4 marks