Instructions Specific to This Exam

1. This examination contains one question worth a total of 100 marks.

2. You will be assessed primarily on your knowledge of the relevant cases, legislation and other assigned materials identified in the Business Organizations syllabus, together with your ability to recognize the legal issues raised by the facts and analyze the competing arguments available to the parties.

3. No marks are awarded for merely reproducing or summarizing the facts. Your answer should identify the relevant legal issues, state the governing legal principles and apply those principles to the facts.

4. Respond to the question actually asked. Do not provide a general essay on partnerships or corporations, and do not work through a memorized checklist of issues that are not reasonably raised by the facts.

5. Full case citations are not required for authorities contained in the assigned materials. Where relevant, identify cases and statutory provisions with sufficient precision to demonstrate your knowledge of the applicable law.

6. You are asked to prepare a memorandum of law. You do not need to spend examination time creating formal headings such as “To,” “From,” “Date” or “Re.” Marks are awarded for substantive legal analysis.

7. Pay particular attention to the distinction between:

   • obligations incurred by an unincorporated business and those incurred by a subsequently incorporated corporation;

   • internal restrictions among business participants and their effect on third parties;

   • personal liability and liability of a partnership or corporation; and

   • authority to bind a business organization and the consequences where authority is disputed.

8. The assigned materials may describe statutory provisions that have subsequently been amended. Where the syllabus directs candidates to use current legislation, the current statutory provisions prevail.

9. Unless the facts indicate otherwise, apply the Canada Business Corporations Act to the corporation and the applicable Ontario partnership legislation to the unincorporated business.

10. Do not address taxation, securities regulation, insolvency law or employment law.

11. Write a clear and organized answer in complete sentences.

QUESTION

FACTS

In January 2025, Mara Kwan, Elliot Brenner and Devon Ashford decided to develop automated sorting equipment for small distribution warehouses.

Mara was a robotics engineer. Elliot had worked in industrial sales for more than a decade. Devon was a former banker who agreed to provide most of the initial funding.

They began operating under the name Latchline Automation.

The three signed a two-page document entitled “Founders Arrangement.” It provided:

“The parties intend to collaborate in developing and commercializing the Latchline system. Nothing in this agreement is intended to create a legal partnership.”

The document also provided that Mara would receive 40% of the venture’s net profits, Elliot 35%, and Devon 25%.

Mara agreed to contribute her engineering work and certain prototype designs. Elliot agreed to handle sales, suppliers and customer relationships. Devon contributed $250,000 to the venture.

Devon’s contribution was not repayable on a fixed date and did not bear interest. The Founders Arrangement stated that Devon would recover his investment “through his entitlement to profits as the business develops.”

The three opened a bank account in the name Latchline Automation. Any two of them could authorize payments.

Their website described Mara, Elliot and Devon as the venture’s “three co-founders.” An early marketing brochure described them as:

“the partners behind Latchline Automation.”

Devon objected to the word “partners” when he saw the brochure.

Elliot responded:

“It’s marketing language. Nobody thinks we formed a law firm.”

The brochure was never changed.

Although Devon did not work at Latchline every day, he attended monthly meetings, approved the annual budget, participated in pricing decisions and personally negotiated an increase in the venture’s line of credit.

The Founders Arrangement also stated:

“No Founder may commit Latchline Automation to any contract exceeding $75,000 without the written approval of all three Founders.”

It further provided:

“As between the Founders, no Founder shall be responsible for an unauthorized commitment made by another Founder.”

In April 2025, Elliot negotiated with Cobalt Drive Components Ltd. (“Cobalt”), a supplier of industrial servo motors.

Cobalt had previously supplied Latchline with three smaller orders, each worth less than $25,000. Elliot had negotiated and signed each order without involving Mara or Devon.

Cobalt’s sales director understood Elliot to be responsible for purchasing and sales at Latchline. She had also reviewed Latchline’s website and marketing brochure.

Elliot then signed a contract requiring Latchline to purchase $210,000 of motors from Cobalt over the next six months.

He did not obtain Mara’s or Devon’s approval.

The contract was signed:

Latchline Automation
Per: Elliot Brenner, Co-Founder

Cobalt was not shown the Founders Arrangement and was unaware of the $75,000 restriction.

When Devon learned of the contract, he told Elliot:

“You had no authority to do that. If Cobalt wants its money, that is your problem.”

Elliot replied that purchasing motors was an ordinary part of Latchline’s business and that Cobalt had always dealt exclusively with him.

Around the same time, Mara began discussions with Orison Logic Ltd., a software company whose control software could substantially improve Latchline’s sorting system.

The introduction to Orison had been made by a potential Latchline customer during a meeting attended by Mara and Elliot.

Orison later sent an email to Mara’s Latchline email address offering to sell an exclusive Canadian licence to the software for $70,000.

Mara did not tell Elliot or Devon about the offer.

Instead, she incorporated a company wholly owned by her called Morrowglass Technologies Inc. and caused Morrowglass to acquire the licence.

Two months later, Morrowglass licensed the same software to another warehouse-automation company for $140,000.

When Elliot discovered what had happened, Mara said:

“The opportunity was offered to me because I am the engineer. Latchline never paid for the software and never agreed to buy it. I used my own money, so the profit is mine.”

By the summer of 2025, the founders had become concerned about personal exposure arising from Latchline’s increasing business.

They agreed to incorporate federally.

On July 10, Elliot began negotiating a five-year lease for a manufacturing facility with Westmere Industrial Properties Ltd. (“Westmere”).

At that time, the corporation had not yet been created.

The lease identified the proposed tenant as:

Latchline Robotics Inc., a corporation to be incorporated under the Canada Business Corporations Act.

Elliot signed:

Latchline Robotics Inc.
Per: Elliot Brenner, President

The lease also contained the following provision:

“The parties acknowledge that the Tenant has not yet been incorporated. Elliot Brenner executes this agreement solely on behalf of the proposed corporation and shall incur no personal liability under this lease whether or not the proposed corporation subsequently comes into existence or adopts this agreement.”

Two days later, Mara ordered a specialized laser-cutting machine from Axiom Fabrication Equipment Ltd. (“Axiom”) for $320,000.

The purchase order identified the purchaser as Latchline Robotics Inc.

Mara signed:

Mara Kwan
Chief Technology Officer
Latchline Robotics Inc.

The Axiom sales representative knew that Latchline Robotics Inc. had not yet been incorporated. His internal sales note stated:

“Customer says federal incorporation should be completed next week.”

The purchase order contained no provision addressing Mara’s personal liability.

Latchline Robotics Inc. (“Latchline Inc.”) was incorporated under the CBCA on July 18.

Mara received 40% of its shares, Elliot 35%, and Devon 25%. All three became directors. Elliot became President and Chief Executive Officer and Mara became Chief Technology Officer.

No formal agreement was executed transferring the liabilities of Latchline Automation to Latchline Inc.

The founders nevertheless began conducting all new business through the corporation.

The old Latchline Automation bank account remained open temporarily while accounts were transitioned.

Latchline Inc. moved into Westmere’s facility on August 1. It paid rent from its corporate bank account for the next six months.

The board never passed a resolution expressly adopting the Westmere lease.

Axiom delivered the laser-cutting machine to the same facility.

Latchline Inc.’s employees installed the machine, and it was used continuously for approximately ten weeks to manufacture components sold by the corporation.

The corporation generated approximately $190,000 in sales from products manufactured partly using the machine.

No board resolution expressly adopted the Axiom purchase order.

When Axiom later demanded payment, Devon reviewed the original documents and said:

“That contract was signed before the company existed. Mara ordered it, so Axiom should chase Mara.”

Mara disagreed.

She said:

“The company took the machine, installed it and made money with it. It is obviously the company’s contract now.”

Cobalt, meanwhile, continued delivering motors under Elliot’s earlier $210,000 contract.

After incorporation, Latchline Inc. paid Cobalt $60,000 from its corporate bank account.

Cobalt changed the customer name in its accounting system from “Latchline Automation” to “Latchline Robotics Inc.” after receiving the payment.

No one expressly discussed whether the corporation was replacing the founders as debtor.

Cobalt did not expressly release Mara, Elliot or Devon from any existing obligation.

Devon nevertheless took the position that the payment and account-name change meant that Cobalt had agreed to look only to the corporation.

By September, the founders considered the old Latchline Automation venture finished.

At a meeting, Elliot said:

“Everything is corporate now. The old business is done.”

Mara and Devon agreed.

They did not send notice of that decision to Cobalt or any other supplier with which Latchline Automation had previously dealt.

Three weeks later, Latchline Inc. reached the limit of its corporate credit facility.

Elliot urgently needed additional servo motors to complete a customer order.

Without telling Mara or Devon, he contacted the same sales director at Cobalt and ordered another $90,000 of motors.

Rather than use Latchline Inc.’s purchasing system, Elliot asked Cobalt to:

“put this one through the old Latchline Automation account for now.”

Cobalt complied.

Its sales director believed the founders were still carrying on the same business through a different corporate structure and was unaware that Mara and Devon considered the earlier venture terminated.

The motors were delivered to Latchline Inc.’s facility and used to complete the corporation’s customer order.

Cobalt has not been paid for them.

Devon says the $90,000 order cannot bind him because the original venture had already ended.

Several months later, a different authority problem arose.

Latchline Inc.’s board had adopted an internal resolution providing:

“The Chief Executive Officer may enter into contracts on behalf of the Corporation with a total commitment not exceeding $150,000. Any commitment exceeding that amount requires prior Board approval.”

The resolution was not included in the corporation’s articles.

Elliot subsequently negotiated an exclusive distribution arrangement with Palisade Motion Group Ltd. (“Palisade”).

The agreement required Latchline Inc. to purchase at least $900,000 of components over three years.

During negotiations, Mara became concerned about the proposed commitment.

She sent Palisade’s commercial director an email stating:

“Just so there is no confusion, any commitment of this size still requires approval from our board.”

Two days later, Elliot told Palisade:

“The board is comfortable with the deal. We are good to sign.”

No board meeting had occurred.

Palisade did not ask to see a board resolution.

Elliot signed the agreement as President and CEO of Latchline Inc.

The first shipment, worth $85,000, arrived three weeks later.

Warehouse employees accepted the goods in the ordinary course. Latchline Inc.’s accounts-payable department paid the invoice.

Neither Mara nor Devon knew about the signed three-year agreement at that time. They believed the $85,000 shipment was an ordinary purchase within Elliot’s authority.

Latchline Inc. incorporated those components into products and sold them to customers.

When Palisade sent a second shipment, Mara learned for the first time that Elliot had executed the three-year agreement.

The board immediately notified Palisade that Elliot lacked authority and that Latchline Inc. would not honour the remainder of the agreement.

Palisade responded:

“Your President and CEO told us the board approved it. Your company accepted the first shipment, paid us and resold the products. Any internal approval problem is between you and Elliot.”

While these disputes were developing, Latchline Inc. prepared an important demonstration of its newest sorting machine for a prospective customer.

The machine incorporated a safety interlock designed to stop the robotic arm whenever a person entered a marked area around it.

On the morning of the demonstration, the interlock malfunctioned repeatedly and stopped the machine even when no person was nearby.

A Latchline engineer told Mara that the demonstration should be postponed until the sensor could be replaced.

Mara replied:

“We cannot lose this customer because of a bad sensor. Disable it for the demonstration. We will control the area manually.”

The engineer complied.

During the demonstration, a prospective customer, Leonie Park, stepped into the marked area to examine a component.

The robotic arm did not stop and struck her, causing serious injuries.

Latchline Inc. accepts that the engineer was acting in the course of employment during the demonstration.

However, the corporation has limited insurance coverage and is experiencing significant cash-flow problems.

Leonie has threatened to sue:

• Latchline Inc.;

• Mara personally;

• Elliot personally; and

• Devon personally.

Devon says:

“The entire reason we incorporated was so none of us could ever be personally liable for business debts or accidents.”

Elliot also argues that only the corporation can be liable because the machine and the employee who operated it belonged to the corporation.

Mara accepts that she instructed the engineer to disable the interlock but says that she acted only in her capacity as an officer of Latchline Inc.

Relations among Mara, Elliot and Devon have now deteriorated badly.

Devon seeks advice concerning:

• whether he was ever personally exposed to obligations incurred by Latchline Automation;

• whether the original founders can still be liable to Cobalt after incorporation;

• whether Mara was entitled to keep the benefit of the Orison software opportunity;

• who is responsible for the Westmere and Axiom pre-incorporation contracts;

• whether Latchline Inc. is bound by Elliot’s Palisade agreement;

• whether Elliot’s later Cobalt order can bind the former Latchline Automation business; and

• whether incorporation protects the founders and directors from Leonie’s claim.

Do not address taxation, securities regulation, insolvency law or employment law.

QUESTION

The senior partner at your firm asks you to prepare a brief but comprehensive memorandum addressing the significant Business Organizations issues arising from the full sequence of events.

Advise as to the legal relationships and liabilities of Mara, Elliot, Devon, Latchline Automation and Latchline Robotics Inc., together with the material rights of the relevant third parties.

Your analysis should identify the governing statutory and common-law principles, assess the strongest competing arguments, distinguish internal rights from liabilities owed to outsiders, and explain the likely practical consequences of each issue.

Do not merely list statutory provisions or possible claims. Apply the governing law to the facts.

100 MARKS