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Shareholder Agreements & Disputes

ONCA: Complex Shareholder Dispute Not Appropriate for Summary Judgment

A shareholders’ agreement is a contract entered into by some or all of the shareholders of a corporation. It governs the relationship between the parties and can also regulate how the company’s business is managed.

In a recent Ontario Court of Appeal decision, the court found that one part of a complex litigation arising out of a shareholders’ agreement had not been appropriate for summary judgment. 

Shareholders Engaged in Complex Litigation

The appellant and respondent are real estate developers. In 2007, they entered into a joint venture agreement through their respective numbered companies to develop a project in Waterloo, Ontario. Shortly after entering into the joint venture agreement, they formed a corporation to pursue other development opportunities in Waterloo, London and Oshawa.

Under a shareholders’ agreement dated April 2, 2008, they became shareholders of the corporation through their respective corporations, with the appellant holding 55% of the common shares and the respondent holding 45% of the common shares. The parties were the corporation’s only directors. The shareholders’ agreement contained a non-competition clause.

Shortly after the shareholders’ agreement was executed and development on the lands commenced, the parties’ business relationship deteriorated and they became engaged in sustained and hard-fought litigation.

In 2010, the respondent commenced an action in which he claimed over $30 million in connection with the joint venture project and the development project.

In 2012, the appellant commenced a companion action to the respondent’s action, which was based on a claim for damages arising out of an alleged breach of the non-competition clause. 

In 2014, the parties consented to an order that the two actions be tried together. 

However, in May 2017, the respondent brought a motion for summary judgment to dismiss the appellant’s action on the ground that the non-competition clause was an unenforceable restrictive covenant. The motion judge agreed with this submission, holding that the non-competition clause was unenforceable, and granting judgment dismissing the action.

The appellant appealed, claiming that the motion judge erred by granting summary judgment. The appellant argued that the motion judge effectively granted partial summary judgment because of the existence of the other action and the factual linkage between the two.

In response, the respondent contended that summary judgment was appropriate because the only issue before the motion judge was the enforceability of the non-competition clause. The respondent also argued that the motion judge granted full summary judgment because it disposed of the appellant’s action.

Court of Appeal Sets Aside Summary Judgment

The Court of Appeal began by noting that the motion judge did not undertake an analysis as to whether this was a proper situation in which to consider summary judgment, although that preliminary question was argued before him. Instead, the motion judge merely alluded to the issue in one paragraph of his reasons. The court then stated:

“It would seem, at first blush, to be unusual to consider summary judgment in one action that has already been ordered to be tried together with another action, along with an order for common examinations for discovery. Indeed, the order directing that the actions be tried together refers to the fact that the actions are “related”. It is even more unusual given that it appears that the facts underlying the two actions are inextricably intertwined. […]

[I]t is difficult to see what saving of time and expense was accomplished by dealing with this issue separately, when the main parties are locked in other litigation that is still ongoing and has been for some time. The issue of the enforceability of [the non-competition clause], by itself, could have been easily dealt with at the trial, if the issue was as narrow as the [respondent contends]. Purporting to deal with it through a summary judgment motion has only caused further delay, distraction, and expense, all in the context of litigation that has been going on for far too long as it is.”

The court found that the respondent was correct in arguing that the motion judge had granted full summary judgment on the non-competition issue, but only in the most technical sense. The court explained that the principles surrounding partial summary judgment are not to be so narrowly construed nor applied. The court found that the two actions were factually intertwined.

Additionally, the court found the motion judge made a number of findings about the non-competition clause that demonstrated that summary judgment was not, in fact, an appropriate route to take in this action because all of his findings required a factual foundation, and yet he failed to refer to any factual foundation for any of these findings. 

Finally, the court found that the motion judge had erred in rejecting the legitimacy of the clause as a mere “agreement to agree”, which suggested that the motion judge had misunderstood the proper application of the principle.

The court therefore concluded that the matter was not one that ought to have been dealt with by way of summary judgment. As a result, the appeal was allowed, the summary judgment was set aside and the action was reinstated. Finally, the court found that the appellant was entitled to his costs of the appeal, fixed at $50,000.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continuing to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

As with any other legal contract, a shareholders’ agreement should be drafted by knowledgeable legal counsel. In the case of a shareholders’ agreement specifically, assistance should be sought from a lawyer with significant experience advising clients on corporate and commercial matters, including corporate governance and business succession. At Baker & Company, we have this experience, and we are here to help.

At Baker & Company, we regularly review and update existing shareholders’ agreements, and draft new shareholders’ agreements for clients of all sizes and in all industries. We also represent clients in shareholder disputes. We are known for being the firm that handles the “complicated stuff”. We do not shy away from the most complex of legal scenarios and regularly help clients through their most challenging corporate law issues. Call us at 416-777-0100 or contact us online for a consultation.

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Corporate & Commercial Law

SCC: Corporations Not Protected under “Cruel and Unusual Punishment”

The Supreme Court of Canada has ruled that corporations are not protected under s. 12 of the Canadian Charter of Rights and Freedoms (the “Charter”), after a corporation claimed that a $30,000 fine constituted “cruel and unusual punishment”.

Corporation Fined $30,000 Under Quebec Legislation

A Quebec corporation was fined $30,843 by the Court of Québec after being found guilty of carrying out construction work as a contractor without holding a license for that purpose as prohibited by the Building Act. Section 197.1 of the Building Act sets out mandatory minimum fines for both corporations and individuals.

The corporation challenged the constitutionality of the mandatory minimum fine, claiming that it constituted “cruel and unusual punishment”, which is contrary to protections set out in the Charter. Specifically, s. 12 of the Charter states: 

12. Everyone has the right not to be subjected to any cruel or unusual treatment or punishment.

Both the Court of Québec and the Quebec Superior Court dismissed the challenge. The Court of Québec concluded that expanding the protection of rights intrinsically linked to individuals to include corporate rights would trivialize the protection granted by s. 12andthe Quebec Superior Court found that the provision’s purpose was the protection of human dignity, which applies exclusively for natural persons.

However, the Quebec Court of Appeal allowed the corporation’s claim, concluding that since corporations could face cruel treatment or punishment through harsh or severe fines, s. 12 could apply to them. 

Supreme Court of Canada Finds that Charter Provision Does Not Apply to Corporations

The Supreme Court of Canada unanimously found that s. 12 of the Charter does not apply to corporations; it offered three concurring reasons.

The majority of the court found that s. 12 of the Charter does not protect corporations from cruel and unusual treatment or punishment because the text “cruel and unusual” denotes protection that only human beings can enjoy. The protective scope of s. 12 is thus limited to human beings. The court found that its own jurisprudence on s. 12, in both its French and English versions, is marked by the concept of human dignity, and the existence of human beings behind the corporate veil is insufficient to ground a s. 12 claim of right on behalf of a corporate entity, in light of the corporation’s separate legal personality.

The majority stated:

“The protection against cruel and unusual punishment under s. 12 of the Charter therefore exists as a standalone guarantee. [E]xcessive fines (which a corporation can sustain), without more, are not unconstitutional. For a fine to be unconstitutional, it must be “so excessive as to outrage standards of decency” and “abhorrent or intolerable” to society […]. This threshold is, in accordance with the purpose of s. 12, inextricably anchored in human dignity. It is a constitutional standard that cannot apply to treatments or punishments imposed on corporations.”

In a concurring opinion, written by Abella J., three of the other judges found that the purpose of s. 12 of the Charter is to prevent the state from inflicting physical or mental pain and suffering through degrading and dehumanizing treatment or punishment. The provision is meant to protect human dignity and respect the inherent worth of individuals and its intended beneficiaries are people, not corporations. Abella J. concluded:

“Corporations are, without question, entitled to robust legal protection, constitutional or otherwise. But protection for a quality it does not have, namely, human dignity or the ability to experience psychological or physical pain and suffering, is a remedy without a right. Since it cannot be said that corporations have an interest that falls within the purpose of the guarantee, they do not fall within s. 12’s scope.”

Finally, Kasirer J. wrote a third concurring opinion, agreeing that the protection offered by s. 12 of the Charter does not extend to corporations; although the scope of s. 12 has been broadened over the years, its evolution is still concerned only with human beings. Starting from the language of s. 12, particularly the word “cruel”, it would distort the ordinary meaning of the words to say that it is possible to be cruel to a corporate entity.

Get Advice

Baker & Company has adopted all of the COVID-19 safety precautions and vulnerable employees have been invited to work from home. We are fully operational and continue to work on client assignments. Where possible, meetings are being held via video link or by telephone conference.

At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial.  Our litigation team has dealt with all kinds of disputes in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.

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Corporate & Commercial Law Doing Business In Canada

Financial Aid for Canadian Businesses Facing COVID-19 Challenges

Businesses across the country have been facing unprecedented financial strain since the World Health Organization declared COVID-19 to be a global pandemic on March 11th. The resulting measures put into place to slow the spread of the virus have had a dramatic impact on every individual and industry in the country, with most companies facing reductions in business or even closures. Several companies have already begun to take action, asking employees to reduce their hours or turning to layoffs, as cash on hand becomes a major concern.

In an effort to help businesses maintain payroll expenses and keep people employed throughout the health crisis, the federal government announced last week that it would be enacting several initiatives to provide businesses with assistance and tax deferrals to increase spending on pressing matters, like payroll and other operating costs. Today, the Prime Minister announced a major increase in assistance.

Federal Wage Subsidies

When the plan was originally announced last week, the proposed subsidy was set at 10%, to a maximum of $1,375 per employee and $25,000 per employer. Eligible small and medium-sized businesses could take advantage of the subsidy from March 18th through to June 20th, in an effort to avoid layoffs where possible.

However, as of today, March 27, Prime Minister Trudeau has announced a dramatic increase to the wage subsidy plan, as 10% was evidently deemed insufficient to keep many businesses going until the threat of the pandemic begins to wain in Canada. The Prime Minister announced this morning that the subsidy is going to be increased from 10% of payroll to 75%, a significant jump that will hopefully mean good things for many employees across the country who would otherwise be facing unemployment.

Eligible small and medium businesses can take advantage of the subsidy retroactive to March 15, meaning employees will be paid even if their workplace has been forced to slow down or close completely. As these changes were just announced, more details will follow, likely early next week. For example, there was no mention of per employee or per business caps, so this remains to be seen.

Canada Emergency Business Account

In this morning’s press conference, Prime Minister Trudeau also announced the Canada Emergency Business Account, which will be used to provide loans of up to $40,000 for eligible small and medium-sized businesses. The loans will be guaranteed by the federal government and will be interest-free for the first year. Certain qualifying businesses will also be granted loan forgiveness of 10% of the total amount.

In addition, businesses will be able to defer GST/HST payments as well as taxes on imports until June of this year. This will allow businesses to keep more cash on hand to assist with immediate expenses.

Provincial Aid for Businesses

In addition to the federal aid, the Ontario government will also be working to provide businesses with needed assistance throughout the next few months.

The province will be providing $6 billion in provincial business tax interest and penalty relief to corporations over a five months period. For smaller companies that pay less than $1 million in payroll, the province will temporarily increase in the Employer Health Tax exemption. The province will also allow a deferral of WSIB premiums for up to six months. Municipalities throughout Ontario are also being encouraged to extend deferrals of property tax as well.

While these are significant steps towards helping businesses face this unprecedented time, it remains to be seen what the long-term effects the pandemic will have on the Canadian economy overall. Cases of COVID-19 continue to rise in Ontario and across the country, but with any luck we will begin to see evidence of a reduction soon, owing to the extensive protocols put in place to slow down the spread.

At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial.  Our corporate and commercial law team has dealt with all kinds of issues in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.

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Corporate & Commercial Law Corporate Governance & Contracts Litigation

“Force Majeure” Clauses & COVID-19

COVID-19 is currently impacting nearly every aspect of our daily lives, from who we can see to where we can go and what we can do. Businesses are also beginning to feel the effects, with closures and reductions on services already happening. But is it possible that COVID-19 will also have an impact on our legal relationships? Some are speculating that the current pandemic could trigger “force majeure” clauses in many contracts, which will have a significant impact on the parties’ rights and obligations.

What is a “Force Majeure” Clause?

A force majeure clause is included in a contract in case an unforeseen event occurs, making it impossible for one or more parties to carry out their obligations under the contract. This clause is usually contemplated with respect to what are often referred to as “acts of God”, such as earthquakes or hurricanes. Could the same clause be applied to the situation we’re currently finding ourselves in?

In some cases, rather than tearing up the contract altogether, the parties may agree to extend deadlines for completion of obligations in the hope that the situation will change, allowing the contract to operate largely as originally intended, with some modified terms.

Some force majeure clauses specifically mention epidemics or pandemics in the list of events that could trigger the clause. In those cases, COVID-19 would certainly qualify as a triggering event. But what about contracts that aren’t as specific?

Enforcing a “Force Majeure” Clause for COVID-19

The availability of this clause as a means to repudiate, avoid penalities or extend deadlines under a contract will largely be dependent on the language in the clause itself. If the clause is specific about the types of events that could lead to enforcement of the clause and is not open-ended in any way, this may be a barrier to enforcing the clause due to the pandemic. However, if the language is somewhat vague and leaves the type of event open to interpretation, it may be enforceable. Of course, if the contract specifically considers the possibility of a pandemic or epidemic, COVID-19 would fall within that, as mentioned above.

Timing is also a factor. For contracts signed before the virus became a known threat, it is more likely to be included as a triggering event. However, if the contract was entered into after the virus was commonly known, it may no longer be considered an event that could not be foreseen by the parties.

Any party seeking to enforce their rights under a force majeure clause must be able to demonstrate that:

  • the event that occurred was outside the knowledge and control of the contracting parties; and
  • the event that occurred makes complying with one’s obligations under the contract impossible.

Courts in Ontario generally have a high standard when interpreting these clauses in a contract dispute, and so a party must be able to clearly demonstrate the factors impacting their ability to carry out their obligations as set out in the contract. In the absence of such a clause, it may be possible to raise the issue of the frustration of contract, however, the application of this doctrine is considerably more limited and is often used in an employment context.

The Outcome of Enforcing a “Force Majeure” Clause

When a party is successful in triggering the force majeure clause under a contract, several options are available with respect to the outcome. The option chosen will largely depend on the terms of the contract in question as well as the impact of the unforeseen event. If the event poses a temporary and calculable obstacle, deadlines may be extended or certain work may be deemed no longer required. However, in situations where the triggering event is much bigger or longer-lasting, it may result in a repudiation of the contract as a whole.

The current situation with COVID-19 is unpredictable and disruptive to nearly every aspect of doing business across the globe. It remains to be seen whether “force majeure” clauses will be commonly enforceed as a result of the pandemic, but given the extent and scale of the interruption, as well as the unpredictability as to how long the interruption will last, it seems feasible that this clause will be employed in more than a few instances.

At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial.  Our litigation team has dealt with all kinds of contract disputes in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.

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Corporate & Commercial Law Defamation And Social Media Litigation

Organization Unsuccessful in Blocking Defamation Claim as SLAPP Action

B’nai Brith (BB), a charitable organization supporting the Jewish people of Canada and human rights causes in general, recently brought a motion seeking to dismiss an action for defamation brought against it by the Canadian Union of Postal Workers (CUPW). BB claimed that the action should be classified as a SLAPP action, aka strategic litigation against public participation, and therefore dismissed. The court has denied the motion, allowing the action for defamation to go forward.

A Serious Accusation of Aligning With Terrorism Supporters

CUPW, as part of its ongoing work, regularly works with similar unions in foreign jurisdictions. One such organization is a union supporting Palestinian postal workers. CUPW has also taken a polarizing stance supporting the boycott of Israeli products, due to the union’s stance on the ongoing clash between the two countries. A worker and CUPW member brought a complaint with respect to CUPW’s public position, and as a result, BB began looking into CUPW’s activities and associations.

When investigating social media accounts associated with the Palestinian union, BB found a page maintained by a senior member of the union. On the page were messages praising individuals involved in terrorist activity as heroes. BB sent this information to CUPW and called for a comment, advising that BB would be making the information public. Five days later, BB released the first in a series of press releases, with the headline, “Canadian Postal Workers Align with Pro-Terrorism Palestinian Union”. In the press releases, it claimed that CUPW had aligned itself with terrorist-supporting organizations and with the “path of violence and extremism”.

CUPW brought an action for defamation against BB, claiming that BB’s actions were malicious. CUPW pointed out that it has made public, via the union’s website, its support of a peaceful two-state solution to the conflict in the middle east as well as its stance against terrorism, violence and antisemitism. CUPW further alleged that the claims against the Palestinian union were untrue and that BB issued its press releases based on faulty research and a reckless disregard for the truth.

BB then brought an anti-SLAPP motion claiming that CUPW’s action should be dismissed, as the action sought to limit BB’s expressions on a matter of public interest.

The Test for an Anti-SLAPP Action

The court then turned to the test set out in s. 137.1 of the Courts of Justice Act, which states:

 137.1 (1) The purposes of this section and sections 137.2 to 137.5 are,

(a) to encourage individuals to express themselves on matters of public interest;

(b) to promote broad participation in debates on matters of public interest;

(c) to discourage the use of litigation as a means of unduly limiting expression on matters of public interest; and

(d) to reduce the risk that participation by the public in debates on matters of public interest will be hampered by fear of legal action.

The court agreed that the issue of the conflict between Israel and Palestine was a matter of public interest and that legitimate criticism of the union’s views was protected speech. However, it also found that it would be an uphill climb for BB to rely on ‘truth’ as a defence to its public claims about CUPW. While it was true that CUPW was involved in a project with the Palestinian union, it would be very difficult to establish that because of that, CUPW could be said to support terrorism. The court pointed out that the Canadian government, European Union, United Nations and the State of Israel had all sponsored projects in the past in Gaza and the West Bank. This alone would not be enough to validate a claim of supporting terrorism.

The court also found that there was evidence to suggest that BB had acted without due diligence, which may be fatal to a defence of “fair comment” in the defamation action. BB’s research into the Palestinian union consisted of a cursory review of a few social media pages, and its public statements ignored CUPW’s publicly-posted policies against terrorism, violence and antisemitism. There was also the possibility that BB had acted with malice, stemming from BB’s vast disagreement withe CUPW’s stated support of boycotting products from Israel. Rather than publicly challenging the union on that stance, the court found that BB may have simply chosen to focus on a tenuous link between CUPW and the union in Palestine in order to blow that out of proportion.

The court was cautious to say that there had been no actual finding of malice, but simply the possibility of it. As a result, the court rejected BB’s motion to dismiss the defamation action, allowing it to be fully heard in court on the merits. It will be interesting to see how the courts decide this matter as the case moves ahead. Given the controversy surrounding the subject matter, there are undoubtedly passionate advocates on both sides of the issue. The challenge faced by the courts will be to come to a decision based on legal merits presented by both parties.

At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial.  Our litigation team has dealt with all kinds of defamation matters in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.

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Corporate & Commercial Law Defamation And Social Media Litigation

Anti-SLAPP Lawsuit Update

In an earlier post, we discussed Anti-SLAPP motions in relation to an ongoing matter between Subway and the CBC. In that case, the CBC had conducted an investigation into Subway and the food the company marketed as 100% chicken. Following an 8-month investigation, the CBC concluded that the food only contained 50% chicken meat, while the remainder consisted of what appeared to be soy product. The CBC aired the results of its investigation, and Subway publically denied the claim. Further, the fast-food chain launched a $210 million dollar defamation lawsuit against the broadcaster. Earlier this year, the CBC filed what is known as an ‘Anti-SLAPP’ motion to have the suit dismissed under s. 137.1 (3) of the Courts of Justice Act (the ‘Act’). This section of the Act is aimed at restricting lawsuits strategically filed to protect the plaintiff from criticism on matters of public interest, otherwise known as Strategic Lawsuits Against Public Participation.

On November 22, the Ontario Superior Court of Justice released a decision in which it allowed the CBC’s motion and dismissed Subway’s lawsuit.

The Criteria Needed to Establish SLAPP Litigation

As discussed in the previous post, in order to be successful in an anti-SLAPP motion, the motioning party must demonstrate that the lawsuit surrounds a form of “expression” which was made in relation to a “matter of public interest”.

Public Interest

While Subway argued that the public would have little interest in specifics relating to the DNA breakdown of various ingredients and would be more concerned with a “consumer-oriented assessment of chicken or animal protein content”, the court disagreed. While many people may not regularly check the scientific breakdown of the food that they ingest, the court found that:

There are few things in society of more acute interest to the public than what they eat. To the extent that Subway’s products are consumed by a sizable portion of the public, the public interest in their composition is not difficult to discern and is established on the evidence.

Further, the court emphasized the importance of protecting the industry of investigative journalism as a whole and noted that there was a public interest in protecting those involved in the profession from an undue burden relating to litigation stemming from their work.

Substantial Merit

Once the CBC had established the public interest, the onus shifted to Subway to demonstrate that its claim against the CBC had substantial merit. Given that Subway was an international fast-food chain known almost solely for being a purveyor of food, the CBC’s claims were not insignificant. They would be likely to have a major impact on Subway’s reputation on a national and potentially global scale.

Subway was not required to demonstrate that it had a winning case to satisfy this criterion. It simply had to prove that it had “more than a mere chance of winning”. Subway was successful in this regard. It provided evidence demonstrating the reach of the CBC’s report, and also obtained its own expert evidence relating to the makeup of its chicken to counter the investigation. In the evidence provided by the fast-food chain, the laboratory results showed significantly less plant protein in the chicken than what was reported by the CBC (1% to the CBC’s 40% or more).

Responsible Communication

With Subway establishing substantial merit, the CBC then turned to a defence of its broadcast under the banner of ‘responsible communication’. To do so effectively, the CBC had to satisfy a two-part test:

  1. The report must have been in the public interests; and
  2. The CBC must have been reasonably diligent in establishing the validity of the claims in the report.

The report had already been deemed by the court to be a matter of public interest, so the CBC moved on to part two of the test. To satisfy this arm of the test, the CBC explained that it had retained Trent University to complete the DNA tests, and that the chicken had repeatedly come back showing significant plant protein in its makeup. The CBC then retained another independent tester to assess Trent University’s results. Lastly, the CBC provided Subway with the results and gave the company ample time to respond before airing the results publicly. In a follow-up piece, the CBC included Subway’s strong disagreement with the CBC’s findings.

The court found that while there may have been issues with Trent University’s methodology, the CBC itself had exercised due diligence in obtaining the information used in its report.

The Balance of Harm

The final determination in deciding whether to dismiss a potential SLAPP lawsuit is to assess the balance of harm between the parties. In the case at hand, the CBC positioned itself providing a service: to inform the public about matters of significant importance; in this case, consumer goods, and truth in labelling items meant for public consumption. The court found that while the investigation may have a broad impact on Subway as an organization, any impact in that regard was outweighed by the public interest in freedom of the press, and the right of the public to know the truth about items meant for their consumption. As a result, Subway’s case against the CBC was dismissed.

It is important to note that Subway has an ongoing action against Trent University, the lab that provided the CBC with the initial results pertaining to the genetic makeup of the chicken. This action was not dismissed under the Act.

At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial.  Our litigation team has dealt with all kinds of litigation matters in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.