Corporations, Relationships, and Liabilities

The case of Ms.Challenor v. Nucleus Financial Network (Network) highlights the complexities of corporations, their relationships, and liabilities that subject them. The case in question depicts a legal dispute in which Challenor, an independent contractor, provided services to Network, who failed to pay. Challenor took legal action against both Network and Tricaster Holdings Inc (Tricaster) as Network’s majority shareholder.

The first inherent matter in the case is determining if there was a breach of contract in the agreement formed by both parties. In an agency agreement, the principal has an obligation to the agent and must abide to the conditions by which the agent was hired. It would that Network breached its agreement with Challenor by failing to pay her for her services. However, to determine if a true breach of contract occurred, the details of the agreement need be revealed. For example, if the agreement were for Challenor to receive payment upon completion, and she engaged only in part performance, there would have been no implied obligation for Network to pay Challenor for the services rendered. However, under a silent pay agreement, in which the custom of an industry calls for payments, the principal assumes an obligation to pay the agent a reasonable amount synonymous with the “effort put forth by the agent” (Yates, Berezniki-Korol & Clark, 2008, p. 438).

Assuming Challenor has a legal case against Network, the second consideration is if she also has a case against Tricaster. The potential outcome of the case is dependent on the relationship between Network and Tricaster. Tricaster can be defined as a holding corporation as it is holds the majority of Networks shares (Yates, Berezniki-Korol & Clark, 2008). Although holding corporations allows various organizations to be combined, this in itself does not constitute a partnership. A partnership is formed when there “ is sharing of the net proceeds after expenses have been deducted (the profits) from the enterprise that gives rise to the presumption of a partnership” (Yates, Berezniki-Korol & Clark, 2008, p. 450). Assuming Network has no resources, it becomes evident that there is no profit sharing between both corporations. In reality Network is a subsidiary of Tricaster. According to the law of corporations a subsidiary is a company owned by another company through the control of the majority of its shares (Phelps & Lehman, 2005). Furthermore, the owner of the subsidiary may control the activities of the subsidiary. Accordingly, in a parent/subsidiary relationship profits are split between the parent company and the subsidiary company’s non-controlling- interest shareholders (Baker, 2009). Tricaster’s parent/subsidiary relationship minimizes its liability and exposures as it retains it’s separate legal entity. Challenor would thus encounter more difficulty in obtaining a ruling in her favour against Tricaster.

The argument in the case rests in if a holding company, as a separate entity can hide behind it’s subsidiary, also a separate entity. While “generally the separation of corporate identities immunizes the parent corporation from financial responsibility for the subsidiary's liabilities” (Phelps & Lehman, 2005, p. 386), the parent company has certain duties to maintain to avoid the courts from perceiving the subsidiary as a business conduit. Thus, in some instances the court treats both parent and subsidiary corporations as one entity. The growing complexities of employee/employer relationships and difficulty in establishing which party is the employer, have warranted the enactment of new provisions to protect employees. Where control and direction is confused, the court may apply the common employer rule. For example, assuming Network had no resources and Tricaster was responsible for providing compensation to employees, the court could rule that under the circumstances Tricaster exercised enough control over the subsidiary’s employees to act as an employer. “ The Employment Standards Act, provides a statutory authority by which, two or more related entities may be treated as one for the purposes for that legislation” (Powers, 2008 n.p).

Challenor had an agreement with Network that may have been breached. Tricaster could be found to have a position of authority by which it is considered the employer of Network’s employees. Although Challenor was hired by Network as an independent agent, the courts may find that she was functioning as an employee or servant (Yates, Berezniki-Korol & Clark, 2008) and impose common employer legislation on both Nucleus and Tricaster.

References

Baker, S. (2009). Financial Management: the recent changes to the calculation of

goodwill and their impact on non-controlling interest. Retrieved on February 17,

2010 from: The free Library database.

Phelps & Lehman (January, 2005). West’s encyclopaedia of American law. Vol. (9) 386-

387. Retrieved on February, 16, 2010.

Powers, M. (2008). Commerce and finance. Retrieved on February 17, 2010

From: Literature Collection database.

Yates, A., Bereznicki-Korol, T. & Clarke, T. (2008). Business law in Canada (8th ed.).

Canada: Pearson Education Canada.