Copyright © 2013 Pearson Canada Inc Chapter 4 Enforcing Contractual Obligations Legal Fundamentals for Canadian Business Third Edition

Copyright © 2013 Pearson Canada Inc Learning Objectives List the events that can bring a contract to an end Identify the various mistakes that can end or otherwise affect a contract Describe four forms of misrepresentation Explain the effects of duress and undue influence on a contract (Continued)

Copyright © 2013 Pearson Canada Inc Learning Objectives (Continued) Consider the implications of privity and assignment for a contract Describe how a contract can be breached or otherwise ended Outline the remedies that are available for breach of contract Summarize risk-reduction strategies when forming or ending a contract

Copyright © 2013 Pearson Canada Inc Disputes May revolve around –The existence of the contract –The conduct of the parties at time of negotiating the agreement –Performance of obligations under contract

Copyright © 2013 Pearson Canada Inc Mistake When parties have a different understanding of terms of contract Shared mistake –Both parties have made same mistake –Contract void for lack of consensus –If mistake only in recording the terms, may ask court to rectify (correct) agreement (Continued)

Copyright © 2013 Pearson Canada Inc Mistake (Continued) Misunderstanding –Each party has a different understanding –Courts will imply most reasonable interpretation and enforce –If both interpretations equally reasonable, contract void for lack of consensus (Continued)

Copyright © 2013 Pearson Canada Inc Mistake (Continued) One-sided mistake –Usually has no effect on contract –Caveat emptor (let the buyer beware) –Only if different understanding is a result of misrepresentation would it be actionable (Continued)

Copyright © 2013 Pearson Canada Inc Mistake (Continued) If mistake as to nature of document signed, contract may be void –Non est factum (It is not my act) –If mistake as to nature of document due to carelessness, claim is ineffective Contract Interpretation –Terms and words given “reasonable meaning” –Industry usage for special or technical terms

Copyright © 2013 Pearson Canada Inc Exemption Clauses Also known as exculpatory, exclusion, or limitation clauses Attempt to limit or eliminate liability for one party to the contract Due to one-sided nature, courts interpret –As narrowly as possible –Against the favoured party (Continued)

Copyright © 2013 Pearson Canada Inc Exemption Clauses (Continued) Must be brought to attention of other party Usually found in standard-form contracts Create an unequal bargaining position

Copyright © 2013 Pearson Canada Inc Misrepresentation False and misleading statements that induce a person to enter into a contract If a term of contract, can sue for breach Must be statement of fact Statement of opinion actionable if made by expert Silence generally not misrepresentation, unless duty to disclose (duty of good faith)

Copyright © 2013 Pearson Canada Inc Innocent Misrepresentation Misleading another without knowing or being careless Only remedy is rescission –If goods destroyed or not available, no other remedy possible –Not available if any wrongdoing by person claiming rescission –Not available if contract affirmed

Copyright © 2013 Pearson Canada Inc Fraudulent Misrepresentation Intentionally and knowingly misleading another to induce him/her to enter into contract Victim may seek rescission, damages, or both If made innocent misrepresentation, and later learn it is false, but fail to correct it, it becomes fraudulent May seek punitive damages in extreme cases Easier to sue for innocent or negligent misrepresentation

Copyright © 2013 Pearson Canada Inc Negligent Misrepresentation If person making misrepresentation should have known what he/she was saying was false, he/she was careless Victim may seek rescission, damages, or both

Copyright © 2013 Pearson Canada Inc Criminal Fraud Specific provisions of Criminal Code deal with fraudulent activity – Examples: –S prohibit knowingly making false representations intended to induce someone to act on the representation –Other sections deal with specific areas of fraud including the falsification of employee records, books, and other documents

Copyright © 2013 Pearson Canada Inc Duress Entering into a contract because of coercion Threats may be violence, financial pressure, scandal, etc. May be against you, your family, your property, or business Contract is usually voidable Threats may also be criminal offence

Copyright © 2013 Pearson Canada Inc Undue Influence Abuse of trust relationship Contract voidable Presumed in certain relationships –Lawyers, doctors, trustees, guardians, religious advisors, adults with infant children, adult children with aging parents –May be rebutted by evidence May have to prove in other situations

Copyright © 2013 Pearson Canada Inc Unconscionability Taking advantage of vulnerable person’s situation –e.g., poverty, mental impairment (short of incapacity) Bargaining positions of parties are unequal Contract grossly unfair to victim Court can set aside or modify contract Also regulated by statute

Copyright © 2013 Pearson Canada Inc Privity Only the parties to a contract are bound to it or may enforce it Exceptions –Interests in land bind subsequent owners of the property –Trusts – beneficiaries may enforce –Life insurance – beneficiaries may enforce –Some statutory exceptions (Continued)

Copyright © 2013 Pearson Canada Inc Privity (Continued) Agents acting for principals –Agent never a party, so no privity issue Novation –One person taking over obligations of another in a contract; no privity issues as new contract is required Employees –Contract clauses often extended to employees, thus ignoring privity

Copyright © 2013 Pearson Canada Inc Assignment Transferring a benefit under a contract to a third party (Continued)

Copyright © 2013 Pearson Canada Inc Assignment (Continued) Usually assignor and assignee must join together to sue if debtor fails to pay Statutory assignment allows assignee to sue directly if –Assignment is absolute (complete and unconditional) –Assignment is in writing –Proper notice was given to debtor (Continued)

Copyright © 2013 Pearson Canada Inc Assignment (Continued) May only assign the benefits, not the obligations Assignee takes assignment “subject to the equities” Assignee cannot be in a better position than the assignor

Copyright © 2013 Pearson Canada Inc Negotiable Instruments Controlled by federal Bills of Exchange Act Freely transferable from party to party Innocent third party (called a holder in due course) may enforce a negotiable instrument against the person who made it Include promissory notes, cheques, and bills of exchange (aka drafts) (Continued)

Copyright © 2013 Pearson Canada Inc Negotiable Instruments (Continued) Promissory note –One person promises to pay another a certain sum of money at some future date or on demand (Continued)

Copyright © 2013 Pearson Canada Inc Negotiable Instruments (Continued) Cheque –Drawer orders bank to pay a certain sum of money to a third party (the payee) on demand (Continued)

Copyright © 2013 Pearson Canada Inc Negotiable Instruments (Continued) Bill of exchange –May be an order to any person or business to pay money to someone either now or at a future time (Continued)

Copyright © 2013 Pearson Canada Inc Negotiable Instruments (Continued) Holder in due course –Innocent third party who acquires possession of instrument –Right to collect whether original obligations met or not –If instrument is endorsed, that person can also be held liable for amount owed

Copyright © 2013 Pearson Canada Inc Discharge of Contracts

Copyright © 2013 Pearson Canada Inc Performance Once parties have performed as required under the contract, it is discharged Conditions - major terms of contract –If breached, contract ends (if other party wants to end it) Warranties - minor terms of contract –If breached, obligations continue –May seek damages from breaching party (Continued)

Copyright © 2013 Pearson Canada Inc Performance (Continued) Substantial performance –Substantially all obligations have been fulfilled, but a condition is breached in a minor way –May seek compensation for small part remaining –If contract requires payment, must be cash unless otherwise specified Limits on coinage set under Currency Act (Continued)

Copyright © 2013 Pearson Canada Inc Performance (Continued) Tender of performance –Ready, willing, and able to perform; other party refuses to accept performance –Contract has been breached by refusal; performance no longer required –Debt treated differently – if party refuses to accept payment, money is still owed but debtor must seek payment and bear all costs of collection

Copyright © 2013 Pearson Canada Inc Breach Incomplete or improper performance of contract Repudiation – breach by refusal to perform Anticipatory breach – repudiation before performance is due gives victim two options –Treat contract as breached –Continue to demand performance (Continued)

Copyright © 2013 Pearson Canada Inc Breach (Continued) Anticipatory breach (Continued) –If contract is treated as ended, victim may sue for breach immediately –If victim demands performance, unexpected events may discharge both parties –If victim of repudiation does not perform during waiting period, he/she will be in breach –Choice of remedy is binding (Continued)

Copyright © 2013 Pearson Canada Inc Breach (Continued) Exemption clauses attempt to lessen liability for breach –Narrowly interpreted by courts Fundamental breach –Breach of very essence of contract –Exemption clauses can still apply if properly worded In some cases, a breach of contract can be a criminal offence

Copyright © 2013 Pearson Canada Inc Frustration Outside, unforeseen event that is out of the control of either party and renders contract either impossible to perform or completely different than what parties contemplated Caused by things such as illness, destruction of subject matter, government actions, natural disasters (Continued)

Copyright © 2013 Pearson Canada Inc Frustration (Continued) Effect used to be “let the loss lie where it falls” All jurisdictions now have legislation that require payment for benefits received and the return or apportionment of any deposit

Copyright © 2013 Pearson Canada Inc Agreement May modify or end a contract by agreement All elements of contract must be present Cannot impose change on the other party Each side must receive new consideration –May be just relieving each of his/her remaining duties –If only one side relieved, change is not binding (Continued)

Copyright © 2013 Pearson Canada Inc Agreement (Continued) Contract itself may contain conditions for changing or ending obligations –Condition precedent - Contract begins only if conditions are met –Condition subsequent - Terms in contract specify when continuing obligations will end

Copyright © 2013 Pearson Canada Inc Remedies for Breach Rescission –Returning parties to original positions Damages –Compensation to attempt to put victim in position he/she would have been in if contract properly performed –Sometimes includes emotional stress or pain (Continued)

Copyright © 2013 Pearson Canada Inc Remedies for Breach (Continued) Liquidated damages –Term in contract to limit damages Deposit –Amount forfeited as pre-estimate of damages Down payment –First payment of purchase price; not meant to be forfeited (Continued)

Copyright © 2013 Pearson Canada Inc Remedies for Breach (Continued) Victim must mitigate loss Damages must be reasonably foreseeable at time contract entered into Equitable remedies –Only available if damages not sufficient –Not available if any wrongdoing by party claiming –Not available if innocent third party affected (Continued)

Copyright © 2013 Pearson Canada Inc Remedies for Breach (Continued) Equitable remedies (Continued) –Specific performance Requires breaching party to perform contract Only if subject matter of contract unique –Injunction Requires a person to stop doing something (Continued)

Copyright © 2013 Pearson Canada Inc Remedies for Breach (Continued) Equitable remedies (Continued) –Accounting Disclose financial records and dealings Pay profits of wrongdoing to victim –Quantum meruit Pay a reasonable price for services rendered