Chapter 7: Contract Defects and Breach of Contract PDF

Chapter 7: Contract Defects and Breach of Contract Defects None of us would agree to a contract without being aware of all it contained—unless we were mis- taken as to its nature, deliberately misled by the other party, or forced into the agreement. If any of these situations did occur, it would can...

Chapter 7: Contract Defects and Breach of Contract Defects None of us would agree to a contract without being aware of all it contained—unless we were mis- taken as to its nature, deliberately misled by the other party, or forced into the agreement. If any of these situations did occur, it would cancel consent—the intention to create legal relations—and could be seen as a legal reason for getting out of a contract. Some may call these grounds loopholes in a contract. The laws governing when a contract can be set aside are very restricted, and differ greatly between consumer and business transactions. There are consumer protection laws that do not apply to deals between businesses. Courts have traditionally been very reluctant to set aside agreements, and it is not easy to get out of a business contract once it has been made. Courts will not help a business get out of a bad deal if it was fairly negotiated. The reasons that a court would consider are: Misrepresentation. During the bargaining process, one party states a material fact that is un- true, and the other party relies on this fact when entering into the contract. Mistake. The parties make an error in the agreement. However, a legal mistake is a very limited ground for relief. Duress. Actual, or threatened, violence, or unreasonable coercion is used to force agreement. Duress can also include threats of economic harm to another party. Undue influence. An individual, such as a lawyer or accountant, who holds a position of trust because of specialized knowledge, takes advantage of the other party. It is the misuse of influence and the domination of one party over the mind of another to such a degree as to deprive the latter of the will to make an independent decision. Unconscionable. A contract is considered an unconscionable transaction when there is an overwhelming imbalance of bargaining power due to the victim’s desperation, ignorance, or disabil- ity and the stronger party knowingly took advantage of the weaker party’s vulnerability and a grossly unfair and improvident agreement was made that offends the standards of commercial morality. Non est factum. One party is misled as to the type of document being signed. Non est factum (“it is not my doing”) is a plea that a person didn’t know what he or she was signing. It applies when a contract is made in a language they do not understand or it is in writing and they cannot read. Misrepresentation What Is a Representation? Definition misrepresentation a false statement about a material fact that induced another to enter into a con- 290 tract Misrepresentation is one of those words that is used differently in law than in ordinary use. A repre- sentation, as the term is technically used in law, usually refers to statements made before the contract is formed. In law, misrepresentation is a false statement about a material or major fact that induced the other party into the contract. The false statement must be made during the bargaining process. For example, a salesman tells a customer that the car dealership will provide a courtesy car related to any repair work necessary during the warranty period. The customer then signs the standard form Used Car Bill of Sale (as found in the Appendix to Chapter 6). Nothing is written into the agreement about the courtesy car. That matter is not then a term of the agreement. The purchaser may not have thought to have it included because she has the salesman’s assurance and her mind was satisfied on the point. In addition, she is more concerned about price, warranty period, and such. When she comes for her first repair under the warranty she asks for her courtesy car. The service manager looks puzzled and asks where she got that idea. He pulls out the contract and shows her that there is nothing in it about a courtesy car. She tells her story. Of course, the sales rep has moved on and is not present to confirm it. In this example the statement regarding the courtesy car is called a representation. If it is false, it is a misrepresentation. If it had been part of the contract, it would have been a term of the type that is called a warranty. Usually, as discussed in the previous chapter, the law says we must live up to our agreements or face the legal consequences. Therefore, you had better know what you are getting into when you enter into a contract—“let the buyer beware!” However, the courts have developed special rules to give relief to innocent parties who have relied on misrepresentations in entering into a contract. Of course, it is easy to make up a misrepresentation after the fact, so the courts are reluctant to ignore the written document. The person asserting the representation may have some difficulty in proving that it was made. The evidence may simply be one person’s word against another. It will be difficult to predict which version the court will believe. That is why it is advisable to have every promise in writing. Representations are usually restricted to statements of fact. However, if the maker is an expert, then opinions can be the basis for a representation. For example, one person may tell a purchaser that there will be no difficulty in getting a zoning change respecting the property. This statement is a mat- ter of opinion and not of fact and the purchaser cannot hold the seller liable for it based on misrep- resentation. However, if the maker is an expert in the field, such as a lawyer, the maker may be held responsible. Types of Misrepresentation There are three types of misrepresentation: innocent—one party to a contract makes a statement without being aware that it is incorrect or untrue negligent—facts are misstated because of carelessness fraudulent—one party deliberately misleads the other Essential Concepts Of Misrepresentation A misrepresentation is a statement of fact made during the bargaining process that is untrue. 291  It concerns a material fact that was sufficiently important to persuade an individual to enter into a contract. It is not made a final term of the contract. An expert may be liable for statements of opinion. The factors that the court considers for establishing negligent misrepresentation were established in the case discussed in the following case.. Example: In Queen v. Cognos 1 SCR 87, Douglas Queen was an accountant with a secure, well-paying job in Calgary. Cognos Inc., a large soft- ware company, offered him a job in Ottawa to work on a new software accounting project that it was undertaking. Queen quit his job in Calgary and moved his family to Ottawa to work on the project. After five months on the job funding for the project ceased. He continued to work at several fill-in po- sitions at Cognos and was finally terminated 18 months after joining Cognos. Queen sued Cognos for negligent misrepresentation. The Supreme Court set out five criteria that had to be met to succeed in a claim for negligent misrepresentation: 1. There must be a duty of care based on a special relationship between the two parties 2. The representation in question must be untrue, inaccurate or misleading 3. The maker must have acted negligently in making the representation 4. The listener must have relied, in a reasonable manner, on the negligent statement 5. The listener suffered damages from relying on the statement In this case the Supreme Court ruled that the 5 part test had been met. Even though Cognos believed the project would proceed, it was negligent in telling Queen that it was definite. They should have disclosed it still needed further approvals. The Court awarded Cognos damages of $67,224 plus in- terest. 292  Business Law Applied 1 Lesley and Philip Sand are thinking of purchasing a house. They see one they particularly like, and arrange to view it. The current owner, Arthur Keye, shows them around the house, stating, “I’ve owned this house for 20 years, and it’s completely sound. There are no problems.” In fact, as the Sands later discover, the house is infested with termites. There are three possible explanations of Keye’s making the statement he did: i)Over the past few months he has noticed some droppings of sawdust in his basement. No one has been sawing wood, and so there is no reason for the sawdust to be there. However, he hasn’t bothered to find out the cause of the sawdust. ii) He does not know that there are termites in the building. iii) He’s seen the termites, but tells the Sands the house is problem-free since he’s des- perate to sell it so that he can move to Florida. a) Decide which of the three types of misrepresentation would apply to each of the above situations. 2 Relying on Esso’s estimate that he would sell 800,000 litres of gasoline annually, John Mardon signed the lease for a filling station. However, Esso’s company accountant had made a mathematical error, and this estimate was to- tally wrong. In fact, annual sales at this particular station were approximately 240,000 litres. The lease agreement that Mardon signed made no mention of the projected annual sales. a) If Esso claims as a defence the fact that the statement about annual sales was not in fact part of the contract, is that valid? b) The gasoline company did not intentionally mislead Mardon. It was simply a mistake. Is that a valid defence for Esso if he were to sue Esso Silence Definition caveat emptor let the buyer beware In most contracts, the seller does not have any legal duty to disclose facts that might affect the buyer’s decision to purchase. This rule in the sale of products is expressed in the phrase caveat emptor, let the buyer beware. A more modern translation of the Latin is “let the buyer be well informed.” If I buy a car from Shady Sam’s Used Cars, and discover that it gets terrible gas mileage, that is my problem. Sam does not have to tell me that the car is a “gas guzzler,” even though he may be well aware of that fact. There are exceptions to the usual right not to disclose any information harmful to your interests: If there is a special position of trust between the parties, or where the contract is based on good faith, (see Chapter 4). One of the limited types of contracts where there is a requirement of complete disclosure is an insurance contract. The applicant must reveal any circumstances that might affect the insurance company’s decision to grant a policy of insurance or the amount of the premium. The insurance company also has a duty of good faith to the customer. If it fails to pay a claim without a valid reason, it will have to pay damages for breach of this duty in what is called a bad faith action. 293 Example: In Schoff v. Royal Insurance Company of Canada, 2004 ABCA 180 (CanLII), Nancy Goyan obtained car insurance from Royal Insurance and told them she had no previous accidents, was the only licensed driver in her home and she had 3 cars. The truth was that she had previous accidents and had 4 sons at home all who all had their drivers licenses (3 who were under age 25) and she owned 5 cars. Her son Charles caused an accident driving one of the cars Royal insured for his moth- er. He injured the Schoffs and their damages were set at $496,486. The Alberta Court of Appeal ruled that there was fraudulent misrepresentation by Mrs. Goyan. Royal was still liable for $200,000 under the Alberta insurance law, but nothing more. Luckily the Schoff’s had taken extra coverage on their insurance in case of injury by an underinsured driver. In the sale of land there is an obligation to reveal defects that are latent, which means: hidden, in the sense that they would not be revealed by an ordinary inspection and of which the owner is either aware or is in reckless disregard of evidence that would point to such defects. For a defect to be considered a latent defect, the owner must have been aware, or ought reasonably to have been aware, of the defect. (See Chapter 15) Example: A few months after a home was purchased, the new owners discovered drainage issues which had not been disclosed by the previous owners. The sellers had disclosed the existence of an unrelated water issue. The tribunal recognized there is a principle of “buyer beware” for real estate transactions in British Columbia. The purchaser is responsible for any issues that arise, unless the seller breaches the contract, engages in fraud, or does not disclose a latent defect, of which they were aware. The tribunal considered whether or not the owners had failed to disclose the latent defect, among other issues. The tribunal found that the sellers were not aware of the defect, and therefore it was not a latent defect. See Nanayakkara v. MacIntyre, 2020 BCCRT 791 (CanLII). If you elect to give information (assuming there is no position of trust, or statutory obligation to disclose), it must be complete and accurate. The law recognizes that a half-truth is the most dan- gerous of lies. For example, a landlord told a prospective purchaser that the premises were currently rented to a reliable tenant. The landlord did not reveal that the tenant had given notice to terminate the tenancy. This was held to be a misrepresentation. Example: In Krawchuk v. Scherbak, 2011 ONCA 352 (CanLII), a woman bought a house for $110,000 and the vendor had disclosed some minor problems on a SPIS (seller’s property information sheet), but not serious structural or plumbing problems. After she moved in she discovered major structural defects and plumbing defects and it cost $110,742 to repair the house. The Ontario Court of Appeal held the vendor 50% liable for these costs and the real estate agent and her brokerage were also 50% responsible. Ms. Krawchuk had purchased title insurance and was also able to recover $105, 742 under that policy as well. The double recovery was allowed as the defendants were not allowed to benefit from the purchaser’s wise decision to purchase title insurance. If a party makes a statement believing it to be true at the time but later discovers facts that make it untrue, that individual must tell the other side of the change. For example, a company charged an employee with stealing money from it. Some friends of the employee offered to replace the money. The company later learned that the employee had not stolen the money, but it accepted the repay- ment from the friends. The company was held to have had an obligation to reveal the true state of affairs and therefore had to return the money. Putting a positive spin on damaging information has become a well-honed skill of the modern busi- ness person. However, this practice may come into sharp conflict with the laws regarding accuracy in making a statement. For instance, when a business is in financial difficulty, the rule requiring accu- rate and complete information in statements may cause difficulties for the officers of that company in dealing with its bank. 294 N.B.D. Bank (Canada) v. Dofasco Inc., 34 B.L.R. (2d) 209 (Ont. Gen. Div.) The National Bank of Detroit agreed to give a rotating line of credit to Algoma Steel. As part of that financing arrange- ment, the bank required detailed timely financial information from Algoma before each advance. The time came for a $4,000,000 advance. The bank asked for the agreed financial information from two of Algoma’s officers and directors. Algoma had just settled a difficult strike. The chief financial officer of Algoma told its board of directors at a meeting that in addition to the problems caused by the strike, the price of world steel had fallen so that the Algoma plant could not produce steel at a competitive price. The company was insolvent. When speaking to the bank, both Algoma officers, who had been at the board meeting, told the bank that Algoma was in difficulties because of the costs in delays of start-up after the strike. They said nothing of the opinion of the Algoma CFO. One of the officers forgot to send a part of the Algoma financial information requested by the bank. The bank did not notice that this information was missing. The bank advanced the $4,000,000 and when Algoma went bankrupt, the bank sued the two officers personally for fraudulent and negligent misrepresentation. The Court’s Decision The court found that silence is normally not a basis for misrepresentation; however, if something is said, it must be complete. Cleverly selecting words that might be literally true by themselves can be a misrepresentation. The maker of a statement must make certain that the listener is not misled. The statement that Algoma was experiencing difficulty because of the strike was true, but it was only part of the story. The failure to provide some of the financial statements was also held to be deliberate. If the bank had seen these statements, it would have made further inquiries before ad- vancing the money. The trial judge noted that Algoma’s officers were “in a box.” However, he said that the officers “had a duty of care to give highly relevant information made relevant by the circumstances of the case.” The officers were found personally liable to the bank on the basis of negligent misrepresentation. Essential Concepts Of Accuracy in Statements While there is no general duty to reveal harmful information to the opposite party, there is such a duty where there is a relationship of trust between the parties, an implied duty of good faith, a statutory obligation to disclose, or a latent defect known to the party If any statement is made, it must be full and complete. If any statement is true when made but later proves to be untrue, the change must be revealed to the other party. Business Alert! Caveat Emptor Sellers are rarely obligated to disclose defects in an article being purchased. You must undertake your own research, and calculate the possible risks before entering into any business deal. The courts will not set aside a transaction simply because one side had more—or better—infor- mation than the other. For major purchases, it’s always best to have the item inspected by a professional: houses and other buildings—a contractor or certified inspector should inspect the condition of the structure businesses—an accountant should verify the profitability of the business vehicles—a mechanic should inspect for mechanical soundness property in commercial areas—the purchaser should inspect for possible contaminated land 295  Business Law Applied 3 Christopher Clause owned a motel located at the midway point of a highway connecting two large cities—an excellent situation for an overnight stop when travelling between the two. Clause discovered that the government planned to construct a superhighway north of the old road. When it was completed, most traffic would bypass his motel. Clause immediately put the motel up for sale, and it was bought by Karl Gustaffson at fair market value. One month after taking over the business, Gustaffson learned about the proposed new high- way. He sued Clause to have their contract set aside. a) Were the facts misrepresented by Clause before the sale agreement was signed? b) Did Clause have a duty to reveal the plans of the highway to the purchaser? c) Would Gustaffson be successful in a lawsuit against Claus based on misrepresentation? d) What, if anything, could the purchaser have done to protect himself? Unjustified Claims of Fraud Fraudulent misrepresentation is based on the action of deceit in tort. The tests the courts use to es- tablish whether fraud has taken place are very strict. Emotions can run high in civil actions, and one party may be absolutely certain that the other was fraudulent. The wronged person tends to see fraud where a more dispassionate observer might not. Because of the level of feelings that can be generated, the individual being sued might well feel un- justly accused and refuse to settle the matter out of court. In an effort to ensure that only valid fraud cases are heard, the courts usually award substantial costs against an individual who unsuccessfully alleges fraud, even if that party eventually wins the court action on other points. The amount of mon- ey involved can be a large percentage of any final court award, and is a serious deterrent to allega- tions of fraud without strong supporting evidence. Example: In 887574 Ontario Inc. v. Pizza Pizza Ltd., 1995 CanLII 7417 (ON SC), a group of Pizza Pizza franchise owners sued the parent company for using incorrect accounting methods that inflated the amount of such items as royalties that were due to the parent company. The franchise owners also alleged fraudulent accounting practices by the parent company. The judge who arbitrated the matter awarded $2.7 million to the store owners because of the incor- rect accounting practices, but found that they had not proved their allegation of fraud. As a result, they were ordered to pay $500,000 in costs to the mother company as compensation for the legal fees it had incurred in defending the fraud issue. Tort and Contract Definition negligent misrepresentation a careless but not intentionally inaccurate statement about a materi- al fact that induced a contract Definition fraudulent misrepresentation an incorrect statement made knowingly with the intention of caus- ing injury to another 296 Unfortunately, the law respecting misrepresentation is complicated because innocent misrepresen- tation developed under the law of contract, but both negligent and fraudulent misrepresentation developed under and remain part of the law of tort. Negligent misrepresentation (an incorrect state- ment made without due care for its accuracy) derives from the tort of negligent misstatement (Hedly, Byrne & Co. Ltd. v. Heller, A.C. 64) It was first called negligent misrepresentation in the case Esso Petroleum Co. v. Mardon 2 O.E.R. 5 (C.A.). Fraudulent misrepresentation (an incorrect statement made knowingly with the intention of causing injury to another) derives from the tort of deceit established in the landmark case of Derry v. Peek (1889), 14 Pa.P.P. 337. These two torts occur in a contractual context and so are often, incorrectly from a technical point of view, considered part of the law of contract. Curiously, then, a large part of the law regarding the negotiation stage of a contract is governed by the law of tort. Remedies for Misrepresentation The court’s approach to awarding damages varies by the type of misrepresentation. There are two possible remedies a court can give for misrepresentations: rescission or damages. Definition rescission the cancelling of the contract, with both parties put back into their original positions Rescission means the cancelling of the contract, with both parties put back into their original posi- tions. One party must give back the money; the other must return the goods. Definition damages monetary compensation in a lawsuit for the loss suffered by the aggrieved party Damages are monetary compensation in a lawsuit for the loss suffered by the aggrieved party. The courts do not want to award damages against a party who made an innocent misrepresentation, but in effect as to the aggrieved party, you have a choice to go through with the contract or to get out of it. In other words, you can take it or leave it! For example, in the private sale of a car a seller honestly believes it to be a 1999 Mustang and sells it for $15,000. On reading the car manual, the purchaser discovers it is a 1998 car worth $2,000 less. The purchaser can either keep the car or return it and get his money back. He cannot keep the car and sue for the $2,000. In negligent misrepresentation rescission can be allowed under contract law and damages can be awarded under tort law. Because fraud is so serious, the innocent party is permitted to choose rescission or to claim damages, and sometimes is permitted both. Bars to Rescission The purpose of rescission is to return the parties to their original positions. When a contract is re- scinded the goods or property are returned and the money is refunded. The person who is returning the property can be compensated for any expenses that were incurred. In innocent misrepresen- tation damages are not awarded in addition to the rescission because both parties were innocent, (though in some small claims cases judges have been known to ignore this and have also awarded incidental damages). If there was negligent or fraudulent misrepresentation, rescission and damages 297 are both possible. Rescission may be denied in situations where it is impossible to return the property, for example it has been destroyed or damaged, or it has been sold to an innocent third party who was unaware of the misrepresentation. Rescission can also be denied if there was a delay in claiming this remedy. The court may see this delay as a sign the party was not acting in good faith and seeking to get out of the contract on a technicality. It is always safe to claim rescission immediately upon discovering the grounds for it. Legalese Rescission Rescission is derived from Latin. Re, used in this context, means back, as in return; scis- sion comes from the Latin verb scindere, to cut, (scissors comes from the same word). Thus, when a contract is rescinded, it is “cut back,” so that it never existed. Essential Concepts Of Remedies for Misrepresentation Not all remedies can be given for all types of misrepresentation. Innocent—rescission, only Negligent—rescission and/or damages Fraudulent—rescission and/or damages Stolen Cars One of the most frequent misrepresentations concerns the sale of stolen cars. One pat- tern for stolen car sales is for the car to be stolen in one province, brought to another province, and registered there. This is easy to do. In many provinces there are no checks by the government owner- ship-permit office on the accuracy of the information given on the transfer registration. Even where there are checks, these may not be effective. Chop shops buy wrecked cars to obtain valid V.I.N. (vehicle identification numbers) and then have one stolen to match for year, model, and such. The stolen car gets the wreck’s V.I.N. and this one will not show up on police stolen-car lists! So beware of buying cars advertised for sale online or in newspapers, especially if you are getting a fantastic deal on a very popular model. Consumer protection laws will give no value against a sophis- ticated criminal who will likely be difficult to find. Be sure to get a certified cheque and two or three pieces of photo identification including a driver’s license, when selling a car privately. 298  Business Law Applied 4 Angelo Bolatta advertised his Mustang car for sale at a price of $16,500. A man who introduced himself as Roland Berry called on Bolatta one evening, tried the car, and said he liked it. In the course of general conversation, the prospective purchaser represented himself as being connected with professional hockey. Roland Berry was well known as a coach at the time. The purchaser wrote a cheque for $16,500, signing it “Roland Berry.” Bolatta asked for identifica- tion, and was shown a pass to the local stadium. This carried a photograph of the purchaser, along with an official-looking stamp. Bolatta registered the change of ownership, and allowed Berry to take the car. Two days after Bolatta deposited the cheque, his bank advised him that it had been forged, and that the credit in his account was cancelled. A few days later, Muriel Gibson, who had advertised for a car of this type, received a visit from a man who said his name was Angelo Bolatta. He showed her a motor-vehicle permit bearing Bo- latta’s name and address. The car was exactly what Gibson wanted, and she bought it for $14,800. Within the next three or four days, Gibson discovered that the usual driver’s manual was missing from the glove compartment, and telephoned Bolatta to ask for further information about the car. The whole story was then revealed in an excited conversation. Her telephone call proved a fateful one for Gibson, because Bolatta brought an action against her for return of the car. a) What were the two contracts involved, and who were the parties to each? b) What type of misrepresentation was made by Berry to Bolatta and Gibson? c) What steps did Bolatta take to protect his interests? Were they what any reasonable person would have done under the same circumstances? d) How else might Bolatta have safeguarded his interests? e) How did Gibson attempt to protect her money? Were the steps she took reasonable? f) What else might Gibson have done? g) Which particular remedies for misrepresentation were available to Bolatta? h) Which principle would the court apply to decide the case? What would be the result? Entire Agreement and Exclusion Clauses It will be useful to recall entire agreement and exclusion clauses now that you have seen concrete ex- amples of misrepresentations. The parol evidence rule does not exclude misrepresentations, that is, statements made before the contract was formed. However entire agreement and exemption clauses often try to limit or exclude liability for any misrepresentations at all. As we saw in the previous chap- ter, it is often difficult to accurately predict whether these clauses will be effective, but courts tend not enforce these clauses when there is misrepresentation, especially fraudulent misrepresentation. Terms, Representations and Opinions A representation is a statement made before the contract is made, while a term is part of the contract. Misrepresentation requires that it was a fact that was relied upon, statements that are opinions or forecasts are often not considered to be facts or representations or terms of the contract and cannot be the basis for a claim in misrepresentation. The legal test for finding that a statement is a term or representation is; would the maker have intended to guarantee the statement when it was made. In 299 the case below, the franchisor would not have guaranteed specific future profits. Their statements were their opinions and forecasts at the time the contract was made. Example: In Healy v. Canadian Tire Corporation, Limited, 2012 ONSC 77 (CanLII), an owner of a Canadian Tire store sued the franchisor for negligent misrepresentation because the profit projec- tions he was given did not materialize and after 6 years running the store he was on the verge of bankruptcy. The court held that a profit forecast by its very nature is only an estimate or projection about a matter in the future. Negligent misrepresentation cannot be based on a future forecast; it must be based on a statement of existing fact. Though the franchisor was liable under the provincial franchise law for a breach of duty of good faith and liable for $250,000; that was significantly less than the $1,600,000 the judge would have awarded in damages if the claim for negligent misrepresentation had been successful. Special Consumer Rules Most provinces have enacted special rules to control misrepresentation in consumer transactions. The various acts, usually called unfair trade acts or business practices acts, differ in detail. In dealing with misrepresentation, however, each is similar. Each, in effect, makes the representation govern over the written contractual provisions. Any entire agreement clause is nullified. Damages and even criminal sanctions can apply. False advertising is one of the most common types of misrepresentation and will be discussed in Chapter 8 along with other areas of consumer protection. Always remember that promises by com- panies that sound too good to be true, probably are. Promises that you should be very wary of include: you will become a top model if you just pay for photos to be taken you can earn $10,000 a month without leaving home, or $25/hour no experience needed loans at low rates for those with bad credit ratings someone in Nigeria wants to get $20 million out of that country and will pay if you help them you just won an all-expenses paid vacation if you just pay a promotion fee If you are considering becoming involved with these scams, you probably should not. Check out these companies on the websites for the Better Business Bureau and the RCMP crime prevention site first before you give them any money. In almost all cases, these companies will take your money and give you little or nothing in return and it is best to avoid them entirely. 300  Business Law Applied 5 Bertram bought an air conditioner in August during Aircontrol Inc.’s end-of-season sale. Con- cerned that he would not be using it until the next season, Bertram asked Patricia, the salesperson, if the unit would be covered for any problems that might occur during the next year. Patricia re- sponded the unit would be covered up to the next September. All went well until July of the next year, when the unit developed a strong vibration noise. Air- control examined the air conditioner and told Bertram it would cost $400 to make the necessary repairs. When Bertram complained, the store referred to the sales contract, which said there was a six-month warranty. The sales contract also contained a clause saying that the sales contract rep- resented the entire agreement and that there were no other promises made. a) What is the name in law for the statement made by the salesperson that the unit would be under warranty until next September? b) Does the entire agreement clause in the sales contract deal with the statement made by the sales rep? If so, how? c) Does Bertram have any remedy to insist that the warranty period extends until Sep- tember of the relevant year? d) If Bertram had bought this air conditioner for his business, would he be able to rely on the same legal principle? e) What must business persons do to protect themselves in this type of situation? Mistake A mistake is an erroneous belief or a misunderstanding about an essential term in the contract. The legal concepts surrounding mistake are complex, and are not dealt with in great detail here. The instances when courts give relief for mistake are few. Instead, the courts tend to preserve business deals, on the basis that businesses need to be able to rely on their transactions, rather than having them reopened later. Mistakes that could have been avoided by due care will not usually result in relief from the court. Common and Mutual Mistake If both parties to the contract make the same mistake then it is a common mistake. If both parties are mistaken, but about different things, then it is a mutual mistake. Definition rectification a court can alter (rectify) an essential term if there is an obvious error to make it con- form to their true intentions If there is convincing evidence that both parties made an agreement and the mistake was made when putting that agreement into written form, such as a typing or clerical error, the court may rectify (al- ter) the written agreement to conform to the parties’ real agreement. Rectification will only occur if the court thinks that it was such a large obvious error, that an objective bystander would have recog- nized that a mistake had been made when the contract was formed and it prevents one party from being unjustly enriched. 301 For example: Ilya agreed to sell his house to Kim for $398,000. When the contract was typed up the price was listed as $39,800 but neither party noticed the typing error. On the closing date Kim looked at the contract and gave Ilya a cheque for $39,800. Ilya could claim that this was a major obvious cler- ical error and an objective bystander looking at it would realize a mistake had been made. Ilya could apply to the court and get a rectification order to correct the mistake and set the price at $398,000. Note however if the typing error had listed the price at $378,000 instead of $398,000 Ilya would prob- ably not get a rectification order. Even though it is an error of $20,000, it is not an obvious error, as someone objectively looking at the price of $378,000 would not recognize that a mistake had been made. In the Ron Engineering case below a mistake of $750,000 was not rectified but in McLean a $115,000 mistake was rectified. Example: In R. v. Ron Engineering & Construction 1 SCR 111, an engineering firm submit- ted a bid on a government contract of $2,748,000 along with a $150,000 deposit. The firm realized within an hour after the bidding had closed that due to a calculation error its bid should have been $750,000 higher. The engineering firm claimed that it had made a mistake and so its bid should not be considered and its deposit should be refunded. The court ruled that the mistake was not so large as to indicate that there had been an obvious miscalculation. The bidding process clear- ly stated the deposits were non-refundable. The court also wanted to protect the integrity of the tendering process and prevent future contractors from claiming a mistake to try to avoid contracts they had underbid on. The court ruled the government was entitled to keep the $150,000 deposit. McLean v. McLean 2013 ONCA 788 (CanLII) Helen and Wilmur Mclean agreed to sell their dairy farm to their son Melville and his wife Maureen McLean at fair market value. The real property (the land, farm house, barns and other buildings) was valued at $337,444, of which the farm house was $115,000. When the personal property (such as livestock, milk quota, equipment and furnishings) was included, the fair market value of the entire operation was $733,255. The parents agreed to take back a mortgage for the full value of just the real property. When the agreement, the land transfer and the mortgage documents were typed up, the value of the real property was incorrectly listed as $222,444 instead of $337,444. The value of the farm house had most likely been left out of the calculations, a mistake of $115,000. The documents were signed and registered at the government land titles office with this lower value. The parents eventually realized this mistake and asked the court to rectify the agreement, transfer and mortgage documents by changing the price for the real property to $337,444. Maureen argued that she thought the fair market value of the entire purchase was only $625,000, so there was no mistake and the documents should not rectified. The trial judge ruled that the parents had not established a common intention about the value of the farm and there was no common mistake, so rectification was denied. The parents ap- pealed. The Court’s Decision The Ontario Court of Appeal noted that rectification is designed to ensure that one party is not unjustly enriched at the expense of another. It ruled that the parties had both agreed the value of the real property was $337,444. There was a common intention and it was a common mistake when the documents were typed up with an incorrect price for the real property. Given all the evidence, on the balance of probabilities, a reasonable objective observer would believe the parties in- tended the real property to sell for $337,444. The families had used an inexperienced lawyer who had acted for both sides and had made multiple drafting errors. The court believed the value of the farm house, which was $115,000, had been mistakenly left out of the calculations and that was why the price was $115,000 lower than they had agreed upon. The documents as originally drafted did not reflect the true intention of the parties. To allow the son and his wife to purchase the farm at the lower price would unjustly enrich them. The court ordered all the documents to be rectified so that the sale price for the real property would be changed to $337,444. Other examples of a common mistake that could change a contract would be where the parties both thought the subject matter of the contract was in existence when the deal was made, but in fact it had 302 been destroyed or stolen, so then the contract would be void because of the shared mistake. For ex- ample, John agreed to sell his boat to Inga for $25,000 on May 10, and they arranged to go to the mari- na on May 15th to transfer the boat to Inga. When they got to the marina on May 15th they discovered the boat had been destroyed. The marina owner told them a severe storm had occurred on May 3rd and many boats had been destroyed including John’s. John and Inga had both been mistaken that the boat was good shape at the time the contract was made, when in fact it had been destroyed a week earlier. Their contract is therefore void due to the common mistake. But when both parties make a mistake about the true value of the goods, the contract is enforceable. For example: Raj sells a painting he found in his attic to Maria at his garage sale for $50. Maria then goes home to get her car so she can transport the painting. In the meantime an art dealer tells Raj the painting is really worth $20,000. This was a common mistake by both Raj and Maria about the true value of the painting when he sold it to her. The contract is valid though and Maria is entitled to the painting for the $50 she paid. The following case illustrates a mutual mistake that resulted in the court ruling there was no consen- sus, so no contract had been formed. Example: In Ron Ghitter Property Consultants Ltd. v. Beaver Lumber Company Limited, 2003 ABCA 221 (CanLII), Beaver Lumber had a lease with Baxter Estates that included a rental sharing agreement (RSA) whereby Beaver would pay Baxter 45% of the net profits it made from subletting any part of the property. Beaver later entered into an agreement to assign the lease to Ghitter Properties for $1.55 million, but Ghitter was not aware of the RSA. Beaver believed Ghitter knew of the RSA and Beaver had not concealed it. Just before the deal was to close, Ghitter learned of the RSA and refused to close the deal. The trial court and the Alberta Court of Appeal both agreed that the contract was void due to a mutual mistake. There had been no consensus between the two parties. When they had made the agreement, both sides were mistaken on what was included in the deal. It was not a breach of contract, there had been a mutual mistake about a fundamental term so no valid contract had been formed. Unilateral Mistake When only one party is mistaken, it is called a unilateral mistake. The courts are very reluctant to give any relief when it is just one party who was mistaken. The courts want to uphold the terms of the con- tract and the principle of caveat emptor (buyer beware) and enforce the contract. The court will not usually let a party out of a contract because they did not read the contract carefully or had misunder- stood a term because they had not done their due diligence, especially if it is a business-to-business contract. There usually has to be unjust enrichment and almost fraudulent behaviour by the defen- dant for relief to be granted when a unilateral mistake is made. Example: In Lee v. 1435375 Ontario Ltd., 2013 ONCA 516, the defendant was selling a dry cleaning business he had been running for 5 years. Neither the buyer nor the seller realized that the zon- ing laws had recently changed and the dry cleaning business was no longer an allowed conform- ing use in that location. There was a possibility the city would allow the business to continue, but legal permission would have to be obtained. When the buyer discovered the zoning issue just af- ter the purchase, he sued the vendor.. The Court considered it to be a unilateral mistake by the purchaser since he had not asked the vendor if the business conformed with the zoning. There was no misrepresentation or wrong doing by the seller, and the city might still allow the dry cleaning business to continue in this location. The purchaser should have done its due diligence and should bear the consequences of its own mistake. The contract was valid and the sale was not rescinded. It is possible in the case of a unilateral mistake for the court to grant rectification or damages, but it is usually only done when the aggrieved party can prove that the opposite party clearly knew of the 303 mistake and was taking advantage of it as in the Sylvan Lake case below. Example: In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, O’Con- nor and Bell agreed orally that they would form a joint venture to develop housing units around the 18th hole of a golf course. The land for the development was agreed to be 100 yards wide along the 18th fairway, but instead it was typed up as 100 feet wide. O’Connor knew of this error when Bell signed the agreement, but told him the written contract contained the same terms as their oral agreement. Later when Bell discovered this mistake he wanted it rectified. It would not be possible to build two rows of houses if the land was only 100 feet wide, so the project would not be financial- ly worthwhile. O’Connor insisted that the contract should be enforced as it was written. Bell pro- duced convincing evidence to the court of their oral agreement and that O’Connor knew of Bell’s unilateral mistake and was using it to get out of the deal. The trial judge described O’Connor’s be- haviour as almost fraudulent and stated it would be unjust and unconscionable to let O’Connor take advantage of Bell’s unilateral mistake. Though it was too late to rescind the contract as other con- struction had occurred on the lands, the court ruled it was a unilateral mistake and Bell was entitled to his lost profits of $620,000. Bell had been awarded an additional $200,000 in punitive damages by the trial judge, but the Supreme Court denied the punitive damages. It considered the compen- satory damages for lost profits were large enough to act as a deterrent to this type of behaviour. A business person must understand that relief for unilateral mistake is rare. Careful proofreading is important. Even a misplaced comma can lead to an opposite party gaining a benefit as the AGM Campbell case, next, (which has been called the million dollar comma case), demonstrates. AMJ Campbell Inc. v. Kord Products Inc., CanLII 5840 (ON S.C.) AMJ Transportation Inc. (“AMJ”), a transportation company, sold its subsidiary, Kord Products Limited, which made transportation containers, to ITML Inc. (“ITML”) for $13,688,000.00 subject to adjustments depending on evaluation of the inventory. One of the items for evaluation was “average selling price” which was defined in a non-binding letter of intent as “net of taxes, freight rebates and discounts”. At the Purchaser’s lawyer’s request the phrase was changed to “net of taxes, freight, rebates and discounts”. The change was highlighted in the track changes feature during the exchange of drafts of the final agreement. The difference in interpretation was that under the first reading only freight rebates (estimated at ten percent of the freight charges) would be deducted. Under the second version, all payments for freight charges plus freight rebates would be deducted. This was a difference, including interest, of about $1 million. AMJ sued for rectification of the contract based on mistake. The Court’s Decision The Court found there was no ambiguity in the final version of the phrase. Only AMJ was mistaken as to the effect of the phrase. ITML was not mistaken, so the mistake was unilateral (one-sided). While relief of rectification could be granted for unilateral mistakes if certain conditions were met, the Court was in- fluenced by the fact that by highlighting the track changes, AMJ’s attention was drawn to the change. The Purchaser did not and could not reasonably be taken to know that AMJ was mistaken. The Purchaser relied on the final version in agreeing to the deal and had acted completely ethically. AMJ’s action for rectification was dismissed. Essential Concepts Of Mistake A mistake is an erroneous belief or misunderstanding by one or more of the parties about an 304  essential contract term A common mistake occurs when both parties make the same mistake and a mutual mistake is when they both make mistakes, but about different things A unilateral mistake occurs when only one party makes a mistake and relief is only granted if it is proved that the defendant was taking advantage of the other party A court can rectify a mistake if it was an obvious clerical error and would cause unjust enrich- ment unless rectification occurs The courts want to enforce contracts as they are written and do not want to change the written agreement unless there was no consensus or unjust enrichment due to the mistake Business Alert! E & OE Businesses often include the notation E & OE (errors and omissions excepted) at the bottom of invoices and statements. This is an attempt to say that the transaction can be set aside if it later proves to contain a mistake. It has no effect in law. Business Law Applied 6 Stephen’s Travel Agency sent a firm quote to a corporate client of $7,500 for a package deal. The client accepted the quote and paid. One week later, the agency discovered that it had forgotten to include one item for $10,500. Ste- phen’s informed the client of the error, and requested payment. The client refused, claiming it had not known of the mistake, and had paid in good faith. a) On what legal remedy could Stephen’s rely? b) What would the travel agency have to prove in order to be successful in its attempt to secure payment? c) Would the size of the error be sufficient to establish that the client must have been aware of it? d) What circumstances might indicate whether the client knew of the mistake? e) If the invoice had contained the notation E & OE, could the travel agency rely on this fact? Duress Definition duress actual or threatened violence or unreasonable coercion used to force an agreement Entering into a contract “under duress” has a fairly limited meaning in law. Duress is not succumbing to a high-pressure sales pitch, nor is it renting a truck at a high rate because there is one rental com- pany in town. Duress is an overt threat inducing someone to enter into a contract. Actual or threatened violence cannot be used to force an individual to enter into a contract. Duress might also be in the form of blackmail, or the threat of criminal prosecution. Someone who has been forced to consent to a contract can have that agreement set aside by the courts. The threat of force means there is no true consent, so the contract is voidable. 305 Thankfully there are very few reported cases of the classic type of duress. In Byle v. Byle 1990 CanLII 313 (BCCA), a son threatened to “blow off his brother’s head” unless the elderly father transferred property to him. The father made the land transfer to the son who had made the threats, but later the court ruled the contract was void due to duress. Economic Duress One form of duress is economic duress. Sometimes, one business is aware of another company’s financial difficulties, and uses unfair methods to obtain better terms in a contract. To succeed in a claim for economic duress you must establish that you had no other practical alternatives so you had to agree to the demands of the other party, but you had agreed only under protest and later had tried to avoid the contract. Computron Systems International Inc. v. Ladhani et al., 2020 ONSC 3188 (CanLII) Computron Systems International Inc. sold computer accessories. It bought Apple brand Beats headsets from Tech- logics Inc. On receiving one shipment, Computron discovered they were knockoffs. Computron had given Techlogics a deposit of $60,000. When Computron requested it back, Techlogics said it would only give the refund if Computron signed a release that included the phrase, “waiv[ed] right to litigation“. Computron signed the release under protest and Techlogics returned the deposit. Computron sued Techlogics for loss of profits on the resale (the expectation interest). Techlogics pleaded the release and Computron countered with the defence of economic duress. The Court’s Decision The Court summarised the law of economic duress: “However, not all pressure, economic or otherwise, can constitute duress sufficient to carry these legal consequences. It must have two elements: it must be pressure that the law regards as illegitimate; and it must be applied to such a degree as to amount to “a coercion of the will” of the party relying on the concept. In considering whether the will of the party seeking relief was coerced, the court must consider: 1. Did the party protest at the time the contract was entered into? 2. Was there an alternative course available to the party? 3. Did the party receive independent legal advice? 4. After entering the contract, did the party take steps to avoid it? Each of these factors must be considered, but none may be determinative of the issue, depending upon the circum- stances.” The Court found that Computron established each of the factors: it did protest at the time; it had no real alternative because $60,000 dollars was a significant amount to a small corporation; there had been no legal advice, and it started its lawsuit within a reasonable time thereafter. The Court gave Computron judgment for $30,000 against Techlogics. Note: You will see this case again reviewed for another aspect under the Sale of Goods Act in Chapter 8. Business Alert! If objecting to any action such as signing a document, accepting a lesser amount in payment of a debt, you will need evidence of the protest. Be certain to record that protest. It can be written on the 306 document or confirmed the same in writing. Business Law Applied 7 Direct to the Net Inc. became a great success in only four years after start-up and it decided to go public. About one week before making the announcement of its initial public offering (IPO), it was served with a statement of claim by a former shareholder who alleged the company had used his ideas without paying for them four years ago. The Directors of Direct to the Net Inc. believe that there is no merit in the claim and feel that they are being blackmailed, but do not want to report a lawsuit of this type on the corporation’s disclo- sure material for the public offering. They agree to pay one million dollars to settle the claim. a) Is there any ground in law by which the corporation can have the settlement set aside by a court after the IPO? If so, what is the name for this course of action? b) What business considerations are relevant to the decision to sue and the timing of any lawsuit to set aside the settlement? Undue Influence Definition undue influence misuse of influence and domination over another party that deprives them of the will to make an independent decision Undue influence is that type of influence which prevents a party to a contract from exercising inde- pendent judgment or decision making in signing a contract. The doctrine of undue influence was not created to save people from the consequences of their actions, but to save them from being victim- ized by others. It is of two types, actual and presumed, and it occurs in two types of situations: firstly, where there is no special relationship between the parties, and secondly, where there is a special relationship. Actual One example of actual undue influence was a case in which a person claimed to be a medium giving a message from a dead relative that large amounts of money should be paid to the medium to con- duct a ritual to save the deceased from suffering in the next world. In another case, a bank manager threatened to lay criminal prosecutions against a son who forged his father’s name on a promissory note, unless the father signed a personal guarantee of the son’s loan which was then in default. This threat of criminal prosecution against the son was considered actual undue influence by a person (the bank manager) not in a special relationship with the aggrieved party (the father). Thus actual undue influence appears to require an element of express coercion. Actual undue influence is often an abuse of bargaining power and akin to duress. In the two examples above there was no special relationship and the aggrieved party must prove the undue influence. Presumed Definition 307 rebutted proven to be false Sometimes, trust or confidence exists between certain individuals in traditional relationships such as lawyer-client, accountant-client, doctor-patient, and the like. The person who is in the position of trust cannot use that influence to gain a personal advantage at the expense of the other party. This rule is akin to fiduciary duty and abuse of trust. A fiduciary relationship is one in which a weaker or more vulnerable person places trust and confidence in a stronger or more skilled person (see a more complete definition of agency in Chapter 6). In such a relationship undue influence is presumed. That means it does not have to be actually proved. There does not have to be any express coercion or threat. Instead, the presumption would have to be rebutted or proven to be false to avoid liability. There is a second type of special relationship that is not a traditional one but is open-ended. Thus, it is based on the particular facts of a case; one person may in fact give trust and confidence to another and this trust is abused. Because this type of relationship is based on the facts of a case, it is called a de facto special relationship. A common example is marriage. A married woman today is, generally, not presumed to be under the influence of her husband. However, in a traditional marriage, if the wife does leave financial matters to her husband and has no business experience, these facts may well support a finding that there was a special relationship, which in turn raises a presumption of undue influence. Legalese Presumption A presumption in law is something assumed to be true without the necessity of prov- ing it to be so. For example, if a lawyer buys a house from a client, and a client wants to set aside the transaction claiming the price was too low, the court will presume that the lawyer used undue influ- ence, that is, took advantage of the trust that the client put in the lawyer. The lawyer has the right to rebut (disprove) the presumption. Usually this is done by showing that a fair price was paid, and that the lawyer had therefore not taken advantage of the weaker party. Essential Concepts Of Undue Influence Undue influence means that some unfair advantages have been taken of a weaker person by a stronger person. Actual undue influence requires some overt act, and it compares to duress. Presumed undue influence arises from a special relationship which is similar to a fiduciary relationship. Special relationships can be traditional ones (such as lawyer-client) or ones formed on the individual facts of the case. Guaranteeing Debts There is a line of cases that permitted a spouse, usually a wife, in what was called a traditional mar- riage, to avoid the enforcement of a bank guarantee that she had signed for her husband’s business loan on the ground of undue influence. The theory in those cases was that the bank should have known that the wife was in the type of marriage in which she had no experience outside the home, was dominated by her husband and emotionally could not exercise any independent consent. There do not appear to have been any successful cases in recent times on this basis. That may be be- cause of the changing role of women in society. However the line of cases is relevant because it gave rise to the practice of insisting on Independent Legal Advice (ILA) for any person, not only a spouse, 308 signing or co-signing a guarantee of debt. The lawyer giving the advice must be independent, which means chosen by and paid for by the guarantor. Example: In Lewis v. Central Credit Union Limited, 2012 PECA 9 (CanLII), 77 year old Ella Lewis co- signed a mortgage on property she and her son owned an interest in, so that her son Orville, could get a loan to start a new carrot farming operation. She had signed previous lending agreements over the years and always had received independent legal advice, but not this time. When Orville’s carrot crop failed the credit union wanted to sell the property secured by the mortgage, but Ella asserted the mortgage was unenforceable due to undue influence. She claimed that if she had known how deeply in debt Orville was at the time of the mortgage she would have never agreed to it. The PEI Court of Appeal ruled that this was a case of presumed undue influence given the parent-child relationship and that this contract was disadvantageous to Ella. The credit union had to rebut this presumption by ensuring Ella had independent legal advice or present evidence she fully understood and freely agreed to the contract. Since that was not done, there was no proof that she had given her free and informed consent so the mortgage contract was unenforceable. Business Law Applied 8 Mary Row was a school teacher married for 15 years to James Row, who was a lawyer. Mrs. Row left all decisions on financial matters to her husband and did not even have a credit card in her own name. Mr. Row wanted to invest in hi-tech stocks and arranged for a bank loan. The bank insisted on a guarantee from Mrs. Row. Since Mr. Row was a lawyer, the bank did not require that she have I.L.A. The stock investments were a complete loss, the husband became depressed, could not practice law, and eventually went bankrupt. The bank sued Mrs. Row on the guarantee. a) What facts must Mrs. Row establish to raise a presumption of undue influence? Will she likely be successful in doing so? b) Was the bank on constructive notice of any special relationship in these circumstanc- es? c) What possible defence can a bank raise? Will it be successful? d) If you believe the result would be different in this case than in the Courtney case, why do you believe so? 309 Bank of Montreal v. Courtney, 2005 NSCA 153 (CanLII) Holly Courtney signed three promissory notes to enable her husband to borrow $900,000 to purchase shares in IT com- panies. She did not receive any independent legal advice.When the companies he invested in failed, he was unable to make the loan payments, so the bank took legal action against Holly to collect the money. She claimed that the prom- issory notes were unenforceable as she had been unduly influenced by her husband. The Court’s Decision The Nova Scotia Court of Appeal agreed with the trial judge’s ruling. It stressed that the absence of independent legal advice does not automatically mean there was undue influence. The issue of when ILA is necessary is based on two issues; did they understand the contract and were they free to make their own decision. In this case the court believed she had the intellect and ability to understand the loans and she had freely and voluntari- ly entered into these agreements. She had never complained at the time the agreements were signed, nor had she called the bank later to express any concerns. The court stated that ILA would have made no difference in these transactions as she already knew what she was signing. There was no evidence for the bank to presume that she was being unfairly pressured by her husband. The contracts also did not disadvantage her, as she would have benefitted if her husband’s investments had been successful. Therefore the claim of undue influence had not been proven and the loan agreements were enforceable. The Courtney case above illustrates though how even if it is a special relationship, and there was no independent legal advice given, the presumption of undue influence can be rebutted if there is suf- ficient evidence the dependent person understood and freely agreed to be bound by the contract. This principle is followed in a more recent Ontario Court of Appeal case which held that where the presumption of undue influence arises between a borrower and guarantor, there is an onus on the lender to take reasonable steps to “ensure the proposed guarantor understands the transaction and is entering into it voluntarily” through the use of independent legal advice. See JGB Collateral v. Ro- chon, 2020 ONCA 464 (CanLII). Unconscionable Transactions Definition unconscionable transaction a grossly unfair and improvident agreement that so offends commu- nity standards of commercial morality it should not be enforced The doctrine of unconscionability provides courts with another basis to change or rescind a contract in certain circumstances. Unconscionability is based on the belief that some contracts, when seen as a whole, “vary so much from community standards of commercial morality” that they should not be enforced. For a contract to be considered unconscionable there must be two factors present: 1) significant inequality in bargaining power due to the needs, inabilities or distress of the weaker party and 2) as a result they were taken advantage of by the stronger party and a substantially unfair con- tract was formed. The contract must be a grossly unfair and improvident (hasty and careless) trans- action that shocks the conscience of the court. The relief of unconscionability is often misunderstood and it should not be seen as a synonym for unfairness. A court does not set aside a contract just because it is unfair. The opposite is true. In a business bargaining situation, contract law protects competition and each party is entitled to get the best deal for themselves that they can. But in some situations, when one side is so much stronger and takes advantage of the other knowing 310 they are in a vulnerable situation, often due to financial difficulties, age or mental impairment, if the deal that is struck is clearly unconscionable, the courts can refuse to enforce the contract. Cases often involve insurance companies offering small amounts for a quick settlement of an insur- ance claim. The client who is injured is often desperate and has little or no understanding of how serious their injury is, and even less knowledge of the appropriate settlement amount. If the court thinks the amount the injured client accepted in the settlement is so grossly unfair it is unconsciona- ble, a higher amount can be awarded. Example: In Burkardt v. Gawdun 2003 SKQB 100 (CanLII), a 20 year old woman was injured in a car accident and 7 months later had a second car accident. The insurance adjustor advised Ms. Burk- ardt that she needed to settle the first claim before they could deal with the second accident claim, though this was not true. Ms. Burkardt had suffered a back injury in the first accident and the insur- ance company knew that the full extent of her injuries had not yet been determined. The client had little understanding of business or insurance contracts, so she agreed and accepted a payment of $4,500 and signed a release. Her back problems continued to increase which led to back surgery sev- eral years later. Ms. Burkardt then asked the court to set aside the original settlement agreement as an unconscionable transaction. The court ruled that there had been unequal bargaining power, the settlement was substantially unfair and the insurance company had taken advantage of the young client. The original settlement was rescinded as it was an unconscionable transaction, and the court awarded $53,000 in damages. Fairly frequently in divorce cases one party will claim that the equal division of family assets or the amount of equalization payments ordered is unconscionable. In family law the courts have set the threshold high and it must be proven that it would “shock the conscience of the court” to qualify as an unconscionable transaction. Example: In Sera v. Sera 2009 ONCA 105 (CanLII) the court considered it unconscionable to have a husband pay his wife $4.129 million based on the value of the family business, when soon after the valuation date was set, his business almost collapsed due to the impact of free trade. The court recal- culated his payment and set it at $900,000. Unconscionability is sometimes raised when people are challenging a will or gifts that have been made, but it can also arise in a variety of different contract situations such as in the Birch case. Example: In Birch v. Union of Taxation Employees, Local 700300 2008 ONCA 809 (CanLII), a union was found to have imposed an unconscionable contract term on its own union members. The union tried to force workers who crossed the picket line to work during the strike, to pay a fine equal to one day’s gross pay for each day they worked during the strike, plus they were suspended from union membership for one year for each day worked as well. The court ruled this was a penalty and uncon- scionable and the workers did not have to pay the fines. The Lydian Properties case below is a clear example of an unconscionable transaction where a com- pany took advantage of a desperate person. 311 Lydian Properties v. Chambers 2009 ABCA 21 (CanLII) Lydian Properties is a real estate investment company. As part of its business, it monitors courthouse foreclosure re- cords so it can offer its services to people who are about to lose their homes because they are behind in their mortgage payments. Donna Chambers found herself in such circumstances. She was in debt, pregnant with her fifth child, on a reduced income because she was on maternity leave, and had recently been divorced when, in the fall of 2005, she fell into arrears on her home mortgage. Foreclosure proceedings were commenced. She had been unable to arrange re-financing, was confused, anxious to retain ownership of her home, and felt pressure to act quickly. She got brochures sent to her by Lydian that promised “several ways to get money to you quickly to pay off arrears and other expenses so you can carry on with your life” and “honest, lasting solutions to help you out of foreclosure.” Chambers contacted Lydian and soon after signed a number of documents, the result of which was that title to her home was transferred to Lydian, and she became its tenant. The equity in her home became a deposit for an option for her to reacquire the home within a year’s time at a specified repurchase price ($20,000 higher), provided she made every rental payment on time. The transaction closed on February 15, 2006 and Chambers immediately fell into arrears. Lydian responded quickly; on March 1, 2006, it served her a Notice of Eviction. On May 16, 2006, Lydian applied for an order terminating her tenancy, granting Lydian possession of the home and judgment for the unpaid rent. The initial court decision ruled in Lydian’s favour. But Chambers then went to court and the judge declared the transaction should be set aside because it was unconscio- nable. Lydian appealed this decision to the Alberta Court of Appeal. The Court’s Decision The Court of Appeal reviewed what needed to be established before a court could rule a contract was unconscionable. Four criteria had to be met: 1. It was a grossly unfair and improvident transaction 2. The victim lacked independent legal advice 3. There was an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illit- eracy, ignorance of the language of the bargain or similar disability 4. The other party knowingly took advantage of this vulnerability. The Appeal Court found that when the entire contract, including the lease and the option, was considered, the trans- action was neither fair nor reasonable. It found Chambers would have to pay Lydian $20,000 more than Lydian had purchased the home for. Failure to meet even a single monthly payment resulted in default and she lost all her rights to the property. The court concluded the ultimate effect of the transaction was to transfer the property to Lydian, pay it an inflated rent, and give Chambers the right to buy the property back for an additional $20,000 beyond the approximately $17,000 equity she had in the home. The contract was grossly unfair and improvident (hasty and careless), Chambers had not obtained legal advice prior to signing the documents, that there was an overwhelming imbalance in the parties’ bargaining positions, and that Lyd- ian knowingly took advantage of Chambers in her desperate situation. The Court of Appeal agreed with the judge’s decision that the contract was an unconscionable transaction and there- fore it was rescinded. Lydian’s appeal failed. Consumer Protection Many provinces have enacted sections in their Consumer Protection Legislation giving relief on the basis of unconscionability. These laws will likely be applied to favour the consumer. The legislation lists some factors that the court can look at to determine whether the transaction was unconsciona- ble such as: 312  The consumer was not reasonably able to protect his or her interests because of some infirmi- ty, inability to understand the language or similar factors The price grossly exceeds the market price for the goods or services There was no reasonable probability of payment by the consumer Critical Concepts of Unconscionable Transactions An unconscionable transaction is one that varies significantly from the community standards for commercial morality Courts do not just set aside every contract because it is unfair To be an unconscionable transaction there has to be an overwhelming imbalance of bargain- ing power due to the victim’s desperation, ignorance, or disability The stronger party knowingly took advantage of the weaker party’s vulnerability and a grossly unfair and improvident agreement was made that shocks the conscience of the court Non Est Factum Definition non est factum (it is not my act) a plea that a person didn’t know what they had agreed to The defence of non est factum is not usually available to business people. It was developed in a much earlier time, when a large percentage of the population was illiterate. Sometimes, a document was put in front of a person who could neither read nor write, and a signature—an X was sufficient—re- quested. The individual might be told that the document was a simple letter, when in fact it was really a guarantee of a debt, or a deed to the ownership of land. To have such an agreement set aside by the courts, the illiterate party could plead there was no intention of signing that type of document, and that it was understood to be something entirely different. For example, an elderly widow is told that she is signing a mortgage renewal, but she is actually signing over the deed to her house. A mortgage renewal is a different type of document from a deed to a house. This is the basis of the plea non est factum. It does not apply if only some of the terms are different from what the assignor thought (for example, a different price). In modern times, it is reserved for people the court feels need protection, but who do not technically fit into the legal category of those who lack capacity. Most reported cases have involved very elderly persons who are clearly taken advantage of by unscrupulous relatives or financial institutions. It has also recently been applied to set aside spousal guarantees. Example: In Trans Canada Credit v. Judson, 2002 PESCTD 57 (CanLII), James Judson signed what he thought was a credit reference for his daughter’s boyfriend. He actually had signed a promissory note making him liable for the boyfriend’s debt with Trans Canada Credit. Judson had very little education, his ability to read was extremely limited and he needed two hearing aids though could only afford one. He did sign the promissory note, but he thought it was for an entirely different purpose. The court recog- nized that contracts are not rescinded merely because someone was careless. However in this case the court believed that the document lacked the precision and clarity one would expect of a promissory note and it was signed very quickly and Judson had no independent legal advice. What he signed was radically different from what he believed he was signing so the promissory note was void due to non est factum. 313  Business Law Applied 9 Inga was an 80 year old Swedish woman who spoke and read almost no English. Her son Sven came to her with some documents to sign. Sven told Inga that it was an application for a loan and she just had to sign as a reference for him so that he could get the loan. Inga asked Sven if this would risk any of her money and he assured her it wouldn’t. The documents that she signed how- ever included a $200,000 mortgage on her house. Sven got the loan from the bank, but when he was unable to make payments on the loan, the bank contacted Inga and told her it planned to sell her house to get the money Sven owed. Inga was very upset and said this couldn’t happen as she had never agreed to any of this. a) Discuss the defences Inga can use to try to prevent the bank from selling her house and what she must establish to be successful. b) Discuss the claim that the bank will make and what it must establish to be successful. Discharge and Remedies Discharge of Contract Definition discharge of contract occurs when all the parties have done exactly what they were required to do under the terms of the agreement: the promises have been completed and the parties have no further obligations to each other All things must come to an end—including a contract. At some point, the contract must be discharged, and the promises made by the parties brought to an end. Usually, discharge of contract occurs when all the parties have done exactly what they were required to do under the terms of the agreement: the promises have been completed and the parties have no further obligations to each other. For example, a manufacturer agrees to supply a fleet of delivery vans by September 11 of a given year. It does not supply the vans until December 1 of that year. This is a breach of contract. If the person suffered damages because of the delay, the manufacturer will likely have to pay the purchaser for the loss. Frustration Definition frustration an outside event that makes the performance of the contract impossible, and excuses a party from performance Sometimes circumstances, not created by the parties, have made it impossible, or virtually impossi- ble, for one of the parties to do what was promised, the contractual performance is considered to be frustrated. All the parties are discharged from their obligations under the contract. The circumstanc- es that give rise to frustration occur after the contract has been made. Frustration is an outside event that makes the performance of the contract impossible, and excuses a party from performance. The grounds that are necessary to establish frustration are narrow. They must be considered as unfore- seeable. Examples of frustration would include situations where goods sold were stolen or destroyed 314 after the contract was made but before the delivery date, or in a personal service contract, the person was injured or became ill and could not perform on the date set in the contract. If an event that forms the basis of the contract does not occur because of a frustrating event, then dependent contracts may also be considered frustrated. For example if a performer agrees to sing at a concert hall but then is injured and cannot perform, that contract is frustrated. If the concert hall had signed a contract with a security firm to provide security guards for that performance, that contract too may be considered frustrated as well. It is not impossible for the security guards to come, but there would be no need, since there was no longer going to be any concert on that date. Sometimes actions by the government can cause a contract to be frustrated. If the laws change and prohibit an activity, such as rezoning or new licensing requirements, that may give rise to frustration. A contract is not considered to be frustrated just because it becomes more expensive to perform. It is also not frustrated if it becomes merely inconvenient to perform, it has to be a permanent complete frustrating event that totally affects the nature, purpose and consequences of the contract. A contract is also not frustrated if it is self-induced frustration, such as one person intentionally causing the frustrating event to occur. In employment law if an employee is ill or injured and cannot work, the contract can be considered frustrated and may allow the employer to consider the contract terminated. The employee cannot then sue for wrongful dismissal. Human rights legislation however does require the employer to make accommodations for workers who are disabled due to illness or injury, so that may provide them with some protection and delay or deny the company’s right to claim frustration for many years. There is a distinction between mistake and frustration. Frustration only occurs when the unexpected event occurs after the contract is made. If the unexpected event occurs before the contract was made and the parties were unaware of it, then the contract is void due to mistake not frustration. For exam- ple if John agrees to sell his boat to Lara on May 15th and he will deliver it to her on May 20th,but nei- ther one realized it had been destroyed in a storm on May 10th, this contract is void due to mistake. If the boat is destroyed on May 16th it is void due to frustration. As a result of the COVID-19 pandemic, in 2020, many provincial governments instituted policies lim- iting the number of people who could gather in one place, the types of businesses that could operate their businesses, and other types of significant changes to the public’s livelihood. Arising from this is the question of whether or not contracts relating to the performing arts and wedding industry (ven- ue rentals, lighting rentals, etc) would be considered to be “frustrated”. In the event that contracts entered into before the pandemic came to light could be considered to be frustrated, significant con- cern about the treatment of contracts entered into after the governmental policies came into effect exposed a gap in the existing law of contract frustration. As this edition is being written there are two lower court decisions from Quebec discussed below. It is too early to tell if they will be followed by other jurisdictions and the higher level courts. Example: A landlord gave a commercial tenant that sold concrete for interior design use a lease. Be- cause of a government decree that only essential businesses could operate for several months of the COVID-19 crisis, the tenant could not operate and could not pay its rent. The governments offered a program by which the federal and provincial governments would contribute 50% of the rent, the tenant 25% and the landlord would forgive 25%. The landlord had to apply for this program, but it refused and brought a court application to evict the tenant. The court held that this refusal to partic- ipate in the government program was a failure of the landlord’s duty to mitigate and dismissed the application for eviction. Investissements immobiliers G. langara inc.v. 9224-5455 Québec Inc. (2020 QCCS 2176) 315 Force Majeure Clause Many contracts, especially international agreements, contain a force majeure clause, which widens the scope of grounds for not performing a contract because of radically changed circumstances. The following is a common force majeure clause: Definition act of God the violence of nature St. Anne warrants and represents that its requirements under this contract shall be approx- imately 15,000 tonnes a year, and further warrants that in any one year its requirements for Secondary Fibre shall not be less than 10,000 tonnes, unless as a result of an act of God (the vio- lence of nature), the Queen’s or public enemies, war, the authority of the law, labour unrest, or strikes, the destruction of or damages to production facilities, or the non-availability of markets for pulp or corrugating medium. If there is a force majeure clause in a contract then the parties have anticipated that an unexpected event may occur and often have allocated who shall bear the risk, so the contract cannot be consid- ered frustrated. When frustration does occur it is sometimes difficult to determine who shall bear the losses that re- sult. Common law dictated that if a deposit had been paid it would be returned if there had been no benefit provided. If some benefit had been given then they would get none of the deposit back. The all or nothing rule with deposits caused problems; however this has been overcome in almost ev- ery province as specific statutes have been passed to deal with frustrated contracts. These laws now allow a court to apportion the deposit money or losses based on what costs were incurred and the benefits that were received. 316 KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295 (CanLII) Safeway entered into a contract to sell property to KBK for a mixed commercial and residential condominium project. At the time the contract was made the property was zoned to allow a maximum floor space ratio (FSR) of 3.2. KBK had spoken with an official from the City of Vancouver regarding the zoning and the size of developments that would be al- lowed. On October 28, 1996 the contract was made and it specified that the purchase price would be the greater of $8.8 million or $38 multiplied by the FSR permitted by the City on the closing date. KBK paid a $150,000 deposit on that date. One month later and before the closing date, the Director of Planning for the City of Vancouver applied to rezone the property allowing a FSR of only 0.3, or only 20% of the floor space originally allowed. Neither Safeway nor KBK had con- templated this event. When the proposed rezoning was approved soon after, KBK informed Safeway that it considered the contract frustrated and demanded the return of its deposit. Safeway denied there was frustration and refused to return the deposit. Safeway then sold the property to another buyer for $5.4 million. KBK argued that the test for frustration was whether an intervening event that the parties had not contemplated had resulted in a “radically different” contract than the parties had agreed to. It claimed that the rezoning had produced that radically different result. Safeway claimed that the contract was for the sale and purchase of land and that had still been possible after the rezoning, so the contract was not frustrated and it was entitled to keep the deposit. The trial court ruled it was a frustrated contract and KBK was entitled to the return of the deposit money. Safeway ap- pealed to the B.C. Court of Appeal. The Court’s Decision The Appeal Court reviewed the three conditions that had to be satisfied for the doctrine of frustration to apply. These are: 1) What, having regard to all the circumstances, was the foundation of the contract? 2) Was the performance of the contract prevented? 3) Was the event that prevented the performance of the contract in the contemplation of the par- ties when the contract was made? The court then ruled that all three conditions had been met. The contract was not just a sale of land, it was the sale of land for the development of a mixed commercial residential property with a square footage of about 231,800 square foot. The rezoning struck at the root of the agreement and reduced the size of the development to 30,230 square feet. This was not a mere inconvenience, it transformed the contract into something totally different from what the parties intended. Therefore the contract was frustrated and KBK would have its $150,000 deposit returned. Example: A landlord gave a commercial tenant that sold concrete for interior design use a lease. Be- cause of a government decree that only essential businesses could operate for several months of the COVID-19 crisis, the tenant could not operate and could not pay its rent. The governments offered a program by which the federal and provincial governments would contribute 50% of the rent, the tenant 25% and the landlord would forgive 25%. The landlord had to apply for this program, but it refused and brought a court application to evict the tenant. The court held that this refusal to partic- ipate in the government program was a failure of the landlord’s duty to mitigate and dismissed the application for eviction. Investissements immobiliers G. langara inc.v. 9224-5455 Québec Inc. (2020 QCCS 2176) 317 Business law Applied 10 Gina hired Sunray Ltd. to build a sunroom on the back of her home. Sunray agreed to drill foot- ings for the sunroom10 feet deep to support the structure. The total cost of the project was $25,000 including custom made windows. Gina paid a $3,000 deposit when she signed the contract. Sun - ray ordered the custom made windows for the sunroom at a cost of $10,000 which Sunray paid for and were delivered before construction began. Once Sunray began drilling, it discovered that the property was located over an underground stream and neither side knew of it. When it drilled down 4 feet, it hit water. It was not possible to install the 10 deep footings for the sunroom. Sunray said it would not be safe to build the sunroom on this home. a) Is Sunray liable for breach of contract? What defense can it use? b) Can Gina get her deposit back? c) Who should bear the cost of the custom made windows? minor breach 318