Chapter 8 - Non-Enforcement of Contracts PDF

Exported for Shyam Thomas on Sat, 05 Oct 2024 03:46:09 GMT Chapter 8: Non-Enforcement of Contracts OBJECTIVES After studying this chapter, you should have an understanding of why enforcement of contracts is the norm the exceptional circumstances in which contracts are not enforced...

Exported for Shyam Thomas on Sat, 05 Oct 2024 03:46:09 GMT Chapter 8: Non-Enforcement of Contracts OBJECTIVES After studying this chapter, you should have an understanding of why enforcement of contracts is the norm the exceptional circumstances in which contracts are not enforced which contracts must be in writing and why [A] Business Law in Practice Martha Smith bought a fitness club in downtown Toronto and renamed it “Martha’s Gym.” She invested $50 000 of her own money and financed the remainder through a business loan from the local bank. Martha tried to attract a large clientele to the facility, but the volume of business failed to meet her expectations. She began to run short of cash and fell behind in her monthly loan payments to the bank. Eventually, the bank called the loan, which had an outstanding balance of $20 000. The bank told Martha that unless she paid off the entire balance in two weeks, it would start seizing assets from the fitness club. Martha convinced her elderly parents, Mr. and Mrs. Smith, to help her by borrowing $40 000 from the same bank. She explained that through such a cash infusion, she would be able to retire her own loan with the bank and use the balance as operating capital for her business. Martha assured her parents that the problems at the fitness club were temporary and that by hiring a new trainer, she would be able to quickly turn the business around. Martha and her parents went to meet Kevin Jones, the branch manager, who had handled Mr. and Mrs. Smith’s banking for over 35 years. Kevin said that he would give the Smiths an acceptable interest rate on the loan—namely, 8 percent—but insisted that the loan be secured by a mortgage on their home. Since the Smiths had no other means of paying back the loan and the house was their only asset, they were nervous about the proposal, which they did not fully understand. However, they did not want Martha to go through the humiliation of having her fitness equipment seized and sold at auction. For his part, Kevin was tremendously relieved that the Smiths had come in to see him. Kevin was the one who had approved Martha’s ill-fated business loan in the first place, and he had failed to ensure that it was properly secured. He saw this as an opportunity to correct his own error and get Martha’s loan off his books altogether. Kevin had the mortgage documents prepared and strongly encouraged the Smiths to sign, saying that this would protect Martha’s assets from seizure. He also told them that to a large extent, signing the mortgage was just a formality and that he was confident that nothing would come of it. In the end, the Smiths decided to put their trust in Kevin that he would not let them enter into a contract that could bring about their financial ruin. They simply signed the mortgage. Immediately, $20 000 went to the bank to pay the outstanding balance on Martha’s loan. The remaining $20 000 was paid directly to Martha (Figure 8.1). Figure 8.1 Martha’s and Her Parents’ Financial Arrangements with the Bank Martha’s business continued to operate until the additional capital was completely expended. Its prospects failed to improve, as Martha was still unable to attract customers and the new trainer quit. Eventually, neither Martha nor her parents could make the payments on the mortgage, and the bank began to foreclose on the Smiths’ home. Mr. and Mrs. Smith are in shock—they never believed that it would come to this. 1. Did Kevin manipulate or pressure the Smiths into signing the mortgage? If so, what legal remedies do the Smiths have? 2. Did Mr. and Mrs. Smith enter into the contract on the basis of mistake or misrepresentation? If so, what legal remedies do they have? 3. How could Kevin have managed this transaction better? The Importance of Enforcing Contracts Once negotiators reach an agreement that appears to contain their consensus on the essential elements of a bargain, a contract is formed. The law then focuses on enforcing that agreement in order to preserve the integrity, reliability, and predictability of contractual relationships. Were it otherwise, the business world would be unable to predict with any certainty which agreements would be binding. At the same time, the Canadian legal system recognizes the injustice of enforcing contracts without any provision for exceptional circumstances. Accordingly, the law endeavours to achieve a balance between two competing goals. On the one hand, it must prevent people from pulling out of deals because they have found better opportunities elsewhere or have failed to conduct diligent negotiations. On the other hand, it must remedy situations where an apparently valid contract fails to reflect the real agreement of both parties or is fundamentally unjust. This chapter presents a number of legal doctrines—developed through common law and statute—that are exceptions to the general rule that a contract, once formed, is enforceable. It categorizes these doctrines on the basis of there being an unequal relationship between the two parties; misrepresentation or important mistakes concerning the contract; or a defect within the contract itself. If the aggrieved party can bring itself within one of the doctrines discussed in this chapter, there are two possible outcomes. In certain circumstances, they may elect whether to keep the contract in force or have it brought to an end. Where this option is available, it is said to be a voidable contract. For example, when someone signs a contract under duress, it is that person’s choice whether to abide by the contract or seek to have it set aside by a judge. In other, more limited instances, the legal problem is so serious that the aggrieved party has no choice in the matter: a court must declare the contract to be null and void. In other words, because of some tremendously substantial defect—such as the illegality that underlies the “hit man” contract—the contract is considered never to have existed at all and, for that reason, to be of no force or effect. This is known as a void contract. Quiz Question 8.1 Mark as: None Review Which of the following are competing goals that contract law attempts to balance when enforcing contracts? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a the goal of providing remedies, and the goal that contractual terms are reasonable the goal of preventing people from avoiding contractual obligations, and the goal of ensuring the b contract reflects the real agreement between the parties the endeavour to preserve the real agreement reached by the parties, and the goal of preventing c mistakes the goal of ensuring equal power between the parties, and the goal of ensuring contract negotiations d are successful Correct Answer: b the goal of preventing people from avoiding contractual obligations, and the goal of ensuring the contract - reflects the real agreement between the parties Show Submitted Answer Hide Correct Answer Check My Answer Contracts Based on Unequal Relationships Legal Capacity In general, the law assumes that individuals and properly constituted organizations have the legal capacity to form contracts. Contract law also emphasizes the importance of consent and voluntariness. Because they may be unable to give true consent to their agreements, certain kinds of people—namely, children and those with mental incapacities—are given the benefit of special legal protection. Minors The age of majority is the age at which a person is recognized as an adult for legal purposes. This age is generally a provincial matter and is set at 18 or 19 years of age, depending on the province. For example, Ontario’s Age of Majority and Accountability Act sets the age of majority at 18. Those under the age of majority (called minors or infants) are in a very different position concerning their ability to enter contracts than are those who have attained the age of majority. The general rule is that minors are not obligated by the contracts, but they also have the option to fulfill their contractual commitments and can enforce a contract against the other party. In this way, contracts with a minor are usually voidable, at the option of the minor alone. There are also important exceptions to the rule that minors are not obligated by their contracts. As Bob Tarantino summarizes the matter, the law seeks to “reconcile the competing interests of protecting minors from exploitation (arising from their relatively weak situation … ) while also reserving certain species of contracts or relationships in order to ensure that the valid interests of minors (to obtain beneficial goods and services) are protected.” Without some legal protection, those who supply beneficial goods and services would perhaps refuse to deal with minors at all. Including for such a reason, minors are obligated by contracts for beneficial goods, known as essentials or “necessaries,” and are required to pay a reasonable price for them. What amounts to a necessary in a given case is legally determined in relation to two questions: 1. Is the item being acquired necessary to this minor? 2. Does this minor already have an adequate supply of the item? While food, shelter, and clothing are the most common categories of necessaries, the two-step test must still be satisfied for the supplier to be able to enforce the specific contract. Suppliers should also be aware that even when the contract is one for necessaries, problems of enforcement can arise. Suppliers may be faced with the presumption that a minor who lives with a parent or guardian is already adequately provided for and has no outstanding needs. Minors are also bound by beneficial contracts of service (such as for an apprenticeship or for the purposes of earning a livelihood). There is no universal test for determining whether a contract of service is beneficial, though one author has observed that benefit can be found when “the minor is receiving some advantage from the transaction equal to or in excess of any rights or interests which are being foregone.” The common law generally provides that when a minor reaches the age of majority, there is no impact on contracts formed when underage. Unless they involve contracts for beneficial goods or beneficial service, they remain unenforceable against the minor. Only if the person—now of legal age—expressly adopts or ratifies the unenforceable agreement does it become enforceable. An important exception to this rule is where the agreement is of a permanent or continuous nature, such as a partnership agreement. In such a case, the minor, upon attaining the age of majority, must reject (repudiate) this obligation, even if it is for non-necessaries. In all Canadian jurisdictions except British Columbia, the common law governs the contractual capacity of minors. In British Columbia, a different set of rules applies, as set out in the Infants Act. This legislation provides even more protection for the infant than is present at common law, since generally, even contracts for necessities and beneficial contracts of service are unenforceable at the election of the minor pursuant to this Act. However, a court has a number of powers under the legislation and can order, for example, that compensation be paid by or to any of the parties to the contract. BUSINESS APPLICATION OF THE LAW 8.1 Dealing with Minors Because minors receive special legal protection due to their vulnerability, businesses face more risk of unenforceability when contracting with them. If the contract is for any significant value, a contractor should consider either contracting with the parent or guardian instead of the minor, or requiring that individual to co-sign or guarantee the performance of the minor. This is because, generally speaking, the minor can simply abandon the contract, at the minor’s sole option, unless the contract is one for beneficial goods or beneficial services described earlier. Critical Analysis Question 8.2 Review What are the justifications for treating infants differently in the contractual arena than adults? Your Answer No answer submitted Quiz Question 8.3 Mark as: None Review  Which statement best represents the general common law rule for the enforcement of contracts against minors? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Upon reaching the age of majority, a minor automatically becomes bound by the contracts made while a a minor. b Contracts with minors are usually enforceable by the minor but not against the minor. c Minors are bound by contracts in the same way as adults. d A contract between adults and minors are never binding on minors. Correct Answer: b - Contracts with minors are usually enforceable by the minor but not against the minor. Show Submitted Answer Hide Correct Answer Check My Answer Mental Incapacity For a contract to be formed freely and voluntarily by both parties, both must be able to understand the nature and consequences of their agreement. Therefore, those who were mentally impaired (through illness or intoxication by alcohol or drugs) may be able to avoid the contract at issue in certain instances. A recent case has said, for example, that courts will not set aside a contract made with a mentally impaired person if (a) the contract is “fair and was made in good faith”; and (b) the other party “had no knowledge of his or her mental incapacity and did not take advantage of that person.” Knowledge in this context refers to knowledge the other party actually has or should have had given the circumstances. To the extent that the other party has unfairly exploited the party that is lacking capacity, there are additional grounds for attacking the contract’s validity—namely, duress, undue influence, and unconscionability. All three are considered next. The fact that Martha’s parents are elderly does not, of itself, mean that they lack mental capacity to enter into financial transactions. Rather, before Martha’s parents can avoid paying the mortgage on this ground, a court will have to be satisfied that their advanced age has affected their sanity or mental competence—an unlikely outcome on the facts of this scenario. They may be old and overly trusting, but not legally incompetent. Duress Contracts that are made as a result of one of the parties being threatened with physical harm are obviously not enforceable. The presence of this extreme form of duress indicates that the threatened party did not freely consent to the terms of the contract and, in fact, was the victim of a crime. Duress is now a broader concept and includes economic duress. In the more difficult cases—those more likely to arise in commercial dealings—economic duress takes the form of one party financially pressuring the other. For example, a company might threaten to break a contract that it knows is crucial to the other side unless the other side gives certain financial concessions or payments in return. Under the traditional test, these concessions will be unenforceable if it is shown that the coercion went beyond ordinary commercial pressure to a force or a coercion of will that prevented the other side from giving true consent to the proposal. Courts have more recently suggested that a party’s lack of a “practical” or “realistic” alternative can count as evidence of economic duress in the proper case. When duress is established, the contract is voidable at the option of the party that was subject to the duress. There is no possibility that Martha’s parents, discussed in the Business Law in Practice case, can rely on the doctrine of duress to avoid their obligations under the mortgage. Though the bank was going to seize Martha’s fitness club equipment and offer it for public sale, this “threat” did not amount to duress. Certainly, her parents may have been very upset and worried by the situation, but this would not force them to borrow $40 000 from the bank. Furthermore, the bank is fully within its legal rights to seize property when a loan has fallen into arrears. Quiz Question 8.4 Mark as: None Review What is the definition of “duress” with respect to contractual relationships? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a inequality between the parties b the threat of physical or economic harm that results in a contract c unfair manipulation that compromises someone’s free will d unfair criminal activity that seriously undermines a contract  Correct Answer: b - the threat of physical or economic harm that results in a contract Show Submitted Answer Hide Correct Answer Check My Answer Undue Influence Since the basic premise of contract formation is that both parties have chosen to enter into the contract, surrounding circumstances that put in question the ability of one of the parties to exercise free will or choice are of great concern. If these factors are sufficiently strong, then the contract is voidable at the option of the party whose free will was lost because of the undue influence of the other contracting party. Undue influence traditionally operates in two circumstances: Actual pressure: Sometimes a transaction—commercial or otherwise—arises because one party has exerted unfair influence on the other. In such a case, the party that seeks relief from the contract must show that the influence existed, was exercised, and resulted in the agreement in question. If an elderly person is pressured into signing over an estate to caregivers in return for care, such a transaction could be set aside for undue influence. Presumed pressure based on a special relationship: Sometimes the relationship that already exists between the parties gives rise to a presumption that the ensuing agreement was brought about by one party’s unfair manipulation of the other. For example, when the contract is formed between family members or between a lawyer and client or a doctor and patient, for example, the court is entitled to assume that undue influence has been exerted. Other kinds of relationships—as between a banker and a customer, for example—do not import this presumption. When the presumption is in place, however, it then falls to the more powerful party to prove that no undue influence was present. There is a chance that the elderly Mr. and Mrs. Smith would succeed in having the $40 000 mortgage set aside as having been procured by undue influence, either actual or presumed. The Smiths could argue that they entered into the mortgage with the bank only because the bank manager insistently preyed on their overwhelming need to help their daughter. If so, they could then win on the grounds of actual pressure. An argument could also be advanced on the grounds of presumed pressure. Though courts will not ordinarily presume that a bank has undue influence over its customers, the Smiths may succeed by proving that they placed themselves entirely in the hands of their longstanding bank manager and had received no qualified outside guidance. It would then fall to the bank to show that the mortgage was freely and independently entered into by the Smiths. One way of proving that the contract was freely chosen is to arrange for the weaker party—such as the Smiths—to get independent legal advice concerning the transaction before it is entered into. The lawyer providing that advice will also produce what is called a “certificate of independent legal advice,” which is then appended to the mortgage or other document in question. In the certificate, the lawyer attests to a number of matters, including the following: They have explained the proposed transaction to the weaker party. The weaker party appears to understand the proposed transaction. The weaker party is proceeding with the transaction on a free and informed basis. Quiz Question 8.5 Mark as: None Review When a relationship exists between a lawyer and a client, the court is entitled to assume presumed pressure amounting to undue influence. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False Correct Answer: a - True Show Submitted Answer Hide Correct Answer Check My Answer CASE 8.1 Bank of Montreal v Duguid, 2000 CanLII 5710 (ONCA), leave to appeal to SCC granted (2000) SCCB 2238, notice of discontinuance filed (2001) SCCB 1416 THE BUSINESS CONTEXT: When a bank lends money to a customer, it wants to ensure that, in the event of default, the customer has provided sufficient collateral to cover any shortfall. If the customer does not have satisfactory collateral, the bank may refuse to make the loan unless a third party either co-signs or guarantees the loan. This situation can pose serious risks for the third party, given its responsibility that loan payments must be made. FACTUAL BACKGROUND: In 1989 Mr. Duguid and a business partner applied to the Bank of Montreal for a loan to finance their investment in a condominium project. The bank said that it would make the loan only if Mrs. Duguid would co-sign it. Mr. Duguid approached his wife, a real estate agent, who did sign the loan. Contrary to the bank’s usual policy in such matters, its representative failed to recommend to Mrs. Duguid that she secure independent legal advice prior to signing. In short order, the loan went into default, Mr. Duguid declared bankruptcy, and the bank sued Mrs. Duguid for the amount outstanding on the loan, namely $87 000 plus interest. THE LEGAL QUESTION: Did Mrs. Duguid co-sign the loan as a result of her husband’s undue influence? RESOLUTION: Though the bank itself did not exert undue influence, any undue influence exerted by the husband would release the wife from her obligation under the loan if the bank knew or should have known about the undue influence and did nothing about it. Because Mr. Duguid was in a close, personal relationship with the other debtor—namely, his wife—the bank had a duty to make inquiries since the loan was clearly to the wife’s disadvantage. If there was any undue influence, this failure by the bank would lead to the wife’s loan being set aside. A majority of the Ontario Court of Appeal said, however, that there was no undue influence. Only if the wife could demonstrate that she reposed “trust and confidence” in her husband concerning financial matters would there be a presumption of undue influence. As a real estate agent, she knew the risks of her husband’s investment, and there was no potential for domination. On this basis, undue influence could not be presumed. Even if it could be presumed, the bank had rebutted that presumption, given Mrs. Duguid’s knowledgeable background. On this basis, the loan was enforceable against her. The dissenting judge would have set the loan aside based on undue influence. The dissent said that while Mrs. Duguid did not repose trust and confidence in her husband in the classic sense, she did fear “destroying the relationship between herself and her husband” should she refuse to co-sign. Her background as a real estate agent was simply irrelevant to this more emotional question. Given that Mrs. Duguid agreed to the loan during a low ebb in her marriage and that she signed in order to maintain “some level of tranquility” in the household, a presumption of undue influence had been established. This presumption was not rebutted by the bank since it knew that the transaction was to the wife’s disadvantage and that there was a substantial risk that her husband would pressure her to sign. Since the bank failed to advise her to get independent legal advice, Mrs. Duguid’s loan should be set aside due to undue influence. Critical Analysis  Question 8.6 Review Do you think that the dissent was correct to assess Mrs. Duguid’s emotional reasons for co-signing the loan? Or do you prefer the majority’s focus on Mrs. Duguid’s relatively sophisticated background as a real estate agent? Your Answer No answer submitted Quiz Question 8.7 Mark as: None Review UniCal’s supplier demanded that it pay more for components than specified in the contract. These components are crucial to UniCal’s business. The supplier says that unless UniCal pays more, it will receive no components at all. Fearful that its business might otherwise fail, UniCal agrees to the price increase. What legal principle might UniCal argue to have its agreement to pay more set aside? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a undue influence b economic duress c physical duress d unfair competition Correct Answer: b - economic duress Show Submitted Answer Hide Correct Answer Check My Answer Quiz Question 8.8 Mark as: None Review  Kramer returned from a wedding in a highly intoxicated state and, while still under the influence, agreed to sell his motorcycle to his roommate for a price substantially lower than its market value. Which statement best describes Kramer’s legal position? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a He must claim relief due to the effects of duress. b He must claim relief on the basis of undue influence. c He must claim relief on the basis that he lacked mental capacity. d The contract will be binding on Kramer because his reduced mental capacity was self-induced. Correct Answer: c - He must claim relief on the basis that he lacked mental capacity. Show Submitted Answer Hide Correct Answer Check My Answer Unconscionability Where one party stands in a position of being able to take advantage of someone and causes that person to enter into an unfair or improvident agreement, an unconscionable contract is the result. According to the Supreme Court of Canada, proof of unconscionability involves a two-step process, as discussed in Case 8.2. CASE 8.2 Uber Technologies Inc v Heller, 2020 SCC 16 THE BUSINESS CONTEXT: Arbitration clauses can benefit both sides in a contractual dispute because of advantages that arbitration may have when compared to litigation (discussed in Chapter 4). However, when contractual provisions—like an arbitration clause—are harsh and introduced into the contract in a demonstrably unfair way, courts will not enforce them. FACTUAL BACKGROUND: As noted in Chapter 4, “Business Application of the Law 4.2: Arbitration Clauses in Contracts,” David Heller, an UberEats driver in Ontario, commenced a proposed class action on behalf of Uber drivers claiming that the drivers are employees (not independent contractors) and entitled to benefits provided by employment standards legislation. Uber argued that Heller could not bring a class action as a clause in his driver’s contract with Uber required disputes to be arbitrated in the Netherlands. Though the contract did not reveal the cost for initiating the arbitration process, it was considerable, namely US$14 500 and close to Heller’s annual income. Note too that this cost would not include legal expenses, travel costs, or the arbitrator’s fees. THE LEGAL QUESTION: Is the arbitration clause unconscionable and therefore unenforceable? RESOLUTION: The Supreme Court of Canada ruled that arbitration clause was unconscionable. It clarified that doctrine of unconscionability is a two-step test, requiring (1) inequality of bargaining power; and (2) an improvident bargain. Inequality of bargaining power: The court concluded that there was inequality of bargaining because “[t]here was a significant gulf in sophistication between Mr. Heller, a food deliveryman in Toronto, and Uber, a large multinational corporation. The arbitration agreement, moreover, contains no information about the costs of mediation and arbitration in the Netherlands.” An improvident bargain: The court concluded that the bargain between Heller and Uber was improvident, emphasizing the extraordinarily high cost of initiating arbitration especially in relation to the likely size of any arbitration award. The court went on to observe that the arbitration agreement: also designates the law of the Netherlands as the governing law and Amsterdam as the “place” of the arbitration. This gives Mr. Heller and other Uber drivers in Ontario the clear impression that they have little choice but to travel at their own expense to the Netherlands to individually pursue claims against Uber through mandatory mediation and arbitration in Uber’s home jurisdiction. Because the arbitration clause was unconscionable, the court would not enforce it. As a result, Heller was allowed to proceed with his proposed class action, an action which was subsequently certified by the Ontario Superior Court of Justice. Refer to Heller v Uber Technologies Inc, 2021 ONSC 5518. Critical Analysis Question 8.9 Review Is the test for unconscionable too strict? Should it not be enough to show that the contract was improvident? Your Answer No answer submitted The Smiths, introduced in the Business Law in Practice case, may be able to convince a court that their contract with the bank was unconscionable. As for the first step (inequality of bargaining power), the Smiths are inexperienced and unsophisticated senior citizens who received no independent legal advice prior to signing the mortgage. The first step of the test is arguably established, particularly if a court were sympathetic to their plight. As for the second step (an improvident bargain), the rate of interest in the Smiths’ mortgage to the bank, was set at 8 percent and, from that perspective, was reasonable. However, there is a strong argument that the transaction was nonetheless a very unfair bargain for them. Through the mortgage, the Smiths put at risk their only substantial asset for a loan they could never repay from their own resources. In fact, while the bank and Martha stood to gain enormously from the transaction, the Smiths stood to lose significantly for absolutely no return. People seeking to avoid a contract owing to mental incapacity, duress, undue influence, or unconscionability must do so as promptly as possible or risk losing their case (Figure 8.2). Figure 8.2 Why should contracts that appear normal on the surface be subject to challenge on the basis of the relations between the parties or the surrounding circumstances? [B] Note that some provinces have enacted consumer protection legislation that includes unconscionability as a standard against which to assess the fairness of a consumer transaction. Quiz  Question 8.10 Mark as: None Review What must an aggrieved party prove in order to be released from a contract on the basis of unconscionability? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The agreement was between family members and constituted an improvident bargain. b The aggrieved party is a minor, and the agreement was not in writing. c The aggrieved party did not have an opportunity to obtain independent legal advice. d There is inequality between the parties, and the resulting agreement is substantially unfair. Correct Answer: d - There is inequality between the parties, and the resulting agreement is substantially unfair. Show Submitted Answer Hide Correct Answer Check My Answer Misrepresentations and Important Mistakes Misrepresentation of Relevant Facts Parties involved in negotiating a contract are usually not obligated to volunteer information. The basic principle or rule is that both parties are to look out for their own interests and if they want information, they should ask for it. Sometimes parties do owe a duty to disclose information without being prompted, however. Consider the follow scenarios: One party provides only partial information to the other side. This may amount to a misrepresentation, since once information is offered, it must not be misleading or incomplete. One party actively conceals the truth. For example, if the vendor of a building takes steps to conceal a crack in the foundation, this must be disclosed or it will amount to a misrepresentation. One party neglects to correct an earlier assertion that, when stated, was correct but now no longer is so. If a physician selling their practice gives initial information regarding its value that later  becomes inaccurate, the physician must go back and disclose this new fact to the prospective purchaser. The parties are in a relationship requiring utmost good faith. Insurance law provides an example of this. The person applying for insurance coverage has a duty to disclose all information that would be relevant to the insurer who is assessing the risk of accepting the application. A statute imposes a positive obligation to disclose information. For example, and as discussed in Chapter 16, legislation requires directors of a corporation to disclose their interest in certain kinds of contracts involving the corporation they serve. The difference between a statement made in the contract and one that is made prior to entering into the contract is crucial in this area of law. If the statement is made in the contract, it is a promise or a term of the contract. If it proves to be untrue, a breach of contract has occurred. However, if the statement is made prior to entering into the contract but is not a term, it still can have legal consequences. A statement that meets the conditions set out in the next section is known in law as an actionable misrepresentation. Contract law allows the party that has relied on a misrepresentation to have the contract cancelled. This cancellation is called rescission and involves putting the parties back into their pre-contractual positions. Because rescission is an equitable remedy, the court requires the person seeking such assistance to act promptly in bringing the complaint forward. Where rescission is not possible, such as when one party has substantially altered the subject matter of the contract, the courts will endeavour to do what is practically just so that the innocent party receives some redress, including monetary compensation. Quiz Question 8.11 Mark as: None Review What is the goal of the common law remedy of rescission? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a It seeks to provide redress to the innocent party. b It seeks to provide monetary redress for harm incurred. c It seeks to return parties to their pre-contractual positions. d It seeks to enforce good faith in commercial transactions.  Correct Answer: c - It seeks to return parties to their pre-contractual positions. Show Submitted Answer Hide Correct Answer Check My Answer Ingredients of an Actionable Misrepresentation The law provides that a negotiating party must answer inquiries accurately and that any information volunteered must be correct. Whether or not a statement is a misrepresentation that allows the other party a remedy depends on its nature and effect. To count as a misrepresentation, it must be proven that the statement is false; clear and unambiguous; material to the contract—that is, it must be significant to the decision of whether or not to enter into the contract; one that actually induces the aggrieved party to enter into the contract; and concerned with a fact and not an opinion, unless the speaker claims to have special knowledge or expertise in relation to an opinion. Categories of Actionable Misrepresentations The law further divides misrepresentations into three categories: Fraudulent misrepresentation: The speaker has a deliberate intent to mislead or makes the statement recklessly without knowing or believing that it is true. Negligent misrepresentation: The speaker makes the statement carelessly or negligently. Innocent misrepresentation: The speaker has not been fraudulent or negligent, but has misrepresented a fact. By process of elimination, the misrepresentation is merely innocent. When Kevin told the Smiths that signing the mortgage was a formality, this statement amounted to a misrepresentation, since a mortgage is in fact a legal instrument with far-reaching consequences, the most serious being that the bank could foreclose on the Smiths’ house. If the Smiths can prove that they relied on that representation in deciding to sign the mortgage, they will probably succeed in establishing an actionable misrepresentation. Minimally, this statement was negligent, but, given the likely state of Kevin’s banking knowledge, the statement might even be fraudulent. When Kevin told the Smiths he was confident that nothing would come of their signing the mortgage, this was arguably an expression of opinion—not a statement of fact—and therefore not actionable. A court might find, however, that since Kevin is an expert in the area of mortgages and other banking matters, his statement was one of fact, and order a remedy on that basis. While a court would be unlikely to find this statement to be a fraudulent misrepresentation, given the sparse facts, it may well find it to be negligent. Quiz Question 8.12 Mark as: None Review Jackson is selling his house. In order to hide evidence of serious cracking in the concrete basement walls, he has put up drywall throughout the basement, painted it, and installed new baseboards. What legal doctrine would a buyer most likely rely upon to rescind the resulting contract? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a unconscionability b misrepresentation c undue influence d duress Correct Answer: b - misrepresentation Show Submitted Answer Hide Correct Answer Check My Answer Remedies for Misrepresentation Besides entitling courts to rescind or set aside a contract, certain kinds of misrepresentations are torts, which provide for a remedy in damages. If the misrepresentation is fraudulent or negligently made, damages in tort can be awarded in addition to the remedy of rescission provided by contract law. Where the misrepresentation is neither fraudulent nor negligent, an action is still available to set the contract aside based on innocent misrepresentation (Table 8.1). Negligence is discussed further in Chapter 11, and fraud (or deceit) is discussed further in Chapter 12. Upon the Smiths demonstrating an innocent misrepresentation, the court can order that their contract with the bank be set aside. If the Smiths can go on to prove that the bank—through Kevin—is responsible for the tort of negligence or fraud, they are entitled to damages as well. Fraudulent Negligent Innocent Misrepresentation Misrepresentation Misrepresentation Rescission in Rescission in Rescission in contract contract contract Remedy Damages in tort Damages in tort Table 8.1 Remedies for Misrepresentation Given the cost of litigation—and the fact that the innocent party may fail to prove their case on the balance of probabilities that an actionable misrepresentation had been made—prevention is the best recommendation. It is prudent to insist that important terms be an express part of a written contract, so as to achieve the goal of clarity between the parties. It is generally easier to prove breach of a written term than to establish that an oral statement made during contractual negotiations amounts to a misrepresentation in law. If the other party balks at recording an important representation as an express, written term, the customer would be best advised to do business elsewhere. Quiz Question 8.13 Mark as: None Review How does misrepresentation differ from a breach of contract? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Misrepresentation refers to statements made prior to entering into a contract. b Misrepresentation must be intentional in order to be actionable. c Misrepresentation only applies if the parties are in a relationship of utmost good faith. d Proof of misrepresentation alone is insufficient for the courts to rescind a contract. Correct Answer: a - Misrepresentation refers to statements made prior to entering into a contract. Show Submitted Answer Hide Correct Answer Check My Answer Mistake The doctrine of legal mistake is one of the most difficult aspects of contract law. In the course of its development by the courts, the law of mistake has become so complex and confusing that it presents a major challenge even to seasoned lawyers and judges. In practice, legal mistake is rarely proven, but when it is, the court is entitled to set the contract aside as a remedy. The central point is that legal mistake is much narrower than the everyday idea of a mistake. A simple oversight or error by one negotiating party does not constitute a legal mistake and provides no basis for avoiding a contract. As previously noted, negotiators are expected to look after themselves and to exercise appropriate caution before making legal commitments. Compare the following two examples. Example 1. Kerry intends to make an offer to sell her car for $11 000 and in error sends a written offer to Sean for $10 000. Sean accepts her offer. Example 2. Kerry makes a written offer to sell her car for $1100 rather than $11 000, and Sean promptly accepts. There is no reason to believe that the car, worth approximately $11 000, should be sold at a substantially lower price. Moreover, there is nothing in the relationship that would suggest that Kerry would give Sean a break in price. In both cases, Kerry has made a mistake according to the common understanding of that word. However, in all likelihood, only in Example 2 would this be interpreted at law as a mistake worthy of a remedy. The error Kerry has made in Example 1 is not one that would surprise or otherwise alert Sean. This could be exactly the price for which Kerry intends to sell her car. In contrast, in Example 2, Sean could not reasonably expect that the price would be so low, especially if Kerry and Sean have had earlier discussions about the possible price range. Kerry has made an error, and any reasonable person in Sean’s position would realize that. In the latter example, there can be no true agreement for $1100. The law will not permit Sean to “snap up” Kerry’s offer. A legal mistake may also occur if both parties have made the same error (known as common mistake ). If Kerry’s car appears to be old and relatively worthless, and she and Sean negotiate on that basis for a relatively low price, their agreement is based on a common mistake if the car turns out to be a valuable antique. Only if the error is such that the car purchased is a totally different thing from what the parties thought it was will the contract be set aside on the basis of mistake. For example, if the difference is between low-grade transportation (what the parties thought the car was) and a classic car to be displayed and never driven (what the car actually is), a mistake in law could possibly be established. To the extent that the error is simply a mistaken assumption about the quality of the car (i.e., in terms of value), however, no legal mistake has occurred, and the purchaser is entitled to retain what may appear to be a windfall. Needless to say, such distinctions can be subtle. Courts will fix errors in contract on a limited basis. For example, when parties have made a common mistake in recording their agreement, courts will correct the contract in specific circumstances through the remedy of rectification. According to the Supreme Court of Canada, the party seeking rectification must “identify the terms which were omitted or recorded incorrectly” and provide evidence of the definite terms that the parties “had specifically agreed to” at the time the contract was formed. What the courts will not permit is an attempt by parties “to go back in time and re-engineer a concluded transaction.” Under the Business Law in Practice case, Martha’s parents may have signed the mortgage under the mistaken belief that Martha’s business problems were temporary and reversible. This is not a legal mistake, however, and there is no possibility that the mortgage would be set aside on the basis of this misapprehension. Case 8.3 helps illustrate the very limited assistance offered by the law of mistake to the party labouring under an error—even a large one. CASE 8.3 The Queen (Ont) v Ron Engineering, 1981 CanLII 17 (SCC) THE BUSINESS CONTEXT: As noted in Chapter 6, owners commonly secure competitive bids to build large projects through a call for tenders. In response, contractors (also known as tenderers) submit tenders that set out a price for the work to be done. Though this is a fact-specific matter, the tendering rules can require the contractors to submit a tender deposit that is forfeited by the contractor who is chosen if they refuse to undertake the job. It is therefore important that the tender price be accurately tabulated before the tender is submitted to the owner since it can be difficult to withdraw after the fact, at least not without risking the deposit. FACTUAL BACKGROUND: Ron Engineering submitted a tender on a project for a price of $2 748 000 along with a certified deposit cheque for $150 000 as the tendering rules required. The tendering rules— contained in the Information for Tenderers—stipulated that tenders could be withdrawn up to the official closing time, after which they would be irrevocable. The rules also provided that the deposit was forfeited by the successful contractor if the successful contractor refused to proceed with the project. Tenders closed at 3:00 p.m. and, soon thereafter, Ron Engineering realized that, due to a simple miscalculation, it had submitted a bid that was $750 000 less than it had intended to submit. Though this error was detected by Ron Engineering and explained to the owner within 72 minutes of closing, the owner insisted that Ron Engineering proceed with the project or forfeit its deposit. THE LEGAL QUESTION: Does the law of mistake provide Ron Engineering with a route of escape, or is the company obligated to either perform or forfeit its deposit? Is it too late for Ron Engineering to withdraw its tender? RESOLUTION: The Supreme Court of Canada ruled that tenderers in the position of Ron Engineering could not withdraw tenders after the official closing time. Upon submission of its tender, Ron was in a preliminary contract with the owner. This preliminary contract (known as Contract A) required the owner to respect the rules on how to evaluate tenders and required tenderers not to withdraw their tenders after the official closing time. Only the successful tenderer would enter into the larger contract to perform the work in question (known as Contract B). Ron Engineering unsuccessfully argued that the law of mistake prevented Contract A from ever coming into existence. According to the court, since Ron Engineering intended to submit the very tender submitted, including the named price, there was no mistake in any legal sense. Furthermore, even though the tender was $750 000 less than it should have been, this error was not so large as to suggest to the other side that there had been a miscalculation. Unless there was something seriously amiss with the tender—such as an entire page missing—Contract A would come into existence. Since no such circumstances existed here, Ron Engineering lost its deposit. The court insisted that such strictness was essential to protecting the integrity of the tendering process. Critical Analysis Question 8.14 Review Is the law of mistake too harsh? What would the consequences be if a party could escape its contractual obligations simply because it had made a mathematical error? Your Answer No answer submitted An argument that is often made, though seldom successfully, concerns signed documents. The signer may misunderstand the type or nature of the document. Perhaps the signer thinks they are signing a guarantee of a debt, but the document is actually a mortgage on their residence. Or the document is a transfer of land, and the signer thought they were signing an option to sell the property. The argument is “I never intended to sign this type of contract.” In practice, this argument tends to succeed only when there is a good reason for the signer’s failure to more closely examine the document before signing—as when the signer is poorly educated, illiterate, or otherwise dependent on the creator of the document (the other party) for an explanation of what it is. Simple carelessness in signing a document without attention to what it is or to what its consequences might be is not enough to avoid enforceability. Quiz Question 8.15 Mark as: None Review Which situation might give rise to a successful claim of mistake? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Mindy intends to sell her cottage at the lake for $110 000, but instead sends a written offer to George for a $100 000. George accepts her offer. Farid leases a space for his new convenience store because of its proximity to a bus stop, but then finds b out that the city is moving the bus stop. c Janice purchases a painting from Mark at a garage sale for $5.00 and later learns it is worth $200. Gina sends an offer to Remus to buy his Xbox for $5000, when she meant to offer only $50. Remus d accepts her offer. Correct Answer: d Gina sends an offer to Remus to buy his Xbox for $5000, when she meant to offer only $50. Remus accepts - her offer. Show Submitted Answer Hide Correct Answer Check My Answer Contracts Based on Defects Illegality Under the classical model of illegality, even a freely chosen contract will be unenforceable for the following reasons: It is contrary to a specific statute. It violates public policy. These contracts are void and of no effect unless the court decides that the offending portions of the contract can be deleted, or severed, and the remaining portions saved. In such a case, only some of the contract will remain in effect and be enforceable. What a court will not do, however, is re-draft the offending portions to make them comply with the law. An illegal contract is not necessarily one that is criminal. More broadly, it is simply one that violates statute law or public policy. Illegal by Statute Numerous kinds of contracts are made illegal by legislation. Examples include the following: The Criminal Code forbids loans at a rate of interest considered “criminal”—defined as a rate exceeding 60 percent per year. (Refer to Business and Legislation 26.3 for discussion and proposed changes in this area). The courts may or may not invalidate the entire transaction, depending on whether it is possible to sever the clauses dealing with the criminal rate of interest from the rest of the contract. The federal Competition Act invalidates a range of commercial transactions that unduly restrict competition. For example, resale price maintenance contracts are prohibited because, through them, manufacturers attempt to influence retail prices in the stores by keeping them high. Entering into such contracts can lead to criminal sanctions. Ontario’s Real Estate and Business Brokers Act provides that an unlicensed realtor cannot maintain an action for services rendered. Business enterprises should take care to meet their statutory and regulatory obligations lest they be faced with a challenge to the legality of a contract into which they have entered. Increasingly, however, the consequences of statutory illegality depend on all the circumstances of the case. As one leading text in this area of law states, “If every statutory illegality, however trivial in the course of performance of a contract, invalidated the agreement, the result would be an unjust and haphazard allocation of loss without regard to any rational principles.” This statement signals a more flexible perspective, which may fully eclipse the strict, traditional approach that says that illegal contracts are automatically unenforceable. Contrary to Public Policy At common law, contracts are contrary to public policy when they injure the public interest. For example, an employer may wish to restrict the activities of employees to prevent them from joining the competition or becoming the competition. Or someone wishing to acquire a business may want to ensure that the vendor cannot simply set up shop down the street and immediately begin competing with the new owner. The motivation for such clauses is understandable since both the employer and business acquirer, as the case may be, want to protect their own best interests. Clauses that restrict someone’s business activities in this way are known as restrictive covenants or covenants in restraint of trade. If drafted too broadly, they are unenforceable as being contrary to public policy. In short, restrictive covenants may unduly interfere with the other side’s ability to earn a livelihood, and they reduce competition within a sector. In 2009, the Supreme Court of Canada in Shafron v KRG Insurance Brokers expressly reaffirmed that restrictive covenants in the sale of a business are subject to less scrutiny because the business owner is typically paid for goodwill. In the employment context, by way of contrast, the employee receives no such recompense, and there is typically a power imbalance between employee and employer that the law wants to protect against. Two main kinds of restrictive covenants are found in this area. A non-solicitation clause simply forbids the employee (or business vendor) from contacting the business’s customers. A non-competition clause forbids competition itself and is therefore much more intrusive. The Supreme Court of Canada has confirmed that non-competition clauses are enforceable if they are “reasonable between the parties and with reference to the public interest.” This, in turn, can lead to a complex analysis but will generally include an assessment of whether the employer has a proprietary interest they are entitled to protect. Courts assessing the reasonableness of the clause will weigh the following factors: how large a geographic area is covered by the clause; the period of time during which the covenant purports to be in force; and the extent of the activity which the clause purports to limit. Once the reasonableness of a restrictive covenant has been established, it is enforceable unless it runs contrary to the public interest. In Case 8.4, the Ontario Court of Appeal assessed non-competition clauses in an employment context. CASE 8.4 M & P Drug Mart Inc v Norton, 2022 ONCA 398 BUSINESS CONTEXT: Though an employer wants to protect its proprietary interests through a non- compete clause, it must not over-reach or else risk that the clause will not be enforceable at all. FACTUAL BACKGROUND: At issue was a non-compete clause prohibiting a pharmacy manager from competing with his employer for one year following termination. The clause stated, among other things, that the “Employee shall not carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the business within a fifteen (15) kilometre radius of the business of the [current employer’s] business.” Litigation arose when the employee gave several months notice, resigned from the plaintiff’s employ and took a position as a pharmacist at the drug store less than three kilometres away. THE LEGAL QUESTION: Is the non-compete clause enforceable? RESOLUTION: The Court of Appeal agreed with the trial judge’s assessment that the non-compete clause was unenforceable because it was unreasonable. In terms of stating the law, the court acknowledged the following: The reasonableness of the non-compete clause is to be assessed in relation to “the extent of the activity sought to be prohibited, the geographical coverage of the restriction, and its duration ….” A non-compete clause is unreasonable when it is ambiguous. This is in part because when restrictions are unclear, “it will not be possible to show them to be reasonable.” Here, the clause was unenforceable because it was vague and overly broad. For example, the clause as drafted could forbid the employee from participating even in the non-pharmacy aspects of a business and that would be an unreasonable restriction. Critical Analysis Question 8.16 Review Since the employee signed the contract containing the non-compete clause and therefore presumably agreed to it, is it fair that the law puts the full risk of the clause being overbroad on the employer? Your Answer No answer submitted The Supreme Court of Canada in Shafron has also confirmed that, in an employment context, courts are not to re-draft overly broad non-competition clauses by “reading them down” until they become reasonable—that is, legal and enforceable. Rather, such clauses are simply and utterly unenforceable. A central policy objective is to prevent employers from intentionally drafting broad clauses with the expectation that the courts will simply reduce their scope as appropriate. This could lead to employees who never make it to court, being bound by an unreasonable non-competition clause. The court also agreed that judges may remove part of an impugned provision to “cure” it, but only sparingly and “only in cases where the part being removed is clearly severable, trivial and not part of the main purport of the restrictive covenant.” Note however, that in the context of a sale of a business, courts are more ready to adjust an overly broad non-compete clause by severing the offending portions. Non-compete clauses are governed exclusively by the common law except in Ontario where new legislation is in place. This is discussed in Business and Legislation 8.1. BUSINESS AND LEGISLATION 8.1 Non-Compete Clauses The Ontario legislature has recently banned most non-compete clauses based on the concern that employees were being subject to unfair advantage and require better protection. However, not all non-compete clauses are forbidden. They can still be part of senior executive agreements and in the sale of a business scenario. Beyond this, the legislation does not forbid non-solicitation agreements (discussed earlier) and does not ban non-disclosure agreements. As summarized by the government, a non-disclosure agreement in an employment contract “prohibits an employee from sharing confidential company information and processes.” In Video 8.1, CBC News reporter Meagan Fitzpatrick discusses this legislation. Video Please visit the textbook on a web or mobile device to view video content. Critical Analysis Question 8.17 Review  In light of Video 8.1 and the information in this portion of the text, do you agree with this new legislation or does it make the employer too vulnerable? Would a non- disclosure agreement (which are still permitted) help fill in the gap? Your Answer Ontario’s new legislation regarding non-compete clauses means that the Ontario Court of Appeal’s decision in Msubmitted No answer & P Drug Mart (discussed in Case 8.4) has more limited application in Ontario going forward when the non-executive employment contract is at issue. However, and for example, M & P Drug Mart would still apply in relation to litigation over senior executive agreements and non-compete clauses in the context of the sale of a business. Additionally, because the case offers a current and comprehensive statement of the law, courts in other jurisdictions are likely to find it persuasive from a more general perspective. The Supreme Court of Canada in Payette v Guay recently offered analysis on non-solicitation clauses. Like non-competition clauses, they too must be reasonable, unambiguous, and restricted to a time-frame but beyond this, a “determination that a non-solicitation clause is reasonable and lawful does not generally require a territorial limitation.” This is, in part, because “in the context of the modern economy, and in particular of new technologies, customers are no longer limited geographically, which means that territorial limitations in non-solicitation have generally become obsolete.” Quiz Question 8.18 Mark as: None Review What is the difference between a non-solicitation clause and a non-competition clause? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. A non-solicitation clause forbids the affected party from contacting the business’s customers for a a certain period of time, and a non-competition clause forbids working in the same industry for a certain period of time. A non-solicitation clause will usually be upheld by the courts, but a non-competition clause will always b constitute an unreasonable restriction on trade and be illegal. A non-solicitation clause forbids working in the same industry for a certain period of time, and a non- c competition clause forbids the affected party from contacting the business’s customers. d A non-solicitation clause is less likely to be enforced by the courts than a non-competition clause.  Correct Answer: a A non-solicitation clause forbids the affected party from contacting the business’s customers for a certain - period of time, and a non-competition clause forbids working in the same industry for a certain period of Show Submitted Answer time. Hide Correct Answer Check My Answer Quiz Question 8.19 Mark as: None Review Which of the following elements would a court consider when determining the enforceability of a non- competition clause on the grounds of reasonableness? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a contravention of the Real Estate and Business Brokers Act b the reasonableness of location and time restrictions c contravention of anti-price maintenance legislation d the need to maintain free and open competition Correct Answer: b - the reasonableness of location and time restrictions Show Submitted Answer Hide Correct Answer Check My Answer Quiz Question 8.20 Mark as: None Review Why do the courts subject restrictive covenants in the employment context to greater scrutiny than those arising in the sale of a business? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a because the clauses are typically ambiguous  b because there is typically a power imbalance in employment situations c because such agreements offend human rights legislation d because such clauses violate the Competition Act Correct Answer: b - because there is typically a power imbalance in employment situations Show Submitted Answer Hide Correct Answer Check My Answer Writing as a Requirement As a general rule, contracts do not have to be in writing in order to be enforceable. A party to an oral contract must find other means to prove its existence, such as the calling of witnesses. Sometimes, however, a contract must be evidenced in writing due to the Statute of Frauds. The Statute of Frauds was imported to Canada from England. Except in Manitoba and New Brunswick, where it has been completely repealed, the Statute of Frauds applies to differing extents in all common law provinces. The purpose of the Statute of Frauds is to prevent fraud and perjury by requiring written proof of certain kinds of contracts. The four categories discussed next are the most relevant to business. A contract falling into these categories must have its essential terms contained in a document or documents signed by the party against whom the contract is to be enforced. Several documents can be combined to meet the requirement if each of the documents can be connected with the others. If the writing requirement cannot be met, however, the contract is generally unenforceable. Quiz Question 8.21 Mark as: None Review What was the intended purpose of the creation and enactment of the Statute of Frauds? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a to require that commercial contractual relationships be stated in one document  b to avoid the difficulty in proving the value of the goods or services exchanged c to allow performance to take the place of a written duly executed agreement d to impede perjury and fraud by documented evidence of specified types of contracts Correct Answer: d - to impede perjury and fraud by documented evidence of specified types of contracts Show Submitted Answer Hide Correct Answer Check My Answer Contracts of Guarantee A guarantee is a promise to pay the debt of someone else, should that person default on the obligation. A guarantee must generally be evidenced in writing. The province of Alberta has gone even further than the Statute of Frauds by requiring additional formalities from non-corporate guarantors, including the requirement that the written guarantee be accompanied by a lawyer’s certificate. In this certificate, the lawyer attests that the guarantor is aware of the contents of the guarantee and understands it. Quiz Question 8.22 Mark as: None Review What is the legal definition of a “guarantee”? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a a fair contract formed by one advantaged party over another b a pledge evidencing the capacity to enter into legally binding contracts c a pledge to pay another’s liability in the event of default of such duty d a contract made enforceable by performance over a period of time  Correct Answer: Show Submitted Answer Hide Correct Answer Check My Answer c - a pledge to pay another’s liability in the event of default of such duty Contracts Not to Be Performed Within a Year The rationale for requiring a written record for these kinds of contracts is the difficulty of proving promises that were possibly made in the distant past. Since the arbitrary cutoff of one year is bound to be unfair in some cases, the courts have been known to interpret the Statute of Frauds in such a way as to avoid an injustice. The requirement of writing for this kind of contract has been repealed in several jurisdictions, such as Ontario, British Columbia, Manitoba, and New Brunswick. Contracts Dealing with Land Contracts concerning land—including leases and sales—generally must be evidenced in writing in order to be enforceable. Nevertheless, in the interest of fairness, the courts have also created an exception to the absolute requirement for writing in the case of “part performance.” If the person attempting to enforce an oral agreement for purchase and sale of land has performed acts in relation to the land that could be explained by the existence of an agreement, that performance may be accepted in place of a written agreement. Quiz Question 8.23 Mark as: None Review In the interests of fairness, the courts have created an exception to the requirement for writing in the case of contracts dealing with land. What is this exception known as? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a past performance b past consideration c part performance d part consideration  Correct Answer: c - part performance Show Submitted Answer Hide Correct Answer Check My Answer TECHNOLOGY AND THE LAW 8.1 Electronic Signatures Contracts are generally enforceable, no matter what form they take, but there are important exceptions. For example, signature requirements exist in statutes such as the Statute of Frauds. As noted in Girouard v Druet, 2012 NBCA 40, it is generally accepted that the purpose of a signature is (1) “to identify the person who is signing; that is to say, to identify the source and authenticity of the document”; and (2) “to establish the signatory’s approval of the document’s contents.” In the context of written contracts, courts have avoided being unduly technical. As Stephanie Ben-Ishai and David Percy summarize the matter, a mark made by the person signing is sufficient if intended as authentication of the document; as well, mere initialling of the document can suffice (Figure 8.3). Figure 8.3 How does legislation governing electronic signatures help create certainty in the marketplace? [D] In relation to electronic contracts, legislators across the country have offered guidance as to what fulfills a signature requirement. For example, Ontario’s Electronic Commerce Act, 2000, c 17, s 11, provides that, with some significant exceptions, “a legal requirement that a document be signed is satisfied by an electronic signature.” Section 1(1) defines an “electronic signature” as “electronic information that a person creates or adopts in order to sign a document and that is in, attached to, or associated with the document.” Most Canadian jurisdictions have accepted electronic signatures according to statutory rules of varying strictness. While case law in the area is still limited, there are nonetheless several helpful cases in place. For example, in Leoppky v Meston, 2008 ABQB 45, the court concluded that an email with the sender’s name typed at the bottom counted as a signature required by the Statute of Frauds. Given that the intention of the signatory is of paramount concern, questions surrounding the validity of a signature will almost certainly have to be decided on a case-by-case basis. Critical Analysis Question 8.24 Review Are electronic signatures more or less reliable than the handwritten variety? Your Answer No answer submitted Sources: Michael Deturbide & Teresa Scassa, Digital Commerce in Canada (Toronto: LexisNexis, 2020); and Donalee Moulton, “E-Signatures Are Fast, But Manage the Risk”, Lawyers Weekly (31 May 2013) 13. Quiz Question 8.25 Mark as: None Review Which of the following reflects the general view in Canada with respect to electronic signatures? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a They cannot take the place of signatures on written contracts.  b They are capable of binding the parties to contractual obligations. c They are not acceptable in the absence of extrinsic evidence of an agreement. d They are always accepted as conclusive evidence of the parties’ intention. Correct Answer: b - They Showare capable of Submitted binding the parties Answer to contractual Hide obligations. Correct Answer Check My Answer The mortgage given by the Smiths to the bank must comply with the Statute of Frauds, since it concerns an interest in land. That is, through the mortgage, the bank acquires the right to sell the land and apply the proceeds against the Smiths’ loan, should they default on payments. The mortgage prepared by the bank appears to meet the requirements of the Statute of Frauds because the agreement is a written contract and has been signed by the Smiths. Contracts for the Sale of Goods All provinces have a version of the Sale of Goods Act, and most contain a provision that contracts for the sale of goods above a specified amount must be in writing to be enforceable by the courts. The amount generally set is low ($50 in Alberta, for example) and not adjusted to reflect inflation. Thus, it would appear that most sales of goods are caught by the Act. Since written contracts are generally not produced for routine transactions, it is fortunate that sale of goods legislation also contains very broad exceptions that limit the application of the rule. For example, if partial payment is made by the buyer, or if the buyer accepts all or part of the goods, no written evidence is required for the contract to be enforceable. Even without Statute of Frauds requirements, creating a record of an agreement is generally a prudent business decision. Personnel may change and memories may fade, and genuine disagreement as to the terms of a contract can result. Through a well recorded written document, such disagreements—and perhaps the expense of litigation—can be avoided. That said, businesses and individuals must strike a reasonable balance between the comfort of complete records and the time and effort required to produce them, particularly in small transactions. Quiz Question 8.26  Review Mark as: None What type of contracts does the Statute of Frauds require to be in writing in order to be enforceable? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. contracts for the sale of goods over a certain value, contracts dealing with land, and contracts with a minors b contracts of guarantee, contracts not to be performed within one year, and contracts dealing with land c contracts for the sale of goods over a certain value, insurance contracts, and contracts dealing with land contracts that will not be completed within six months, contracts dealing with land, and contracts with d lending institutions Correct Answer: b - contracts of guarantee, contracts not to be performed within one year, and contracts dealing with land Show Submitted Answer Hide Correct Answer Check My Answer BUSINESS AND LEGISLATION 8.2 Internet Contracts Even where a contract is not caught by the Statute of Frauds, legislation on other fronts might impose a writing requirement. For example, as part of a broader consumer protection strategy, most governments across Canada have enacted protections specifically in relation to internet contracts. Though such legislation is not uniform from province to province, one broad requirement is that the merchant provide “a copy of their online contract and other particulars related to the sale.” Generally speaking, if the merchant fails to comply with these requirements, the consumer can cancel the contract altogether, making it unenforceable. The writing requirement is important for helping the consumer to confirm what rights and liabilities exist under the internet contract as well as whether it reflects the consumer’s understanding of what the contract should say. Critical Analysis  Question 8.27 Review Should internet contracts be subject to specialized protections? Your Answer No answer submitted Managing the Risks of Unenforceability When contracts are entered into, a business runs the risk that they may ultimately be unenforceable. Since a contract is only as good as the process leading up to its formation, businesses should train their employees carefully in how to negotiate contracts. Matters to be concerned about include the following: Are the parties to the contract under any legal incapacities? Has one party taken unfair advantage of the other? Has one party misled the other? Has a substantial mistake been made? Is the contract contrary to legislation or in violation of public policy? Is the contract required to be in writing? An affirmative response to any of the foregoing may signal a possible problem if suing becomes necessary. Securing a deal at any cost may end up producing no deal at all. Business Law in Practice Revisited 1. Did Kevin manipulate or pressure the Smiths into signing the mortgage? If so, what legal remedies do the Smiths have? While the Smiths have the capacity to contract and were not subject to duress by Kevin, the mortgage transaction is probably unconscionable. There was inequality between the parties—namely, the bank and the Smiths—because the Smiths were inexperienced senior citizens who had received no prior independent legal advice. As well, the transaction was very unfair, since the Smiths were risking their only substantial asset for a loan they could never repay on their own. In short, only the bank and Martha would benefit from the transaction, while the Smiths stood to lose everything. On this basis, both of the steps necessary to establish unconscionability have been met, and a court will set the mortgage aside unless the bank can somehow show that the transaction was fair. The mortgage transaction is also liable to be set aside at common law on the grounds that it was signed on the basis of undue influence. There is a good argument that the Smiths did not freely enter into the mortgage but did so only because Kevin preyed on their deep need to help their daughter. As well, it appears that the Smiths put their entire trust in Kevin, which is another basis for a court to find undue influence. 2. Did Mr. and Mrs. Smith enter into the contract on the basis of mistake or misrepresentation? If so, what legal remedies do they have? The Smiths could argue that they did not understand what they were signing and that the whole thing was a “mistake.” This may be true from their point of view, but they did sign the mortgage document. The law ordinarily expects people not to sign documents unless they understand them. Accordingly, the mortgage is unlikely to be set aside on the grounds of mistake. There is a very strong argument, however, that Kevin misrepresented the nature of the transaction by telling the Smiths that signing the mortgage was just a formality and that likely nothing would come of it. While it could be argued that this statement was merely an opinion, this defence is unlikely to succeed since the words were spoken by a banker who should know better. While it also could be argued that the Smiths did not rely on Kevin’s statement—in other words, that they knew very well that their house could be foreclosed upon if Martha failed to make the payments—a judge is much more likely to take the Smiths’ side. There is an excellent chance that the mortgage would be set aside on the basis of Kevin’s misrepresentation. 3. How could Kevin have managed this transaction better? Since the essence of a contract is the free and voluntary adoption of obligations, Kevin should never have asked the Smiths to sign the mortgage until they had secured independent legal advice. Furthermore, it would probably have been better for Kevin not to have been involved in the transaction at all, and instead to have sent the Smiths elsewhere. Most of the legal problems in this scenario arose because Kevin was trying to get a bad loan he had given to Martha off his books. This motivation may have interfered with his judgment in how to handle the Smiths from the outset. Chapter Summary A broad range of doctrines are available to cancel all or part of a contract, but they apply only in relatively unusual or extreme circumstances. Moreover, courts are justifiably demanding in what parties must prove in order to be released from their obligations. Courts expect parties to negotiate carefully and deliberately to ensure that any commitment they make accurately reflects their intentions. If the deal merely turns out to be less desirable than expected, the doctrines in this chapter are unlikely to apply. With limited exceptions, contracts made by minors are not enforceable against them. At common law, unless the contract is for a necessary, or amounts to a beneficial contract of service, it is unenforceable at the election of the minor. In British Columbia, minors have even more protection through legislation. Persons suffering from a mental impairment also do not generally have the capacity to contract when they are incapable of understanding the transaction. The doctrine of duress permits a court to set aside a contract when one of the parties was subjected to such coercion that true consent to the contract was never given. The doctrine of undue influence permits the same outcome if one party, short of issuing threats, has unfairly influenced or manipulated someone else into entering into a contract. Unconscionability also considers the unequal relationship between the two contracting parties. If both inequality between the parties and an improvident bargain can be established, the contract can be rescinded by the court. If the transaction is sufficiently divergent from community standards of conduct, this may signal the presence of exploitation and lead to a finding of unconscionability. Misrepresentation concerns the parties’ knowledge of the circumstances underlying a contract. If one party misrepresents a relevant fact and thereby induces the other side to enter into the contract, the innocent party can seek to have the contract set aside or rescinded. If the misrepresentation also counts as a tort, the innocent party is entitled to damages as well. A party that has entered into a contract based on wrong information can try to have the contract set aside on the basis of mistake, but this strategy will rarely be successful because mistake is an exceedingly narrow legal doctrine. Contracts that are illegal because they violate a statute though courts are increasingly looking at all of the circumstances surrounding contracts and will not automatically set them aside. Contracts are also illegal when they are contrary to public policy. Non-competition clauses, for example, are subject to a specialized set of rules going to reasonableness, though in Ontario, non-compete clauses in an employment contract are generally banned. The Statute of Frauds, in its various forms, seeks to prevent fraud and perjury by requiring written proof of certain kinds of contracts. With the use of electronic and internet contracts becoming more and more common, modern legislation also seeks to address the same types of problems in the new environment of technological commerce. Chapter Study Key Terms and Concepts age of majority The age at which a person becomes an adult for legal purposes. common mistake Both parties to the agreement share the same fundamental mistake. economic duress The threat of economic harm that coerces the will of the other party and results in a contract. illegal contract A contract that cannot be enforced because it is contrary to legislation or public policy. legal capacity The ability to make binding contracts. misrepresentation A false statement of fact that causes someone to enter a contract. mistake An error made by one or both parties that seriously undermines a contract. non-competition clause A clause forbidding competition. non-disclosure agreement In an employment contract, non-disclosure agreements are used to forbid employees from divulging confidential information. non-solicitation clause A clause forbidding contact with the business’s customers. public policy The community’s common sense and common conscience. rectification A remedy available where parties have made a mistake in recording their agreement and based on establishing the specific terms actually agreed to. rescission The remedy that results in the parties being returned to their pre-contractual positions. unconscionable contract An unfair contract formed when one party takes advantage of the weakness of another. undue influence Unfair manipulation that compromises someone’s free will or choice. void contract A contract involving a defect so substantial that it is of no force or effect. voidable contract A contract that, in certain circumstances, an aggrieved party can choose to keep in force or bring to an end. Questions for Review Refer to Notes section for question footnotes. Question 8.28 Review Explain the difference between a void contract and a voidable contract. Your Answer No answer submitted Question 8.29 Review Who has the legal capacity to form contracts? Your Answer No answer submitted Question 8.30 Review What must be proven by someone seeking to avoid a contract based on mental impairment? Your Answer No answer submitted Question 8.31 Review Describe the doctrine of undue influence. Your Answer No answer submitted Question 8.32 Review What is duress? How does it relate to the idea of consent? Your Answer Question 8.33 No answer submitted Review Give an example of economic duress. Your Answer No answer submitted Question 8.34 Review What is an unconscionable transaction? Your Answer No answer submitted Question 8.35 Review What is a misrepresentation? Your Answer No answer submitted Question 8.36 Review How does the concept of a legal mistake differ from its ordinary meaning? Your Answer No answer submitted Question 8.37 Review Name one statute that makes certain kinds of contracts illegal. Your Answer No answer submitted Question 8.38  Review What is the role of public policy in contract enforcement? Your Answer No answer submitted Question 8.39 Review How are non-competition covenants used in employment contracts? Your Answer No answer submitted Question 8.40 Review How does the Statute of Frauds affect contracts? Your Answer No answer submitted Question 8.41 Review What four types of contracts relevant to business law are required to be in writing? Your Answer No answer submitted Question 8.42 Review How might the fact that a contract is electronic affect its enforceability? Your Answer No answer submitted Question 8.43 Review  Is an electronic contract subject to the same basic principles as a traditional contract? Question 8.44 Review Your Answer Who No is asubmitted answer minor? Your Answer No answer submitted Question 8.45 Review Are contracts with minors binding? Your Answer No answer submitted Questions for Critical Thinking Refer to Notes section for question footnotes. Question 8.46 Review As noted in this chapter, Ontario has passed legislation largely banning non-compete clauses in an employment context. Given that the common law already offers considerable protection to employees in the context of non-compete clauses, do you agree with this new legislation? Explain. Your Answer No answer submitted Question 8.47 Review What factors should a business consider in developing a policy on documentation of commercial relationships? Should it insist that all contracts be in writing, or is more flexibility in order? Your Answer No answer submitted Question 8.48  Review Which doctrines discussed in this chapter would be likely to arise in a business context? Why? Your Answer No answer submitted Question 8.49 Review How can a business use a risk management plan in order to reduce the chances that it will enter into an unenforceable contract? Your Answer No answer submitted Question 8.50 Review Given the strictness of the defenses or doctrines discussed in this chapter, it is fair to say that parties are generally almost always bound the contracts they sign? Does the law go far enough to protect people who end up in a contract they may not have wanted or intended? Why or why not? Your Answer No answer submitted Question 8.51 Review Before the weaker party can rely on a defence of mental incapacity through illness or intoxication, they must prove that the other party was aware of such an impairment or should have been. Is this requirement a reasonable one? If a person does not have the capacity to contract, should that not be the end of the matter? Your Answer No answer submitted Situations for Discussion Refer to Notes section for question footnotes. Question 8.52 Review Through her lawyer, Ms. Tanya, a commercial landlord, sent a letter to her tenant, Ms. Desie, who ran a bridal shop out of the premises. Tanya’s lawyer demanded all back rent and stated that if the rent owed was not received by the deadline specified, Tanya would lock her tenant out of the business premises. Desie had no money to pay the back rent and therefore did not make the specified deadline. In fact, Desie sent in no money at all. The landlord changed the locks. Soon thereafter, the parties came together in settlement whereby Desie agreed to provide a promissory note in the amount owed in addition to Tanya’s legal fees in relation to this matter. Subsequently, Desie alleged that Tanya’s lawyer had forced her to settle and sign the promissory note in question. Desie said that she felt that she had no choice but to sign because otherwise, she would not have been allowed back into the rental premises. Desie says that the agreement should be unenforceable due to the lawyer’s duress.​ Did the conduct of the lawyer amount to duress? What constitutes duress? Your Answer No answer submitted Question 8.53 Review Donald rear-ended a taxicab that was owned and operated by Samson. Rather than taking the matter to court, Donald agreed to pay for the cost to repair Samson’s cab as well as $500 to compensate her for loss of income while the cab was under repair. In return, Samson signed a document titled “Full and Final Release,” which had been prepared by Donald’s acquaintance—who also was a lawyer. Samson had no legal advice prior to signing the release and did not focus what it said. This document actually purported to release Donald for all liability, including personal injury to Samson. Samson, however, thought that the release only related to her claims for vehicle repair and lost income. Although Samson felt fine at the time of signing the release, she later showed symptoms of a soft tissue injury and sued Donald for damages associated with this injury. Is the release a full defence to Samson’s claim, or should the signed release be set aside on the basis of unconscionability?​ Your Answer No answer submitted Question 8.54 Review Ms. Stewart bought a business operating in rented space in a shopping mall. Shortly after she took over the business, the landlord pressured her to sign a lease that made her responsible for the arrears in rent of the previous tenant. The landlord secured Ms. Stewart’s agreement by exerting tremendous pressure on her. For example, he called in the sheriff to execute a distress for rent when, at that time, she was in arrears only for the month of January. The landlord told Ms. Stewart that if she did not pay the former tenant’s arrears, “she would be the one to suffer.” The landlord knew that Ms. Stewart was unsophisticated in business dealings and that she had signed the lease without seeking advice.​ Is she obligated by the lease? Your Answer Question 8.55 Review No answer submitted Leona was interested in purchasing property that she intended to use for her family’s expanding brickyard business. She spoke with the owner, who had recently inherited the property from his elderly aunt. Leona asked if there were any restrictions on the land preventing it from being used as a brickyard. The owner replied, “Not that I am aware of.” Though this was literally true, the owner failed to explain that he had never checked whether the land was subject to any restrictions. Leona purchased the land and has found out that it cannot be used as a brickyard. Can she have the contract rescinded based on misrepresentation? Why or why not?​ Your Answer No answer submitted Question 8.56 Review Colby purchased Edgar’s general insurance business in Red Deer, Alberta. Their agreement contained a non-competition clause that prohibited Edgar from carrying on or engaging in the business of a general insurance company within Red Deer for a period of two years following the sale. By separate employment agreement, Edgar worked as a manager for Colby. This employment contract also contained a non- competition clause that provided that Edgar “could not compete with Colby in Red Deer for a period of two years after he ceased to work for Colby.” After 17 years working for Colby, Edgar resigned and opened his own general insurance business in Red Deer, which took some of Colby’s customers. Is the non-competition clause in Edgar’s employment valid and enforceable? Your Answer No answer submitted  Question 8.57 Review Gus started working as a labourer on Dick’s farm as a young man. A few years later, Gus indicated that he planned to go elsewhere, but Dick did not want to see that happen, especially as illness had left him unable to run the farm unassisted. Dick said he would leave his entire farming operation to Gus in his will if Gus stayed. Gus did stay and over the next two decades took over all aspects of the farm, becomi