copyright © 2013 pearson canada inc. 4 - 1 chapter 4 enforcing contractual obligations legal...

Copyright © 2013 Pearson Canada Inc. 4 - 1

Chapter 4Enforcing

Contractual

Obligations

Legal Fundamentals for Canadian Business

Third Edition


Learning Objectives

• List the events that can bring a contract to an end• Identify the various mistakes that can end or

otherwise affect a contract• Describe four forms of misrepresentation• Explain the effects of duress and undue influence

on a contract

(Continued)


Learning Objectives(Continued)

• Consider the implications of privity and assignment for a contract

• Describe how a contract can be breached or otherwise ended

• Outline the remedies that are available for breach of contract

• Summarize risk-reduction strategies when forming or ending a contract


Disputes

• May revolve around – The existence of the contract– The conduct of the parties at time of

negotiating the agreement– Performance of obligations under contract


Mistake

• When parties have a different understanding of terms of contract

• Shared mistake– Both parties have made same mistake– Contract void for lack of consensus– If mistake only in recording the terms, may ask

court to rectify (correct) agreement

(Continued)


Mistake(Continued)

• Misunderstanding– Each party has a different understanding– Courts will imply most reasonable

interpretation and enforce– If both interpretations equally reasonable,

contract void for lack of consensus

(Continued)


Mistake(Continued)

• One-sided mistake– Usually has no effect on contract– Caveat emptor (let the buyer beware)– Only if different understanding is a result of

misrepresentation would it be actionable

(Continued)


Mistake(Continued)

• If mistake as to nature of document signed, contract may be void– Non est factum (It is not my act)– If mistake as to nature of document due to

carelessness, claim is ineffective

• Contract Interpretation– Terms and words given “reasonable meaning”– Industry usage for special or technical terms


Exemption Clauses

• Also known as exculpatory, exclusion, or limitation clauses

• Attempt to limit or eliminate liability for one party to the contract

• Due to one-sided nature, courts interpret– As narrowly as possible– Against the favoured party

(Continued)


Exemption Clauses(Continued)

• Must be brought to attention of other party

• Usually found in standard-form contracts

• Create an unequal bargaining position


Misrepresentation

• False and misleading statements that induce a person to enter into a contract

• If a term of contract, can sue for breach• Must be statement of fact• Statement of opinion actionable if made by

expert• Silence generally not misrepresentation,

unless duty to disclose (duty of good faith)


Innocent Misrepresentation

• Misleading another without knowing or being careless

• Only remedy is rescission– If goods destroyed or not available, no other

remedy possible– Not available if any wrongdoing by person

claiming rescission– Not available if contract affirmed


Fraudulent Misrepresentation

• Intentionally and knowingly misleading another to induce him/her to enter into contract

• Victim may seek rescission, damages, or both• If made innocent misrepresentation, and later learn

it is false, but fail to correct it, it becomes fraudulent

• May seek punitive damages in extreme cases• Easier to sue for innocent or negligent

misrepresentation


Negligent Misrepresentation

• If person making misrepresentation should have known what he/she was saying was false, he/she was careless

• Victim may seek rescission, damages, or both


Criminal Fraud

• Specific provisions of Criminal Code deal with fraudulent activity – Examples:– S. 361-365 prohibit knowingly making false

representations intended to induce someone to act on the representation

– Other sections deal with specific areas of fraud including the falsification of employee records, books, and other documents


Duress

• Entering into a contract because of coercion

• Threats may be violence, financial pressure, scandal, etc.

• May be against you, your family, your property, or business

• Contract is usually voidable

• Threats may also be criminal offence


Undue Influence

• Abuse of trust relationship• Contract voidable• Presumed in certain relationships

– Lawyers, doctors, trustees, guardians, religious advisors, adults with infant children, adult children with aging parents

– May be rebutted by evidence

• May have to prove in other situations


Unconscionability

• Taking advantage of vulnerable person’s situation– e.g., poverty, mental impairment (short of

incapacity)

• Bargaining positions of parties are unequal• Contract grossly unfair to victim• Court can set aside or modify contract• Also regulated by statute


Privity

• Only the parties to a contract are bound to it or may enforce it

• Exceptions– Interests in land bind subsequent owners of the

property– Trusts – beneficiaries may enforce– Life insurance – beneficiaries may enforce– Some statutory exceptions

(Continued)


Privity(Continued)

• Agents acting for principals– Agent never a party, so no privity issue

• Novation– One person taking over obligations of another

in a contract; no privity issues as new contract is required

• Employees– Contract clauses often extended to employees,

thus ignoring privity


Assignment

• Transferring a benefit under a contract to a third party

(Continued)


Assignment(Continued)

• Usually assignor and assignee must join together to sue if debtor fails to pay

• Statutory assignment allows assignee to sue directly if – Assignment is absolute (complete and unconditional)

– Assignment is in writing

– Proper notice was given to debtor

(Continued)


Assignment(Continued)

• May only assign the benefits, not the obligations

• Assignee takes assignment “subject to the equities”

• Assignee cannot be in a better position than the assignor


Negotiable Instruments

• Controlled by federal Bills of Exchange Act• Freely transferable from party to party • Innocent third party (called a holder in due

course) may enforce a negotiable instrument against the person who made it

• Include promissory notes, cheques, and bills of exchange (aka drafts)

(Continued)


Negotiable Instruments(Continued)

• Promissory note– One person promises to pay another a certain

sum of money at some future date or on demand

(Continued)



• Cheque– Drawer orders bank to pay a certain sum of

money to a third party (the payee) on demand

(Continued)



• Bill of exchange – May be an order to any person or business to pay

money to someone either now or at a future time

(Continued)



• Holder in due course– Innocent third party who acquires possession of

instrument– Right to collect whether original obligations

met or not– If instrument is endorsed, that person can also

be held liable for amount owed


Discharge of Contracts


Performance

• Once parties have performed as required under the contract, it is discharged

• Conditions - major terms of contract– If breached, contract ends (if other party wants to end

it)• Warranties - minor terms of contract

– If breached, obligations continue– May seek damages from breaching party

(Continued)


Performance(Continued)

• Substantial performance– Substantially all obligations have been fulfilled,

but a condition is breached in a minor way– May seek compensation for small part

remaining– If contract requires payment, must be cash

unless otherwise specified• Limits on coinage set under Currency Act

(Continued)


Performance(Continued)

• Tender of performance– Ready, willing, and able to perform; other party

refuses to accept performance– Contract has been breached by refusal;

performance no longer required– Debt treated differently – if party refuses to

accept payment, money is still owed but debtor must seek payment and bear all costs of collection


Breach

• Incomplete or improper performance of contract

• Repudiation – breach by refusal to perform• Anticipatory breach – repudiation before

performance is due gives victim two options– Treat contract as breached– Continue to demand performance

(Continued)


Breach(Continued)

• Anticipatory breach (Continued)– If contract is treated as ended, victim may sue for

breach immediately– If victim demands performance, unexpected

events may discharge both parties– If victim of repudiation does not perform during

waiting period, he/she will be in breach– Choice of remedy is binding

(Continued)


Breach(Continued)

• Exemption clauses attempt to lessen liability for breach– Narrowly interpreted by courts

• Fundamental breach– Breach of very essence of contract– Exemption clauses can still apply if properly

worded

• In some cases, a breach of contract can be a criminal offence


Frustration

• Outside, unforeseen event that is out of the control of either party and renders contract either impossible to perform or completely different than what parties contemplated

• Caused by things such as illness, destruction of subject matter, government actions, natural disasters

(Continued)


Frustration(Continued)

• Effect used to be “let the loss lie where it falls”

• All jurisdictions now have legislation that require payment for benefits received and the return or apportionment of any deposit


Agreement

• May modify or end a contract by agreement• All elements of contract must be present• Cannot impose change on the other party• Each side must receive new consideration

– May be just relieving each of his/her remaining duties

– If only one side relieved, change is not binding(Continued)


Agreement(Continued)

• Contract itself may contain conditions for changing or ending obligations– Condition precedent - Contract begins only if

conditions are met– Condition subsequent - Terms in contract

specify when continuing obligations will end


Remedies for Breach

• Rescission– Returning parties to original positions

• Damages– Compensation to attempt to put victim in position

he/she would have been in if contract properly performed

– Sometimes includes emotional stress or pain(Continued)


Remedies for Breach(Continued)

• Liquidated damages– Term in contract to limit damages

• Deposit– Amount forfeited as pre-estimate of damages

• Down payment – First payment of purchase price; not meant to

be forfeited

(Continued)



• Victim must mitigate loss• Damages must be reasonably foreseeable at

time contract entered into• Equitable remedies

– Only available if damages not sufficient– Not available if any wrongdoing by party

claiming– Not available if innocent third party affected

(Continued)



• Equitable remedies (Continued)– Specific performance

• Requires breaching party to perform contract

• Only if subject matter of contract unique

– Injunction• Requires a person to stop doing something

(Continued)



• Equitable remedies (Continued)– Accounting

• Disclose financial records and dealings

• Pay profits of wrongdoing to victim

– Quantum meruit• Pay a reasonable price for services rendered

copyright © 2013 pearson canada inc. 4 - 1 chapter 4 enforcing contractual obligations legal...

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