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Management and Organizational Studies
Management and Organizational Studies 2275A/B

Business Law Textbook Notes Chapter #7-8 Chapter #7: Formation of Contracts (Continued) Capacity  Some people are more vulnerable than others and thus require special protection from the law  Several categories have been identified as needing protection, and are protected by having their freedom to enter into contracts limited or eliminated completely Minors/Infants  The age of majority varies with the provinces  The general principle is that persons under the age of majority, called infants or minors, are not bound by their agreements, but the adults with whom they contract are bound  Most problems relating to minors and contracts they have entered into arise in situations involving young people who are approaching the age of majority  The test for capacity is objective  When an adult deals with a person who is a minor, it does not matter if the adult was under the impression that the other person was an adult, or even that that person clearly understoof the terms of the contract  The only question is whether the other person was under the statutory age of majority at the time the contract was created  As a general rule, whenever a minor enters into a contract with an adult, the adult is boung by the contract, but the minor can choose not to be bound by it  *See example page 226  British Columbia follows the Infants Act which states that, in most cases, a contract made by a minor is unenforceable against him; the minor may, however, enforce the contract against an adult party to the contract – the result, then, is the same as in the provinces which rely on the common law  The Minors’ Property Act allows a court to confirm a contract eneter into by a minor if it believes it is in the best interests of the child to do so  When dealing with contracts made online, the law with respect to capacity will be determined by the jurisdiction where the contract is created, which is sometimes not clear; also, there is no way for online merchants t know the personal characteristics of the parties with whom they are dealing – therefore it is important that merchants include appropriate resitrictions and disclaimers in their online contracts  Necessaries and Beneficial Contracts of Service o Except in BC, minors are bound by contracts for the acquisition of necessaries and for contracts of service that benefit the minor o Necessaries = things required to function in society (ex: food, clothing, lodging, transportation) o What constitutes a necessary will vary with the particular needs of a minor and her status o Ex: If the minor is purchasing clothing, but already has a sufficient supply, then that clothing will not be considered necessary o When a minor is married or living on his own, what constitutes a necessary will be broader than would be the case if he were single and dependent on his parents o It is unlikely though, that a car would qualify as a necessary since other forms of transportation are generally available o Minors are bound by contracts for necessaries o However, even when the subject of the contract is determined to be a necessary, it does not guarantee that the merchant will get paid full price, as the minor is obligated only to pay a reasonable price for such necessaries o When a minor borrows money to buy necessaries, there is an obligation to repay the debt only if the funds advanced are actually used for necessaries o Government student loans are exceptions, because they are supported by legislation requiring repayment regardless of what the money is used for and regardless of the age of the borrower o Minors are bound by contracts of service that substantially benefit them (ex: contracts of employment, apprenticeship, or service are binding if it can be demonstrated that, taken as a whole, the contract is for the benefit of the minor) o If it becomes apparent that the minor is being taken advantage of, or the contract is not in the minor’s best interests, the minor will not be bound  On Becoming an Adult o A minor can ratify a contract at the age of majority o If she ratifies the contract after becoming an adult, she loses the right to avoid the contract  ratifying the contract makes a voidable contract binding o Ratification can be in writing, or it can be implied o Ratification must be complete; a minor cannot affirm the beneficial provisions of the contract and repudiate the rest o There are certain contracts that a minor must repudiate within a reasonable time after becoming an adult to avoid obligations (or a failure to repudiate can be evidence of ratification) o These situations tend to involve contracts through which a minor acquires some interest of a permanent and continuous nature o Ex: contracts involving land, shares in corporations, partnerships, and marriage settlements o Description of contractual relationships:  At the first stage, when the parties have entered into the contract but the minor has not yet obtained any benefit from it, and has not yet paid, the minor is not bound by the contract  this is an “executionary contract”  If the minor has received the goods, but has not yet paid for them, she is not necessarily bound by the contract  this is a “partially executed contract”  When the goods are in the minor’s possession, she will be required to return them or pay for them, and upon return is entitled to a refund of any money already paid  If the minor has passed the goods on to a third party, or the goods have been destroyed, the merchant will not be entitled to payment, and the merchant also cannot insist that the party to whom the goods have been given return them o When a contract gives no benefit, a minor can escape even an executed contract o A minor can insist that payment be refunded if there is a total failure of consideration and the minor gained nothing from the deal o In general, if the contract is prejudicial to the interests of the minor, it is void  Parents’ Liability o Parents are not responsible for the torts of their children, nor are they responsible for the contractual obligations of their children, in the absence of specific legislation creating such a responsibility o If a minor enters into a contract, she alone is responsible to perform the contract o The adult contracting with the minor cannot turn to the parents if the minor does not perform as required by the contract o Parents can be held liable for their children’s contracts only under specific conditions o Parents can be held liable when the minor is acting as an agent having the appropriate authority to bind the parent in contract o Parents will also be bound if they guarantee the minor’s obligation at the time the contract is entered into o A guarantee is a written commitment whereby the guarantor agrees to pay the debt is the debtor does not o Because parents are responsible to provide for their minor children, they can be held responsible by the merchant for contracts their children enter into for necessaries  Infants’ Liability for Torts o A minor may be liable in tort law o A minor is as liable as an adult for torts committed, although th standard of behaviour expected may differ o The courts will not allow adults to bring a tort action just to get around the incapacity problem in contract law o If the minor used the subject matter of the contract in a way that would be expected under the contract, then the adult must sue in contract, not tort, despite the protection given to the minor by the law of contracts o If the minor used the subject matter of the contract in a way that was not contemplated in the contract, carelessly causing injury or damage to those goods, the adult would be able to sue for negligence and the minor would not be protected by the defence of infancy o *Read example page 230 o The adult cannot circumvent the protection afforded to the minor in contract law by suing in tort instead o This explains why car rental agencies will not rent to minors, but when a minor misrepresents himself as an adult and contracts to rent a vehicle, the agency may be able to get damages form the minor by suing for the tort of fraudulent misrepresentation o Not are the parents responsible, since parenst are not liable for the torts of their children unless they can be said to have been negligent in their own right, or when there is a statute in place imposing such lisbaility Insanity and Drunkenness  Insanity or mental incompetence applies if the person did not understand the nature of the act being performed  The burden of proving incapacity on the basis of insanity or mental incomepetence rests with the person claiming to be incapacitated  that person must lead evidence showing that he did not understand the consequences of his actions  To escape contractual liability on the basis of insanity or mental incompetence, the person (or a representative) must prove not only insanity or mental incompetence, but also that the person he was dealing with knew, or ought to have known, of the incapacity  A person may be declared mentally incompetent by a court  in such cases a trustee will be appointed to handle that person’s affairs  People who lose their ability to reason through intoxication, whether from alcohol or drugs, are treated in the same was as people incapacitated by insanity or mental incompetence  For the contract to be avoided, the person must have been so intoxicated that she didn’t know what she was doing, and the other person must have known, or ought to have known, of the incapacity  The person trying to escape a contract on the basis of drunkenness must also be able to show that, on reaching sobriety, the ccontract was repudiated  Ex: an intoxicated person who purchases shares is not permitted, on becoming sober, to wait and see whether the stocks go up or down before repudiating the contract  Hesitation to repudiate makes the contract binding (this requirement of repudiation also applies to insane people who regain their sanity) Others of Limited Capacity  In some jurisdictions, corporations can limit their capacity to contract by so stating int heir incorporating documents  Otherwise, corporations incoropoated under these general statutes have “all the power of a natural person” to contract  In those jurisdictions where the capacity of a corporation can be limited, people dealing with those corporations are affected by that limitation only if they have notice of it  The capacity of Crown corporations and other government bodies is limited by legislation  if they have not been given the capacity to enter into a particular type of contract, any agreemet of that type will be void  When at war, any contract with a resident of an enemy country is void if detrimental to Canada; if not detrimental, the contract is merely suspended for the duration of the hositlities  Contracts with foreign governemnts may or may not be enforceable  Foreign diplomats have immunity  in civil matters, a court will not allow a lawsuit to proceed against such persons, and their property is immune from seizure; these representatives can waive this immunity, if they wish, but anyone dealing with persons who have diplomatic immunity ought to be aware of the protection they have been given  Trade unions have the capacity to enter into contracts that relate to their trade union activities  Bankrupts (a person who has made an assignment in bankruptcy or been forced into bankruptcy through a court order obtained by a creditor, and who has not been discharged from bankruptcy) also have their capacity to contract limited  The capacity of Indians is limited to some extent by the Indian Act Legality  An agreement must be legal and not contrary to public interest to qualify as a binding contract  Contracts involving activities that, while not illegal, are considered immoral or contrary to public interest may also be void  When discussing legality, it is necessary to understand the difference between contracts formed illegally (the contracts itself is illegal) and contracts performed illegally (the contract is performed in an illegal way) Contracts Performed Illegally  Lawful contracts performed illegally may be enforced  The response of the courts to the illegal performance of a lawful contract will vary  In making their decisions, the courts will consider many factors, such as the intent of the parties, the actions of the parties, and public policy  The court may enforce the contract in appropriate circumstances  The illegal performance of a lawful contract often involves a breach of legislation that is regulatory in nature  such legislation may contain provisions declaring that a breach of the legislation will result in the relvant contract being void, or other specified consequences  The courts will apply these statutorily mandated outcomes whenever a contract is performed contrary to the legislation  Sometimes, however, regulatory legislation does not indicate the result f a violation of the legislation  In such cases, the courts amy make a variety of decisions  They may treat the contract as void but not illegal  They will then restore the parties to their original positions, ordering the return of any deposits advanced and property that has been transferred  If the illegal performance can be separated from the rest of the performance of the contract, then they may rule that only that part of the contract is void  If the violation of the legislation is more one of procedure than of substance, the courts may enforce the contract Contracts Formed Illegally  Illegal contracts are illegal when formed  An illegal contract will not be enforced; it is void  Usually, when faced with a void contract, the court will restorie the partis to their original position, ordering them to return any deposits advanced and property that has been transferred; but an illegal contract involves unacceptable or immoral conduct  under such circumstances, while the contract is void, the courts will not assist the parties by restoring them to their original position unless one of them is innocent of any wrongdoing  An illegal contract usually involves the commission of some prohibited conduct, such as the sale of a controlled substance, or the commission of some violent or antisocial act  The conduct may be identified as wrongful and specifically prohibited by the Criminal Code or some other statute  The common law, however, goes even further, and assumes that some types of immoral conduct are unacceptable and against public policy  Even though the immoral conduct is not a crime, or does not result in a violation of a statute, when people make agreements involving such conduct, the agreements are treated like illegal contracts  Ex: an agreement with a prostitute  prostitution is not illegal, but it is considered immoral and against public policy  The classic approach of declaring every illegal contract void was viewed as harsh and inequitable, as it could result in a windfall to one of the parties  However, the new judicial approach to illegal contracts means that an illegal contract may be partially enforceable; the courts may sever the illegal provisions of the contract, leaving the balance of the contract enforceable  Examples of illegal contracts: 1) Contracts to commit a crime  Agreements involving murder, drug dealing, or even charging a high rate of interest are contrary to the Criminal Code and are therefore illegal contracts 2) Contracts to commit a tort  Ex: IF A offers B $100 to falsely claim that C did a poor job of repairing his house, that would be defamation. The contract to pay B to defame C would be illegal. 3) Contracts involving immoral acts  Ex: Prostitution is not illegal in Canada, but it is considered immoral, and therefore it would be illegal (and so a prostitute could not expect the court to enforce an agreement made with a client) 4) Contracts that are bets and wagers  Historicaly, the courts would not enforce contracts related to gambling atcivities, as they were against public policy  Now this area is covered by statute, and the rules vary from province to province  The statutory provisions are designed primarily to limit and regulate gambling activities  The courts will enforce only contracts for which the activities have statutory approval or are licensed  Insurance is like a wager (a person owning a property pays for insurance to insure against the destruction of the property)  insurance contract is valid when there is an insurable interest  Contracts for sales of shares also have difficulties  if the contract merely requires the parties to pay each other the difference if the share price goes up or down, it is a void wager; to avoid this problem, the contract must provide that the share will actually changehands 5) Contracts in restraint of marriage, or in favour of divorce  Any contract that has its object to prevent or dissolve a marriage is against public policy  Ex: an agreement to pay someone $100,000 in return for a promise never to marry would be an illegal contract 6) Contracts that promote litigation  An agreement in which one person, to satisfy some ulterior motive, pays another to sue a third would be n illegal contract and therefore void, because it promotes litigation  An exception is a lawyer’s contingency fee because they make courts accessible 7) Contracts that obstruct justice  If the effect of contract is to interfere with the judicial process, it is against public policy  An agreement that encourages criminal activity by providing to pay a person a salary whenever he is in jail would involve such an obstruction of justice 8) Contracts that injure the state  Ex: a contract to sell secret military information 9) Contracts that injure public service  Ex: bribing a public official to vote a certain way 10) Contracts between businesses to fix prices or otherwise reduce competition  These types of contracts are controlled by the federal Competition Act  This statute specifically prohibits agreements that have the “undue” restriction of competition as their primary purpose or objective  Ex: contracts regarding 2 merchants agreeing not to sell a particular commodity below a certain price, or not to open up branches that would compete with each other in separate communities would be illegal and void  These types of conspiracies may also be punishable by criminal act 11) Contracts that unduly restrain trade  When a business is sold, the contract often includes a clause prohibiting the seller from opening another business in competition with the business she is selling  if such a provision is reasponable, and necessary to protect the interests of the parties, it is enforceable  If the privision is unreasonably restrictive, or against public interest, it will be void (an agreement is against the public interest when it interferes with free trade, drives up prices, decreases service, or has any other effect whereby the public may be harmed)  When a restriction is excessive and is deemed to be an unreasonable restraint of trade, normally only that provision will be void; it will be severed and the rest of the agreement will be enforced  The effect would be that the purchase price and all other terms of the agreement would be the same, but the seller would have no restrictions at all; he would be free to open similar business anywhere, at any time  An employer will often impose a similar restrictive covenant requiring employees to promise not to compete during, or after, their employment  Lathoguh the same test of reasonableness is used, the courts are much more reluctant to find such restrictive covenants valid  It is only when the employee is in a unique position to harm the company that these provisions will be enforced Intention  Not all agreements are contracts – often people enter into arrangements or undertakings never intending that legal consequences will flow from them  The law requires that for an agreement to be binding contract, the parties must have intended that legal obligations and rights would flow from it  When determining intention, the courts do not look to the state of mind of the person making the promise  rather, they look to the reasonable expectations of the promise  The test is objective  Would a reasonable person have thought that the person making the promise was serious and that the agreement was legally binding?  Issues regarding intention: a) Stated intention of the parties  If the parties clearly state that they do not wish to be legally bound by their agreement, or that their agreement is not to be enforceable in any court, that instruction will be honoured  Such a statement must be embodied in the terms of the contract and be very clear as to the intention not to be bound  “Letters of intention” are examples of such communications; they clearly do not create legal obligations for the parties b) Commercial relations  If the relationship between the contracting parties is primarily commercial in nature, the courts will presume that the aprties intended to be legally bound by their agreement  The contract will be binding on them in the absence of any evidence or clear instructions to the contrary c) Domestic and social relations  When an agreement is between members of a family, or friends involved in a domestic (non-business) activities, there is a presumption that the parties do not intend legal consequences to flow from their agreement  However, if the parties go out of their way to have a lawyer draw up a formal contract, then the courts recognize that the parties did intend that legal consequences would flow from their agreement and so they would enforce the contract d) Social and business relations  Problems arise when the relationship involved is a mixture of social and commercial relations  Ex: when friends jointly enter a contest and then disagree on the distribution of the prize  In such cases, the courts must judge each situation on its individual merits  The courts use the reasonable person test to determine whether it is reasonable for the parties trying to enforce the agreement to think that a legally binding contract had been created e) Exaggerated claims  Merchants often exaggerate the qualities of their products in advertisements or when they talk to customers (Ex: my product is the best!)  The courts apply the reasonable person test to determine whether, in the circumstances, the customer should have taken the exaggerated claim seriously Form of the Contract The Requirement of Writing  Historically, the form of the contract was very important  promises were enforceable because ethey were contained in sealed documents, called deeds  Today, there is no general rule that a contract must take a certain form, although most jurisdictions have statutory requirments regarding the transfer of land  Contracts may be in writing, under seal, verbal, or even implied from the conduct of the parties  The importance of a written contract is practical – it is always a good idea to put the terms of an agreement in writing, so that if a dispute arises there is something permanent that establishes the terms to which the parties agreed  If a dispute between the parties does end in litigation, each of the parties will be in a better position to prove her case if she can produce written evidence to support her claim When Writing is Required  The Statute of Frauds requires some contracts to be in writing in order for them to be enforced  Types of contracts generally includes under the Statute of Frauds in Canada: 1) Contracts not to be performed within one year  When the terms of the agreement make it impossible to perform the contract within one full year from the time the contract is entered into, there must be evidence in writing for it to be enforceable  Failure to have evidence in writing will make it no less a contract, but the courts will refuse to enforce it  Some provinces, including BC and Ontario, have eliminated the requirement of writing in this area  Note that even when it is impossible for one party to complete performance within the year, written evidence is not required when it is clear in the contract that the other party is expected to perform within that year 2) Land dealings  Any contract that affects a party’s interest in land must be evidenced in writing to be enforceable  Any sale of land (or part of it, such as the creation of a joint tenancy in land) must be evidenced in writing  Any creation of an easement, right of way, or estate (such as a life estate), is also covered by the Statute of Frauds  But, contracts for services to the land that do not affect the interest in the land itself are not covered  Ex: if a carpenter agrees to build a house, such an agreement may affect the value of the land, but not the interest in the land itself  Therefore, it does not need to be evidenced in writing to be enforceable 3) Guarantees and indemnities  In most provinces, the Statute of Frauds rwquires that a guarantee be in writing, but not an indemnity  Indemnity = describes a relationship in which a third party assumes a primary obligation for the repayment of the debt along with the debtor 4) Others  The original Statute of Frauds required that whenever the purchase of goods sold exceeded a specified minimum, there had to be evidence in writing for the sale to be enforceable  It is usually sufficient evidence in writing if a receipt or sales slip has been given  Many statutes require certain transactions to be in writing to be valid  In many jursidictions, the Statute of Frauds also rewuires the promises of executors (to be responsible personally for the debts of an estate), and pormises made in consideration of marriage, to be evidenced in writing ot be enforceable What Constitutes Evidence in Writing  Note that it is not the whole agreement that must be in writing  There needs to be evidence in writing supporting only the essential terms of the agreement (normally an indication of the parties, the subject matter of the contract, and the consideration to be paid)  It can take the form of the actual agreement itself, or simply a receipt, note, or email  It can come into existence after the creation of the contract referring to it  The writing can be more than one document, but must be signed or initialied by the person denying the existence of the contract Effect of the Statute of Frauds  If a contract is not evidenced in writing this does not make it void under the statute of frauds  it is merely unenforceable  The contract is binding on the parties, but the courts will not assist them in enforcing it  The courts will not assist a person who has performed to get out of the contract; nor wil the court order the return of any money paid  When there is a lien (a right to seize property), or when there is a right to set off a debt against the obligations created by the contract, the parties themselves may be able to enforce th eonctract, without the help of the courts Part Performance  Courts will waive requirement of writing for land if the parties can prove that the contract has been partially performed Chapter #8: Factors Affecting the Contractual Relationship Mistake  In limited circumstances, the courts will provide a remedy where one or both of the parties have made a mistake with respect to a contract  Where it is clear that because of the mistake, the parties have failed to reach a concensus, the contract is void; there is no complete agreement between them  The court will not interfere when te parties have simply made a bad bargain  this is an error in judgment and the person who made it must live with it  Reviewable mistakes in contract involve a person’s mind being at odds with the terms, surrounding circumstances, or other factors relating to the contract  Such a mistake can relate to the terms of the contract, including the identity of the parties  It can relate to an assumption upon which the contract is based, or an expected result or consequence of the agreement  The mistake can be made by only one of the parties or by both  Where both parties are making a mistake, it can be either: o Shared mistake = where both are making the same mistake o Misunderstanding = where each party has a different idea as to the meaning of the terms of the contract  Courts will try to give effect to the reasonable expectations of the parties  When the mistake relates to the terms of the agreement itself, such as the identity of the parties or the subject matter of the agreement, the courts are more willing to provide a remedy  The courts also will not interfere with contractual obligations unless the demonstrated mistake is significant or material with respect to the agreement  Where the mistake is caused by the negligence of one of the parties, that party will normally be held responsible for the error  If the mistake is one about the facts involved, as opposed to a mistake based on an interpretation of the law or its effect, the court will be more likely to provide a remedy  Where one party stands to make a windfall at the epense of the other, the courts likely will review the transaction, whether the mistake is one of law or of fact  Ex: when one party receives a payment she is not entitled to because the other has misunderstood his legal obligation, the court will likely order those funds returned on the basis of unjust enrichment  The area of mistake in contract law is evolving, and the courts tend to modify or reverse there position over the years  Remember: If a contract is void it is not a contract at all; if it is voidable the contract does exist, but one of the parties has the option of getting out of it Shared Mistake  Shared mistake = occurs when the 2 parties are in complete agreement but they have both made the same mistake regarding some aspect of the contract  The courts will review the transaction only where the mistake relates to some fundamental aspect of the subject matter of the contract  Most common example resulting in a void contract: when the subject matter of the contract no longer exists at the time the contract is made  The courts have also found a contract void due to shared mistake when, unknown to the parties, the property being sold was already owned by the purchaser  In both of the above cases, the parties have together made the same significant mistake with respect to a factual aspect of the agreement that has destroyed the basis of the contract; as a result, the contract is void for lack of concensus  When the shared mistake relates only to the value of what they are dealing with, it normally will not affect the enforceability of the contract  Rectification o If the written document does not reflect the common intention of the parties to the contract, the courts are willing to correct or rectify the document o Ex: if 2 parties had agreed to the sale of land for $500,000, but a clerical error made the document read $50,000, the court would add the missing zero and require the parties to perform the corrected agreement o The courts will do this only where it is clear that both understoof what they were agreeing to and what was written was different from that understanding o The courts are not rewriting the agreement during rectification – they are simply correcting a written document so that is corresponds to the demonstrated intention of the 2 parties o Rectification of the contract may be available as a remedy in other situations as well, such as where one person makes a mistake caused by the fraud by the other party Misunderstanding  Another type of mistake occurs when the parties h
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