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LAW 122 (614)
Chapter 10

ch. 10 -Contractual Defects .docx

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Ryerson University
Law and Business
LAW 122
Theresa Miedema

Chapter 10 – Contractual Defects - Contractual defects are significant b/c they often provide one of the parties with a defence when other party brings a lawsuit Void – courts won’t enforce the contract Voidable – protected party has a choice - Party protected – but has no choice - can VOID (leave) contract, or stay in - unenforceable AVOID - Both terms have “Avoid” – you might be able to walk away – treat like it never existed Incapacity to Contract • Aperson cannot enter into a contract unless they have the legal power to give consent. • Law draws distinction between those who have capacity to contract and those who do not • Capacity is the legal power to give consent – legal power to enter into a contract - be bound by contract • Types of parties that lack capacity or have limited capacity to contract: o Minors o Mentally incapacitated persons o Intoxicated person o Corporations o Associations o Indian bands andAboriginal persons o Public authorities Personal Capacity Minors (pg. 238) - Minors – those who haven’t reached the age of majority (the age at which a person is held fully accountable in law – 18 on Ontario) - Some contracts voidable at minor’s option – contract voidable if minor entitled to avoid legal obligations that it created o Some contracts with minors are voidable; not every contract with minor void at outset o If a contract is voidable, minors may elect to avoid contractual liability – if so, they are relieved of all future liabilities under the contract - should do so as soon as possible – if delay courts may say minor affirmed contract, thus loses right to avoid it o Statutes may modify minors’legal obligations Ex. minor cannot avoid contracts for goods and services, contracts of employment to their benefit o When you turn 18, you have a reasonable time to decided whether or not you want to avoid a contract that you have created when you were a minor Mental Incapacity - Regardless of age, a person may lack capacity b/c of a deficient intellect - If court declares person lacks mental capacity, all contracts with that person are void and cannot be enforced at all; even if no court declaration person may be considered mentally incompetent if lacks mental capacity at time contract formed, then contract voidable, like minors o Minor’s contract voidable even if other unaware of age issue, but contract with person of mental incapacity voidable only if other should have recognized problem  Voidable if you haven’t been certified (pro-claim) or declared of being mentally incompetent. However, if you are in that situation, you can only void the contract if the party who you are contracting with – if it was reasonable for them to know that you were not mentally competent at that time. Contracts are voidable, that can be voided when you regain competency Intoxication • Rules for drunkenness similar to those with mental incapacity, an otherwise capable person may enter into contract with intoxicated Agreement voidable if person so drunk they could not know or appreciate what doing, and other party must have been alerted to that fact • Set aside contract intoxicated party must make prompt election when sober, otherwise will be taken to have affirmed contract • You lose capacity to the point where you are in the position of being literally insane, no control left, no sense of what you are doing (usually will pass out or in a hospital before reaching this point) – other party has to be reasonably aware you were drunk and you have to void the contract promptly Business Corporations - Corporations are treated as legal persons - Law distinguishes between chartered corporations and statutory corporations • Chartered corporations are treated the same as individuals who have reached the age of maturity – contracts made in breach of charter are binding o Statutory corporations have limited contractual capacity. Their capacity to contract is limited by the powers given to them through legislation  If a statutory corporation attempts to contract in a manner that exceeds its statutory powers, it acts ultra vires, meaning beyond authority. When a corporation acts ultra vires, it lacks the capacity to contract. - Associations – capacity issues arise more often with associations: unincorporated business organizations that lack contractual capacity, such as private clubs, charities o Most associations do not enjoy independent legal existence so incapable of contracting; some provinces have laws allowing for contractual capacity o If association attempts to contract outside its limits, it lacks capacity and agreement ineffective o Member of association may enter contract for benefit of association, but then liable under the agreement – unlike corporate officers and directors, will not be able to avoid personal liability - Indian Bands: body of Aboriginal people whose land and money held by Crown, unincorporated association, but has legal capacity due to Indian Act, can sue or be sued o Same is not true of individualAboriginal persons or Indians, limitations in relation to reserve land not being subject to contract, but otherwise free to contract like others - PublicAuthorities –many contracts created on daily basis by public authorities at federal, provincial and municipal levels o Public authority acting on behalf of government generally has capacity to contract independent of any specific statutory authority to do so – only limitation is power under Constitution’s division of powers to regulate the area in question Absence of Writing - No writing – contracts don’t have to be in writing to be enforceable, you want them to be written for risk management o For most contracts no formal requirements, but certain types of contracts must be evidenced in writing, this due to English Statute of Frauds, now consumer legislation  Statute of Frauds – required some contracts to be evidenced in writing to reduce risk of lying in legal proceedings, this before time of electronic commerce These Three must be in writing or won’t be enforced: - Guarantees o Aguarantee is a contractual promise by a third party, called a guarantor, to satisfy a debtor’s obligation if that debtor fails to do so.  Person promises to pay the debt of another person if the debtor can’t pay (guarantor pays) ex. consignor on loan o Guarantor is only gives a conditional promise. Their promise is conditional on your inability to fulfil your promise. o An indemnity is an unconditional promise to assume another’s debt completely - Contracts for the sale of an interest in land o Unenforceable unless evidenced in writing o May be difficult to distinguish contracts that concern an interest in land from those that do not - Contracts not to be performed within a year – don’t worry about this o Unenforceable unless evidenced in writing; narrow interpretation by courts – contract not caught if it could possibly be performed within one year Writing Requirements - Form and content of the note or memorandum – contract must be in writing or there must be a note or memorandum that provides evidence of it o Doesn’t have to take any particular form but has to provide evidence of essential elements of the contract such as the parties’names, the subject matter of the agreement and the price, and it needs to be signed by the party against whom the agreement is being enforced. - Legal effect on non-compliance o Statute of Frauds renders some contracts unenforceable unless they are sufficiently evidenced in writing, such contracts cannot support action for breach of contract o Agreement not entirely irrelevant – it is not void, but merely unenforceable, can be used to pass property, may provide defence, Ex. party who received goods has to pay for benefit received Consumer Protection and Writing Requirements - Some consumer protection laws require certain types of agreements to be made in writing to protect consumers’interests - By requiring agreements to be in writing, these laws can help prevent exploitation of consumers and prevent disputes about the terms of the contract Doctrine of Frustration - Acontract is frustrated when some event makes performance impossible or radically undermines its very purpo
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