Chapter 8

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Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 8: Non-Enforcement of Contracts 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 • Law focuses on enforcing that agreement in order to preserve the integrity, reliability, and predictability of contractual relationships • Canadian legal system recognizes the injustice of enforcing contracts without any provision for exceptional circumstances • 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 • Legal doctrines – developed through common law and statute – that are exceptions to the general rule that a contract, once formed, is enforceable ◦ Categorizes these doctrines: ▪ An unequal relationship between the two parties ▪ Misrepresentation or important mistakes concerning the contractual ▪ A defect within the contract itself • Voidable Contract: A contract that, in certain circumstances, an aggrieved party can choose to keep in force or bring to an end ◦ Example: 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 • Void Contract: A contract involving a defect so substantial that it is of no force or effect ◦ In limited circumstances, 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 avoid ◦ 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 Contracts Based on Unequal Relationships Legal Capacity: The ability to make binding contracts Minors Age of Majority: The age at which a person becomes an adult for legal purposes ◦ Those under the age of majority are in a very different position concerning their ability to enter contracts than are those who have attained the age of majority ◦ To protect minors from the enforcement of contracts that may not be in their best interest, the general rule is that minors are not obligated by the contracts they make ◦ Minors have the option to fulfill their contractual commitments and can enforce a contract against the other party should that party be in breach ◦ Contracts with minors are usually voidable, at the option of the minor alone ◦ Since minors may have to provide for their own welfare,, there are exceptions to the general common law rule of immunity from liability ◦ Minors are obligated by contracts for essentials, known in law as “necessaries” and are required to pay a reasonable price for themselves ◦ What amounts to a necessity 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? ◦ Contracts known as beneficial contracts of service are also binding if they are considered largely for the benefit of the minor ▪ Example: An employment contract with a minor is enforceable if the employer can show that the contract involves a significant element of raining and career development, such as one would expect in a program required to enter or progress through a trade or profession ▪ Enforceability in this context means that the employer can be awarded damages for breach of contract ◦ Common law generally provides that when a minor reaches the age of majority, there is no impact on contracts formed when underage ▪ They remain unenforceable against the minor unless they involve necessaries or beneficial service contracts ▪ Only if the person – now of legal age – expressly adopts or ratifies the agreement does it become enforceable ▪ The one 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 this obligation, even if it is for non-necessaries ▪ If fails, liability will be imposed from the time the minor becomes of age ▪ Except British Columbia, the common law governs the contractual capacity of minors ▪ British Columbia set out the Infants Act Mental Incapacity • In order 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 • If people are mentally impaired through illness and intoxication by alcohol or drugs, such that they were unable to understand the consequences of their actions, and the other party was aware of their state, they may be able to avoid the contract • There are additional grounds for attacking the contracts validity – namely, duress, undue influence and unconscionability Duress • Contracts that are made as a result of one of the parties being threatened with physical harm are obviously not enforceable • This indicates that the threatened party did not freely consent to the terms of the contract and, was the victim of a crime • Duress is now a broader concept and includes economic duress • Economic Duress: The threat o economic harm that coerces the will of the other party and results in a contract ◦ 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 ◦ 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 ◦ Other courts have suggested that a party's lack of a “practical” or “realistic” alternative can count as evidence of economic duress • When duress is established, the contract is voidable at the option of the party who was subject to the duress Undue Influence • Surrounding circumstances that put in question the ability of one of the parties to exercise free will 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: Unfair manipulation that compromises someone's free will • Traditionally operates in two circumstances: ◦ Actual Pressure: Sometimes a transaction – commercial or otherwise – arises because one party has exerted unfair influence on the other. The party who seeks relief form the contract must show that the influence existed, was exercised, and resulted in the agreement in questions. 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: 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, the court is entitled to assume that undue influence has been exerted. Other kinds of relationships such as banker and customer – do not import this presumption. When presumption is in place, it then falls to the more powerful party to prove that no undue influence was present • One way to prove that the contract was freely chosen is to arrange for the weaker party 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” • In the certificate, the lawyer attests that: ◦ He or she has 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 • Read case on pg 178 Unconscionability • Unconscionable Contract: An unfair contract formed when one party takes advantage of the weakness of another • According to the Supreme Court of Canada, proof of unconscionability involves a two- step process: ◦ Proof of inequality between the parties ◦ Proof of an improvident bargain or proof of exploitation. If the transaction is sufficiently divergent from community standards of commercial morality, this is a “strong indication of exploitation”. At this point, the court will presume unconscionability. It then falls to the stronger party to show that the contract was, in fact, fair • Many provinces have enacted legislation that relies on unconscionability as a standard against which to assess the fairness of a consumer transaction • Ontario's Consumer Protection Act gives remedies – including damages and the right to have the contract set aside – to the consumer who has entered into a contract on the basis of an unfair practice, which includes unconscionable representations. In determining whether to assist the consumer, the court is directed by the legislation to consider whether the person making the representation knows or ought to have known that, for example: ◦ The consumer was not reasonable able to protect his interests because of his physical infirmity, ignorance, illiteracy, inability to understand the language. Or similar factors ◦ The price grossly exceeded the price at which similar goods or services are readily available to like consumers ◦ There was no reasonable probability of payment of the obligation in full by the consumer Inequality between the Parties • The required inequality may result because one party is unsophisticated, is poorly educated, lacks language facility, or has lower economic standing than the stronger party • Parties to a contract are never on strictly equal bargaining terms; therefore, disparity between them is, on its own, insufficient to upset a contracting An Improvident Bargain • The party seeking to have the contract set aside must also be able to demonstrate that its terms greatly advantage one party over the other • There must be proof of substantial unfairness • 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 • Read case on pg 180 Misrepresentations and Important Mistakes Misrepresentation of Relevant Facts • Parties involved in negotiating a contract are usually not obligated to volunteer information • 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 • 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 be misleading or incomplete ◦ One party actively conceal
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