This Document Contains Chapters 5 to 8 Chapter 5 Negligence, Professional Liability, and Insurance Answers to Questions 1. List and explain what a plaintiff must establish to succeed in a negligence action. It must be demonstrated through a reasonable foreseeability test that there was a duty to be careful, and secondly, that there was a failure to live up to that duty. Thirdly, it must be demonstrated that damages or injuries are present and that those injuries were caused by the careless conduct complained of. It must also be clear that the injury was not too remote from the conduct complained of. It should also be noted that the presence of contributory negligence or other unacceptable conduct on the part of the victim, such as voluntarily assuming the risk, may reduce or eliminate any award. 2. When a tort is committed intentionally, what remedies are available that may not be available when the conduct is unintentional? The remedy that is usually available when serious intentional wrongdoing is involved is punitive damages. This remedy may not be available for negligence. 3. Explain what is meant by the reasonable person test? It is a test used by the courts to establish whether a duty is owed by someone to another or others. The court would ask “What would a reasonably prudent person, in possession of all the facts of the case have done?” 4. What test do courts use to determine whether the defendant owed to the plaintiff a duty to be careful? Because of the Anns case (still followed in Canada) the test for determining duty consists of two questions. First, was injury or harm reasonably foreseeable? And secondly, is there a public policy reason that the duty should not be imposed, that the scope of the duty be reduced, that the class to whom the duty is owed be limited or that the damages be reduced? 5. Explain how the adoption of the Anns case test by the Supreme Court of Canada modified the approach to duty of care established by Donoghue v. Stevenson. The Anns case added a second part to the test. The first part is a re-statement of the test from Donoghue v. Stevenson. The second part asks if there is a public policy reason the duty should not be imposed, or should it be reduced or restricted in some way? The courts are trying to avoid indeterminate liability for new areas of negligence. 6. Distinguish between misfeasance and nonfeasance and explain the significance of the difference in tort law. Misfeasance involves wrongful conduct; nonfeasance is the failure to act. Generally the law will not impose an obligation to do something unless some duty can be shown because of the unique relationship between the two parties. Misfeasance is wrongful conduct that is usually controlled by the law of negligence. 7. Describe the test used in determining the appropriate standard of care required of the defendant in a negligence action. The reasonable person test is used to determine what the appropriate standard of care is for negligence. What would the reasonably prudent person, in possession of all the facts do? The courts also take into account the costs of the taking action and the risks. 8. How has an occupier’s liability to persons using the property changed in recent years? The most significant change is that occupiers’ liability has been codified in many provinces by legislation. In common law in the past it was thought that the standard of care demanded from an occupier varied with the status of the person on the property. An invitee was owed a different duty than a licensee and very little duty was owed to a trespasser. It is likely that the effect of recent court decisions has been to abolish the difference between an invitee and a licensee. 9. How does the “but for” test help to satisfy the requirements of causation? It is necessary to establish that the action complained of actually caused the injury. The ‘but for’ test is simply a way of applying that principle. To determine the cause of an automobile accident, the question is posed, “But for the careless conduct of the driver, would the injury have been avoided?” 10. Distinguish between the “thin skull rule” and the “crumbling skull rule” and explain how they relate to the question of remoteness. With the thin skull rule, as long as the defendant could have foreseen the possibility of injury, the fact that the plaintiff was more susceptible to injury than the average person is not significant. The defendant must “take the victim as he lies”. In a crumbling skull situation, the plaintiff had a pre-existing condition that would have affected them, even if the defendant had never caused anything to happen to the plaintiff. The defendant will therefore be responsible for part of the plaintiff’s injuries, but not all. 11. Explain how the effect of contributory negligence has been modified in recent years. Historically at common law where there was contributory negligence on the part of the plaintiff, victims were entitled to no compensation from the tortfeasor because of their own negligent conduct. The significant change has been the legislation now permitting the courts to apportion the loss between the parties. 12. Explain why the defence of volenti non fit injuria is difficult to establish. To be successful, the defendant must show the plaintiff assumed not only the physical risk, but also the legal risk of undertaking the action, which is very rarely done. 13. Explain the obligations that are imposed on the producer of a product and to whom the obligation is owed. The producer must exercise reasonable care in the manufacture of a product. The duty is owed to the ultimate consumer as long there has been no intermediate inspection or modification. 14. Why is the case of Haig v. Bamford considered important in the recent development of tort law? It was thought prior to this decision that a careless statement that resulted in economic loss was not actionable unless some special fiduciary duty could be demonstrated. This case clearly demonstrated that the House of Lords was willing to impose such a duty in broader circumstances. There is still some question as to whether the duty imposed for careless words is as broad as the duty imposed for careless conduct (determined by the reasonable foreseeability test). But in any case, there is no doubt that the liability for careless words has been expanded much beyond the direct relationships where it existed before. The result is that professionals and other experts now face liability for the careless things they say in the course of their professional activities even to those with whom they have no direct relationship. Today the principles developed in this case must be further qualified by the application of the principles of the Anns case. 15. Describe how the Anns case test can impact the establishment of a duty of care in cases involving professional liability. The rules in the Anns case determining the existence of duty of care consist of 2 parts. The first question to ask is whether there was a degree of proximity between the parties such that if the person being sued had thought of it he or she would have realized that his or her actions posed a risk of danger to the other. This is a restatement of the reasonable foreseeability test developed in Donoghue v. Stevenson. The second part is to determine whether this duty should be modified. Is there any reason that the duty should not be imposed? Should the scope of the duty be reduced? Should the class to whom the duty is owed be limited or should the damages be reduced? This allows the court to apply other non-legal factors such as public policy to the case. In cases such as Hercules Management Ltd. v. Ernst & Young, the Supreme Court applied the Anns case to limit the liability of the accounting firm when faced with a claim for investor losses based on flawed financial statements. 16. Identify the principle established in Rylands v. Fletcher. When will it be applied? If the defendant chooses to have or store inherently dangerous items on their land, according to the principle of strict liability in this case, the owner will be liable for any damage that results from the escape of the items, no matter how it happened. 17. What is vicarious liability? Are there any restrictions on its availability? This is a form of strict liability that imposes liability on one person for the actions of another, such as in the employment relationship. Employee must be acting in the course of their employment for the employer to be found liable. 18. How does the standard of care required from professionals or other experts differ from the test used to determine the standard of care required generally? The standard imposed is more correctly stated as the standard of care expected from a reasonable person in the same circumstances. That is, where the person is a professional, it is the reasonable doctor, lawyer, accountant, etc. When a standard is set by a professional governing body and it falls below what the judge considers appropriate from a reasonably prudent professional, the higher standard will be required. 19. Explain the nature of a fiduciary duty and under what circumstances it arises. Fiduciary duty arises where two parties are in a trust relationship. One may be an employee, a partner, a director and as such owes a duty to act always in the best interests of the person, business or company to whom they owe the duty. 20. Explain the source and nature of the powers of a professional organization. List the rights a member of that organization has when facing disciplinary proceedings. Most professionals are members of self-governing disciplinary bodies. These are created under provincial legislation which allows them to grant practice licenses, suspend or expel members and set standards of conduct, education and training. When a member is being disciplined, the body must follow the rules of natural justice, any statutory requirements and the provisions of human rights legislation. 21. Distinguish between business interruption insurance and fire insurance. Why might a businessperson want to have both forms of coverage? Fire insurance is designed to cover loss to property through fire. To obtain compensation for lost profits during a close down caused by fire, the insured would require business interruption insurance as well. 22. What is meant by an insurable interest and how does it apply to the various types of insurance discussed in the chapter? An insurable interest is some relationship that the insured has with the subject matter of the insurance so that if the insured against event takes place the insured will suffer a loss. With property insurance it is the insured’s equity in the property. With life insurance it is based on the relationship or involvement with the person whose life is insured. With liability insurance or business interruption insurance it is the risk of paying a damage judgment and the potential loss of profits. 23. What remedies does an insurer have if the insured misrepresented material facts when applying for insurance coverage? Failure to disclose information material to the loss may result in the losses being unrecoverable from the insurance company. Even where it is not relevant to the loss, if it is a material misrepresentation it may cause the entire policy to be void. Legislation in some provinces upholds the insurance where the misrepresentation was innocent; but even in those jurisdictions, the policy will be unenforceable if the misrepresentation or failure to disclose was done knowingly. 24. Explain what is meant by the right of subrogation. How may subrogation affect not only the insured but the person who has caused the injury or damage? Indicate what other means insurance corporations have to keep their damages as low as possible. When an insured suffers a loss caused by another, the insurance company will compensate the insured but acquire from him the right to sue the person causing the loss. This is called the right of subrogation. The insured then can only collect once, not from both the insurance company and the person causing the injury. Also the person causing the injury is not protected by the insurance carried by the victim because his insurance company can and will turn around and sue in the place of the victim. The insurance company steps into the shoes of the insured upon paying compensation. Insurance companies will often re-insure their coverage if the risk or the magnitude of the potential loss warrants it. This spreads the risk of loss among several insurance companies. Solutions to Cases 1. Roper v. Gosling. [2002] 5 W.W.R. 79, (Alta C.A.); 2002 ABCA 71 (CanLII) The plaintiff and the defendant had both been drinking, but the evidence indicated that Roper was not displaying any outward signs of inebriation. Gosling admitted to being drunk, but asked Roper if he was capable of driving before getting in the car. In the suit, Roper defended on the basis of contributory negligence on the part of Gosling. The trial judge held, and the Court of Appeal affirmed that Gosling did not encourage Roper to drink, there was no evidence of impairment and therefore there was no reasonable foreseeability. As a result there was no finding of contributory negligence on the part of Gosling. 2. Dixon v. Deacon Morgan McEwan Easson et al. (1989) 62 D.L.R. (4th) 441 (B.C.S.C.); 1989 CanLII 2786 (BC SC) In this case the court held that although it was foreseeable that someone might rely on certain statements, the necessary degree of proximity was missing. The auditors were not aware of the plaintiff as an individual or a member of a limited class of people who would rely on them when they prepared the statements. Rather the plaintiff was a member of an unlimited, open-ended class and therefore no duty was owed and the action was dismissed. Had they known that the statement was to be used to attract investors the plaintiff would have belonged to a limited class of which they had knowledge, and a duty would have been owed. Compare this case to Haig v. Bamford discussed in the text. 3. Schoff v. Royal Insurance Company of Canada, [2004] A.J. No. 592 (C.A.); 2004ABCA 180 (CanLII) All insurance policies involve a duty of utmost good faith on the part of the party requesting the insurance. There is a duty to disclose any information that may affect the decision of the insurer as to whether to insure. In this case, there were many misrepresentations on the part of Mrs. Goyan when she obtained the contract of insurance, however it was third parties who were making the claim. The Insurance Act of Alberta required minimum coverage of $200,000 which was not affected for third parties, even in the face of fraud by the policy holder. The Schoffs received $200,000 under the Royal insurance policy and additional money under the underinsured clause of their own insurance policy. Chapter 6 The Elements of a Contract— Consensus and Consideration Answers to Questions 1. What is meant by “freedom of contract?” Explain the impact of this principle on the development of contract law. What are two types of restrictions on this principle? Freedom to contract assumes that both parties are in an equal position to bargain the terms of their contract. From this principle the courts have developed a hands-off approach to the contractual relationship allowing the parties to determine the nature of their own agreement and refusing to protect either party from a bad deal. This has not been a fair reflection of the relationships that have been created in modern times because of the relative power of large retail organizations over consumers, and so today a considerable body of consumer protection legislation has been created to cover these situations. 2. List and explain the elements that must be present for an agreement to qualify as a contract. There must be offer and acceptance leading to consensus. Consideration is the price to be paid. Each party must have the legal capacity to contract. The contractual relations must not only be legal, but not against public policy and the parties must have an intention to be legally bound. 3. Explain the difference between a formal contract and a parol contract. A formal contract is on that is sealed by the party to be bound. Parol contracts may be verbal or written but are not under seal. 4. Explain the difference between void and voidable. What is the practical result of this difference? A void contract is missing an essential element and is not enforceable. A voidable contract exists, but one party has the option of ending the contract. The implications of each choice differ for third parties. If the contract is void, title to any subject matter must be returned to the vendor. If voidable, the third party retains title. 5. Distinguish between unenforceable contracts and illegal contracts. An illegal contract is void, as it involves the performance of an illegal act or payment of illegal consideration. An unenforceable contract is lacking in some requirement, such as consideration. 6. Explain the difference between a bilateral contract and a unilateral contract. A bilateral contract is one in which both parties make commitments and assume obligations. A unilateral contract involves the performance of an act or service as the consideration for whatever is promised. The contract becomes binding when the act or service is performed. An example is the offer of a reward for the finding and return of an item. Once returned there is a binding contract for payment of the reward. 7. What practical concepts does contract law use to determine if “a meeting of the minds” has happened? Consensus occurs when one party states its position in the form of an offer and the other party, through acceptance, makes a similar commitment to be bound by the terms of that offer. 8. At what stage in the process of forming a contract are the significant terms of the contract clearly set out? The terms of the contract are clearly set out when a complete offer is made by one party. 9. Explain the role of implied terms in a contract. Who has the power to imply terms into a contract? When will the power be used? In order for a contract to be binding the parties must have set out the major provisions of their agreement. There are many minor technical aspects to the agreement, however, which the parties may not have put their minds to. These can be implied into the contract and, therefore, form part of the contract. One of the main functions of the Sale of Goods Act is to set out a number of terms that can be implied into any agreement for the sale of goods when the parties to the sale have not dealt with that particular aspect of the matter. The court can imply terms into a contract to enforce the intention of the parties but the court will not do so when the term would be clearly inconsistent with what has been agreed. The court will not make the bargain on behalf of the parties. When all the important terms have been agreed to, however, the court will generally be willing to supply missing peripheral elements of the agreement, usually following the accepted practice of the industry involved, rather than see the agreement become ineffective because of its incompleteness. 10. Is an “agreement to agree” binding? Explain your answer. If the terms have been agreed upon, and there are no further negotiations contemplated, then an agreement is valid, even if it is to be put into a more formal document later. If the parties have just reached an agreement to negotiate further, that is not a binding contract. 11. Distinguish between an offer and an invitation to treat. Invitations in the form of advertisements and displays are designed to encourage the customer to enter into negotiations in relationship to the particular product being advertised and are not intended to be an offer on the part of the vendor. An offer is when one of the parties commits themselves to the particular terms of the agreement in such a way that it is clear that the other party merely has to accept in order for the agreement to be binding. For example, by going to a store advertising an item, selecting one, and taking it to the cashier. 12. Can you accept an offer that was made to someone else? Explain your answer. No. An offer must be communicated to you as an individual in order to be capable of acceptance. The naming of the parties is an essential term of an offer in a bilateral contract. 13. List and explain the various ways an offer can come to an end. An offer will come to an end: (1) at the end of a specified time, (2) at a reasonable time if no time is specified, (3) at the death or insanity of the offeror, (4) when there is a revocation of the offer, (5) if the offer is rejected (6) if there is a counteroffer (7) if the subject of the offer becomes illegal (8) if the subject matter of the offer is destroyed. 14. What is the effect of the offeror stating in an offer that the offer will remain open for acceptance until a specific date? What can offerees do to protect themselves from the offer being revoked? Stating that the offer will remain open for acceptance until a specific date does not commit the offeror to keep the offer open until that time unless some consideration has been paid for that commitment (option). In the absence of such consideration, the offer can be revoked by the offeror. The effect of the specified date merely determines a point beyond which the offer will no longer be open. 15. What risks are faced when a person offers to sell certain goods to A and then sells them to B? How can this problem be avoided? When an offer is made to sell goods or commodities to a particular person, and then they are sold to another, that sale does not revoke the original offer. Thus the person making the offer may find himself in the difficult position of having sold the goods but still obligated to the original offeree if that offer is accepted. To protect from this eventuality, the offeror should either make sure that the original offer is revoked before the sale goes through, or make the sale conditional on the lapsing of the original offer. 16. Explain the two types of contracts that result from the tendering process. A tendering contract consists of a contract A and a contract B. Contract A comes into existence when the party presenting a bid responds to the request for tender and submits a bid. That contract carries specific terms that are distinct from the ultimate construction contract that is awarded when the successful bid is chosen. The construction contract is contract B. 17. What do the courts do, when interpreting standard form contracts, to correct the imbalance in bargaining power between the parties? The courts attempt to correct an imbalance in bargaining power by interpreting standard form contracts strictly against the drafter of the contract. That normally results in ambiguity being resolved in favour of the less powerful party. This is particularly important when dealing with exemption clauses. 18. Do parties to a contract have a duty to act honestly in the performance of their contractual obligations? Explain your answer. Historically, there was no “stand-alone” duty of good faith in the enforcement of commercial contracts, common law courts imply a duty of good faith to ensure parties do not act in a way that defeats the objective of the agreement they have entered into. Therefore, parties do have a duty to act honestly in the performance of their contractual obligations. A recent Supreme Court of Canada decision created the need for good faith in contractual performance. 19. What qualities must an acceptance demonstrate to be effective? The acceptance of the offer must be a complete, unqualified commitment to the original offer and as a general rule must be communicated to the offeror to be effective. (But note postbox rule.) 20. When is a contract formed? The contract is formed when acceptance of an offer is communicated to the offeror. 21. When will silence be considered an acceptance of an offer? Silence, as a general rule, does not constitute acceptance. An important exception to this rule occurs when there is an ongoing business relationship between the parties that has an established norm of not saying “no” being an acceptance. 22. What is the general rule regarding acceptance? What is the practical result of this rule? The general rule is that the contract is formed when and where the offeror learns of the acceptance. This would then determine the jurisdiction and law governing the contract. 23. Explain the effect of the postbox rule on the principles governing acceptance. The general rule of acceptance is that it must be communicated to the offeror before it is effective, and it is effective when and where communicated. The postbox rule is an exception and states that when it is appropriate to respond by mail, an acceptance is effective when and where posted. This can be very important to the parties since the time of acceptance can be considerably earlier, and the place of acceptance may determine what jurisdiction’s law will apply to the contract. 24. Discuss the role the postbox rule plays when modern communication methods are used. The postbox rule is limited to the use of the postal mail. Where fax and email are used, the acceptance will not be effective until received by the offeror. 25. What is “click-wrap”? How is an online offer to sell a software license usually accepted? Before purchasing software on the Internet, the purchaser usually has to agree to the seller’s terms and conditions. When the purchaser clicks on the “I Accept” button it is assumed that the terms and conditions have been read and accepted. This is similar to the in-store purchase of software where the physical removal of the shrink wrap presumes the purchaser has read the terms. For Internet software purchases, clicking on the “I Accept” button is called “clickwrap” as it is similar to the in-store removal of shrink wrap. 26. What two factors do the courts consider when deciding whether to enforce an electronic contract? The two issues the courts consider when deciding whether to enforce an electronic contract are as follows: One is the form of assent where the offeree really knew and accepted the terms. This highlights the importance of having the purchaser click on the “I Accept” button to verify their acceptance of the terms and conditions before placing their order. The second issue is the reasonableness of the terms. For instance, terms that are hard to locate or very small are not considered reasonable. 27. Define consideration and explain what is meant by the term “the exchange of consideration.” Consideration is the price paid by each party for what they obtain in the agreement. Each party must make some sort of legal commitment to the other, and the benefit derived therefrom is referred to as consideration. This is in keeping with the bargaining nature of the agreement and, therefore, the term “the exchange of consideration” simply refers to the fact that a bargain has been struck with both sides committing to give the other some benefit or advantage. 28. Explain under what circumstances a person who fails to properly perform a gratuitous promise can be held liable for that failure. A person failing to perform a gratuitous promise may be liable through promissory estoppel if the other party incurred some cost in reliance upon the promise. Promissory estoppel may only be used as a defense, not as a cause of action. Secondly where the person promising has started to do something and does it improperly which causes injury or loss to the other party, there may be a cause of action based on the tort of negligence. 29. Does consideration have to be fair? Explain your answer. Consideration does not have to be fair, it only has to have some value, in the absence of other factors such as fraud, unconscionability, etc. The court would only address the value of the consideration as evidence that one party was taken advantage of by the other through fraud, or other situations. 30. What difficulty might be faced by a person who has already agreed to do a specific job and then extracts a promise of more pay from the other party? The person is already bound by contract and when he extracts a promise for more out of the other party, there may be no consideration to support the new promise. 31. If a person who is rescued promises to pay the rescuer $1000 but doesn’t pay, will the rescuer be successful in suing for breach of contract? Explain your answer. If the promise to pay is made after rescue, it is a gratuitous promise and is unenforceable. If made before rescue, it is a unilateral contract. The contract becomes binding when the act or service is performed. 32. “A creditor is bound by her promise to take less in full satisfaction of the debt.” True or false? Explain your answer. True. Many jurisdictions have passed legislation providing that when a creditor has agreed to take less in full satisfaction of a debt, and has actually received the lesser sum, the creditor is bound by the agreement and cannot sue for the difference. 33. Explain why a contract dispute settled out of court is considered binding even though one party would have obtained more if the action had been taken to court. When it is relatively clear that a litigant who settled out of court for a compromised sum would have been fully successful had the court dealt with the matter, there is still consideration to support the settlement. What the two parties have each given up is their right to allow the court to determine the outcome. The right is of considerable value to both parties for saved time and costs. Therefore, giving it up amounts to valid consideration on both sides. 34. Explain a person’s obligation regarding payment when he has requested a service without specifying a particular fee. Quantum meruit is one of the exceptions requiring consideration be established if a valid contract is to exist. Even though the consideration has not been specifically agreed to, there is an obligation to pay a “reasonable” amount for the services actually rendered. 35. Describe what is meant by promissory estoppel and the circumstances in which it will arise in contract disputes. When it is clear that there is no consideration to support a promise made by one of the parties to an agreement, that promise is not enforceable as a general rule. It is only when the other person (promisee) is being sued by the promisor that it is permissible to use that promise as a defense. 36. How does the presence of a seal affect the requirement that consideration must be present in a contract? When a seal is used it is not necessary to show consideration for the contract to be binding. A sealed contract is considered a formal contract or a deed. The court will not entertain any suggestion that the promise contained in a formal contract is not supported by consideration. Solutions to Cases 1. Wembley Marketing Ltd. v. ITEX Corp., [2008] O.J. No. 5194 (S.C.), 2008 CanLII 67425. The Court concluded that “(i)n all of the circumstances, I find that there was a binding agreement between Wembley and ITEX and I see nothing unfair or unreasonable in giving effect to the terms of the Agreement…. I find no evidence of fraud or misrepresentation on the part of ITEX. Moreover, Mr. Fuss, an experienced businessman, signed his name to the same agreement on two occasions. This is enough to fall within the principles confirmed in Fraser Jewellers, supra. Moreover, according to his collective evidence on this point, Mr. Fuss either did not read the Agreement, read a specific part of it or merely glanced at the clause. Given how unsatisfactory his evidence was on this point, I am unable to find a basis upon which to conclude that it would be unfair or unconscionable to hold the plaintiffs to the Agreement.” The Court then concluded that the desire to enforce the forum selection clause was genuine and that the plaintiff tendered no evidence that it would be prejudiced if it were forced to bring its claim in a foreign court. Accordingly, the forum selection clause was held to be binding. 2. Bigstone v. Bigstone, 2013 SKCA (CanLII). The courts should enforce the interspousal agreement, even though the wife signed it after the husband died. The parties were of one mind in the interspousal agreement. There was no error in principle as the parties, being of one mind, the agreement did not hinge on the contract being signed. The spirit of the contract was that they were of one mind. 3. Ayerswood Development Corp. v. Hydro One Networks Inc., [2004] O.J. No. 4926 (S.C.), 2004 CanLII 45463 (ON SC) This was a unilateral contract. Hydro One had made an offer through their program that was open to anyone. If the conditions of the offer were complied with, acceptance then occurred and the person accepting would be entitled to the incentive payments. The court held suspension of the program did not result in a revocation of the offer before acceptance and “(i)n a unilateral contract, the person making the offer is not entitled to withdraw it once a party is in the process of performance”. The court ordered the incentive payments to be made by the defendant. 4. IGM U.S.A. Inc. (Bucci Industries U.S.A. Inc.) v. Linamar Holdings Inc., 2007 CanLII 38942 (ON SC). Generally an invoice cannot unilaterally impose terms on a customer. (There is a reason we are sometimes asked to sign an invoice. And you do not have to sign.) The court held that “(t)he stipulation on the back of the invoice did not form part of the contract agreed to between the parties, which had already been formed.” The court established that the Ontario courts do have jurisdiction to deal with the litigation using the common law principles of jurisdiction simpliciter and forum non conveniens. 5. Leonard v. GC Surplus, 2014 CanLII 18980 (ONSCSM) The contract was made where the offer was made. Leonard made the offer from Toronto. The contract was formed in Toronto. 6. Stadnyk v. Dash, 2007 SKQB 443 (CanLII). The courts should decide that the offer was unconditional and therefore should be accepted. The final paragraph from Stadnyk’s lawyer reference that a response would be appreciated in 10 days did not make the offer conditional on signing within 10 days. The language was not precise enough to make that conditional. 7. MacMillan Estate v. Hoffman, 2011 BCSC 141 (CanLII). The court held “…that the Lease to Purchase document does not place any obligation on Mr. Hofmann to purchase the Property and therefore is not an agreement for sale.” Since rent was no longer being paid, the court declared the Lease to Purchase null and void. If a valid Lease to Purchase was in place there would be no need for it to be executed under seal since there would be an exchange of consideration. Chapter 7 The Elements of a Contract: Capacity, Legality, and Intention Answers to Questions 1. “In determining whether a child has contractual capacity, the court will attempt to determine if she actually understood the transaction.” True or false? Explain your answer. False. For those under the age of capacity in your province, by law they lack the legal capacity to enter into a binding contract. 2. Explain the circumstances in which an infant may escape liability for a contract and the circumstances in which an infant is bound by a contract. Infants are not bound by the contracts they enter into unless they are for necessities or are beneficial contracts of service. But once an infant’s contract is completely performed or the infant has paid for the goods or services, the contract cannot be voided unless there is a complete failure of consideration. 3. What is the significance of a minor’s contract being designated as a beneficial contract of employment or for service? It is binding on the minor in most provinces. 4. In addition to debts incurred for necessaries, when will a minor be liable for a debt he incurred? This varies depending on the province. In B.C., there will be no liability other than for student loans. In other jurisdictions it may include contracts of employment, apprenticeship or service. 5. What are the three stages of a contractual relationship? Describe the legal situation of a minor in each of these stages. First stage – executory contract – the parties have entered into the contract, but the minor has not yet received any benefit from it and has not yet paid. A minor is not bound to the contract. Second stage – partially executed contract – the minor has received the goods but has not yet paid. The minor may not be bound, but must return the goods and is then entitled to a refund of any money already paid. If the goods have been destroyed or title passed to a third party, the vendor is still not entitled to payment, and cannot pursue the third party. Third stage – executed contract – Minors have received benefit under the contract and have paid. In most provinces, minors will be bound unless what they received was of no value. If the contract is prejudicial to the interests of the minor, it will be void. 6. If there is no relevant legislation, when will the parents of a minor be responsible for the minor’s contracts? When will they be liable for the torts of the minor? In contract law parents are not responsible for the contracts of their children unless it can be demonstrated that an agency relationship existed between parent and child. Similarly, in tort law parents are not liable for the tortious conduct of their children unless it can be demonstrated that they were negligent in their own right. 7. When can an adult sue a minor in tort even though there is a contract between them? When the minor uses the subject matter in some way that is not anticipated under the contract, (e.g. drag racing) and damages it, the adult can sue in tort and escape the limitations imposed by the minor’s lack of contractual capacity. 8. What must an insane or drunk person establish in order to escape liability under a contract? Each must establish that they were unable to understand the nature of the contractual relationship and that the other person knew or should have known of that drunkenness or insanity as determined by the application of the reasonable person test. 9. Explain what care business people must exercise when entering into contracts with government corporations or bodies. Crown corporations and government bodies are often empowered to enter into contracts generally but some may have that power specifically limited by the legislation or regulations authorizing their operations. Business people should be aware of statutory limitations to the capacity of these bodies when dealing with them. 10. Explain four other situations where business people must be careful that those they deal with have the capacity to contract. Foreign governments and their representatives, bankrupts, “Indians” under the Indian Act, and government agencies. 11. Explain the difference between a contract that is performed illegally and an illegal contract. An illegal contract is one that covered an illegal activity. It is unlawful and cannot be enforced. But if the contract itself is legal, and it was only in the performance that an illegal activity occurred, then innocent parties are entitled to the benefits of the contract. 12. What decisions can a court make if performance of a contract violates a regulatory statute? The legislation itself may provide for the contract being void, or other mandated outcomes, which the courts must follow. If there are no such provisions, the court may treat the contract as being void, but not illegal and may grant rescission. If the illegal performance can be separated from the rest of the performance of the contract, the court may rule only that part void and enforce the rest of the contract. 13. What are the two reasons that can cause contracts to be illegal? Commission of some prohibited conduct set out in a statute, or immoral conduct that is against public policy. 14. How has the law regarding the judicial treatment of illegal contracts changed? The classic approach was that every illegal contract was deemed to be void. The court may now sever just the illegal portion of the contract, leaving the balance of the contract enforceable, even to the point of re-writing part of the contract. 15. Give five examples of contracts deemed by the court to be against public policy and describe the effect of such a designation. At common law, these are any contracts to commit a crime or a tort, to commit immoral acts, obstruct justice, injure the state, contracts that unduly restrain trade, restrict competition, contracts as bets and wagers, contracts to promote litigation, contracts to injure public service and contracts in restraint of marriage. Most of these types of contracts are void and the courts usually will not assist the parties to return to their original positions. Some, however, such as contracts that unduly restrain trade or restrict competition, may have only that portion of the contract that is tainted invalidated. 16. “All contracts that restrain trade are illegal.” True or false? Explain your answer. False. Only those contracts which unduly or unreasonably restrain trade are against public policy. For example, when a business is sold it is often necessary to restrain the vendor’s freedom of activity through a restrictive covenant in order to protect the value of the goodwill in such a contract. 17. Describe the test the courts will use in determining whether the parties had an intention to be bound when they made an agreement. With close family relationships there is a presumption of lack of intention and in commercial transactions there is a presumption of intention to be legally bound. In other situations a reasonable person test is applied and the courts will give effect to the stated intention of the parties. 18. With respect to the element of intention, explain how the courts’ treatment of domestic agreements differs from their response to commercial transactions. When agreements involving close family relations or friendships are involved, the courts presume that there is no intention to be legally bound and, thus there is no contract. When a commercial contract is involved, however, the presumption is that there is an intention to be legally bound and this has to be disproved by the parties in order to escape a contract on the basis of lack of intention. 19. How will the court determine if there was a contractual intention when there is a dispute between a brother and his sister over how to operate their business? The courts presume there is no intention to be bound if the contract is between family members. However, if the party wishing to enforce the contract can bring forth sufficient evidence to convince the court that they did intend to be bound, the presumption will be rebutted and the court would enforce the contract. 20. What is the significance of a written document in contractual relations? (1) It has important practical evidentiary effects since it will be a permanent record as to what the parties have agreed. (2) Such a written record might be essential to satisfy the requirements of the Statute of Frauds in order to be enforceable. 21. Explain why some people have suggested that the Statute of Frauds has led to more frauds than it has prevented. The Statute of Frauds imposes a technical requirement on the parties to a contract which must be satisfied for that contract to be enforceable. That can work to the disadvantage of either party, not just to the benefit of the victimized party. Therefore many verbal contracts that could be enforced between people allow one of the parties to escape because the Statute of Frauds is not satisfied. 22. Give examples of the types of contracts currently included under the Statute of Frauds? The answer will vary based on jurisdiction and the relevant legislation i.e. B.C. Law and Equity Act. (1) Contracts not to be performed within one year. (2) Land dealings. (3) Guarantees and indemnities. (4) Promises in consideration of marriage. (5) The promise of an executor. (6) Other special statutory requirements such as the Sale of Goods Act. Examples of contracts under the Statute of Frauds include contracts for the sale of goods over a certain amount, contracts for the sale of real estate, and contracts that cannot be performed within one year. 23. What “evidence in writing” is required to satisfy the requirements of the Statute of Frauds? This is usually identification of the parties, consideration, the description of the property involved, but may include other provisions as well. 24. “A contract that does not satisfy the Statute of Frauds is void.” True or false? Explain your answer. False. The contract would merely be unenforceable. If the parties have already partially performed, or if there are other remedies that do not require the court’s involvement, the contract would still be binding. Further self-help is available, such as exercising set-off. 25. Will a contract formed online with electronic signature be enforced by the courts? Why or why not? A contract formed online with electronic signature will be enforced by the courts. The Uniform Electronic Commerce Act (UECA) has been adopted by the Uniform Law Conference of Canada, following the lead of the United Nations, to create a more certain legal environment for ecommerce. The governing principal of the UECA is that information shall not be denied legal enforceability solely because it is in electronic form. The use of electronic signatures is allowed but the signature must be created or adopted with the intent to sign the document. However, in most provinces, this does not apply to wills, trusts, powers of attorneys, land transfers, or negotiable instruments. Other exclusions exist as well in individual provinces. 25. Under what circumstances will a contract falling under the jurisdiction of the Statute of Frauds be enforceable even though it is not evidenced by writing? If a contract relating to land has been partially performed by the parties it is not necessary to have evidence in writing. Partial performance has to be consistent only with the existence of the contract and therefore the mere payment of money is not enough. Solutions to Cases 1. National Money Mart Co. v. Tazmania Auto Sales Inc., 2001 ABPC 254. The court held that the infant defendant lacked the capacity to endorse the cheques and therefore would not allow the cause of action against him. The court could not find an alternative course of action against the infant at common law (tort) or in equity. 2. Graham v. Capital Cabs Ltd., 2005 N.W.T.T.C. 6 (CanLII). The court found that the company was contractually bound to pay Graham the sum of $2000 and would have also ordered that sum be paid on the principles of unjust enrichment and quantum meruit. However, the court found that the agreement to provide Graham shares in the company was unenforceable as it was not in writing as required by section 14(2) of the Business Corporations Act. 3. Harvey v. Newfoundland and Labrador, 2005 NLTG 198 (CanLII). The Court should not enforce the contract. The use of one’s political position to benefit another party is illegal and known as “influence peddling”. The courts should not assist Harvey to receive such a benefit under what would have been an illegal act. 4. Dhingra v. Dhingra, 2012 ONCA 261 (CanLII). The public policy rule should not apply prohibiting a person from benefitting from his criminal acts if not found criminally responsible. Since Dinghra was found to be not criminally responsible, he was therefore also found to be not morally responsible. 5. Whitrow v. Hamilton, 2010 SKCA 7 (CanLII). The Court of Appeal should not uphold the trial judge’s decision to sever all of the interest from the debt obligation. Whitrow is not a loan shark. He is a businessman. Furthermore, severing all the interest created an unjustified windfall for Hamilton. A more appropriate approach would be for Hamilton to pay a rate of interest common at that time on the processing fee. Hamilton had that money over that period of time which belonged to Whitrow. 6. Steinke (o/a Muscle Mechanics MassageTherapy) v. Barrett, 2012 MBQB 49 (CanLII). The Court should ascertain if the defendant, Barrett, is in fact harming Steinke’s business. Also, the Court has to determine if it is right to deny Barrett the ability to earn income. Furthermore, how can Steinke’s claim be quantified? What value of loss of clients is attributed to Barrett locating within the 5km distance? If Steinke cannot prove that her business has suffered from Barrett’s location, then the restrictive covenant should not be upheld. 7. McKnight v. Grant (2009), 340 N.B.R. (2d) 386 (C.A.), 2009 NBCA 4 (CanLII). The Court of Appeal held that the agreement to re-convey the cottage was not subject to the Statute of Frauds. The court stated that “(a)lthough there are no cases in this Province on point, as a matter of policy, the application of the Statue of Frauds must be restricted to its original purpose (to prevent perjury and fraud) and not to be invoked as a tactical measure to avoid an otherwise enforceable bargain.” 8. Leoppky v. Meston, 2008 ABQB 45 (CanLII) The electronic emails suggests there was sufficient writing to satisfy the Statute of Frauds. The emails were electronically signed by Meston and although signed just by her first name, showed her connection to the emails. Electronic signatures are considered agreement to a contract when the signature is created or adopted with the intention to sign the document. Assuming the Court found there was an agreement between the two parties, the agreement does comply with the Statute of Frauds. Chapter 8 Factors Affecting the Contractual Relationship Answers to Questions 1. Explain how fraudulent, negligent and innocent misrepresentations differ. Identify the remedies that are available for each type of misrepresentation. Innocent misrepresentation occurs when individuals do not know that what they have said is false. Negligent misrepresentation is when people honestly thought that what they were saying was true, but should have known it was false. Fraudulent misrepresentation is when someone knowingly makes a false statement that induces another to enter into a contract. The importance of the distinction is in the remedies available. If the misrepresentation is innocent, only rescission is available. If the statement becomes a term of the contract, normal breach of contract remedies apply. If the representation was either negligent or fraudulent, rescission and damages are available to the victim. 2. What happens when a misrepresentation becomes a term of the contract? The normal rules of breach of contract apply when a misrepresentation becomes a term of the contract. The remedy available depends on whether the false statement was made innocently, fraudulently or negligently. 3. Under what circumstances can silence or a statement of opinion become misrepresentation? When there is a special duty to act in good faith, failure to inform a contracting party of certain facts can amount to misrepresentation. A statement of opinion is not actionable unless the opinion is that of an expert in the matter being dealt with. 4. What factors may affect the availability of the remedy of rescission? The remedy of rescission is not available if the victim of the misrepresentation has affirmed the contract. Similarly, if it is impossible to return the parties to their original positions or where the granting of rescission will harm a third party, this remedy will not be granted by the courts. 5. Distinguish among duress, undue influence, and unconscionability and give examples of each. Duress is the use of threats of violence or imprisonment to pressure another to enter into a contract. Undue influence may be present when people in a close social relationship contract with one another. Undue influence is assumed when people in certain specified relationships contract. In other circumstances it must be proven. When either of these elements is present the contract is voidable at the wish of the victim. Unconscionability involves one party taking advantage of the other party’s weakness such as desperation, or weak intellect which results in an unfair bargain. 6. A mistake may result in a contract being declared void or voidable. What difference does it make if a contract is merely voidable? If a contract is found to be void it is not a contract at all. If a contract is voidable the contract does exist, but one of the parties has the option of getting out of it. Consequently, when an innocent third party has acquired goods that are the subject of a voidable contract, that party gets to keep the goods; but if the previous contract was void — that is, there never was a contract — the person who sold the goods to the third party never had title to them, and those goods must be returned to the original owner. 7. When will a misunderstanding as to the terms of a contract cause that contract to be void? Only when the misunderstanding is serious enough to eliminate the consensus between the parties will the contract be void. It is not enough for the misunderstanding to have simply resulted in a bad bargain. Caveat emptor remains the guiding principle. 8. Distinguish among shared mistakes, misunderstandings, and one-sided mistakes. With a shared mistake, both parties make the same mistake. That is, they are of a common mind. A mutual mistake occurs when both parties make different mistakes, putting the parties are at cross-purposes. A unilateral or one sided mistake occurs when only one of the parties is making a mistake. 9. What approach will the courts usually take when the mistake involves disagreement about the meaning of the contract? The court will impose a reasonable interpretation of the terms on the parties and if it is impossible to favour one interpretation over another, the contract will be void. 10. What must a party to a contract show to obtain rectification of a document? When the parties incorrectly write down what they’ve agreed (make a clerical error) the court can correct the error to reflect what has been agreed. However, it must be shown that both parties intended something different than what was embodied in the written document. 11. How will the courts respond to ambiguous wording in a contract? The courts will favour the interpretation that keeps the contract alive and will try to give effect to the reasonable expectations of the parties. 12. Explain what is meant by caveat emptor. What is the significance of this principle in relation to a one-sided mistake? Caveat emptor requires a purchaser to be careful. That is, buyers beware! The seller cannot mislead a buyer, but has no obligation to correct assumptions that the buyer has made about the item being purchased. If buyers mislead themselves, that is a unilateral mistake and their problem. Chapter 8: Factors Affecting the Contractual Relationship 13. Under what circumstances would a person raise a claim of non est factum? What restrictions are there on its availability? Non est factum is a defense available when people think that they are signing a document of one nature when in fact the document is of a completely different nature. It is not available when it is only a mistake in the terms of the agreement or when there is negligence on the part of the person signing. 14. Explain the parol evidence rule. The parol evidence rule states that when the term of a contract is clear and unambiguous, the parties will not be permitted to introduce evidence outside of the contract to contradict that clear meaning (whether that outside, extrinsic evidence is in writing or verbal). 15. What is meant by privity of contract? Privity is a fundamental principle of contract law that the parties to a contract do not have the power to impose benefits or obligations on third parties or outsiders who are not parties to the contract. The contracting parties have created a private agreement, and outsiders to it can neither enforce it or be bound to perform its terms. 16. Explain what is meant by the term novation. Novation occurs when the parties to a contract agree to substitute someone new for one of the original parties. Novation can also refer to the change of some important term of the agreement. 17. Explain how privity of contract is impacted in the concept of land transactions, agency, trusts, and assignment. Land transactions - This is an exception to the privity rule. Many interests associated with land can run with the land instead of the parties. Agency - when an agent acts on behalf of a principal the resulting contract is between the principal and the third party. Trusts - A trust is a true exception to the privity rule since one person has a contract with another to hold property in trust for a third. The third can enforce the trust. Assignment - Once an agreement has been entered into between two parties, it is possible for the parties to a contract to assign or sell the rights or benefits they are entitled to under that contract to some third party. 18. With regard to third-party beneficiaries under a contact, what direction does the law appear to be taking? Third-party beneficiaries are gaining more rights as there are signs the doctrine of privity may be breaking down. The Law Reform Commission of Nova Scotia recommended reform to the law pertaining to privity in that it be relaxed by statute to allow third-party beneficiaries to enforce their rights under contract. 19. What qualifications must be realized before there can be a statutory assignment? First, the assignment must be absolute, meaning that it must be both unconditional and complete. The full amount owed must be assigned without any strings attached. Second, the assignment must be in writing, and signed by the assignor. Third, the original party obligated to pay must be notified in writing of the assignment. 20. What is meant by “the assignee takes subject to the equities”? This principle refers to the fact that an assignee is in no better position to enforce the contract than the assignor. Accordingly, if a debtor has a good defence against the assignor, it is also a good defence against the assignee. 21. Can a “holder in due course” obtain better rights than an assignee? Explain. The principle that an “assignee takes subject to the equities” does not apply when dealing with an assignment of a negotiable instrument. The assignee of a negotiable instrument is known as a ‘holder in due course’ and as such is not bound by the equities that may exist between the original parties. Solutions to Cases 1. Queen (Ont.) v. Ron Engineering [1981] 1 S.C.R. 111; 1981 CanLII 17 The deposit should not be returned. By submitting the bid Ron Engineering entered into contract with the owner under terms of that submission. These are different terms than the terms under which the successful bid would be held to. The court will not rectify the bid as there were no errors made in the bidding process. The error made by Ron Engineering does not enable it to get remedy from the courts. There was nothing in the bidding process or in the acceptance of another bid that violated any of the terms of this bid. 2. RF Real Estate Inc. v. Rogers Telecom Holdings Inc., [2008] O.J. No. 3314 (Ont. S.C.J.); 2008 CanLII 42598 (ON SC), aff’d 2009 ONCA 899 (CanLII) “When interpreting a contract, the court looks to the language used by he parties to give effect to their written agreements. The words in the agreement are understood to have their plain and ordinary meaning…. If there are several documents comprising the agreement, they must be read together to discover the intention of the parties.” Based on these principles, the court concluded that there was a binding contract between RF, Sprint and Callnet, and that Rogers assumed those obligations when it acquired Sprint. RF completed a number of the steps required under that agreement and was entitled to be compensated for the work performed. Rogers was ordered to pay RF $800,000. 3. Royal Bank of Canada v. Gill (1988), 47 D.L.R. (4th) 466 (B.C.C.A.); 1988 CanLII 2970 (BC CA). In this case the father is claiming non est factum but the court holds against him. The father, although clearly relying on his son, was aware of the general nature of the documents he signed, and certainly he was careless in signing them. These two factors prevent him from succeeding in a non est factum defense. There was no misrepresentation here on the part of the bank, and it cannot be demonstrated that he thought he was signing something fundamentally different from a guarantee. This is in fact what he signed. When the son told the father he had to sign with him he ought to have understood that it was a guarantee. His failure to properly understand English did not take away from his general understanding of the transaction. Nor did it justify less prudence on his part. Solution Manual for Business Law in Canada Richard A. Yates, Teresa Bereznicki-Korol, Trevor Clarke 9780133847130, 9780132164412
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