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This Document Contains Chapters 5 to 6 Chapter 5 An Introduction to Contracts Instructor’s Manual–Answers by Shannon O’Byrne V. CHAPTER STUDY Questions for Review, page 107 1. What is a contract? Answer: An agreement between two parties that is enforceable in a court of law. 2. What are the elements of a contract, according to the common law? Answer: An agreement that is • complete • deliberate • voluntary • made between two or more competent persons • supported by mutual consideration 3. Must all contracts be in writing in order for them to be legally binding? Answer: No. Oral contracts are enforceable. However, in most Canadian jurisdictions, contracts involving land, for example, must be in writing. 4. What are the purposes of contract law? Answer: Contracts permit parties to rely on the terms they have negotiated and plan their business affairs accordingly. Contracts ensure that each party gets what it bargains for—namely, performance of the promises made to it or monetary compensation in its place. 5. Is the matter of whether a contract exists judged according to a subjective standard or an objective one? Explain. Answer: This matter is judged according to an objective standard test: would a reasonable person, observing the communication that has occurred between the negotiators conclude that an offer and acceptance had occurred? 6. Contract law assumes that parties have equal bargaining power. What is the effect of this assumption? Answer: The assumption rightly prevents a party from securing the court’s assistance and intervention simply because it has made a bad deal. The assumption forces people to take care of their own interests themselves. (Chapter 8 deals with the defences of unconscionability, duress, and undue influence.) 7. How does the presence of a written contract assist in dispute resolution? Answer: A written record helps establish the terms of the agreement to which the parties committed. It helps to remove possible sources of contention or disagreement, especially as memories fade. 8. What is the role of public relations in contracts? Answer: The reputation of a business should be considered along with its legal rights. A lawsuit in the wrong circumstances may result in a serious blow to reputation and a public relations disaster. 9. What is an economic breach? Answer: An economic breach occurs when one party breaches on the basis that it is more economic to do so than to perform the contract in question. 10. Why might a business elect not to perform on a contract, and what are some of the consequences that may arise from this decision? Answer: In some situations, the cost of compensation is more economic than actually fulfilling the obligations. One of the adverse results of non-performance in favour of paying damages is potentially building a reputation for being unreliable and undependable. Questions for Critical Thinking, page 107 1. What are the dangers of taking a highly legalistic, inflexible approach to contractual disputes? Answer: Such an approach can exacerbate a conflict instead of facilitating routes to its resolution. By way of contrast, a willingness to explore informal methods for resolving a contractual dispute can produce workable, quick, inexpensive, and relationship-preserving solutions. Even if the conflict reaches the point of litigation, the parties should try to reach a settlement since trials are costly, unpredictable, and risk-laden. While some disputes can only be resolved by taking a hard line with the other side—because they are being tremendously unreasonable, for example—these kinds of disputes are very much in the minority. 2. Are there any circumstances in which parties might rightly decide that an oral contract is appropriate? Discuss. Answer: Oral contracts are fraught with danger because of strategic or inadvertent recollections as to what was agreed, if anything. However, there may be circumstances where, for example, the contractual relationship is extremely simple and the amount of money at stake is low. It may be that in such cases, the time and expense of writing up a contract is simply not worth it. Hiring the teenager next door to mow your lawn while you are on vacation is an example. The purchase and sale of trinkets at a garage sale is another. Otherwise, it is simply poor practice not to record the agreement. 3. Why are the non-legal factors in a contractual relationship so important? Why is it important to place contract law in a business context? Answer: Chapter 5 is designed to answer this question. A contractual relationship is not just about the terms and conditions recited in the parties’ contract. Factors relating to reputation, relationships, and profitability may, in fact, be of even more important than the rules of contract law and what the contract in question may say. 4. Should negotiators follow a course of strict and absolute honesty in contractual negotiations? Why or why not? Answer: This question ties into the Ethical Perspectives Box: Is it Ethical to Bluff during Business Negotiations? See infra for discussion of that box. Following a course of strict and absolute honesty will minimize the risk of committing an actionable wrong or compromising one’s reputation. However, taken to an extreme, there comes a point at which the person is bargaining against herself, which obviously is contrary to her business’ best interests. 5. How important is it to be aware of the law when negotiating a contract? Does it depend on whom you negotiate with? Does it depend on the size and complexity of the contract in question? Answer: It is very important to be aware of the law when negotiating a contract. You must not misrepresent during negotiations as this would be actionable. In addition, certain parties may not be able to enter into contracts. The size and complexity of the contract in question are irrelevant since the legal principles apply to all contracts, big or small. 6. How could relying on the notion of economic breach prove disastrous to a business? Answer: The key assumption behind economic breach is that the party intending to breach is in a position to estimate with reasonable accuracy what losses the other side would experience. Such estimates are inherently risky exercises. If the party intending to breach underestimates loss on the other side, then the gain anticipated by contracting with the third party is wiped out and more. The breaching party is responsible to the plaintiff for all the reasonably foreseeable consequences flowing from breach. Situations for Discussion, page 111 1. June is a hair stylist who wants to open her own business. Though June has absolutely no experience in the business world, she is determined to succeed. June begins negotiations with a landlord to lease appropriate space for her new salon. The landlord insists that he will only enter into a lease with June if June’s parents also agree to co-sign the lease, making them responsible should June default on her rent obligations. June and her parents agree, thinking that such a provision must be a standard requirement of leases. June has since learned that the newest tenant in the building has secured a lease with the landlord but did not have to produce a co-signer. June is certain that the landlord has taken advantage of her naiveté. What are the pros and cons of June’s inexperience being a legal basis for getting the contract set aside? Answer: In law, it is virtually certain that June does not have the grounds to have the lease set aside since, on the facts, there appears to be no fraud, misrepresentation, duress, unconscionably, or undue influence. These legal doctrines are not the focus of the problem since the grounds for setting a contract aside is dealt with in subsequent chapters. This question, rather, approaches the matter from a more general, policy-based perspective. The pros of permitting June’s inexperience being a legal basis for getting the contract set aside is that it saves her from a contract she no longer wants to be bound by. It also frees her parents. It also means that the relatively more sophisticated landlord cannot take advantage of the relative legal ignorance and false assumptions made by June and her parents. The cons of permitting June and her parents to walk away from this contract are considerably larger. It means that many contracts that appear regular on their face can be impeached based on relatively weak and often unknowable grounds such as the legal naiveté of the other side. It would also mean that individuals do not have to take responsibility for their own lack of legal knowledge. Instead of pursuing the always open, albeit possibly expensive, route of hiring legal counsel, individuals like June are, essentially, able to have it both ways. As discussed in the chapter, the law assumes equality of bargaining power even though it would be rare for the parties to be equally matched. For the most part, contract law requires people to take care of themselves. 2. Frank did some home renovations for a homeowner who has refused to pay Frank’s final account, based on some alleged deficiencies in the quality of Frank’s work. Frank is thinking of suing in order to recover what he is owed. What factors should he take into account before making his final decision on whether to sue or not? Answer: If Frank sues, he will incur expenses on a number of fronts including filing fees and time spent preparing for and attending court. If Frank decides to hire a lawyer, his expenses will go up even further. With or without legal advice, Frank faces the risk that he will lose his action; he almost certainly will destroy any relationship that remains with the customer; and time he otherwise could be spending on his business is diverted. He also risks negative online postings about the quality of his work. As a general proposition, Frank should consider negotiating with the client first, trying to get to the bottom of the alleged deficiencies in the quality of his work. Perhaps there is some truth to the customer’s concerns in which case a compromise on the bill is not only prudent, it is also fair. And even if the client’s concerns are overblown, it still might be more efficient and effective to forgive a portion of his account in order to bring the matter to a close. However, if the client’s complaints would require him to discount his bill to a large extent and unfounded, he may decide to sue. Frank cannot survive in business long if he makes a practice of deeply discounting his bills for work that has been competently done. 3. Melissa, an accounting student, interviews for a job with two firms. She really wants to work for Firm X but gets an offer of employment from Firm Y first and accepts it. A week later she receives offer from Firm X, which she also accepts. She does so because she believes she is economically better off with firm X and will be able to “cancel” her acceptance with Firm Y. a. What is Melissa’s legal situation now? Answer: Melissa appears to be in two contracts. b. Even assuming that she is better off economically by joining firm X, what other costs does she face? Answer: She must be prepared to face the costs of a lawsuit for breach of contract by Firm Y (though a lawsuit is practically unlikely). The other cost is to her reputation for standing by contractual commitments. Yet another cost is on business relations. Melissa probably will not be able to get a job with Firm Y in the future, nor will she necessarily feel comfortable dealing with people from Firm Y. The accounting community can be very small, particularly in small towns and cities. c. Do you think that Firm Y will sue Melissa for breach of contract because she has accepted an employment offer elsewhere? Answer: Melissa is unlikely to be sued since Firm Y is presumably not out of pocket and will be able to replace her. As well, it may not be in Firm Y’s best interest to sue Melissa as there could be could be bad publicity associated with such a suit (i.e., big accounting firm versus little student.) d. What could Melissa have done to prevent this situation from occurring in the first place? Answer: Melissa should have deferred acceptance of the first offer until she heard from her preferred firm. She could even have called Firm X to find out if they had made a decision before deciding whether to accept Firm Y’s offer or not. If the Firm Y was unwilling to leave its offer open pending word from Firm X, Melissa should have made her decision to either go with a sure thing (and take Firm Y’s offer) or let the offer pass and hope that Firm X comes through. What she should not do is accept two offers as this places her in two contracts. e. What should Melissa do now? Answer: Melissa is in two contracts and will have to breach one of them (she can’t work for two accounting firms at once). She may decide to go to Firm Y, explain the situation, and ask for that firm’s understanding of her desire to work for Firm X. Whether she will get that understanding or not is an open question. 4. Samantha Jones entered into a contract with Jason Black to act as a contractor for a new house she is having built. She was anxious to have the house built as soon as possible and, upon receiving Jason’s estimate that the work, including labour and materials, will cost $250 000, she immediately paid a $50 000 deposit. However, since receiving Samantha’s deposit, Jason has been contacted by a developer who is willing to pay him a significant amount more to work on a new housing development, provided that he begins immediately. Jason does some calculations based on the current market. He decides that the amount the developer is offering is enough that he can afford to return the deposit, compensate Samantha for breaching the original contract, and still come out ahead on the development contract. He lets Samantha know that she will have to find a new contractor and begins work on the housing development. When he calls Samantha a few months later to offer her compensation, she informs him that she has finally been able to hire a new contractor, but that the estimate for the work has now doubled. In the intervening months, the costs of labour and materials have skyrocketed. The house that originally would have cost $250 000 will now cost her $500 000. Do you think that Jason should be responsible for the additional costs of building Samantha’s house, even though they very much exceed his original estimates? Answer: Under contract law, Jason is liable for any damages that flow naturally from the breach of the contract. The issue in law is whether or not the damages are the amounts originally estimated or the actual amounts incurred by Samantha when she eventually found another contractor. Jason could argue that he is only liable for the original amounts. Samantha, of course, would take the opposite opinion and argue that the damages are the costs to build the house, which is what the original contract contemplated. As a general rule, most courts would find Jason liable for the full $500 000. When a party breaches a contract, the injured party must mitigate the damages. However, in this case, Samantha eventually found another contractor and Jason must pay for the extra amounts. Jason could have tried to protect himself by settling with Samantha sooner and getting a written release from her. 5. Leopold applied to his provincial government for a student loan and was advanced $13 500. The loan agreement obligated the government to advance further funds midway through the school year. Leopold stopped attending classes in September for medical reasons but did not advise his university’s Student Services Office of this, contrary to a term in his loan agreement. He also used the funds for living expenses instead of for tuition, contrary to the loan agreement. The university determined that Leopold was not eligible for the second installment of his loan, and the government therefore refused to advance it. Leopold sued the government for breach of contract and sought damages in the amount of $1.5 million. Do you think Leopold’s action should be successful? Why or why not? [footnote deleted] Answer: This is a very simple case intended to show students how common sense can take you a long way in contractual analysis. The reciprocal nature of contracts means that where one party fails to perform its part of the bargain in a fundamental way, the other party does not have to perform either. In the real case, the B.C. Supreme Court dismissed the plaintiff’s action because he was in breach of several terms of the loan agreement, including using the loan for living expenses and not advising Student Services that he was taking a leave of absence. These breaches meant that the government was under no obligation to advance the balance of the loan and was therefore not in breach of contract for refusing to do so. The B.C. Court of Appeal dismissed Wang’s appeal (Wang v HMTQ (British Columbia) 2006 BCCA 566. 6. In 2007, a 22-year-old Grande Prairie man was shocked to receive an $85 000 cellphone bill from Bell Canada. The reason for the high cost was that the customer had been using his cellphone as a modem for almost two months. In one month alone, he downloaded what amounted to 10 high-resolution movies, according to Bell. The customer contended that he did not realize what the cost would be to use the modem system and that Bell should have alerted him as his cellphone bill began to climb precipitously. Bell acknowledged that accessing the modem services is costly but also emphasized that to do so, customers are required to register online and must agree to contractual terms that show the higher fees. It also admitted that its newly implemented data-usage monitoring system failed to pick up the customer’s high usage. In the meantime, Bell has offered to reduce the bill to approximately $4000, but the customer is refusing to pay even that sum. Who is right in this dispute and why? What additional information do you require to answer this question? [footnote deleted] Answer: To fully answer this question, it would be essential to review the contract(s) in depth, but assuming the germane content is as reported in the press, one view is that the customer may have an uphill battle. Since he evidently agreed online to the higher fees (albeit without paying any attention to what he was agreeing to), he would appear to be contractually obliged to pay the bill (now reduced to $4000). Conversely, perhaps Bell should have done more to make the surprisingly costly nature of the modem service known to its customers. If a court agreed that Bell should have done more, the customer might be able to argue that he is not bound by the term that charges a higher fee and should have to pay only a reasonable sum for the services rendered, as an implied term. This problem can be revisited later in the course, once unjust enrichment and exculpatory clauses have been taught. For now, a general discussion is the only one possible, given that students as yet know very little about contract law. Chapter 6 Forming Contractual Relationships Instructor’s Manual–Answers by Shannon O’Byrne V. Chapter Study Questions for Review, page 137 1. What must an offer contain? Answer: Answer: An offer must contain a promise to perform specified acts on certain terms. 2. Is an advertisement an offer or an invitation to treat? Why? Answer: As a general proposition, advertisements are classified as invitations to treat because they lack specificity. For practical reasons, however, the law also leans toward this classification. If an advertisement were an offer, the store would be potentially liable for breach of contract if the store ran out of an advertised item. 3. Are oral contracts enforceable? Answer: Oral contracts are enforceable but very hard to prove. 4. What is a standard form contract? Answer: A standard form contract is a “take it or leave it” contract. There is no bargaining. Instead, the customer agrees to a standard set of terms that favours the other side. 5. Explain why it might be a good idea to get a contract in writing. Answer: Having a contract in writing is a good risk management strategy that can help to prevent disputes between parties and help to prove one’s case if a dispute were to go to trial. 6. Does the acceptance of an offer have to mirror it exactly, or are slight variations permissible? Answer: To be effective, the acceptance must manifest an unqualified willingness to enter into the contract on the precise terms proposed. If the purported acceptance does not mirror the offer by agreeing to all its content, it is a counteroffer and no contract has been formed. 7. What is the “postal rule”? Answer: The “postal rule” is a rule that changes the more typical laws that apply to offer and acceptance when entering a contract. It states that acceptance of an offer is effective when and where the acceptance is placed in the mail. 8. How is the postal rule different from the “ordinary rule” for acceptance? Answer: The postal rule is an exception to the necessity of acceptance being communicated for it to be effective. The postal rule does not require acceptance be communicated. 9. When must an offeree communicate acceptance to the offeror in a specific form? Answer: If the offer stipulates a mandatory method of communication an acceptance, then the offeree must follow that method to ensure legal acceptance. 10. Why is a counteroffer a form of rejecting an offer? Answer: Though a counteroffer shows an interest in continuing negotiations, it still amounts to a rejection of the first offer. It is a rejection coupled with an attempt to interest the other side in a new offer. 11. When can an offeror revoke or withdraw an offer? Answer: The offeror can revoke the offer any time before acceptance simply by notifying the offeree of its withdrawal. 12. What is consideration? Answer: Consideration is the price paid for a promise. 13. What is an option agreement? How is the concept of consideration related to the enforceability of such an agreement? Answer: An option agreement is an agreement where, in exchange of payment, an offeror is obligated to keep an offer open for a specified time. If the offeror gets consideration for keeping the offer open, then the option agreement is an enforceable contract. The consideration provided by the offeree to the offeror (to keep the offer open) is usually money though any form of valid consideration will do. 14. What is a pre-existing legal duty? Answer: A pre-existing legal duty is a legal obligation that a person already owes. 15. Is a promise to pay more for performance of a pre-existing legal duty generally enforceable? Answer: The answer depends on jurisdiction. In Ontario and jurisdictions choosing to follow Ontario, the leading decision is Gilbert Steel. This case clearly states that such a promise is not enforceable. In New Brunswick and jurisdictions choosing to follow New Brunswick, such a promise is enforceable provided it was not secured via economic duress. 16. What is a gratuitous promise? Give an example. Answer: A gratuitous promise is a promise for which no consideration is given. A promise to give your best friend your car or a promise to hire someone when that person graduates from university is unenforceable because it has not been “purchased” by the other side. 17. Are the rules governing the formation of electronic contracts different from those for written or oral contracts? Answer: There is no difference between an electronic contract and a written or an oral contract. They all require offer, acceptance, and communication of acceptance. 18. How does the relationship between the parties affect presumptions concerning their contractual intent? Answer: The law presumes that agreements between family members are non-contractual because of the personal nature of the underlying relationship. 19. What does Contract A refer to in a tendering context? Answer: This is the preliminary contract that governs the relationship between tenderer and owner. Contract A typically requires the tenderer and the owner to follow a specific set of rules governing the tender selection process, including a promise by the tenderer not to revoke its tender for a specified time. 20. What does Contract B refer to in a tendering context? Answer: Contract B refers to the larger contract to perform the work in question. Questions for Critical Thinking, page 138 1. The Ontario Court of Appeal in Gilbert Steel and the New Brunswick Court of Appeal in Greater Fredericton Airport Authority take opposite views on the enforceability of contractual variations unsupported by consideration. Which view do you prefer and why? Answer: The classic rule in Gilbert Steel (Ont. CA)—that contractual variations must be supported by consideration—provides a measure of certainty in the law and respects a traditional understanding of consideration. However, it is also a rule that likely surprises many business people and, moreover, can work an injustice in any given case. For the New Brunswick appellate court in Greater Fredericton Airport, the variation rule also lacks commercial reality. As quoted in the text, what follows is the Court of Appeal’s view on the matter, at para. 28: the reality is that existing contracts are frequently varied and modified by tacit agreement in order to respond to contingencies not anticipated or identified at the time the initial contract was negotiated. As a matter of commercial efficacy, it becomes necessary at times to adjust the parties’ respective contractual obligations and the law must then protect their legitimate expectations that the modifications or variations will be adhered to and regarded as enforceable. Absent economic duress, the variation is enforceable. The approach in Greater Fredericton Airport has a certain appeal because it prevents one of the parties from running out on an obligation that she had apparently freely chosen. Relying on the doctrine of consideration as an escape hatch is unpalatable in such circumstances. The other precedent, however, has history on its side. 2. Which approach to controlling spam do you think makes more business sense: an “opt-out” approach so that a business person can send an initial unsolicited email but that message must contain an opt-out or unsubscribe mechanism that the sender must respect; or Canada’s “opt-in” approach described in this chapter? Answer: The American approach to spam or the unsolicited commercial email (UCE) is an opt-out method under legislation called Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. A business governed by this legislation is entitled to send a UCE but must provide, inter alia, an opt-out mechanism so that the recipient can unsubscribe and presumably no longer receive emails from that particular business. In short, the business does not require prior consent to send the UCE. Instead, the recipient must “opt-out.” This approach, as Professor Michael Geist points out, downloads the cost of spam onto consumers which is arguably very unfair given how much spam is distributed globally on any given day. The Canadian approach is an opt-in method. A business who wants to send a UCE must have the consent (as defined by CASL) of the recipient before sending that email. An email asking for permission to send an unsolicited commercial email is itself an unsolicited commercial email and in violation of CASL. The opt-in approach places the cost of compliance onto the business and this according to Geist is more than fair. According to Geist: The new Canadian law … [gives] consumers greater control over the costs they bear from commercial email. By shifting to an opt-in approach, the costs associated with receiving and dealing with email better reflects consumer choice since consumers only incur the costs for those commercial emails for which they have expressly provided consent. It is worth noting that the allocation of costs is also reflected in many (though not all) of the exceptions in the law. For example, product recalls and safety warnings are exempt from the consent requirements, reflecting the benefit to consumers, who bear the costs of receipt. Similarly, business-to-business email is generally exempted as a cost of doing business. See Michael Geist, “In Defence of Canada’s Anti-Spam Law, Part Two: Why the Legislation Is Really a Consumer Protection and Privacy Law in Disguise” (10 July 2014), online: Michael Geist . Barry Sookman is opposed to the Canadian system in part because the costs on business to comply with CASL are very large. For example, he states: The hidden costs associated with CASL cannot be underestimated. Marketing and other e-mail lists have been decimated. See, Jeremy Miller, Canada’s Anti-Spam Law Decimates Email Lists: How to Rebuild; and Kerry George, Truths and Misconceptions About Email Marketing and CASL. Jim Murray in a blog post last week, Real Help For Your CASL Dilemma, summarized the plight of businesses, particularly small businesses stating “They have, in essence, become victims of ‘paralysis by analysis’, and have no idea what constitutes a safe, compliant way forward. They are facing the grim reality that their databases which, for many of them, are the lifeblood of their businesses are being decimated and they are being forced into many hours of extra work to comply with the government’s outrageous demands vis a vis this legislation. See Barry Sookman, “Michael Geist’s defense of Canada’s indefensible anti-spam law CASL” (14 July 2014), online: Barry Sookman . Canada’s anti-spam legislation is in early days—its effectiveness compared to its cost on business is as yet unknown. It is the case that criticism of CASL has abated of late but what this means is another matter. As well, and according to the Government of Canada, the Spam Reporting Centre has received 4,948 submissions from those using the online form and 205,227 submissions using the email address spam@fightspam.gc.ca so the public would seem to be at least reasonably engaged. See Government of Canada, “Canada’s Anti-spam Legislation” (15 January 2015), online: Government of Canada . 3. Family members are presumed not to intend legal relations, while businesspeople are subject to the opposite presumption, namely, that an intention to create legal relations is present. Why should the relationship between the parties affect the enforceability of their promises? Answer: This question goes to the requirement that there be an intention to create legal relations before there can be a contract. The rationale for such a requirement is that an agreement between family members is like an agreement to meet and go for a walk in the park—there is no intention that any legal consequences should follow if one of the parties fails in the commitment. Therefore, the law provides that there is a presumption against there being an intention to create legal relations in such circumstances. The opposite presumption prevails, of course, when there is a commercial context at play. The requirement of intention, as with any other rule governing contract formation, can certainly be defended but also must be identified as somewhat arbitrary. Brian C.J. is quoted as stating, “It is common knowledge that the thought of man shall not be tried, for the Devil himself knoweth not the thought of man.” Furthermore, it has been argued that, in light of the consideration doctrine, the search for intention serves no purpose. See Tuck, “Intent to contract and mutuality of assent” (1943) 21 Can Bar Rev 123. More seriously, the presumption against an intention to contract in the context of family arrangements has been identified as a rule that discriminates against women. What follows is an excerpt from analysis by Christine Boyle, “Gender and judicial policy-making in the law of contracts”: What justifications have been offered for the intention doctrine? They could all well be applied to the commercial sphere—the floodgates argument; the social benefit in protecting relationships from litigation; and the need for flexibility. A critique could easily focus on the merits of these overstated and unprincipled arguments, but feminist concern goes beyond this. Contract law, in its contribution to the construction of the private sphere (i.e., of hearth and home), helps create the cultural idea that there is a haven beyond the market and beyond law where altruism, morality, and love rule. Contract law keeps away to avoid doing harm to that part of our lives. I do not think that there is necessarily anything intrinsically wrong with this, especially if love really did rule rather than self-interest. It is only when examined in context that it is disturbing. The sphere that contract helps create is not a place where egalitarian, trustworthy exchanges take place, but a place where women and children are in danger of being betrayed and exploited. The business world, on the other hand, has been shown to be relatively good at sorting out its own disputes without law. [This quotation, with footnotes deleted, is taken from an unpublished article by Christine Boyle, which the author has on file.] This feminist analysis has particular resonance given that Balfour appears to be the first time that a litigant lost a case because intent could not be proven. For a discussion of how Balfour created the requirement for intent, see Stephen Hedley, “Keeping contract in its place—Balfour v. Balfour and the Enforcement of Informal Agreements” (1985), 5 Oxf J of Leg Stud 391. 4. Was legislation necessary to make the determination that offer and acceptance can be expressed electronically? Why not simply leave such matters up to a judge? Answer: There is an excellent argument that the Canadian judiciary, all on its own, would have come to the conclusion that e-commerce legislation expressly states, including that offers and acceptances can be expressed electronically. It simply makes sense to permit contract law principles to expand in order to encompass new ways of creating contracts. However, the advantage of e-commerce legislation is to make this conclusion abundantly clear and thereby advance certainty in the marketplace. Instead of having to wait for the right case to come along so that a court could pronounce on such matters, the legislators took the lead and set the rules out in advance. As well, because e-commerce legislation across the country was strongly influenced by model legislation, the rules of e-commerce have a common foundation, thereby advancing predictability, certainty and fairness. 5. What risks do negotiators face if they lack knowledge of the rules of contract? Answer: The risk is that the negotiator will inadvertently end up in a contractual relationship that is not wanted. Contract law imposes “a moment of responsibility” on the parties, whether they fully understand that at the time or not. This means that when a negotiator makes what counts as an offer in law, the other side is entitled to accept. This is the case whether the negotiator realizes he or she has made an offer or not—the objective standard by which conduct is measured decides the matter. 6. Do you think that the doctrine of promissory estoppel serves a useful purpose? Would it not be easier if the law simply insisted that all contractual variations be supported by consideration? Answer: Promissory estoppel is a complicated doctrine but it also accords, in many cases, with reasonable commercial expectations. When parties to a contract negotiate a change that fits the definition of promissory estoppel, it is equitable for the party relying on the other side’s promise to have that promise enforced. The purpose of promissory estoppel is to prevent abuse by the other side in an extreme case while retaining consideration as the hallmark of when a contract or a contractual variation is enforceable. Though from a risk management perspective it is preferable to have a variation supported by consideration, the doctrine of promissory estoppel comes to the rescue in the more compelling situations. Note that promissory estoppel would not have assisted the plaintiff in Greater Fredericton Airport. As the appellate court observes at para. 22: Another rule that prevents the enforcement of a variation to an executory contract was articulated in Combe v. Combe, [1951] 1 All E.R. 767 (C.A.), [1951] 2 K.B. 215, namely that a plea of detrimental reliance is not a valid basis for enforcing an otherwise gratuitous promise. The plaintiff who argues detrimental reliance is in fact pleading that the defendant should be estopped from asserting that the agreement is unenforceable because of a lack of fresh consideration for the promise. Regrettably, the fact that the plaintiff may have relied on the agreement to his or her detriment is of no consequence as promissory estoppel may be invoked only as a sword and not as a shield. Thus, Nav Canada’s estoppel-based argument—that it relied to its own detriment on the Airport Authority’s gratuitous promise—must be rejected also. Situations for Discussion, page 138 1. Daniel owned some out-of-town real estate that Paul had been eyeing for some time. On June 1, Daniel’s real estate agent passed along an offer to Paul, whereby Daniel offered to sell Paul that land for $590 000. The offer was expressly to be “open” until June 8 and acceptance had to be in writing. Paul was delighted and even more pleased to learn from the realtor that there was plenty of time to consider the offer and that no one else was “dealing on the property.” On June 3, the real estate agent gave Paul some bad news: Daniel had unexpectedly sold the property to someone else. Paul replied, “Well I accepted last night by initialing Daniel’s offer so Daniel is clearly already in a contract with me. And I’ll hold him to it.” After hanging up, Paul wrote out a formal acceptance and delivered it, along with the initialed offer, to Daniel. Is Paul in a contract with Daniel? [footnote deleted] Answer: The offeree must comply with what the offeror asks for by way of acceptance. Here, acceptance had to be in writing. Does initialing an offer amount to acceptance in writing? Though formal acceptance with inclusion of a signature would have been a safer course, initials can be regarded as sufficient if they show an unequivocal manifestation of assent. But even this does not overcome the larger problem that acceptance was not communicated in time. Though the terms of the offer did not expressly require communication, nor was the requirement of communication express waived. A court would almost certainly regard communication as the default rule that would have to be expressly waived before one could argue that it was off the table. At time of oral communication of the acceptance to the offeror, Paul already knew that the offer had been revoked—he had been told by a reliable source (Daniel’s real estate agent) that the property had been sold to someone else. Likewise, writing out a formal acceptance and delivering it the next day comes too late. It comes after notice of revocation. It is true that Daniel broke his promise by not holding the offer open until June 8. However, under traditional common law articulated in Dickinson v Dodds discussed in this chapter, the promise is gratuitous since there is no consideration provided by the other side. It can therefore be withdrawn before the deadline with no legal consequences. According to Hughes v Gyratron Development Ltd [1988] BCJ No 1598, upon which aspects of this problem are based, Dickinson v Dodds still states the law. 2. An advertisement similar to the following appeared in a popular Canadian business magazine. What legal obligations does it create for Star? Answer: The Star ad (shown below) is a clearly an invitation to treat. At most, it contains a promise to “try hard,” but this would be a difficult promise to sue on. There is also a serious question as to whether such an ad intends to create legal relations. In these regards, the ad can be usefully be contrasted to the ad in Carlill v Carbolic Smoke Ball, set out as Figure 6.2 on page 123 of the text and reproduced below for ease of reference. Figure 6.2 Carbolic Smoke Ball Advertisement Unlike the Star ad, which makes general claims that have no particular content, the Carlill ad leaves nothing to be negotiated—the terms and conditions are clear. As noted by the court in Carlill v Carbolic Smoke Ball Co, [1893] 1 QB 256 (Eng CA): [The ad] is written in colloquial and popular language, and I think that it is equivalent to this: “100£ will be paid to any persons who shall contract the increasing epidemic after having used the carbolic smoke ball three times daily for two weeks.” And it seems to me that the way in which the public would read it would be this, that if anybody, after the advertisement was published, used three times daily for two weeks the carbolic smoke ball, and then caught cold, he would be entitled to the reward. [As for how long the ball was warranted to provide protection] I think, more probably, it means that the smoke ball will be a protection while it is in use. 3. Jack and his sister Lisa inherited their parent’s cottage. Jack suggested to Lisa that he would be willing to buy her out for $50 000. Lisa thought about it for a minute and then quickly agreed. “A deal is a deal,” said Lisa and shook hands with her brother. “There is no need for us to go to a lawyer and get a big fancy contract written up.” If Lisa ever has to prove this contract in a court of law, what are the problems she faces? Answer: Lisa faces several problems. First, it is not clear that Jack has made an offer because he merely expressed a willingness to buy, as opposed to actually offering to buy. However, since the two shook hands with the purchase price of $50 000 having been identified, perhaps an offer and acceptance exist on that basis. Beyond this issue, it could be argued that the contract fails for uncertainty as not all of the critical components of the contract have agreed to, including a closing date. More fatally, as this is a contract for an interest in land, it must be reduced to writing (though in Manitoba there is apparently more give on this matter perhaps). Third, Lisa must prove an intention to create legal relations since she is dealing with a family member and the presumption is therefore of no contract. Fourth, she must prove the terms of the contract and since it has not been reduced to writing, this will be a more difficult matter than it otherwise would be. 4. On October 30, Casgrain offered to purchase some farmland from Butler for $14 500 with possession in January. On November 15, Butler made a counteroffer, by telegram, at $15 000. The telegram was delivered to Casgrain’s home on November 20 but Casgrain was absent on a hunting trip. Casgrain’s wife opened the letter and wrote back to Butler saying that her husband was away for 10 days and asked that he hold the deal open until Casgrain could consider the matter. Butler did not respond. On December 10, Casgrain returned home and immediately wired Butler, purporting to accept Butler’s offer of $15 000. The wire was received on December 12. By this time, Butler had already sold the land to someone else. Has Casgrain accepted the offer in time or has it lapsed? [footnote deleted] Answer: This problem is based on a simplified version Barrick v Clark, [1951] SCR 177 and focuses on the issue of lapse. More specifically, was Butler’s counteroffer still capable of acceptance on December 12 or had the offer lapsed? According to the Supreme Court of Canada in Barrick, since no time of expiration was specified, the offer lapses after a reasonable time. According to Justice Estey, what constitutes a reasonable time depends on the “nature and character and the normal or usual course of business in negotiations leading to a sale, as well as the circumstances of the offer including the conduct of the parties in the courts of negotiation.” Here, the subject matter is a non-perishable, namely, farmland. This would lengthen what a reasonable period would be. Farming could not occur until spring so this would also presumably lengthen the period. If there were a demand for the land, this would shorten the period since the vendor would want to sell in a hot market, rather than a tepid one. Any language in the offer requiring a quick reply (though not on these facts) would shorten the period as well. Though Casgrain’s wife asked that the offer be held open longer, this could not function to lengthen the period since Butler did not reply and could not be unilaterally bound by her conduct in any event. An important point to make about such scenarios is that one simply cannot predict, in advance, when an offer will lapse. Courts will look to factors that tend to shorten the period of time and to factors that lengthen it. A judge will then make a decision based on an assessment of these factors. To avoid unwelcome judicial surprises, offerors should seek to avoid litigation on such a matter by ensuring that all offers specify an expiration date. Likewise, the quicker the offeree responds to an open offer, the less likely he will face a successful argument that the offer in question has lapsed. 5. Mr. and Mrs. Smith were regular participants in a lottery pool with their friends. Each Friday, the group would meet at the local pub and contribute to a pool of cash that would then be used to purchase lottery tickets. The group agreed that if a winning ticket were purchased, the amount would be shared among the participants. There was also discussion that if someone in the group did not come to the pub on the day in question, another person present would contribute on the missing person’s behalf and get paid back later. On one Friday, the Smiths did not attend the pub and therefore did not contribute to the pool of lottery cash but they trusted that their friends would contribute on their behalf. This did not happen. One of the tickets purchased turned out to be a winner and Mr. and Mrs. Smith say they are entitled to a share. The others in the group say that only those who actually paid into the pool for that winning ticket are entitled to a share of the prize. Which view do you think is correct and why? [footnote deleted] Answer: This Situation for Discussion is based on Clancy v Clough, 2011 ABQB 439. The Alberta Court of Queen’s Bench found against the plaintiff in this case. The plaintiff was unable to show, on a balance of probabilities, that the parties had formed a contract whereby an absent member’s contribution to the lottery pool would be contributed by another, who would then secure reimbursement from the absent member. The judge aptly summarized the important aspects of the matter in a separate decision she rendered going to costs at 2011 ABQB 778, as follows: [3] ...The issue at trial was whether the Plaintiffs were entitled to two shares of the lottery winnings. The thrust of the Plaintiffs argument was an agreement the Plaintiffs allege existed between them and other members within the lottery pool. Pursuant to that purported agreement, every person in the pool undertook to ensure that no other member was left out of a lottery draw on account of not being personally present to make their monetary contribution. That is, if one or more persons were not present on the day money was being collected, then, according to the Plaintiffs, the agreement stipulated that those who were present would contribute on behalf of the absentees and later recoup that contribution. The Plaintiffs also advanced several other arguments premised on breach of trust, unjust enrichment, and negligence—though breach of the alleged contract was the primary basis of the claim. [4] The matter was decided in favour of the Defendants. While I found the Plaintiffs had a genuine and subjective belief that such an agreement did exist, I concluded that other members of the group were not operating under the same belief as to the purported obligations. The evidence was that other participants, and in particular the members of a ‘core group’, did not ensure that every person was included in the lottery pool every week: Clancy v. Gough, 2011 ABQB 439 (CanLII), 2011 ABQB 439 at para. 55. This Situation for Discussion starkly underlies the fact that the plaintiff must prove its case, including that there is an agreement between the parties. As the plaintiffs could not show that there was a contract among the parties in the terms expressed—or at all—the plaintiffs’ action failed. On a related front, this case also shows importance of getting agreements in writing. 6. ABC Ltd. is owed $10 000 from Mr. Smith for home repair. Mr. Abbott, a senior officer with ABC Ltd., went to Smith’s home to secure payment and spoke with Smith. Abbott explained that without payment, ABC faced bankruptcy. In response, Smith began complaining about the poor quality of the work done (even though he knew the work was perfectly fine) and that he would only pay $4 000. “Take it or leave it, buster,” he said. Abbott took his cheque and cashed it, feeling that he had no choice in the matter. He would now like to go after Smith for the balance. Can he do so? [footnote deleted] Answer: This problem is based on D & C Builders v Rees, [1965] 3 All ER 837 (CA). ABC’s promise to accept a lesser amount is gratuitous and at common law, it could sue for the balance. It is also possible that ABC could rely on the defence of duress to set aside the second agreement, but it would depend on how strictly the court viewed the test and how the facts struck the court. Duress is discussed in more depth in Chapter 8 so students are not in a position to do much with it at this point. Some Canadian jurisdictions have legislation making promises like that of ABC’s binding even though there is no consideration supporting them. Once a lesser sum has been freely agreed on and paid, the creditor cannot latter claim the full amount. At issue here is whether the lesser sum has been freely agreed to, given ABC’s precarious financial position. This is an open question given the brief facts. If the legislation does not cover the scenario or if the scenario occurs in a jurisdiction without such legislation, ABC may nonetheless be estopped from claiming the full amount. The doctrine of promissory estoppel may bind ABC but only if Smith can show all the ingredients: • Has ABC made a promise or an assurance to Smith that was intended to affect their legal relationship and to be acted on? Here, ABC has agreed to accept a lesser sum so as to affect the contract between them. At face value, it seems ABC intended Smith to act on it. • Has Smith acted on it or in some way changed his position? There is no evidence in the fact pattern that he has done so, though perhaps simply arranging his financial affairs on the basis of ABC’s promise to accept a lesser sum is sufficient. • Smith’s own conduct has been above reproach such that he is deserving of the court’s assistance. If a court were willing to extend Greater Fredericton’s test for duress to apply to a situation involving partial payment of a debt, it could be argued that economic duress existed in that context—it seems that ABC had no practical alternative and that it essentially did not consent to the variation. 7. April manufactures leather chairs and sofas, and she is happy because she has just negotiated a contract with Bob’s Fine Furnishings, Ltd., to supply them with her handmade furniture. The terms of the contract are that on the first Monday of every month, April is to send over 10 chairs and two sofas, and Bob’s Fine Furnishings will pay her $7 000. She is excited to learn that her furniture is so popular that Bob’s Fine Furnishings has a waiting list of customers who have pre-paid for their chairs, as her last shipment sold out in only a week. April is a little worried, however, as she has just received a phone call saying that her leather supplier will not be able to send her any leather for the next three months, because of a local shortage. Without the leather, she knows she cannot fill her order for Bob’s Fine Furnishings by the first Monday of next month, much less for the two months after that. What could April have done when negotiating the contract with Bob’s Fine Furnishings to help manage the risk of a situation like this? What should she do now that the contract is already in place? Answer: April could have inserted into her contract with Bob’s Fine Furnishings a clause allowing an extension of time if April’s suppliers are short or late on their delivery to April. In addition, she could have negotiated a clause that allows a discount for late delivery. From a business perspective April should have more than one supplier to avoid such situations. She also should have negotiated contracts with her suppliers that they would provide discounts if the supplies to April were delivered late. In this way, April could discount to a similar amount to Bob’s and possibly avoid financial losses. Now that the contract is already in place, April could try to renegotiate the terms in light of the new circumstances. She could offer a discount with Bob’s to try and keep the business relationship. 8. Jack was in a lease with Douglas for the rental of a farm, including a large barn. In order to secure a lower monthly lease payment, Jack agreed to be responsible for all necessary repairs to the barn, repairs which had to be completed within six months of Douglas giving notice of those repairs being required. Failure to complete those repairs within six months of that notice gave Douglas the right to evict Jack. In January, Douglas gave Jack notice that some of the hand-built trusses in the barn roof needed replacement. Jack started the repairs but then had the idea that perhaps he could purchase the farm outright from Douglas. To Douglas’s knowledge, he stopped doing repairs on the roof. “Why would I do repairs on Douglas’s timelines when I may just become the owner of the place?” Jack observed to a friend. Jack and Douglas discussed a possible sale of the property for five months at which point negotiations broke down irretrievably. Jack then resumed doing repairs but still had not completed them by the next month. At that point, Douglas served Jack with an eviction notice for failure to make repairs in the six-month notice period. Can Jack rely on the doctrine of promissory estoppel to prevent the running of time this way? Explain. [footnote deleted] Answer: This Situation for Discussion is based on the famous case of Hughes v Metropolitan Railway (1877) 2 App Cas 439 (HL). Arguably, the ingredients of promissory estoppel have been met such that Douglas cannot evict Jack for failure to make repairs in the six-month notice period. As the court states in Hughes: if parties who have entered into a definite and distinct terms involving certain legal results, certain penalties or legal forfeiture, afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have taken place between the parties. Here, the parties entered into negotiations for Jack to buy after Douglas had given his six months’ notice to repair. It can be argued that these negotiations led Jack to suppose that Douglas would not rely on his strict legal rights to evict after the six-month notice period had Elapsed. Rather, based on Hughes, Douglas had implicitly represented that time would stop running against Jack during negotiations. Upon negotiations breaking down, time would start running again. Douglas is therefore promissorily estopped from evicting Jack as the new time for doing repairs had not yet elapsed. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
