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This Document Contains Chapters 7 to 8 Chapter 7 The Terms of a Contract Instructor’s Manual–Answers by Shannon O’Byrne V. Chapter Study Questions for Review, page 162 1. What is the difference between an express and an implied term? Answer: An express term is a provision of a contract that states a promise explicitly. An implied term is a provision that is not expressly included but is necessary to give effect to the parties’ intention. 2. What are two major rules of construction used by the courts in interpreting a contract? Answer: The courts will either apply the plain-meaning rule or give effect to the party’s actual intentions. 3. Who decides the content of a contract and on what basis? Answer: If the parties cannot make this determination between themselves, a judge will decide for them. The court will rely on rules of construction to do so. Additionally, the court is free to imply terms, based on the four sources discussed in Question for Review 4. 4. What are four sources that the court can rely on to imply terms? Answer: First, the doctrine of business efficacy entitles a judge to imply terms necessary to make the contract workable. Second, a court can rely on trade custom to imply a term, though this is unusual since the custom must be notorious. Third, previous dealings between the parties can be the source of implied terms. Finally, contractual terms may be implied as a result of statute law. 5. Why are express terms preferable to implied terms? Answer: Express terms have more certainty. Though courts will imply terms based on a number of grounds (mentioned in question 3 above), the court’s assistance cannot be relied on with any certainty. 6. How does the doctrine of business efficacy affect the interpretation of implied terms? Answer: Through the doctrine of business efficacy, a judge is permitted to imply terms necessary to make the contract workable. 7. How do the courts deal with ambiguities in the contract? Answer: If the existence of the contract is not in doubt, the court will assign as reasonable a meaning as possible to vague or ambiguous terms. As well, if the contract has been drafted by one of the parties, any ambiguity in language will be constructed against that party in favour of the other. 8. What is the expression used to describe an implied legal promise to pay a reasonable price for goods or services? Answer: The term is contractual quantum meruit. 9. What are three ways that a party can control its exposure to liability for breach of contract? Answer: First, a party could insist on a conditional agreement should its ability to perform be contingent on financing or other approvals. Second, it could also seek a limitation of liability clause whereby its liability for breach is limited to something less than would otherwise be recoverable. Third, it could insist on an exemption clause that is a term that identifies events causing loss for which there is no liability. Finally, a party can insist on a liquidated damages clause—a term that specifies how much one party must pay the other in the event of breach. 10. What is a limitation of liability clause? Answer: It is a term of a contract that limits liability for breach to something less than would otherwise be recoverable. 11. How is a limitation of liability clause different from an exemption clause? Answer: A limitation of liability clause only limits the liability to something less than would otherwise be recoverable in the event of a breach of contract. An exemption clause identifies events causing loss for which there is no liability at all. 12. Why are conditional agreements important? Answer: Conditional agreements are essential when one party wants to incur contractual obligations but only under certain circumstances. For example, a business enterprise may be interested in buying a warehouse but only if it is able to secure financing from the bank. If the offer is made contingent on financing and the offer is accepted, then the offeror is only obligated to complete if and when financing is approved. Also important is that, in the interim, the agreement is binding in that the vendor is contractually obligated to wait and see if the condition is fulfilled by the stipulated deadline. 13. What is the parol evidence rule? Answer: The parol evidence rule applies to written contracts and limits the kind of evidence a party is able to introduce. The rule states that if the language of the written contract is clear and the document is intended to be the sole source of contractual content, then no evidence outside the contract can be used to change or add to the contract. 14. What is a separate or collateral agreement? Answer: A collateral or separate agreement is one collateral to or separate from the main agreement. It is one of the exceptions to the parol evidence rule. If there is a separate or collateral agreement to the main agreement, it will be enforceable even if it is an oral agreement. 15. What is an entire contract clause? Answer: An entire contract clause is term in a contract in which the parties agree that their contract is complete as written. 16. What assumptions do the courts make about how contract terms relate to changing circumstances? Answer: Numerous circumstances may arise that prevent a party from performing its contractual obligations or that make performance much more expensive than anticipated. The rule, however, is that the terms of a contract are settled at the time of acceptance. 17. What is the difference between a click-wrap agreement and a browse-wrap agreement? Answer: A click-wrap agreement is an agreement that appears on a user’s computer screen when a user attempts to download software or purchase goods or services online. The user is instructed to view a set of terms and click “I Accept” before proceeding. A browse-wrap agreement, however, is formed simply by the user accessing a specific website, which actually binds the user to the terms and conditions associated with the website. 18. What is a liquidated damages clause? Answer: A liquidated damages clause is a term of a contract that specifies how much one party must pay the other in the event of breach. The parties decide beforehand how much that breach will be worth by compensation. Questions for Critical Thinking, page 162 1. Entering a contract can create a great deal of risk for the parties. What are examples of these risks, and how can they be managed? Answer: Several risks are created when entering into a contract. If the parties are not careful in the drafting of the contract, they could include terms that are vague or use ambiguous language and therefore become unenforceable. The parties may disagree on the meaning of the terms. In addition, there may be some implied terms in the contract. The parties could insert an entire contract clause in an effort to avoid this. The circumstances between the parties may change after the contract is signed. A frustrations clause can avoid some of the problems associated with such changes. Condition precedents protect a party from having to perform the obligations until a certain event takes place. A condition subsequent allow a party to terminate a contract if certain events take place. Limitation of liability clauses and exemption clauses also protect parties from being bound to something that is unintended and help limit liability, including statutory liability. 2. Discuss how the law seeks to analogize electronic contracts to hard-copy, paper contracts. Are these efforts successful? Answer: In an electronic age where e-contracts can be proven to be a reliable record of the agreement at issue, it makes little commercial sense to insist on a rule that e-contracts are not enforceable. Modern commerce would ground to a halt. Instead, the goal is to accommodate e-contracts by finding equivalency rules or analogous ways of looking at e-contracts that reflect the goals of rules that emerged in a paper contract era. For example, Alysia Davies notes in a federal government background paper entitled “The Development of Laws on Electronic Documents and E-Commerce Transactions,” (20 December 2008), online: Parliament of Canada Library of Parliament Research Publications , that model e-commerce legislation offered by the United Nations Commission on International Trade Law …adopts a “functional equivalent approach” to dealing with electronic commerce. This approach is based on analyzing the purposes and functions of paper-based requirements and determining how those purposes and functions can be fulfilled through electronic-commerce techniques. For instance, paper documents serve some of the following functions: • They provide a legible document. • They ensure that a document remains unaltered. • They allow for the reproduction of documents so that parties can have a copy of the same data. • They allow for the authentication of data by means of a signature. • They provide that a document will be in a form acceptable to public authorities and courts. The Guide to the Model Law on Electronic Commerce notes that for “all of the above-mentioned functions of paper, electronic records can provide the same level of security as paper and, in most cases, a much higher degree of reliability and speed, especially with respect to the identification of the source and content of the data, provided that a number of technical and legal requirements are met.” [footnotes omitted] For example, this chapter discusses the problem of evidencing contracts in e-form. One problem the law faces—whether the contract is paper or electronic—is that of authenticity and whether the document has been altered in some way. It seems reasonable then, that if the electronic records system from when the electronic contract is produced is proven to be reliable—then the e-contract satisfies the best evidence rule. 3. The Supreme Court of Canada in Bhasin stated that there is a new duty of honesty in contractual performance. What is this duty and how might it interfere with freedom of contract? Answer: While the duty of honesty arguably interferes with freedom of contract, it is also difficult to imagine parties agreeing to a contract that permitted one or both of them to be dishonest. In short, an obligation not to knowingly mislead would almost certainly reflect the parties’ expectations to begin with. But in any event, the Supreme Court of Canada in Bhasin acknowledged that parties might be free to modify the duty of honesty by contractual term—i.e., reduce the scope of the duty—provided this modification did not eliminate the duty’s “core requirements.” The court offered no tangible illustrations of how this modification process might work and no case law subsequent to Bhasin has shed light on the possibility thus far. 4. Why does contract law refuse to enforce a penalty clause? Why are penalty clauses inherently objectionable? Answer: Contract law focuses on compensating the innocent party, not punishing the party in breach. A penalty clause is therefore inherently objectionable because it is at odds with an important goal of contracts, namely, compensation. Courts do not want to permit parties to hold a clause in terrorum over the other side. 5. Do you agree that contracts should be interpreted based on an objective assessment of the parties’ intentions? What would be the advantages and disadvantages of interpreting contracts based on evidence of what the parties subjectively intended? Answer: Although not a perfect method, it is safer to interpret contracts according to an objective assessment rather than using a subjective assessment. Trying to follow the parties’ subjective intention would create great uncertainty. Floodgates would be opened and parties would try to introduce evidence to show what they intended not what they actually agreed to. Such an approach could lead to abuse by those who would want to reinterpret contracts in a manner favourable to their present situation. This is the reason for the parol evidence rule and the plain-meaning rule. 6. Do you think the law is unreasonable to require business owners to point out to consumers any unexpected clauses in a standard form contract if it appears that the consumer has not assented? Should customers simply be required to take care of themselves and read the contract before signing it? Answer: Although the default rule is that you are bound by what you sign, it is important for the law to create exceptions or the rule would cause too much hardship. It is a simple matter for business to train its personnel to explain a contract to customers and perhaps to have customers initial the more onerous clauses as an indication that such clauses had been brought to their attention. Ask the class to consider this technique: the company could require customers to physically write out the exemption clauses and sign it. If the person has written out the clause, it is very difficult for that person to later claim that he or she was unaware of the clause in question. What, however, might be the public relations fall out from such an approach? Situations for Discussion, page 163 1. Former U.S. administrative law judge Roy Pearson famously sued a local dry cleaner over a lost pair of pants. Among other things, he sought $2 million for mental distress and discomfort, as well as $15 000 for a rental car he said he would need in order to drive to another dry cleaner outside his neighbourhood. Pearson claimed, for example, that the dry cleaner owners committed fraud by not living up to the sign in their window that stated “Satisfaction guaranteed.” According to Pearson, this guarantee was unconditional, he was by no means satisfied, and the defendants had thereby committed an unfair trade practice. How should a judge interpret the “satisfaction guaranteed” sign? [footnotes deleted] Answer: The meaning of term “satisfaction guaranteed” cannot be freighted with the subjective and, in this case, tremendously unreasonable interpretation by Pearson. As the court in the case stated in Pearson v Chung (Superior Court, District of Columbia) (June 25, 2007) at pages 19–20: The plaintiff’s claims regarding the “Satisfaction Guaranteed” sign are premised on his interpretation that the sign is an unconditional and unlimited warranty of satisfaction to the customer, as determined solely by the customer, without regard to the facts or to any notion of reasonableness. The plaintiff confirmed at trial that in his view, if a customer brings in an item of clothing to be dry cleaned, and the dry cleaner remembers the item, and the customer then claims that the item is not his when the dry cleaner presents it back to the customer after it has been cleaned, the cleaner must pay the customer whatever the customer claims the item is worth if there is a “Satisfaction Guaranteed” sign in the store, even if the dry cleaner knows the customer is mistaken or lying. Nothing in the law supports that position. To the contrary, a claim of an unfair trade practice properly is considered in terms of how the practice would be viewed and understood by a reasonable consumer. Alicke v. MCI Communications Corp., 111 F.3d 909 (D.C. Cir. 1997) (practice of rounding up telephone bills to the next full minute could not mislead a reasonable consumer and therefore could not be a material misrepresentation or omission). See also Rossman v. Fleet Bank Nat’l Assn, 280 F. 3d 384 (3rd Cir. 2002) (duration of advertised offer of credit card with “no annual fee” properly determined based on assumptions that would be made by a reasonable person; one year is a reasonable assumption). A reasonable consumer would not interpret “Satisfaction Guaranteed” to mean that a merchant is required to satisfy a customer’s unreasonable demands or to accede to demands that the merchant has reasonable grounds to dispute. 2. Louise purchased land from Reggie subject to the condition that subdivision approval be secured. Unfortunately, the contract between them does not specify who is to try to get the subdivision approval. Louise begged Reggie to seek the approval, noting that only the vendor has the information necessary to make the application successfully. Reggie, who had changed his mind about selling the property altogether, is triumphant: “Where does it say in the contract that I have to do anything about making an application for subdivision? Next time, try to be more clear. And in the meantime, our contract is off.” Is Reggie obligated to try to secure the subdivision approval? If so, on what basis? [footnote deleted] Answer: Though there is no express contractual provision to this effect, Reggie as vendor has the obligation to make the application since, as Louise correctly observes, he is the one with the information. As the SCC notes in Dynamic Transport Ltd v OK Detailing Ltd [1978] 2 SCR 1072 at 1084, a case upon which this situation is based: In a purchase and sale situation, the "person who proposes to carry out a subdivision of land" [under the relevant legislation] is the intending vendor. It is he who must divide his parcel of land, which has hitherto been one unit, for the purpose of sale. If a purchaser carried out the actual work in connection with the application, he could only do so in the vendor's name and as his agent. The vendor is under a duty to act in good faith and to take all reasonable steps to complete the sale. I cannot accept the proposition that failure to fix responsibility for obtaining planning approval renders a contract unenforceable. The common intention to transfer a parcel of land in the knowledge that a subdivision is required in order to effect such transfer must be taken to include agreement that the vendor will make a proper application for subdivision and use his best efforts to obtain such subdivision. This is the only way in which business efficacy can be given to their agreement. In the circumstances of this case, the only reasonable inference to be drawn is that an implied obligation rested on the vendor to apply for subdivision. Likewise, and as suggested above, the vendor in such circumstances is generally obligated to make good faith efforts to secure such approval even though no such obligation is expressly recited in the contract. According again to the Supreme Court of Canada in Dynamic Transport at 1083: This type of case is merely a specific instance of the general principle that "the court will readily imply a promise on the part of each party to do all that is necessary to secure performance of the contract": 9 Hals. (4th ed.), p. 234, para. 350: see also Chitty on Contracts, "General Principles," (23rd ed.) p. 316, para. 698, where it is said: "The court will also imply that each party is under an obligation to do all that is necessary on his part to secure performance of the contract. Based on Dynamic Transport and related case law, Reggie’s literalist, obstructionist interpretation of the contract is almost certainly doomed to failure. 3. Kristin signed a user agreement with Hagel’s Cable, Inc., upon installation of high-speed Internet service in her home. Included in the agreement was a provision that the agreement could be amended at any time, and that customers would be notified of changes on Hagel’s website, by email, or through regular mail. Hagel’s later added a clause to the agreement that any right to commence or participate in a class action suit was waived. The agreement, including the new clause, was posted on its customer support website, and a notice was posted on the main website that the agreement had been amended. Kristin has continued using the service since this time. However, she now wants to join a class action suit that is alleging a number of breaches of the agreement. Will the clause in the amended user’s agreement prevent her from bringing such an action? Did she receive adequate notice of the amended term? Does the fact that the user agreement relates to Internet services make a difference in whether the notice was adequate? How is this situation similar to the Rudder v. Microsoft Corp. case discussed in this chapter? [footnote deleted] Answer: This problem is based on Kanitz v Rogers Cable (2002) 58 OR (3d) 299 (SC). The amendment Kristin objects to is likely enforceable simply because Kristin signed an agreement that expressly permitted amendments to be made in this way that Hagel’s Cable deployed. It is not clear on the facts whether Kristin actually read the agreement but her signature prima facie binds her. Beyond this, there is ample evidence that the service provider took reasonable steps to bring the amendment to the attention of users like Kristin and which steps were contemplated by the main agreement. The amendment was posted on the customer support website and on the main website. It is hard to see how this was not adequate. It should make no difference that the agreement and its amendment relates to Internet services. Banks in Canada amend the terms of bank account agreements all the time, for example. The issue is whether the amendment was contemplated by the main agreement and been brought to the user’s attention in the way the main agreement recites. Beyond this, it is particularly a propos to use the Internet in the circumstances of the situation for discussion at hand. As the court in Kanitz notes: [32] I am also mindful, in reaching my conclusion on this point, of the fact that we are dealing in this case with a different mode of doing business than has heretofore been generally considered by the courts. We are here dealing with people who wish to avail themselves of an electronic environment and the electronic services that are available through it. It does not seem unreasonable for persons, who are seeking electronic access to all manner of goods, services and products along with information, communication, entertainment and other resources, to have the legal attributes of their relationship with the very entity that is providing such electronic access, defined and communicated to them through that electronic format. The situation is quite different than the situation in Rudder v. Microsoft Corp. That case was an example of the click-wrap agreement. By way of contrast, there is no click-wrap component to the situation for discussion here. Kristin signed a physical contract that permitted amendments to be made to the main agreement and posted online by way of notice. 4. Jason and Floë booked a two-week vacation in the Caribbean with The Nation’s Vacations Inc. (Nation), having reviewed Nation’s brochure regarding destinations there. The brochure also contained an exclusion of liability clause, which stated: Please review with care the terms and conditions below as they govern your purchase of travel services from Nation. Your booking with Nation constitutes acceptance of these Terms & Conditions. Answer: LIABILITY Liability for suppliers: Nation makes arrangements with third-party suppliers who provide travel services such as flights, accommodation, and car rentals. Nation endeavours to choose the most reputable suppliers but is not responsible for their acts and omissions. Disappointed customers must sue those third party suppliers directly for any loss or damages. Nation assumes no responsibility for any claim, loss, damage, cost or expense arising out of personal injury, accident or death, loss, damage, inconvenience, loss of enjoyment or upset caused by Nation’s third party suppliers. The brochure itself was designed to open to the page quoted above when flipping through the brochure from back to front. It was in easy-to-read font and with the emphasis indicated above. Though Jason and Floë had spent about 90 minutes reading over the brochure before booking their vacation package, they say that they did not know about the exclusion clause. Moreover, Jason, a construction firm manager, says that he does not know even what an exclusion clause is so reading it would have been pointless in any event. When Jason and Floë arrived at the Caribbean resort, they were immediately disappointed. Though the resort was a 4-star resort as advertised by Nation, Jason and Floë say that when they went to eat dinner in the resort buffet restaurant, they found the conditions to be unhygienic because, among other matters, several small tropical birds were walking around on the floor of the restaurant, having gained access through open doors. At a later point, a cat strolled into the restaurant and, they say, defecated in the corner though the resort disputes this. Jason and Floë also claim that the bathroom in their suite was unhygienic and the staff were uniformly unfriendly, even hostile. Jason and Floë hotly refused management’s offer of a free room upgrade and demanded to be flown home immediately. The resort made those arrangements. Jason and Floë left the next day. Jason and Floë have now sued Nation for breach of contract, seeking, among other matters, reimbursement for their flight to and from the resort, as well as ground transportation and accommodation costs. Nation says it delivered the requested travel services contracted for and in any event has successfully limited its liability through the exclusion clause. What do you think a judge will say? [footnote deleted] Answer: This situation for discussion is based on Eltaib v Touran Ltd Partnership, 2010 ONSC 834. The court offered this summary of the exclusion clause in question: [32] ...I note that the disclaimer page is written in the same font as found elsewhere in the book. The words “Terms and Conditions” are at the top of the page, in white letters measuring one inch high against a bold orange background. I do not consider that it is hidden at the back of the book. In fact, the brochure is designed so that it naturally opens to that page when opened from the back. [33] I am satisfied that the terms and conditions are set out in a way that they would come to a customer’s attention. Moreover, the plaintiffs are clearly intelligent people with backgrounds and experience that persuade me that, notwithstanding their evidence otherwise, they would be familiar with limitations of liability and disclaimers. [34] The language of the disclaimer pertains to the situation about which the plaintiffs complain, namely “loss of enjoyment, upset, disappointment, distress or frustration” arising from an act or omission of a third party—in other words, the resort operator. That is the very nature of the plaintiffs’ claim. The claim falls squarely within the disclaimer and liability is therefore excluded. Out of an abundance of caution, the court nonetheless considered the viability of the plaintiffs’ actions in tort and in contract. He found that the plaintiffs failed to establish that any misrepresentations were made by the defendant. As for the action for breach of contract, the court concluded, [47] For the same reasons enunciated immediately above, the plaintiffs have not proved on a balance of probabilities that there was a breach of contract. The authorities relied on by the plaintiffs are distinguishable on their facts. They involved situations where the resort was in a deplorable state and certain promised amenities were not delivered. So, for example, in Sokolsky, supra, the plaintiffs’ room was in a terrible state. The bed was unmade, the towels were dirty and on the floor. The carpet was water stained and water was pooling to a depth of 3¬–4 inches at the room’s entrance. The promised sailing and kayaking were not delivered. The swimming pools were dirty. That is not at all the case here. [48] Having made these findings, it should be understood that I accept that the plaintiffs were bitterly disappointed with the Almond Beach Resort. However, they did not really give the resort a chance to improve their stay as it attempted for the Chavezs. They ate only at the Reef Restaurant, which had proved to be disagreeable to them. It is hard to understand why they would do so when other opportunities were available. They did not explore other areas of the resort and made no attempt to try the à la carte restaurants. The irresistible inference is that the plaintiffs never really gave the resort a fair chance to live up to their expectations. [49] For these reasons, the plaintiffs’ claim is dismissed. 5. Lunar Inc. had developed a mechanism that harnessed heat from the sun. What the company lacked, however, was a method for storing the heat until it was needed. Trays-R-Us had developed a unique tray that appeared to solve this problem, so the parties entered into negotiations. It was agreed that Trays would sell the trays to Lunar at a set unit price per tray for a term of one year. No particular sales volume for the year was agreed upon or guaranteed. After the trays were produced, however, Trays discovered that they leaked and were unable to hold any solar heat, owing to a design flaw that could not be fixed. As a result, Trays refused to fill any orders for the trays placed by Lunar. Lunar sued for breach of contract, alleging that there was an implied term in the contract that Trays would make trays available to Lunar as required. Does the business efficacy rule require that such a term be implied in the contract between Trays and Lunar? Do you think that such a term might have been left out on purpose? How can a business avoid having terms implied into a contract? [footnote deleted] Answer: It is probably unlikely that the court would use the business efficacy rule in this particular case. The rule is used by the court to imply terms to make the contract workable. The fact that the trays did not work would make the contract unworkable. If Trays were to sell the product to Lunar, the trays would be of no use because of the fact that they do not hold any solar heat: the whole purpose of buying the trays. In addition, the parties did not agree on a particular amount of sales volume. Parties usually do not leave out terms on purpose but if one was aware of the potential problems of including a term as an express term, there are probably situations in which parties do leave out certain terms to create some ambiguity and hope that the implied term will be in their favour. The easiest way for a business to avoid having terms implied by a court is to have them inserted into the contract as express terms. Lunar may have a separate action under misrepresentation if they can show that Trays represented to them that the trays did work, (i.e., they could hold solar heat). 6. The decision of Wiebe v Bobsien, discussed earlier in this chapter, went on to appeal and at that level, the dissenting judge would have found for the vendor. According to the dissent, the conditional agreement was unenforceable because its scope was too uncertain. The dissent stated: I think this case falls in that category of incurable uncertainty. What term should be implied? A term requiring the purchaser to make all reasonable efforts to sell his house sounds alright ... [but] it leaves unresolved the question of whether he must sell at the price he can get, on the market, in the time allotted, or whether he is entitled to insist that the sale can only take place at a price he considers reasonable and is willing to accept. I think that what the parties usually intend by this type of clause is the second alternative. That is, that the purchaser is only committed to sell his own house if he gets the price he has in mind. The reason is that in the residential housing market the purchaser is likely to be unfamiliar with the market, but he is almost sure to know how much cash he has and what size of mortgage he can count on being able to service. The way to deal with this problem in the real estate market is for the form of subject clause to state the price and the essential terms upon which the purchaser must sell his own house. Then a court would have no trouble in implying a term that the purchaser must make all reasonable efforts to sell at that price and on those terms. And the court could assess whether the purchaser had made reasonable efforts to do so. Do you think that the dissent is asking for too much precision and detail in a subject to clause. Why or why not? Answer: There is no doubt that the clause in Wiebe skirted the line of uncertainty and that the dissent’s analysis at the appellate level has much to recommend it from a cautionary perspective. That said, and as the majority points out, it could be difficult to embody in advance exactly how the plaintiff should be bound in dealing with offers on his own residence. What follows is the pivotal passage from the majority’s decision, at (1985) 20 DLR 4th 475, enforcing the “subject to” clause: We were referred to Black Gavin & Co. Ltd. v. Cheung et al. (1980) 20 B.C.L.R. 21 and to Murray McDermid Holding Ltd. v. Thater (1983) 42 B.C.L.R. 119. I agree with Bouck, J., that those are cases in which the purchaser, only promised that he would buy the vendor’s house if he decided that he wished to. No contract is created in such cases. The purchasers made no promise that could constitute consideration for the vendor’s promise. There was no intention to make binding contracts. 9 This is not such a case. The parties intended this to be a binding contract and the court should not be quick to release them from their promises. 10 I agree with the trial judge’s conclusion that the plaintiff was obliged to use his best efforts to sell his own home, and that if he was able to sell he was bound to buy the defendant’s house. The plaintiff’s promise was adequate consideration for the defendant’s promise. 11 We are told that the plaintiff had listed his home for sale prior to the interim agreement being executed. A number of the difficulties that could arise as a result of this interim agreement could be avoided by annexing that listing agreement and spelling out in the interim that the purchaser would use his best efforts to sell in accordance with it. There would then be no doubt about the price and terms that the purchaser was bound to accept as reasonable. 12 It does not follow that I think this interim agreement void. I do not. Once the terms that the purchaser would act in good faith and use all reasonable efforts to sell his home are implied, the difficulties of interpretation are surmountable.... 7. Lucy Smith became interested in enrolling as a member in Trident Ltd.’s online discount service for goods and services in exchange for a monthly membership fee. She decided to join up and linked to the enrollment page. The message on the enrollment page promised "up to" $20 off on select purchases including “10% to 40% savings at over 10,000 Participating Restaurants." The form required Lucy to enter her city of birth, credit card number, and contact information as well as create a password. Text on the enrollment page also stated that by entering one’s "City of Birth" and password and clicking the "Yes" button, the purchaser acknowledges that he or she agrees to Trident’s "Terms & Conditions." Lucy filled in the form completely and then clicked on the “YES” button. Within a few minutes, Lucy received an email from Trident outlining additional terms and conditions of her agreement with Trident, including a provision which prohibited Lucy from joining any class actions against Trident. Is Lucy bound by this new clause? When was her contract with Trident Ltd. complete? Answer: This problem is very loosely based on Schnabel v Trilegiant Corp 2012 WL 3871366 (2nd Cir Sept 7, 2012) and illuminates several of the issues found there. The main question posed by the Lucy scenario is whether the “no class action” clause forms part of the contract or comes too late. On the one hand, Lucy clicked that she had agreed to Trident’s Terms and Conditions. But, unlike in the Sutton case described in this chapter, the clauses were apparently not set out on the website nor accessible via hyperlink. Note that hyperlink communication is a valid form of communicating terms based on Dell Computer Corp, also discussed in the chapter. One could argue that Lucy is bound by terms she knew about or could reasonably locate (say via a hyperlink) but not more. On this basis, the class action clause in a subsequent email comes too late. 8. Trackers is three days late in delivering the tracking to Coasters. Amritha now wants to rely on the clause in the contract that Trackers will pay $5000 for each day that the tracking is late, and she is claiming that Trackers owes Coasters $15 000. However, Trackers points out that Amritha has not been inconvenienced by the late delivery, because construction on the roller coaster had already been delayed by two weeks. It has been a week and a half since Trackers was able to deliver the tracking, and Coasters has still been unable to use it. Is Amritha entitled to rely on the clause and collect the $15 000? Do you need any additional information to make your decision? Answer: Both parties in this scenario have legitimate arguments. Amritha is relying on the strict interpretation of the meaning of the late clause within the contact. It is clear that the tracking is late and therefore, as per the term of the contract, Trackers owes Coasters $15 000. However, because the construction is behind schedule, even if the tracking was delivered it could not be installed and therefore Coasters has not incurred any damages from the late delivery of the tracking. Coasters could also argue that the late delivery clause was not intended to operate in such circumstances. Coasters might also argue that the late delivery charge amounts to a penalty clause and is not enforceable but the amount at stake in the context of a very large contract—$15 000—makes such a conclusion unlikely. As for additional information that may be necessary, one would have to determine whether there were other clauses in the contact that may overrule the late delivery clause. Chapter 8 Non-Enforcement of Contracts Instructor’s Manual–Answers by Shannon O’Byrne V. Chapter Study Questions for Review, page 191 1. Explain the difference between a void contract and a voidable contract. Answer: A voidable contract gives the aggrieved party the option to keep the contract in force or have it brought to an end. A void contract is one that involves a defect so substantial that it renders of the contract of no force or effect. 2. Who has the legal capacity to form contracts? Answer: In general, the law assumes that individuals and properly constituted organizations have the legal capacity to form contracts. 3. What must be proven by someone seeking to avoid a contract based on mental impairment? Answer: If a person is mentally impaired through illness or intoxication such that she is unable to understand the consequences of their actions, that person can seek to avoid the contract if the other party had awareness of the mental impairment. 4. Describe the doctrine of undue influence. Answer: Undue influence is unfair manipulation that compromises someone’s free will. 5. What is duress? How does it relate to the idea of consent? Answer: Duress is the threat of physical or economic harm that results in a contract. The presence of this type of duress indicates that the threatened party did not freely consent to the terms of the contract. 6. What is an unconscionable transaction? Answer: An unconscionable transaction is an unfair contract formed when one party takes advantage of the weakness of another. 7. Given an example of economic duress. Answer: Economic duress includes threatening to break a contract known to be very important to the other side, provided the coercion went beyond ordinary commercial pressure to a force or compulsion that prevented the other side from giving true consent to the proposal. 8. What is a misrepresentation? Answer: A misrepresentation is a false statement of fact that causes someone to enter into a contract. 9. How does the concept of legal mistake differ from its ordinary meaning? Answer: Legal mistake is much narrower than the everyday idea of mistake. A simple oversight or error by one negotiating party does not constitute a legal mistake and provides no basis for voiding a contract. It must be an error that seriously undermines the contract. 10. Name one statute that makes certain kinds of contracts illegal. Answer: Any of the three examples given on page 180 are acceptable: the Criminal Code, the federal Competition Act, and Ontario’s Real Estate and Business Brokers Act. 11. What is the role of public policy in contract enforcement? Answer: At common law, contracts are contrary to public policy when they injure the public interest. Public policy refers to the community’s common sense and common conscience. 12. How are non-competition covenants used in employment contracts? Answer: A non-competition covenant is used to prevent the employee from competing with the employer for a certain time after the contract ends. 13. How does the Statute of Frauds affect contracts? Answer: Contracts caught by a writing requirement, contained in the Statute of Frauds or equivalent, must be evidenced in writing to be enforceable. 14. What four types of contracts relevant to business law are required to be in writing? Answer: Contracts not to be performed within a year, contracts dealing with land, contracts of guarantee, and contracts for the sale of goods above a set minimum must all be in writing. 15. How might the fact that a contract is electronic affect its enforceability? Answer: E-commerce legislation provides that certain requirements must be met to validate an electronic signature. 16. Is an electronic contract subject to the same basic principles as a traditional contract? Answer: Essentially yes. It then becomes a question whether the necessary legislative steps have been taken. For example, as discussed on page 186 of the text, e-signature legislation ensures that a signature requirement is satisfied by an electronic signature. 17. Who is a minor? Answer: A minor is someone who is under the age of majority and is not recognized as an adult for legal purposes. 18. Are contracts with minors binding? Answer: To protect minors from the enforcement of contracts that may not be in their best interests, the general rule is that minors are not obligated by the contracts they make. However, since the goal of the law in this area is to protect the under-aged, minors have the option to fulfill their contractual commitments and can enforce a contract against the other party should that party be in breach. There are some exceptions to the general common law rule of immunity from liability, however, because minors may have to provide for their own welfare in certain circumstances. Minors are bound by contracts for essentials, known in law as “necessaries,” and are required to pay a reasonable price for them. Questions for Critical Thinking, page 191 1. Courts have decided that restrictive covenants must be reasonable between the parties with reference to the public interest to be enforceable. Is this a justifiable limitation on freedom of contract? Answer: One view is to say that the party who agrees to an unreasonable restrictive covenant has simply been a bad bargainer and should bear the consequences of his or her conduct. However, employment contracts in particular can often involve employees who are vulnerable and perhaps feel they must agree to the proposed covenant or not get the job at all. Non-competes in the context of a business sale do not generally involve vulnerability so that concern may not be present but in both instances, the public interest is important and merits consideration. Restrictive covenants should not be enforced if they are anti-competitive and unreasonably interfere with the free market. 2. What factors should a business consider in developing a policy on documentation of commercial relationships? Should it insist that all contracts be in writing or is more flexibility in order? Answer: As this chapter notes, most jurisdictions require certain contracts to be evidenced in writing to be enforceable. Minimally, a business should develop a policy to ensure that it complies with this rule. A more practical and foolproof approach is to get all contracts signed and in writing. Not only with this obviate any enforceability concerns, but it also provides a record of the transaction, which may prove useful should memories fail naturally or strategically. 3. Which doctrines discussed in this chapter would be unlikely to arise in an online transaction? Why? Answer: This is a challenging question since the law in the area is not well developed. Certainly, the doctrines discussed in this chapter apply to online transactions, but whether they would be unlikely to arise is difficult to predict. Legal Capacity: perhaps online transactions would be plagued by more capacity issues because buyer and seller are not face to face. One party has less of a chance to detect that it is dealing with a minor and walk away. Duress: duress involves threat of physical or economic harm. It would seem that this would be less likely to occur in an online transaction, particularly one not involving any negotiations. Even in an online transaction involving negotiations, people are usually reluctant to put their threats in writing. Undue Influence: undue influence requires unfair manipulation that compromises someone’s free will. To the extent that online transactions tend not to be negotiated but are offered more on a “take it or leave it” basis, undue influence is less likely to arise in an online transaction. How can a vendor unduly influence the purchaser if the two simply are not in contact? Unconscionability: to establish unconscionability, the plaintiff must show that an unfair contract was formed because one party took advantage of the weakness in the other. While taking advantage of someone’s weakness is perhaps more likely to occur in face-to-face transactions, some online offers are potentially so unfair that only the weak would actually agree to them. On this basis, unconscionability could easily arise online as well. Whether it would be more or less likely to arise is an open question. Misrepresentation: a misrepresentation is a false statement of fact that causes someone to enter a contract. This doctrine could easily arise online based on misleading statements made by the vendor on its website. Mistake: an online transaction could obviously contain an error that seriously undermines a contract. Perhaps mistake is less likely to occur online, however, given how prevalent the standard form contract is there and the absence of negotiations. On this basis, information can be more carefully contained and verified by the vendor before posting it. Note too that online transactions can be subject to special rules governing mistake. See, for example, Chapter 13’s discussion of electronic agents. Illegality: if the online contract is contrary to legislation or public policy, it can be set aside. Whether this is more or less likely to arise online is an open question. Writing: writing requirements, including the requirement for a signature, can be problematic online. However, as the Technology and the Law box in text Chapter 8 observes, legislation is beginning to take hold to provide guidance. For example, Ontario’s Electronic Commerce Act provides that a legal requirement for a signature can be effected electronically. Whether the common law jurisdictions without such legislation will come to the same conclusion is difficult to say. If the courts are unwilling to extend the common law, online transactions may therefore be faced with more Statute of Frauds issues than the paper transaction would. 4. How can a business use a risk management plan in order to reduce the chances that it will enter into an unenforceable contract? Answer: Apart from the generic concerns going to consent (i.e., a businessperson should not place the other side under duress, exert undue influence, act unconscionability, or misrepresent the facts), a business should, as a possible approach, assess the proposed contract according to a checklist identifying the vulnerabilities associated with that type of contract. What follows is an analysis of specific concerns that may arise in a given kind of contract. Employment Contracts • Is the employee a minor? If so, is this contract for the benefit to the minor when signed? If not, the employer runs the risk that the contract is unenforceable. • Is there a non-compete clause? Is it reasonable with reference to the public interest or does it run the risk of unenforceability? • Given its duration, is this contract caught by the Statute of Frauds or equivalent? • Do the terms and conditions of the contract conflict with applicable employment standards legislation? • For further discussion, see textbook Chapters 20 and 21. Purchase and Sale of Goods • Given the value of the contract, does the Sale of Goods Act specify a writing requirement? • Is the purchaser a minor? If so, the contract is unenforceable unless it is a contract for necessaries. • Is this a consumer transaction? If so, be sure that the standard of conduct set by consumer protection legislation is met. • For further discussion, see textbook Chapters 23 and 24. Equipment Leases • Given its duration, is this contract caught by the Statute of Frauds or equivalent? • Is this a consumer transaction? If so, be sure that the standard of conduct set by consumer protection legislation is met. • For further discussion, see textbook Chapter 17. Real Estate Agreement • Given that the contract relates to a sale of an interest in land, has the Statute of Frauds or equivalent seen compliance? • Has the realtor met provincial licensing requirements? • For further discussion, see textbook Chapter 19. Credit Agreement • Have cost of credit provisions in consumer protection or fair trading legislation seen compliance? • If this is a contract of guarantee, has the Statute of Frauds or equivalent seen compliance? • For further discussion, see textbook Chapter 26. Professional Services Agreement • Given its duration, is this contract caught by the Statute of Frauds or equivalent? • Is this a consumer transaction? If so, be sure that the standard of conduct set by consumer protection legislation is met. • For further discussion, see textbook Chapter 22. Insurance • Given its duration, is this contract caught by the Statute of Frauds or equivalent? • Has there been compliance with the Insurance Act? • For further discussion, see textbook Chapter 28. 5. The law of mistake will rarely provide a defence for someone seeking to avoid a contract. Is the law of mistake too strict and inflexible? Why or why not? Answer: Though the law of mistake is exceedingly narrow and difficult to establish, this is an important adjunct to the notion of certainty. Parties to a contract should be entitled to rely on their agreement and not be concerned that the other side has in some way miscalculated or failed to appreciate its full consequence of the agreement in question. The law requires parties to do their due diligence before they enter the contract. Were it otherwise, there would be tremendous uncertainty in the marketplace. 6. Before the weaker party can rely on a defence of mental incapacity through illness or intoxication, he or she must prove that the other party was aware of such an impairment. Is this requirement a reasonable one? If a person does not have the capacity to contract, should that not be the end of the matter? Answer: On the one hand, if the weaker party lacked capacity there is a good argument that the contract should be set aside no matter what the other side knew or did not know. Without voluntariness, there can be no contract in law. While this view may be theoretically pure, it creates its own issues of certainty and fairness. If the other side is innocent in that he or she did not know about the incapacity issue, why should the risk of incapacity fall on her? And if contracts can be easily upset based on the weaker parties’ unobservable capacity issues, the sanctity of contract is undermined. The requirement that the stronger party be proven to have known about the incapacity is in some ways a compromise between a contract being set aside automatically and a contract being set aside based on the fault of the stronger party. Situations for Discussion, page 191 Introductory comment: The following situations provide general scenarios in which one party may seek to have a contract set aside. They are derived from case law but do not provide the same amount of factual detail. The instructor can add facts, based on the following case summaries, to stimulate further discussion, but students will not, on their own, be able to come to the same conclusion as the court. In discussing these scenarios, ask the students to consider • what doctrine, discussed in the chapter, might be relevant • what the plaintiff would need to prove to have the contract set aside • what the defences might be • what the business expectations might be • what the ethical repercussions are (i.e., is it ethical for the defendant to want to enforce this agreement? Is it ethical for the plaintiff to want to avoid this agreement?) • what the impact on business practices of not enforcing this agreement might be 1. Through her lawyer, Ms. Tanya, a commercial landlord, sent a letter to her tenant, Ms. Desie, who ran a bridal shop out of the premises. Tanya’s lawyer demanded all back rent and stated that if the rent owed was not received by the deadline specified, Tanya would lock her tenant out of the business premises. Desie had no money to pay the back rent and therefore did not make the specified deadline. In fact, Desie sent in no money at all. The landlord changed the locks. Soon thereafter, the parties later came together in settlement whereby Desie agreed to provide a promissory note in the amount owed in addition to Tanya’s legal fees in relation to this matter. Subsequently, Desie alleged that Tanya’s lawyer had forced her to settle and sign the promissory note in question. Desie said that she felt that she had no choice but to sign because otherwise, she would not have been allowed back onto the rental premises. Desie says that the agreement should be unenforceable because of the lawyer’s duress. Did the conduct of the lawyer amount to duress? What constitutes duress? [footnote deleted] Answer: This Situation for Discussion is based on Taber v Paris Boutique & Bridal Inc 2010 ONCA 157. In that case, the appellate court agreed with the motions judge (responding to an application to strike) that the bridal storeowner had not been subject to duress. As the Ontario Court of Appeal stated, [7] In our view, the appeal must be dismissed. [8] There is no doubt that economic duress can serve to make an agreement unenforceable against a party who was compelled by the duress to enter into it. Nor is there any doubt that the party can have the agreement declared void on this basis. [9] However, not all pressure, economic or otherwise, can constitute duress sufficient to carry these legal consequences. It must have two elements: it must be pressure that the law regards as illegitimate; and it must be applied to such a degree as to amount to “a coercion of the will” of the party relying on the concept.... [10] The third party claim here is asserted against the plaintiff’s lawyer acting as lawyer. The only conduct of the lawyer that is pleaded to constitute the necessary economic pressure is that she would not provide re-entry to the defendants unless they agreed to sign the minutes of settlement and the promissory note. No other pressuring conduct by the lawyer is pleaded or even suggested. Nor is there any suggestion that in acting as pleaded, the lawyer was doing anything other than advancing her client’s position. [11] It is plain and obvious that, without more, the defendants cannot succeed in elevating such routine conduct by a lawyer to a level that the law regards as illegitimate. On this basis alone, the third party claim was properly struck. Given that no suggestion is offered about what could be added to the claim to save it, leave to amend is denied. 2. Madeline was 35 years old when she was seriously injured in a car accident caused by the other driver. She was hospitalized for over a month. An insurance adjuster (an employee of the insurer of the culpable driver) visited Madeline at her home upon her release from hospital with the hope of getting her to agree to settle her case out of court for a set amount of money. Though the adjuster knew Madeline would almost certainly win her case in court and be awarded damages at least in the amount of $250 000, he offered only $50 000, assuring her that he had her best interests at heart and it was time to “wrap things up.” Madeline felt confused during the conversation as she was on strong painkillers to help deal with the terrible headaches she suffered as a result of the accident. She really was not quite sure what was going on. Madeline asked for a minute to think about what he had said because she was feeling unwell but the adjuster was adamant. Madeline then took the pen that the adjuster handed her and signed the agreement. Madeline now realizes that she has made a terrible deal. What doctrines in this chapter are relevant to the situation? Do you think Madeline is bound? The following doctrines may be in play: Answer: Misrepresentation: The adjuster told Madeline that he had her best interest at heart in recommending what was clearly a bad deal for her. His other misrepresentation was that it was “time to wrap things up” and conclude a deal, implying some urgency and that the deal was a good one for her to take. All these statements fit the requirements of an actionable misrepresentation: they are false, clear, and unambiguous; material; and relied on by Madeline. The adjuster did not have Madeline’s best interests at heart. On the contrary, he is an employee of the insurer of the culpable driver and misrepresenting his loyalties. In fact, there is an inherent conflict of interest in advising her in any way. There was no urgency and the deal was not a good one. All these representations would be material to deciding whether to sign the proffered deal and there is at least some evidence that Madeline was influenced by or relied on what the adjuster said. Incapacity: Madeline seems to be seriously impaired by her pain medication and general illness associated with a serious car accident. There is considerable evidence that she cannot understand the consequence of her actions. Madeline even asked for time to consider the matter of signing the deal, telling the adjuster that she was feeling confused. Undue Influence: The adjuster was adamant that she sign the deal. He would not give her the time she asked for to think about the deal nor take the obvious step of suggesting that she seek independent legal advice. How forceful his being adamant amounted to is unclear on the facts but it seems he exerted unfair pressure on her to agree. This is perhaps an even easier case to make since she was on pain killers and seemed to be more easily led as a result. The adjuster is purporting to be Madeline’s adviser and clearly pressuring her in the wrong direction. Unconscionability: To establish unconscionability, Madeline must show that an unfair contract was formed because the adjuster took advantage of her weakness. There is inequality between the parties due to Madeline being on painkillers and confused by the situation. There is also an improvident bargain or proof of exploitation since on the facts, she has settled for $50 000 when her claim is worth at least $250 000. Duress: It would be very difficult to argue duress on these facts. Madeline was not threatened physically nor economically. 3. Ms. Stewart bought a business operating in rented space in a shopping mall. Shortly after she took over the business, the landlord pressured her to sign a lease that made her responsible for the arrears in rent of the previous tenant. The landlord secured Stewart’s agreement by exerting tremendous pressure on her. For example, he called in the sheriff to execute a distress for rent when, at that time, Stewart was in arrears only for the month of January. The landlord told Stewart that if she did not pay the former tenant’s arrears, “she would be the one to suffer.” The landlord knew that Stewart was unsophisticated in business dealings and signed the lease without seeking advice. Is she obligated to the lease? [footnote deleted] Answer: This scenario is based, in part, on Stewart v Canada Life Assurance Co (1994), 132 NSR (2d) 324 (CA) and provides a highly illustrative contrast to Situation for Discussion 1 (where no duress was found). On the facts of Stewart, the court found duress and unconscionability. Summary: Stewart v Canada Life Assurance Co (1994), 132 NSR (2d) 324 (CA) Stewart had very little business experience but, in 1990, she decided to purchase a business that operated out of rented premises in a shopping mall. She entered into a lease in June 1991 but only through the landlord’s “heavy-handed methods.” The trial judge found Stewart signed this lease—which required her to pay the arrears of the prior tenant—as a result of economic duress consisting of the threat of termination of the tenancy and ruin of her business. In short, the trial judge concluded that Ms. Stewart faced “catastrophic losses” if her operations were closed by the landlord in June of 1991, and accordingly she was obliged to sign the lease “in order to protect the investment she had made.” In April 1992, Stewart fell behind in the rent. In response, the landlord terminated her lease and sued for arrears, accelerated rent, and other damages pursuant to the provisions of the written lease. The Court of Appeal awarded Stewart damages on her counterclaim, including aggravated damages, of $27 000. In addition to finding duress, the Court of Appeal relied on the doctrine of unconscionability, observing [the landlord’s] insistence on Ms. Stewart executing the lease was unconscionable by any community standard of commercial morality. (Harry v. Kreutziger (1978), 9 B.C.L.R. 166 (B.C.C.A.).) This is not a case of inequality of bargaining power—Ms. Stewart had no bargaining power.... [The landlord] knew this to be the case and took advantage of it. On this footing, the appellate court set aside the lease, ruling that the conduct of the landlord rendered the lease a nullity. 4. Leona was interested in purchasing property that she intended to use for her family’s expanding brickyard business. She spoke with the owner, who had recently inherited the property from his elderly aunt. Leona asked if there were any restrictions on the land preventing it from being used as a brickyard. The owner replied, “Not that I am aware of.” Though this was literally true, the owner failed to explain that he had never checked whether the land was subject to any restrictions. Leona purchased the land and has found out that it cannot be used as a brickyard. Can she have the contract rescinded based on misrepresentation? Why or why not? Answer: This Situation for Discussion is based on Nottingham Patent Brick and Tile Co v Butler (1886), 16 QBD 778 (CA). One view is that when the vendor replied, “Not that I am aware of,” he was implying that he had checked and found nothing. The reply is therefore a half-truth and is actionable. This was the view of the judge in Nottingham. The formal ingredients of an actionable misrepresentation are therefore present. The statement was false; it was unambiguous; it was material in that it was significant to the plaintiff’s decision to enter into the contract and it was relied on in that the statement actually did induce Leona to enter the contract. The weaker view is that the reply “Not that I am aware of” does not necessarily imply that any search was undertaken at all and that it was merely a statement of opinion. While the half-truth could be considered fraudulent, it is at least a negligent statement. In either case, the plaintiff is entitled to rescission and damages in tort. 5. Derek was a minority shareholder and employee of Bridge Decks Ltd. (Bridge), a corporation that provided concrete work on existing and new bridges. When Bridge Decks Ltd. sold all its assets to Concrete-Works-R-Us Ltd., Derek and Bridge agreed to a non-competition clause with the purchasers which, among other matters, restricted them from competing with Concrete-Works-R-Us Ltd. in any jurisdiction in Canada. This meant that the covenant’s geographical restriction even included Manitoba—a province that neither Derek nor Bridge Decks Ltd. had ever worked in—though they had provided bridge work in a town very close to the border between Saskatchewan and Manitoba. The restrictive covenant also prohibited competition by Derek and Bridge Decks Ltd. in the area of concrete work or “bridge rehabilitation of any kind.” Is the non-competition clause Derek agreed to enforceable when measured against the factors identified by the SCC in Elsley (discussed earlier in this chapter)? Does it make any difference that the non-competition clause in this case is related to an asset-sale transaction as opposed to an employment contract? [footnote deleted] Answer: The non-compete, according to the test in Elsley, is enforceable “only if it is reasonable between the parties and with reference to the public interest.” The purchasers have a legitimate business interest in restraining the vendor from competing. While the entire region of Canada is included in the non-compete, a court may find this to be acceptable. This business is largely national—with the exception of have a presence in Manitoba—so a Canada-wide prohibition seems reasonable. It is not clear that the non-compete has an express duration. If it does not, it is almost certainly unreasonable. Prohibited activity under the non-compete is “bridge construction or rehabilitation of any kind.” This is also arguably too broad since it is not confined to the kind of work the vendor was involved in at time of sale but a more expansive restriction. 6. Symphony & Rose was a developer and builder of high-rise condominium projects. A Symphony & Rose sales rep told Wendy and Sam that a penthouse apartment was still available in their current project. Wendy and Sam provided Symphony & Rose’s real estate agent with information relevant to the purchase and delivered cheques for the various deposits. The agent told them that in a few days they would be required to sign an offer on Symphony & Rose’s standard form. They thought they had a deal. A few days later, a senior representative of Symphony & Rose contacted Wendy and Sam to tell them that the penthouse had already been sold but 40 other units were currently still available. Do Wendy and Sam have an enforceable agreement? Should they have done anything differently? [footnote deleted] Answer: Whether Wendy and Sam will succeed depends, in large part, on whether this transaction occurs in a jurisdiction that has the Statute of Frauds or equivalent on its books. Assuming this is so, the penthouse transaction is most certainly caught by the Statute of Frauds since it concerns an agreement for the sale of an interest in land. Hence, unless Wendy and Sam are able to pull together sufficient memoranda evidencing the agreement, it is unenforceable. Note that if Wendy and Sam do have the necessary documentation to satisfy the memorandum requirement, the developers will almost certainly be unable to successfully argue the law of mistake. Though there was a mistake in the colloquial sense of the word—the developers thought the penthouse was available but it turns out they were wrong—this would not count as a mistake in law. There is no argument, for example, that the thing offered for sale was a very different thing from what the parties thought it was. The agreement was for a penthouse. The “mistake” was the developer’s belief that it was still available for sale. Assuming that Wendy and Sam could overcome the Statute of Frauds problems and the mistake issue, they would still have an uphill climb. They would have to establish that the parties intended to enter into a contract once the deposit cheques were delivered and not at some later point, as when a signed agreement would come into being. On the facts, it looks like their agreement was inchoate—they were close to a deal but none was ever finalized. In the future, Wendy and Sam should try to act more quickly and get any agreement related to land in writing. 7. John Tonelli was an exceptionally talented young hockey player who, in 1973 at the age of 16, entered into a two-year contract with the Toronto Marlboros Major Junior A hockey club, a team in the Ontario Major Junior A Hockey League. The league had an agreement with the National Hockey League (NHL) that prevented the drafting of underage players and that called for the payment of certain fees once a player was drafted at the end of his junior career. However, a similar agreement could not be reached with the World Hockey Association (WHA). John—like all other junior hockey players of his time—was forced to sign a new contract as a condition of continuing to play in the junior league. This new contract essentially bound him to play three years longer than his earlier contract with the Toronto Marlboros; in addition, it imposed monetary penalties if he signed with a professional team within that time frame or within a period of three years after he ceased to be eligible to play in the junior league. As soon as he turned 18 (the age of majority), John abandoned the contract with the Toronto Marlboros and signed with the Houston Aeros, a professional team. The Marlboros sued him for breach of contract. Is John’s contract enforceable against him? If yes, does this seem fair, and from whose point of view? If no, is it fair that John can sign a contract and then ignore his obligations under it? [footnote deleted] Answer: Minors do not have the capacity to enter into contracts with two well-established exceptions: 1. Minors can enter into contracts for necessaries. 2. Minors can enter into beneficial contracts for services. In this case, John Tonelli entered into a contract for beneficial services. Whether a contract is beneficial or not depends on whether the contract benefits the minor or is exploitative. John’s contract is enforceable against him if the Toronto Marlboro’s can prove it benefits him. John could argue that the contract was not beneficial but instead exploitative. In particular, John would have to pay monetary penalties if he signed with a professional team and the contract was three years longer than his original contract. Such a contract is too onerous and would be unenforceable against the minor, in this case, John Tonelli. If the contract were not so onerous, then John would most likely be bound to honour it. In fact, junior hockey contracts today have been amended because of this case, and it can be argued that they are beneficial to the player. 8. Sam Moore, an alert and intelligent 52-year-old businessman, tried without success to purchase a piece of farmland from Louis Wells. When he heard that Louis’s brother, James, was willing to sell his nearby farm, he went to see him at his nursing home to make an offer to purchase it. James was 62 years old and, unbeknownst to Sam, was suffering from brain damage. Sam offered to purchase the land for $7000. James signed an acceptance to the offer and received a deposit of $100, without receiving any independent advice on the transaction. The land in question was worth quite a bit more than $7000—in fact, the farmer who was leasing James’s land at the time had offered to pay $14 000 to $15 000 for it just the year before. Since then, a trust company had been appointed under the Mentally Incapacitated Persons Act and had taken over the management of James’s affairs. The trust company refused to transfer the farm to Sam, who decided to sue in order to enforce the contract he entered into with James. Is the contract for the sale of the farm enforceable? If yes, does that seem like a just result? If not, what legal doctrine would likely be used to rescind it? If the contract is not enforceable, do you think that it is fair to Sam? Answer: This situation is based on Marshall v Canada Permanent Trust Co (1968), 69 DLR (2d) 260 (Alta SC) and provides an adequate summary of the facts. This situation is meant to deal with the doctrine of unconscionability. At issue in this case was whether the contract for the sale of the farmland between Sam and James was unconscionable because of James’s weakened mental state and therefore unenforceable. The court in this case found that the contract was unconscionable and dismissed Sam’s action for specific performance of the sale, instead ordering that the contract be rescinded. Unconscionability is an equitable doctrine that allows the court to rescind an otherwise legal contract because of an inequality of bargaining power and an unfair and unreasonable agreement. The court decided that Sam was incapable of protecting his interests and had entered into an improvident bargain: the medical evidence showed that although he was capable of reading a document, he could not relate it to the past or future. Evidence of comparable land values in the area showed that the price agreed on was considerably less than the actual value of the land. Although Sam may be unhappy that the sale did not go through, there was no evidence that he suffered any loss because of the non-performance of the contract—he simply lost out on a good deal. In the future, he might be more careful when negotiating with seniors, especially those who no longer live on their own, but rather in a care or nursing home. Factors that increase the chance the opposite party may be suffering from a mental disability should always be taken into account. It is important to note as well that even the doctrine of unconscionability will not function to rescind a contract when one party is weaker than the other if, in the end, it is a fair and reasonable agreement. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
