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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 I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the difference between implied and express terms • how judges determine and interpret the content of a contract • how a party can include terms as a business tool to protect itself from liability Because the purpose of this chapter is to illustrate how the contract is an extraordinarily effective business tool for managing risk, it dovetails with the risk management theme informing the entire textbook. Through contractual terms, one can secure desirable obligations while avoiding or excluding the unwanted ones. To demonstrate this point, the Business Law in Practice scenario provides a narrative context and a series of contractual clauses—these show how terms are actively used to define the nature and scope of duties owed by one party to the other. II. TEACHING STRATEGIES To set the stage for this chapter, the instructor can lead discussion on how the “ideal” contract comes into existence. This helps students visualize the process by which a contract is created and what its generic objectives and content might be. Creating the “Ideal” Contract Prefatory Matter • The parties must be prepared for negotiations and have a clear understanding of what they want. • The parties must have legal capacity and authority to act. Content The contract must cover the rights and obligations of the parties in a comprehensive and unambiguous way. It should • address risk • contain guarantees • not rely on implied terms • consider foreseeable events or contingencies • define terms Both parties need to be aware of all terms, understand those terms, and accept them. Form • The contract must be complete and a reasonable length. • The contract should be in writing. • The contract should be signed by the parties. • Are witnesses needed? • Should the contract be in duplicate? The framework constructed by class discussion can then be applied to the terms of the Business Law in Practice contract created by Jason and Amritha (i.e., for the sale and purchase of roller coaster tracking). At this point, the question becomes, “How well have the parties done with their contract?” This narrative scenario helps students answer this question, thereby providing an immediate context to the textbook’s discussion of contractual terms. Throughout class discussion, it is useful to refer back to the actual terms negotiated between Amritha and Jason. This assists the students in understanding what the clauses mean, how they manage risk from the perspective of one party or the other, and why parties should take care to make important terms express and not just simply rely on assurances they may have received from each other. For example, • Clause 13 limits liability to “the unit price of defective goods.” Presumably this clause creates an absolute cap on damages equivalent to the contract price of $1.5 million. This means that Trackers’ worst position is set by contract and will provide some comfort in the event of breach. • Clause 13 also excludes Trackers from liability for any loss of profit by Coasters. This means, of course, that any profit that Coasters might lose—including the profit it anticipates from its American customer—cannot be extracted from Trackers even if Trackers is the cause of that loss. • Clause 14 exempts Trackers from any responsibility for defective design. In short, should the tracking fail because of design problems, Coasters must look to the person who provided the design for compensation. Trackers has not been hired to provide advice on the contract specifications. It has been hired to manufacture tracking according to those specs and nothing more. • Clause 20 (the entire contract clause) forecloses, or at least attempts to foreclose, any subsequent suggestions—by the buyer, for example—that additional promises or warranties were given in relation to the goods sold. The purpose behind such a clause is to manage the risk that, in the future, the parties will differ as to what was part of the contract and what was not. Though courts can decline to enforce such a clause—as when there is fraudulent misrepresentation, for example—these clauses are useful in forestalling arguments that the contract is not, in fact, complete as written. • Late delivery charges ($5000 a day). The example in the text under the heading “Judicial Interpretation of Express Terms” specifies a term in which Trackers agrees to pay $5000 for each day it is late in delivering. As noted in the textbook, the probable intent of such a clause is to give Trackers additional incentive to complete on time. This is essential, from Coasters’ perspective, since it has a contractual obligation to its American purchaser to deliver on time. Note that this last clause can also be used to illustrate liquidated damages. That is, if Trackers is late with delivery and refuses to pay the specified amount, the legal question is whether this amount was a genuine estimate of loss or an attempt to punish Trackers for late delivery. The content of this chapter can be channelled through a risk management model that requires the negotiator to develop a comprehensive approach to entering into a contract; that is, first, the negotiator must anticipate what kinds of risks surround the proposed contract, both at present and in the future, and, second, the negotiator must then decide how to handle these risks—should they be eliminated or reduced by contractual terms, or should they be retained? It is very useful to spend time at the end of the chapter on whether the contract negotiated between the Amritha and Jason was effective and whether it could have been improved. For example, in Clause 12 of the Business Law in Practice scenario, the term “best quality” is used. In the absence of any definition in the contract, a key source for defining this term would be any standards in the steel industry. Does “best quality” have a recognized meaning in the trade? Are there several levels of quality of steel that could fit this description? What quality should Coasters expect for the price it is paying? Could the parties have been more precise? Similarly, in Clause 14, Trackers is made exempt for defects “relating to design of goods.” If a dispute arose about liability, is the phrase sufficiently clear? III. STUDENT ACTIVITIES The instructor is referred to Chapter 6 of this Instructor’s Manual, which provides a detailed assignment designed to span the contracts part of the course. Specifically, in relation to this chapter, Part 2 of that assignment directs students to draft an employment contract, based on mock negotiations, using plain language and avoiding legal jargon. In Part 3, students are asked to provide, among other things, • a review of the employment contract, including an account of how each element of a valid contract had been met • what obligations each side has • conditions that might excuse performance • in the event of breach, what the innocent party could seek by way of remedy IV. EXPLANATION OF SELECTED FEATURES Page 143 Business Application of the Law: 911 Emergency Access Critical Analysis: Do you agree with how the trial judge and appeal court interpreted the contract with Bell? Note that the DVD accompanying this Instructor’s Manual contains a very helpful news-clip about this litigation and includes interviews with one of the plaintiffs as well as with counsel. Since the story aired, Bell’s application for leave to appeal to the Supreme Court of Canada was dismissed. It is frankly difficult to defend Bell’s argument that it is not in breach of contract for collecting a fee for a service it did not actually provide. At date of writing and of litigation, the only area in the Northwest Territories that has live-911 service is in Whitehorse yet all customers in the Territories were charged the live-911 fee. The Globe and Mail offers this quote from plaintiff Anderson: “I’m not a very sophisticated man ... but to me it’s fairly straightforward.... The phone company tells you there is no 911 service, then they charge you for 911 service.” See Grant Robertson, “911’s reach leaves North in the cold,” The Globe and Mail (updated 22 August 2012), online: Globe and Mail . As a motions judge succinctly noted in response to an earlier application by Bell to strike Anderson’s statement of claim in this matter: “It would be an unusual contract which let one party charge for doing nothing, and clear words would be needed.” See Bell Mobility Inc v Anderson, 2009 NWTCA 3 (CanLII), http://canlii.ca/t/23jz2 at para 6. Using an older analogy that some students may not understand since door to door milk delivery has all but disappeared, the appellate court observed that “A right to charge a door-to-door delivery fee for milk cannot be triggered by delivering empty bottles.” Accordingly, no fee can be charged. Page 145 Landmark Case: Gateway Realty Ltd v Arton Holdings Ltd (1991), 106 NSR (2d) 180 (SC), aff’d (1992), 112 NSR (2d) 180 (CA) Critical Analysis: The Gateway case has been followed or cited with approval by numerous Canadian courts. Do you think that the court was correct to imply a term of good faith in the contract between the parties? From a general perspective, it could be argued that implying the term of good faith was necessary to give business efficacy to the contract. But it seems that the court was also suggesting good faith as an automatic term of all contracts. Such an approach raises the issue of what the default standard for contractual behaviour is or should be. As a general proposition, most courts are reluctant to suggest that good faith be a mandatory term. Freedom of contract dictates that parties should only be bound by terms that have been expressly or implicitly chosen. Part of the definition of good faith provided by the Nova Scotia court includes, however, the notion that a party cannot, without reasonable justification, act in relation to the contract in a manner that would “substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other.” It seems likely that, in the ordinary case at least, such a term would exist by implication, but this is a point of some contention. Page 146 Case: Glenko Enterprises Ltd v Ernie Keller Contractors Ltd, [1994] 10 WWR 641 (Man QB), aff’d [1996] 5 WWR 135 (Man CA) Critical Analysis: Why should industry or trade practice be relevant to understanding the parties’ contractual obligations? Would it not be simpler for a court to apply the contractual terms as stated and refuse to look outside that document? What are the risks of relying on industry practices as a way of implying terms into a contract? Courts look to industry or trade practice when they are so notorious that they are presumed to be present in the parties’ contract. The motivation is to enforce some honesty and fairness within the contractual context. To simply enforce the contractual terms as stated may lead to a tremendously unfair outcome given the notoriety of the custom at issue (i.e., one party may, with great justification, assume that the practice applies and that is it so obvious, it almost goes without saying). The party purporting to rely on industry practice is, however, taking a big risk given the standard of notoriety that is required before such an industry practice will be found. As always, it is preferable to recite express terms rather than hope that implied terms will materialize. Page 147 Photo caption: How can a business avoid having terms implied into a contract? This can be accomplished by the business inserting an entire contract clause and specifically excluding any implied terms, either by statute or by common law. Page 148 Business Application of the Law: A Request for Goods or Services: Implying a Promise to Pay Critical Analysis: Does the law's willingness to imply a promise to pay lead to uncertainty? Why should someone have liability on a promise that she has not expressly made? The law is informed by a measure of common sense and desire to effect justice. It would be tremendously unfair, therefore, if one party could take the benefit of performance by the other side but not have to pay simply because no express promise to pay had been made at the time of requesting the service. Given the firm and long-standing foundation for the rule implying a promise to pay, it is difficult to argue that it promotes uncertainty. Though it is the case that the exact amount of payment will have to be established by the parties after the fact or, if they are unable or unwilling to do so, by a court of law, there ultimately will be an answer. Page 148 Case: Bhasin v Hrynew 2014 SCC 71 Critical Analysis: If Can-Am had simply avoided all communication with Bhasin about its intention not to renew, would it be in breach of the new duty of honesty? Why or why not? If Can-Am had remained silent from the beginning and created no false impressions, it likely would have escaped liability under the new duty of honesty since the Court was clear that there is no duty of disclosure in a case like this. Can-Am had the unfettered right not to renew and simply had to give notice, nothing more. Where Can-Am went wrong according to the Supreme Court of Canada was—based on a finding of fact by the trial judge—lying about its intentions to terminate. Silence too can be deceptive however and involves a complicated area of law discussed in more detail in Chapter 8 under the heading Misrepresentations and Important Mistakes. Page 151 Case: Corey Developments Inc v Eastbridge Developments (Waterloo) Ltd (1997), 34 OR (3d) 73, aff’d (1999), 44 OR (3d) 95 (CA) Critical Analysis: Is the Corey decision a welcome development? What are the justifications, if any, for abolishing the parol evidence rule in a commercial context? Most students would agree that Corey is a welcome development. It is problematic to apply a rule in a vacuum, particularly when to do so would allow one person to benefit from his or her own duplicity. Though Corey did involve a commercial relationship, there is, as a general proposition, much less justification for abolishing the parol evidence rule in a commercial context, since parties tend to be more sophisticated, have access to legal advice, and overall are better positioned to take care of themselves. The parol evidence rule forces the parties to pay attention to the wording of their contract and to ensure that it is correct and complete. These kinds of checks can be preventative and thereby reduce the possibility of conflict as to what the obligations are. Page 152 Business and Legislation: Evidence of Electronic Contracts Critical Analysis: Are these kinds of amendments to Evidence Act legislation necessary to deal with electronic contracts? Could judges not be entrusted with the task of providing rules on a case by case basis? A new set of practical problems emerges when there is an emphasis on computer systems—such as corrupt files, electronic documents that disappear into cyberspace, and fraudulent alterations to electronic documents, but paper poses analogous challenges. In short, under either a paper or an electronic system, documents are always at risk of being lost, destroyed, or wrongfully altered. For discussion of the unique and common problems associated with e-commerce, see John Gregory, “Solving legal issues in electronic commerce” (1999) 32 Can Bus LJ 84, which continues to have resonance more than a decade later. Gregory’s main conclusion is that the more one studies the legal issues surrounding e-commerce, the less daunting they become “and the less radical the measures needed to ensure that the law does not unnecessarily impede e-commerce” at 85. Some legislative amendments are necessary, however, to facilitate greater ease and certainty in the marketplace. The Ontario legislation referenced in this box is just such an example, since it seeks to make proof of electronic contracts subject to a uniform set of rules. Page 153 Photo caption: Why do well-drafted contracts anticipate events that can affect performance? Contracts are documents that allow for planning for contingencies, such as work stoppages. In relation to the Coasters–Trackers scenario, the main contingency that occurred was a substantial price increase on the supplier’s end. Unless a tracking supplier like Trackers is prepared to risk that the cost of performance may increase when the time comes to perform, it is advised to build some contingencies into its contracts. By anticipating events that can affect performance (such as a sudden price increase), Trackers is better able to meet its obligations and not be caught in a losing contract. Page 155 Case: Wiebe v Bobsien (1984), 14 DLR (4th) 754 (BCSC), aff’d (1985), 20 DLR (4th) 475 (CA), leave to appeal to SCC refused (1985), 64 N1R 394 (SCC) Critical Analysis: Do conditions precedent introduce too much uncertainty into contracts? Although the law surrounding conditional agreements can be complex, businesspeople need a mechanism whereby their contractual agreements can be made conditional on events that are not certain to occur––like securing the necessary financing, zoning variation, or subdivision approval. As the textbook observes, it is also important that the law provide a mechanism for making the contract binding on the parties during the time set aside for that condition to occur. Page 157 Landmark Case: Tilden Rent-A-Car Co v Clendenning (1978), 83 DLR (3d) 400 (Ont CA) Critical Analysis: Courts may be less helpful to the customer in a non-consumer context, since parties are expected to look after their own interests. In a 1997 decision from the Ontario Court of Appeal, for example, the court emphasized that inadequate notice of the kind complained of in the Tilden case will not ordinarily be grounds for attacking an exemption clause in a commercial situation. The court affirmed the rule that a person will be assumed to have read and understood any contract that she signs. Should consumer and commercial contracts be treated differently? [footnote deleted] There is a very strong argument that in a commercial setting, parties should be bound by the document they sign and not be able to rely on the kind of arguments that were successful in the Tilden case. This is discussed in the Fraser Jewellers (1982) Ltd v Dominion Electric Protection Co et al (1997), 34 OR (3d) 1 (CA), cited in footnote 20, page 157 of the textbook. Robins JA reversed the trial judge’s ruling that the limitation of liability clause did not bind the plaintiff because the defendant did not draw its attention to it: As I view the matter, there was no special relationship exiting between these parties that imposed any such obligation on the defendant. This is an ordinary commercial contract between business people ... in this commercial setting, in the absence of fraud or other improper conduct inducing the plaintiff to enter the contract, the onus must rest upon the plaintiff to review the document and satisfy itself of its advantages and disadvantages before signing it. There is no justification for shifting the plaintiff’s responsibility to act with elementary prudence onto the defendant. Page 157 Photo caption: What risks do lengthy contracts—as found in the car rental industry—pose to the consumer and to the business supplying the vehicle? The customer may have agreed to the terms without reading them, understanding them, or even being aware that they form part of the contract. It is prudent for business to make the customer aware of any restrictive or unexpected terms in the contract, such as exemption clauses or limitation clauses, or risk them being found unenforceable by the court. Page 158 Technology and the Law: Click-Wrap and Browse-Wrap Agreements Critical Analysis: The enforceability of terms in click-wrap agreements depends on notification prior to assent. What steps can a business take in preparing and presenting an agreement to ensure that the terms will be found to be enforceable? Do you think that browse-wrap agreements should be enforceable? Why or why not? As a businessperson, how confident would you be at this point concerning the enforceability of a browse-wrap contract in Canada? Click-Wrap Agreements In the Rudder v Microsoft decision referenced in this box, Winkler J. makes a number of points as to why the click-wrap agreement was enforceable: • The entire agreement was readily viewable by using the scrolling function. • There was a requirement to acknowledge acceptance by clicking an “I accept” button. • All terms were displayed in the same format (i.e., no fine print in the document). • The customer was presented with the terms of the agreement twice during the contracting process. In short, the vendor’s objective must be to ensure that the consumer understands the legal relationship being contemplated. To advance this goal even further than Winkler J.’s analysis, a business could include, as the first screen, a summary explaining the nature of the agreement proposed and that the entire contract appears over several screens, not just one. Based on Tilden, any unexpected or onerous clauses should be particularly conspicuous, perhaps by using large font in a distinctive colour. These onerous clauses could also be referenced in the first screen summary so that the consumer is aware of their presence in the agreement. And, of course, the more clearly worded the agreement is, the more likely a court is to hold the consumer bound. Browse-Wrap Agreements The question of enforceability of browse-wrap agreements is challenging in part because courts have taken different views on the matter. In short, unlike click-wrap agreements in which the party assents to the agreement by clicking, the browse-wrap agreement merely has a link to the terms and conditions. The conduct of the customer in simply continuing to use the website is arguably equivocal in the browse-wrap context, making their enforceability less than certain. Chapter 8 Non-Enforcement of Contracts Instructor’s Manual–Answers by Shannon O’Byrne I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • why enforcement of contracts is the norm • the exceptional circumstances in which contracts are not enforced • which contracts must be in writing and why The purpose of this chapter is to provide an account of the exceptional circumstances in which contracts are unenforceable. It is important to emphasize to students that enforcement of contracts is the undeniable norm and that the chances of being able to rely on any of the doctrines discussed in Chapter 8 are remote indeed. This chapter does not focus on the often labyrinthine attributes of the doctrines it canvasses. There are two reasons for its relatively attenuated approach. First, the detail of legal doctrine in the area is time consuming to teach without producing an obvious, counterbalancing benefit. Second, concentrating on detail here at the expense of other more germane areas of business law leads students to logically conclude—although wrongly so—that contracts are commonly and routinely set aside. In short, while this textbook discusses all the doctrines that other business law textbooks cover under the rubric of unenforceability, it chooses to more closely calibrate its depth of coverage. It thereby helps students to understand that—in the contractual arena at least—“when you hear hoof-beats, think horse, not zebra.” This decision to calibrate discussion of exceptional circumstances is the most prominent reason that the contracts part of this textbook is shorter than that found in other business law texts. (For example, while other business law textbooks may devote an entire chapter to the law of mistake, this textbook handles the matter in just over one page. As long as students realize that a legal doctrine permits a contract to be set aside on the grounds of mistake, that what mistake means in law is exceedingly narrow, and that the doctrine itself is rarely applied, the point is adequately made. This is particularly so when such an approach leaves time for studying the employment contract or some other much more pertinent set of legal principles.) As a direct result, the instructor is able to provide fulsome coverage to the legal principles and ideas that figure regularly and prominently in the marketplace. II. TEACHING STRATEGIES Chapter 8 describes a number of exceptions to the basic proposition that once a contract is created, it will be enforced. These exceptions are organized according to three categories: • defects in the relationship between the parties • defects in the specific knowledge and awareness of the parties • defects in the contract itself To ground discussion of these categories, ask the class to identify some of the arguments that the elderly couple from the Business Law in Practice scenario (the Smiths) might make to avoid their obligation to the bank. Then try to categorize those arguments according to the scheme set out just above. The last step is to assess whether the argument would succeed or not. ARGUMENT CLASSIFICATION WILL THE ARGUMENT SUCCEED? “We’re too old to look out for ourselves.” Capacity Probably not. Being elderly does not, of itself, render someone incompetent. “We are dependent on our daughter and the bank manager—we just did what they told us to do.” Undue influence Probably not, though there is a chance, if a court were willing to find that the bank manager insistently preyed on their overwhelming need to help their daughter. Another ground would be to establish that the elderly couple had placed themselves entirely in the hands of their long-standing bank manager. There is nothing in the facts to suggest that Martha had exerted undue influence, by way of contrast. “The bank manager said that signing the mortgage was just a formality and that nothing probably would come of it.” Misrepresentation Probably so. If the Smiths can show that they entered into the mortgage on the basis of this statement, and given the extreme facts, they might succeed. Signing a mortgage is far from being a formality. Signing a mortgage creates serious obligations and liabilities. “Martha lied when she told us that the problems with her business were only temporary.” Misrepresentation Probably not. Martha’s statement cannot be attributed to the bank. She was speaking for herself, and furthermore, her assessment could be classified more as wishful thinking then as a misrepresentation. “We had no idea that we were signing a mortgage and a guarantee.” Mistake Probably not. Although Martha’s parents may not have had a clear sense of what they were signing, they seemed to know that they were assuming obligations. Simple carelessness or risk taking (by not establishing what the document is) will not found mistake in the form of non est factum. “The terms of the agreements we signed are illegal.” Illegality Probably not. There is nothing in the scenario suggesting that a statute has been breached nor is it contrary to public policy per se to lend money to or take a mortgage from senior citizens. “We signed because otherwise the bank would seize Martha’s business assets.” Duress Probably not. The parents were worried but this does not force them to borrow money. Also, the bank is within its legal rights to seize Martha’s assets. “It’s just not right that the bank can enforce these agreements.” Unconscionability Perhaps. Like the elderly person in Bundy and Morrison cases, described later in this Instructor’s Manual chapter, the Smiths are inexperienced and entered into an agreement that put their only asset at risk for no return to them. A court may consider this to be unconscionable, particularly as the Smiths received no independent legal advice, on the facts. As this chart suggests, Martha’s parents may have some success. The most significant points follow: • The parents had a long-standing relationship with the bank, which may place special duties on it. • The bank betrayed that trust to get a bad loan off its books. • It misrepresented the mortgage document as a “mere formality.” • Martha’s parents did not have independent legal advice. That said, it is important to emphasize how extreme and exceptional are the facts of the Business Law in Practice scenario. To drive home this point, ask students to consider whether there are any legal grounds for the Coasters–Trackers contract (discussed in Chapters 5, 6, and 7) to be set aside: Legal capacity? Both the negotiators, and their employers, have legal capacity. Duress? There is no evidence that either party experienced any threat of physical or economic harm that led to a contract. Undue Influence? There is no evidence that either party experienced unfair manipulation that compromised free will. Unconscionability? There is no evidence that either party formed an unwise contract because the other party had taken advantage of his or her weakness. Misrepresentation? Of all the doctrines discussed in Chapter 8 of the textbook, this is the one that is most likely to arise in a generic business context but even then, not with much regularity. In the Amritha–Jason scenario, for example, there was no evidence of false statements that caused one party to enter into a contract with the other. Mistake? Although Jason may have made a “mistake” in the colloquial sense of the word because he failed to anticipate and plan for a sudden increase in Trackers’ manufacturing costs, there was no mistake in law. Illegality? There was nothing illegal in the Trackers–Coasters contract. Note that even the question of whether there is a writing requirement becomes moot since Trackers and Coasters followed prudent business practice and did execute a written contract. III. STUDENT ACTIVITIES Task 1: The instructor is referred to Chapter 6, which provides a detailed assignment designed to span the entire contracts part of the course. As has been already observed, this assignment directs students to draft an employment contract, based on mock negotiations, using plain language and avoiding legal jargon. In Part 3, students are asked to provide, among other things, • a review of the employment contract, including an account of how each element of a valid contract had been met • what obligations each side has • conditions that might excuse performance • in the event of breach, what the innocent party could seek by way of remedy The third item on the above list is particularly relevant to the content of this chapter. See Chapter 6 of this Instructor’s Manual for more detail. Task 2: Show students the CBC news clip regarding the sentencing of Nizar Karigar on the DVD supplement accompanying the Instructor’s Manual. The Karigar case is also described in detail on page 183, International Perspective: Paying Bribes to Foreign Officials. Ask students to consider the validity of anti-bribery legislation, which is founded on the idea that Canadian companies should not win business on the basis of paying graft. Is it fair to hold Canadian business to such standards when its competitors in other jurisdictions are not similarly constrained? Is it better to simply consider paying bribes as the price of doing business? Note that the textbook box explores how bribery hurts the interests of the world’s poorest citizens by undermining governmental infrastructure. And, of course, bribery also undermines the rule of law more generally. Students will be interested to learn that while Canada has historically been regarded as a laggard in combatting corruption , some are now arguing that new federal rules are, in fact, too harsh. According to Theresa Todesco, “Are Canada’s New Anti-Corruption Efforts Too Draconian,” Financial Post (9 December 2014), online: Financial Post , associations like the Council of Chief Executives are unhappy that any Canadian or foreign firm convicted of bribery anywhere in the world are automatically subject to “a 10-year ban from procuring lucrative public contracts with the federal government” and all companies that want to contract with the federal government must “certify they have not been charged with a bribery, corruption or fraud offense anywhere in the world during the past decade.” IV. EXPLANATION OF SELECTED FEATURES Page 166 The Business Law in Practice scenario is based on two cases: Morrison v Coast Finance Ltd (1965), 55 WWR 257 (BCCA) and Lloyds Bank v Bundy [1975] QB 326 (CA). What follows is a summary of both these cases. Summary: Morrison v Coast Finance Ltd (1965), 55 WWR 257 (BCCA) Morrison, an elderly woman with extremely limited financial resources, was convinced by two relative strangers—Lowe and Kitely—to borrow $4000 from Coast Finance, using her house as security. Nine hundred dollars of the money she borrowed was paid by the finance company to itself to settle the debt that Lowe owed to it. The balance was forwarded to a car company for the purchase of two motor vehicles by Lowe and Kitely. Morrison’s house was her only asset, and she had no other means of paying back the money. Though Lowe and Kitely promised to pay her monthly payments, they did not. Morrison subsequently commenced an action against Coast Finance to have the mortgage set aside on the grounds of undue influence and unconscionability. Among other grounds for such a remedy, Morrison established that she had asked for but did not receive independent legal advice at the time of the transaction. On appeal, the court set the mortgage aside on the basis of unconscionability and provided one of the tests for that doctrine, while contrasting it with the doctrine of undue influence. According to Davey J.A., A plea of undue influence attacks the sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and reasonable. Davey J.A. went on to summarize the facts as follows: The extreme folly of this old woman mortgaging her home in order to borrow money which she could not repay out of her own resources, for the purpose of lending it to the two men, who were comparative strangers, is self evident. It would have been bad enough if there had been any prospect of profit, but there was no expectation or reward and no real security. The amount to be paid back to her was exactly the amount of her mortgage to the finance company. The respondent companies knew the essential facts, and undertook the preparation of the documents for the transaction. For them to take advantage of her obvious ignorance and inexperience in order to further their respective businesses raised a presumption of fraud within the above authorities. On this footing, there was clear evidence, under the traditional doctrines of (1) an improvident bargain and (2) inequality in the positions of the parties. The mortgage was set aside accordingly. The wider view of unconscionability is set forth in Lloyds Bank v Bundy, which also forms an important factual foundation for the Business Law in Practice scenario. Summary: Lloyds Bank v. Bundy [1975] Q.B. 326 (C.A.). To assist his son, who was in dire financial straits, Herbert Bundy borrowed money from the bank, secured against his farm. The amount Bundy borrowed was immediately applied against the son’s overdraft with that same bank. Five months later, the son’s business still had not improved and accordingly, a receiving order was made against the son, the overdraft facilities were withdrawn, and his company ceased to trade. The bank then insisted on sale of Bundy’s house and went on to bring proceeding to evict Herbert Bundy. In his well-known introduction to the case, Lord Denning describes the scene as follows: Broadchalke is one of the most pleasing villages in England. Old Herbert Bundy, the defendant, was a farmer there. His home was at Yew Tree Farm. It went back for 300 years. His family had been there for generations. It was his only asset. But he did a very foolish thing. He mortgaged it to the bank. Up to the very hilt. Not to borrow money for himself, but for the sake of his son. Now the bank has come down on him. They have foreclosed. They want to get him out of Yew Tree Farm and to sell it. They have brought this action against him for possession. Going out means ruin for him. He was granted legal aid. His lawyers put in a defence. They said that, when he executed the charge to the bank he did not know what he was doing: or at any rate the circumstances were such that he ought not to be bound by it. At the trial his plight was plain. The judge was sorry for him. He said he was a “poor old gentleman.” He was so obviously incapacitated that the judge admitted his proof in evidence. He had a heart attack in the witness box. Yet the judge felt he could do nothing for him. There is nothing, he said, “which takes this out of the vast range of commercial transactions.” He ordered Herbert Bundy to give up his possession of Yew Tree Farm to the bank. Now there is an appeal to this court. The ground is that the circumstances were so exceptional that Herbert Bundy should not be held bound. The facts of the case showed that Bundy had been treated with extreme unfairness. First, the consideration moving from the bank in exchange for Bundy’s guarantee was “grossly inadequate.” Second, the relationship between the bank and the father was one of trust and confidence. As Lord Denning observed: “The bank knew that the father relied on it implicitly to advise him about the transaction. The father trusted the bank. This gave the bank much influence on the father. Yet the bank failed in that trust. It allowed the father to charge the house to his ruin.” Third, the son had a lot of influence over the father, and the father was anxious to accede to his son’s request for financial assistance. Fourth, there was a conflict of interest between the bank and the father. In assessing the law that would apply to such circumstances, Lord Denning observed: Now let me say at once that in the vast majority of cases a customer who signs a bank guarantee or a charge cannot get out of it. No bargain will be upset which is the result of the ordinary interplay of forces. There are many hard cases which are caught by this rule. Yet there are exceptions to this general rule. There are cases in our books in which a court will set aside a contract, or a transfer or property, when the parties have not met on equal terms—when the one is so strong in bargaining power and the other so weak—that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall. Particularly in light of the fact that Herbert Bundy had not received independent legal advice, Lord Denning set aside the mortgage. According to the court, the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences of pressures brought to bear on him by or for the benefit of the other. The text (page 173) provides the test for unconscionability followed by the Supreme Court of Canada. Page 169 Business Application of the Law: Dealing with Minors Critical Analysis: What are the justifications for treating infants differently in the contractual arena than adults? Infants are regarded as requiring special legal protection because they are vulnerable to manipulation and other forms of unfairness in the hands of the other contracting party. Page 172 Case: Bank of Montreal v Duguid (2000), 47 OR (3D) 737 (CA), leave to appeal to SCC granted, (2000) SCCB 2238; notice of discontinuance of appeal filed (2001) SCCB 1416 Critical Analysis: Do you think that the dissent was correct to assess Mrs. Duguid’s emotional reasons for cosigning the loan? Do you prefer the majority’s focus on Mrs. Duguid’s relatively sophisticated background as a real estate agent? The majority’s approach is to ensure that only the more traditional and extreme kind of dependence leads to a presumption of undue influence. The approach is inherently conservative. This has the benefit of ensuring that a smaller number of contracts will be subject to successful challenge and make banks more willing, perhaps, to lend money to married businesspeople who rely on a spouse to cosign. It has the disadvantage of being, perhaps, less than realistic for ignoring the power of emotions in a marital relationship. The dissent’s approach is to attach legal significance to a more nuanced form of dependence and to recognize that Mrs. Duguid’s sophistication would not necessarily overcome her fear of destroying the relationship between her and her husband by refusing to cosign. Page 174 Photo Caption: Why should contracts that appear normal on the surface be subject to challenge on the basis of the relations between the parties or the surrounding circumstances? Foremost, contract law is about consent to the bargain. If there is a defect in the party’s relationship or in the contract itself, or if there has been misrepresentation or an important mistake, contract law must act. It must provide a remedy when a contract fails to reflect the real bargain or is fundamentally unjust. Page 175 Case: Atlas Supply Co of Canada v Yarmouth Equipment (1991), 103 NSR (2d) 1 (CA), leave to appeal to SCC granted (1991) SCCB 3035; notice of discontinuance filed (1992) SCCB, 897 Critical Analysis: Should a large business with the advantage in information (such as Atlas) be allowed to take advantage of a small, relatively uninformed one (such as Yarmouth)? Which of the judges do you find to be the most persuasive? Whether Atlas took advantage of Yarmouth is a matter of opinion, as the conflicting decisions demonstrate. In short, the matter is unavoidably subjective. How courts respond to such matters is also often driven by policy considerations, as the dissenting judgment illustrates. For the dissent, the plaintiff’s overall sophistication was the deciding factor, particularly in light of a policy concern that contracts should be set aside only in very rare circumstances. Indeed, if contracts were too easily set aside, the marketplace consequences could be dire since parties would be less certain of whether they could rely on their contracts or not. The policy concern driving the majority decision that found unconscionability was the unpalatability of enforcing a contract that was formed on the basis of incomplete and even false information provided by the more powerful party. The Atlas Supply case illustrates a practical reality of litigation, namely that judges hearing the same appeal can view the same facts very differently. It can be very difficult to predict how a given court will respond to facts. Page 179 Case: R v Ron Engineering & Construction Ltd, [1981] 1 SCR 111 Critical Analysis: Is the law of mistake too harsh? What would the consequences be if a party could escape its contractual obligations simply because it had made a mathematical error? There is no doubt that the Supreme Court interpreted the law of mistake in a harsh way, but its overriding concern was to protect to the integrity of the tendering process. If a tenderer could simply cry mistake when it had made a miscalculation in its tender, owners would be in a very untenable, uncertain situation. The Supreme Court of Canada’s approach places the risk of miscalculation squarely on the shoulders of the tenderer. Unless the error made is extreme and palpable, Contract A comes into existence, thereby providing the owner with a firm foundation for choosing the party with which to enter Contract B. The other view is to argue the unfairness of the government securing $150 000 at the expense of the tenderer when, at the time, it had not even purported to choose Ron Engineering for Contract B and had been told about the error within 72 minutes of closing. Any common law rule that permits this tremendously unpalatable outcome is too harsh. Page 182 Case: Elsley v JG Collins Insurance Agencies Limited, [1978] 2 SCR 916 Critical Analysis: Do you agree that non-competition clauses in employment contracts should be less likely to be enforced than similar clauses in the sale-of-business agreements? What are an employer’s “proprietary interests”? Absent a clause preventing competition for a time, the purchaser of a business gains little for the purchase price since a competing vendor will retain his or her customer base and simply operate out of other premises. For this reason, part of the de facto purchase price for a business generally includes the vendor’s commitment not to set up shop across the street. Put another way, the purchaser “pays” for the vendor not to compete. Non-competition clauses in this area are therefore interpreted with a relative inclination toward enforcement. By way of contrast, a non-compete in the employment context is less judicially palatable since it means that a departing employee cannot work in his or her chosen field. This reality may incline a court against enforcement. Also, the inequality between an employer and employee, particularly in times of relatively high unemployment, can be much greater than between vendor and purchaser of a business. This is added reason for not enforcing in the employment context. An employer’s proprietary interests relate to that fact that an ex-employee—who has had a lot of customer contact—can seriously jeopardize the employer’s customer base. For this reason, an employer has concerns should such an employee join the competition or set up shop independently. Additionally, the employer loses the time and expense devoted to having trained the ex-employee. Page 183 International Perspective: Paying Bribes to Foreign Officials Critical Analysis: Do you agree with the penalty assessed in Griffiths? Should it matter how Griffiths conducted itself after the offence had been committed? Though paying bribes is sometimes considered the cost of doing business and the only way perhaps to conclude the deal in question, this view is losing favour. As the court in Griffiths points out, bribes are a cause of embarrassment, actually undermine commercial relationships internationally, and cause injury to the “governmental infrastructure for which the bribed official works.” The cost to the poor should be of particular concern. As the International Financial Corporation of the World Bank Group states: Corruption is among the greatest obstacles to economic and social development. The harmful effects of corruption are especially severe on the poor, who are hardest hit by economic decline, most reliant on the provision of public services, and least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic privileges. Corruption also represents a significant additional cost of doing business in many developing countries. It undermines development by distorting the rule of law and weakening the institutional foundation upon which economic growth depends. See World Bank Group, “Combatting Fraud and Corruption” (undated document), online: World Bank Group . The penalty assessed in Griffiths is large to reflect these kinds of factors as well as based on the size of the bribe. As the court pointed out during sentencing, the fine for bribery seemed to run “from a low of $25,000 in Canada to a high of approximately $12 million in the U.S.A” at para 25 so the court concluded that the proposed fine of $9 million (plus a victim surcharge) was appropriate. Further, it is appropriate under Canadian sentencing principles to take into account how Griffiths conducted itself after the offence had been committed especially as it goes to the question of remorse. According to the court in Griffiths 15 On the other hand, there are a significant number of mitigating factors present in this case. There is a new management team at Griffiths. The people involved in authorizing the bribe are no longer with the company. Most importantly, in my view, when new management came in at Griffiths and discovered the bribe, they acted quickly and decisively to fully investigate the matter and they self-reported the crime to the various relevant law enforcement authorities. Conceivably, had they not done so, this crime might never have been discovered. 16 Then, having reported the matter, Griffiths cooperated fully with the authorities, sharing the results of their investigation with the authorities, including privileged information and documents which the authorities were not otherwise entitled to. 17 In the end, to borrow Ms. Robidoux's submission, Griffiths delivered to the RCMP the evidence package "nicely organized and ready for prosecution." 18 The cost of this investigation is said to be in the range of $5 million and thus sharing this information with the RCMP has obviously saved the prosecution a significant amount of money. 19 Further, I am satisfied from the representations made to me that Griffiths has instituted an effective, comprehensive and robust anti-corruption program such that it is unlikely that there will be any repetition of such illegal conduct. 20 Griffiths' actions since discovering the bribe have saved the prosecution significant money and time in investigation. The guilty plea has avoided the cost of a full-blown trial. And very importantly, Griffiths’ entire course of conduct since discovering the bribe demonstrates a complete and genuine remorse for the illegal conduct manifested by its former officers. 21 These are very significant mitigating factors and must be accounted for and reflected in the sentence I impose. Page 186 Technology and the Law: Electronic Signatures Critical Analysis: Are electronic signatures more or less reliable than the handwritten variety? Overall they are probably no less or no more reliable than the handwritten variety. Some electronic forms of signature are more secure than traditional signatures. Some would argue that electronic signatures are more prone to fraud. However, the process, if done properly, may actually be more secure than traditional signatures, which can also be forged. Page 186 Photo Caption: How does legislation governing electronic signatures help create certainty in the marketplace? Such legislation creates certainty by defining in advance what counts as an electronic signature. While there still may be debate as to whether the subject signature meets that definition or not, at least the definition gives the adjudication process a solid starting point. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
