business law 393 chapter 4

7/23/2019 Business Law 393 Chapter 4

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Copyright © 2013 Pearson Canada Inc. 4 - 1

Chapter 4Enforcing

ContractualObligations

Legal Fundamentals

for Canadian BusinessThird Edition




Learning Objectives

• List the events that can bring a contract to an end

• Identify the various mistakes that can end or

otherwise affect a contract• Describe four forms of misrepresentation

• Explain the effects of duress and undue influence

on a contract(Continued)




Learning Objectives

(Continued)

• Consider the implications of privity and

assignment for a contract

• Describe how a contract can be breached orotherwise ended

• Outline the remedies that are available for breach

of contract

• Summarize risk-reduction strategies when forming

or ending a contract




Disputes

• May revolve around

– The existence of the contract

– The conduct of the parties at time of negotiating

the agreement

– Performance of obligations under contract




Mistake

• When parties have a different understandingof terms of contract

• Shared mistake – Both parties have made same mistake

– Contract void for lack of consensus

– If mistake only in recording the terms, may askcourt to rectify (correct) agreement

(Continued)




Mistake

(Continued)

• Misunderstanding

– Each party has a different understanding

– Courts will imply most reasonable

interpretation and enforce

– If both interpretations equally reasonable,

contract void for lack of consensus(Continued)


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Mistake

(Continued)

• One-sided mistake

– Usually has no effect on contract

– Caveat emptor (let the buyer beware)

– Only if different understanding is a result of

misrepresentation would it be actionable

(Continued)



Mistake

(Continued)

• If mistake as to nature of document signed,

contract may be void

– Non est factum (It is not my act)

– If mistake as to nature of document due to

carelessness, claim is ineffective

• Contract Interpretation – Terms and words given “reasonable meaning”

– Industry usage for special or technical terms



Exemption Clauses

• Also known as exculpatory, exclusion, orlimitation clauses

• Attempt to limit or eliminate liability forone party to the contract

• Due to one-sided nature, courts interpret

– As narrowly as possible – Against the favoured party

(Continued)



Exemption Clauses

(Continued)

• Must be brought to attention of other party

• Usually found in standard-form contracts

• Create an unequal bargaining position



Misrepresentation

• False and misleading statements that inducea person to enter into a contract

• If a term of contract, can sue for breach• Must be statement of fact

• Statement of opinion actionable if made by

expert• Silence generally not misrepresentation,

unless duty to disclose (duty of good faith)



Innocent Misrepresentation

• Misleading another without knowing or

being careless

• Only remedy is rescission

– If goods destroyed or not available, no other

remedy possible

– Not available if any wrongdoing by personclaiming rescission

– Not available if contract affirmed



Fraudulent Misrepresentation

• Intentionally and knowingly misleading another to

induce him/her to enter into contract

• Victim may seek rescission, damages, or both• If made innocent misrepresentation, and later learn

it is false, but fail to correct it, it becomes

fraudulent

• May seek punitive damages in extreme cases

• Easier to sue for innocent or negligent

misrepresentation



Negligent Misrepresentation

• If person making misrepresentation should

have known what he/she was saying was

false, he/she was careless

• Victim may seek rescission, damages, or

both



Criminal Fraud

• Specific provisions of Criminal Code deal

with fraudulent activity – Examples:

– S. 361-365 prohibit knowingly making falserepresentations intended to induce someone to

act on the representation

– Other sections deal with specific areas of fraudincluding the falsification of employee records,

books, and other documents




Duress

• Entering into a contract because of coercion

• Threats may be violence, financial pressure,

scandal, etc.

• May be against you, your family, your

property, or business

• Contract is usually voidable

• Threats may also be criminal offence




Undue Influence

• Abuse of trust relationship

• Contract voidable

• Presumed in certain relationships – Lawyers, doctors, trustees, guardians, religious

advisors, adults with infant children, adultchildren with aging parents

– May be rebutted by evidence

• May have to prove in other situations




Unconscionability

• Taking advantage of vulnerable person’ssituation

– e.g., poverty, mental impairment (short ofincapacity)

• Bargaining positions of parties are unequal

• Contract grossly unfair to victim

• Court can set aside or modify contract

• Also regulated by statute




Privity

• Only the parties to a contract are bound to itor may enforce it

• Exceptions – Interests in land bind subsequent owners of the property

– Trusts – beneficiaries may enforce

– Life insurance – beneficiaries may enforce – Some statutory exceptions

(Continued)




Privity

(Continued)

• Agents acting for principals – Agent never a party, so no privity issue

• Novation – One person taking over obligations of anotherin a contract; no privity issues as new contractis required

• Employees – Contract clauses often extended to employees,thus ignoring privity




Assignment

• Transferring a benefit under a contract to athird party

(Continued)




Assignment

(Continued)

• Usually assignor and assignee must join together

to sue if debtor fails to pay

• Statutory assignment allows assignee to suedirectly if

– Assignment is absolute (complete and unconditional)

– Assignment is in writing

– Proper notice was given to debtor

(Continued)




Assignment

(Continued)

• May only assign the benefits, not the

obligations

• Assignee takes assignment “subject to theequities”

• Assignee cannot be in a better position than

the assignor




Negotiable Instruments

• Controlled by federal Bills of Exchange Act

• Freely transferable from party to party

• Innocent third party (called a holder in duecourse) may enforce a negotiableinstrument against the person who made it

• Include promissory notes, cheques, and billsof exchange (aka drafts)

(Continued)





(Continued)

• Promissory note

– One person promises to pay another a certain

sum of money at some future date or ondemand

(Continued)





(Continued)

• Cheque

– Drawer orders bank to pay a certain sum of

money to a third party (the payee) on demand

(Continued)





(Continued)

• Bill of exchange

– May be an order to any person or business to pay

money to someone either now or at a future time

(Continued)





(Continued)

• Holder in due course

– Innocent third party who acquires possession of

instrument – Right to collect whether original obligations

met or not

– If instrument is endorsed, that person can also be held liable for amount owed




Discharge of Contracts




Performance

• Once parties have performed as required under thecontract, it is discharged

• Conditions - major terms of contract

– If breached, contract ends (if other party wants to end it)

• Warranties - minor terms of contract – If breached, obligations continue

– May seek damages from breaching party

(Continued)




Performance

(Continued)

• Substantial performance

– Substantially all obligations have been fulfilled,

but a condition is breached in a minor way – May seek compensation for small part

remaining

– If contract requires payment, must be cash

unless otherwise specified• Limits on coinage set under Currency Act

(Continued)




Performance

(Continued)

• Tender of performance

– Ready, willing, and able to perform; other party

refuses to accept performance – Contract has been breached by refusal;

performance no longer required

– Debt treated differently – if party refuses to

accept payment, money is still owed but debtormust seek payment and bear all costs ofcollection




Breach

• Incomplete or improper performance ofcontract

• Repudiation – breach by refusal to perform• Anticipatory breach – repudiation before performance is due gives victim two options – Treat contract as breached

– Continue to demand performance

(Continued)




Breach

(Continued)

• Anticipatory breach (Continued)

– If contract is treated as ended, victim may sue

for breach immediately – If victim demands performance, unexpected

events may discharge both parties

– If victim of repudiation does not perform

during waiting period, he/she will be in breach – Choice of remedy is binding

(Continued)




Breach

(Continued)

• Exemption clauses attempt to lessenliability for breach

– Narrowly interpreted by courts• Fundamental breach

– Breach of very essence of contract

– Exemption clauses can still apply if properlyworded

• In some cases, a breach of contract can be acriminal offence




Frustration

• Outside, unforeseen event that is out of the

control of either party and renders contract

either impossible to perform or completelydifferent than what parties contemplated

• Caused by things such as illness, destruction

of subject matter, government actions,natural disasters

(Continued)




Frustration

(Continued)

• Effect used to be “let the loss lie where it

falls”

• All jurisdictions now have legislation thatrequire payment for benefits received and

the return or apportionment of any deposit




Agreement

• May modify or end a contract by agreement

• All elements of contract must be present

• Cannot impose change on the other party

• Each side must receive new consideration

– May be just relieving each of his/her remaining

duties

– If only one side relieved, change is not binding

(Continued)




Agreement

(Continued)

• Contract itself may contain conditions for

changing or ending obligations

– Condition precedent - Contract begins only ifconditions are met

– Condition subsequent - Terms in contract

specify when continuing obligations will end




Remedies for Breach

• Rescission

– Returning parties to original positions

• Damages

– Compensation to attempt to put victim in

position he/she would have been in if contract

properly performed – Sometimes includes emotional stress or pain

(Continued)




Remedies for Breach

(Continued)• Liquidated damages

– Term in contract to limit damages

• Deposit – Amount forfeited as pre-estimate of damages

• Down payment – First payment of purchase price; not meant to

be forfeited

(Continued)




Remedies for Breach

(Continued)

• Victim must mitigate loss

• Damages must be reasonably foreseeable at

time contract entered into• Equitable remedies

– Only available if damages not sufficient

– Not available if any wrongdoing by partyclaiming

– Not available if innocent third party affected

(Continued)




Remedies for Breach

(Continued)

• Equitable remedies (Continued)

– Specific performance

• Requires breaching party to perform contract• Only if subject matter of contract unique

– Injunction

• Requires a person to stop doing something

(Continued)



Remedies for Breach

(Continued)

• Equitable remedies (Continued)

– Accounting

• Disclose financial records and dealings• Pay profits of wrongdoing to victim

– Quantum meruit

• Pay a reasonable price for services rendered

business law 393 chapter 4

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