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5.4.1 CONTRACTS

•each contract must contain certain elements,

-offer

-acceptance

-intent

-consideration

-capacity to contract

-lawful purpose/legality

•Breech of contract

-fraud

-misrepresentation

-duress

-undue influence

•A contract goes through a number of phases. As a matter of habit, I will illustrate general possibilities with a flowchart. This chart is by no means complete, but can give a simple picture of the life of a contract.

•Assignment of rights - unless limited in a contract, other parties can be assigned benefits. For example the use of a “collection agency” is a common method of dealing with bad debts using a third party.

•an offer may expire if not accepted in a reasonable amount of time. Expiry dates for offers are often included.

•simple offers can be revoked at any time (before acceptance), but in some cases we might want “irrevocable offers”. This involves submitting the offers under seal, or in other word giving contract consideration.

•The “option contract” is another type of irrevocable contract. Something of value is exchanged to in effect make the “option contract” a full contract that can lead to another contract. This type of contract could be used in mining to allow some investigation of a mine before buying mining rights.

•Care should be taken to state which jurisdiction the contract is in. If this is not stated in the contract it will be determined to be where the offer was accepted. [The Queen et. al. v. Commercial Credit Corp. Ltd.]

•mutual intent - a contract should outline what both parties agree on in a contract.

•Letters of Intent - a common device to start business decisions, often a prelude to entering into contracts. These “agreements to agree” are not contracts, and are not legally enforceable. [Bahama Consult Ltd. v. Kellogg Salada Canada Ltd.]

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•Consideration is an important part of a contract, in effect both parties must be giving and getting something of value (not necessarily money) to make it worthwhile to enter into the contract. The only case where consideration is not “something of value”, is when the contract is sealed (the seal is seen as something of value). Seals may be the mechanical imprint of a corporation, or a small adhesive label, as is used to make an irrevocable offer a binding contract.

•Gratuitous promise - a promise without consideration that generally wont be upheld by a court. An example is a verbal amendment to a written contract where there is no consideration. Note that this promise is moral not contractual.

•“promissory or equitable estoppel” - In some cases when a contract is amended without consideration (a gratuitous promise), but one party would be inequitably punished by the strict enforcement of the contract, then the amendment may be accepted as valid. [Conwest Exploration Co. Ltd. et. al. v. Letain] [John Burrows Ltd. v. Subsurface Surveys Ltd. et. al.] [Owen Sound Public Library Board v. Mial Developments Ltd. et. al.]

•Capacity to enter into contracts prevents those not capable of meeting the requirements from being held liable.

•Minors do not have the capacity to contract, but if they contract, they can enforce the contract, the other party cannot hold the minor liable (unless it was for a necessity). The age of majority is 18 in most provinces, except in Nova Scotia, New Brunswick, Newfoundland, and British Columbia.

•Drunks and lunatics (like minors) can enter into contracts for necessities, but for non-necessities the contract is unenforceable if the party was obviously incapacitated and repudiates the contract in reasonable time.

•Corporations may not have the capacity to contract. This contract may be outside the corporate charter, not approved by the appropriate official. [Royal British Bank v. Turquand]

•The purpose of a contract must not be illegal or contrary to statutes. Some examples of such contracts are,

-contracts that attempt to avoid loss of property in bankruptcy by transferring ownership (within one year to a relative or three months to a creditor).

-a contract provision to limit settlements already statute specified, such as The Workmans Compensation Act of Ontario

-contrary to the Combines Investigation Act

-contrary to a lien act

-when some form of license is required (e.g., P.Eng.) but not held. [Kocotis v. D’Angelo] [Calax Construction Inc. v. Lepofsky] In some cases this will only void part of the contract [Monticchio v. Torcema Construction Ltd. et. al.]

•a contract that is against public/common law may also be voided. For example, non-competition clauses that could lead to monopoly type situations, or make an engineer unable to earn a liv-

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ing might not be enforced.

•The statute of frauds has been developed to reduce problems resulting from fraudulent testimony. Generally, written contracts are required in certain circumstances such as,

-any aspect of land ownership or interest

-any agreement not to be fully enacted within one year

-debt guarantees

•unenforceable contracts will still be recognized to prevent inequities. For example, if a verbal sales contract is made and one party disputes the contract, it might be unenforceable, but they could force the returns of goods, money, etc.

•Innocent misrepresentation involves a mistake that is not intentionally misleading, but results in another party entering into a contract. If the mislead party comes forward in time, the contract can be rescinded, and they can recover costs incurred. [Township of McKillop v. Pidgeon and Foley]

•Fraudulent misrepresentation is similar to innocent misrepresentation, except an intent to deceive is involved, and the plaintiff can sue for deceit as well. [Derry v. Peek]

•Mistakes in a contract can be overturned in rare cases.

•Rectification can be done for a “common mistake” where an agreement had been reached but inaccurately recorded. If a clerical error has been made in a contract then the court may rectify it. An example of this is a figure of ‘$100 million’ is accidently typed as ‘$100’.

•Contract may be interpreted by the court using dictionary terms, witness accounts of the intentions, etc.

•“parol evidence rule” - conditions that have been agreed upon verbally, but don’t appear in a written contract cannot be entered as evidence. i.e., if it is not written it does not exist in the eyes of the court. This will only be overlooked when it can be seen that the condition was essential for the contract to be effective. [Pym v. Campbell]

•Implied terms are terms that would obviously be expected to be in a contract, but have been overlooked. [The Moorcock] [Markland Associates Ltd. v. Lohnes] [Pigott Construction Co. Ltd. v. W.J. Crowe Ltd.] [G. Ford Homes Ltd. v. Draft Masonry (York) Co. Ltd.]

•Discharge by performance - describes the end of a contract by satisfaction of the provisions of the contract.

•Discharge by agreement - if both parties agree a contract can be terminated or amended.

•Discharge by express terms - These can be written terms to end a contract

•If a contract has been breached by one party, the other party may,

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-sue for damages

-consider the contract discharged [Piggot Construction Co. Ltd. v. W.J. Crowe Ltd.]

•In breach there are,

conditions - essential components of a contract (discharges a contract) warranties - a non-essential obligation in a contract (only sue for damages)

•Repudiation - an obvious indication by one party (verbal or otherwise) that they do not intend to follow the terms of the contract. The other party may ignore the breach, treat it as breached and sue, or (in a reasonable time) notify the other party that they agree to discharge the contract.

NOTE: in some cases repudiation may be warranted.

•Remedies for breached contracts may include,

-quantum meruit - a reasonable measure of the value of work used when it was not stated in a contract or when determining damages. [Alkok v. Grymek]

-specific performance - an award where monetary rewards are not suitable (such as land transfer). This will not be given for anything requiring supervision, such as design work.

-injunction - a restraint to stop another party from an action. This will only apply to contract clauses that are also preventative in nature.

•The compensation for damages are determined by the court [Hadley v. Baxendale]

•Duty to Mitigate - when a party has been injured by a breach of contract they are obliged to minimize loses suffered. Failure to do this will reduce the damages awarded by the court.

•Penalty Clause - a clause that must be a contractual remedy that avoids a breach. If a condition of the contract is not met it can be used to recover damages. These damages must be a reasonable estimate of the incurred loss, or else the court will not uphold the term.

•Substantial compliance - when a contract has been fulfilled for the most part, except for some minor provisions of a contract, the court will award partial payment for work and services done. [Fairbanks Soap Co. Ltd. v. Sheppard]

•Fundamental Breach - when a contract contains an exemption clause (e.g., a maximum liability) and it has been fundamentally breached, then the limitation clauses no longer apply. [Harbutt’s Plasticine Ltd. v. Wayne Tank and Pump Co. Ltd.] [Photo Production Ltd. v. Securicor Transport Ltd.] [Murray v. Sperry Rand Corporation et. al.] [Beaufort Realties (1964) Inc. and Belcourt Construction (Ottawa) Limited and Chomedey Aluminum Co. Ltd.]

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A letter of intent (no value)

An Offer is made (essential)

The recipient of the Offer

changes one of the terms and The Offer is accepted makes a counteroffer - roles (a contract exists)

are reversed.

A gross mistake is found (legal action)

One or more conditions of the contract are not met.

The lapse is ignored		The contract is breached
(the contract is		(legal or other action)
implicitly changed)

The contract is naturally completed (contract ends)

An Offer withdrawn		The contract is estopped		The contract is nullified
(contract doesn’t exist)		(contract nullified)		(tort actions follow)

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•Mailbox Doctrine - When making an offer the medium of communication is usually set by the communication used for the offer. For example, if an offer is mailed, by Mr. A to Mrs. B. The offer is made on the date that A put the letter in the mail. If B accepted the offer, and returned it by mail, then the offer was accepted as soon as it was put in the mail. In other words the contract came into existence when B put the response in the mail. In most other cases the acceptance is only valid when received.

•When an offer has been received, terms can be added or removed by the receiving party. As soon as the terms of the original offer have been modified the offer now becomes a counter offer. This is effectively a new offer, and must be approved by the original party.

•VOID - means that a contract never existed

•VOIDABLE - the contract has an option of being voided

•In a retail store a price tag is an “invitation to treat”, but it is not an offer.

•caveat emptor - buyer beware

•undue influence - when a dominance leading to coercion exists such as an emotional bond between two family members that is exerted to enter a contract.

•duress - unfair pressure or intimidation exerted to cause somebody to enter into an agreement can make the contract voidable [Mutual Finance Co. Ltd. v. John Wetton & Sons Ltd.]

•misrepresentation - this can be either innocent or fraudulent.

•unconscionable transaction -

•Unilateral Mistake - when an honest mistake is made and it is fundamental. If the recipient of the offer knows that there has been a mistake. The court could be persuaded to fix such mistakes. For example, if Mrs. A is buying a new car for $20,000 plus $500 shipping, but she notices that the contract is for $500, and signs eagerly knowing there was a mistake. Later the autodealer realizes a mistake was made and asks the court to correct the unilateral mistake. Some examples of successful and unsuccessful cases are, [Imperial Glass Ltd. v. Consolidated Supplies Ltd.] [ Belle River Community Arena Inc. v. W.J.C. Kaufmann Co. et. al.] [Imperial Glass Ltd.

v.Consolidates Supplies Ltd.] [Ron Engineering et. al. v. The Queen in right of Ontario et. al.] [Calgary v. Northern Construction Company Division of Morrison-Knudsen Company Inc. et. al.] The general principles are,

-the source of the error was clerical

-the errors were not obvious

-the error was reported promptly

-the error was honest and unintentional with good motives

-the “contract” was an irrevocable offer not yet accepted

-the intent was only to correct the offer, not withdraw it.