ENFORCING

CONTRACTUAL
OBLIGATIONS
CHAPTER 4: LEGAL FUNDAMENTALS FOR CANADIAN BUSINESS
WEEK THREE QUIZ
QUIZ 2

1. An adult car salesman (“seller”) offers to sell a car to a sixteen-year-old (“buyer”) in

Ontario for $10,000. The buyer accepts the offer and pays the $10,000 for the sale of a car
that contract is:
A. Void, at the option of the seller
B. Voidable, at the option of the buyer
C. Void, at the option of the buyer
D. Voidable, at the option of the seller
QUIZ 2

2. The case of Gilbert Steel v. University Construction stands for the principle that:
A. Past consideration is not new consideration
B. Past consideration can support a new contract
C. The promise to pay a higher price will be used as evidence to support a new contract
D. When the market increases for the price of a commodity and the client agrees to pay,
that agreement will be used to support a new contract
QUIZ 2

3. An Offer must be ______________ to the Offeree.

A. Reasonable
B. Communicated
C. Standard Form Contract
D. Post Box Rule
QUIZ 2

4. Which of the following is not an element of a CONTRACT?

A. Offer
B. Voidable
C. Acceptance
D. Consideration
QUIZ 2

5. Which of the following is not an essential term of an OFFER?

A. Price
B. Property/Service
C. Parties
D. Specific Performance
 LEARNING OBJECTIVES
• Identify the mistakes that can end or otherwise affect a K
• Describe and contrast the different forms of misrepresentations
• Explain the effects of duress and undue influence on a K
• Consider the implications of privity and assignment for a K
• Describe how a K can be breached or ended
• What is a frustrating event in a K
• What is meant by damages and any limitation on the availability of that remedy
• What are equitable remedies
KEY TERMS IN CHAPTER
• Accord and satisfaction
• Anticipatory breach
• Assignment
• Bill of exchange
• Breach of K
• Cheque
• Condition precedent
• Condition subsequent
• Conditions
• Mitigation
• negligent misrepresentation
• Deposit
• Discharge by agreement
• Discharge by performance
• Down payment
• Duress
• Duty of good faith
• Economic duress
• Fraudulent misrepresentation
• Frustration holder in due course
• Innocent misrepresentation
• Liquidated damages
• Non est factum • Statutory assignment
• Novation • Substantial performance
• One-sided mistake • Tender of performance
• Parol evidence rule • Unconscionability
• Promissory note • Under influence void
• Rectify • Voidable
• Repudiation • Warranties
• Rescission • Misunderstanding
• Shared mistake • Negotiable instruments
• Standard-form contract
CONTRACT INTERPRETATION

• The preference of a court is to give effect to the most reasonable interpretation of the K
and the reasonable expectation of the parties
• If a term is clear and unambiguous, the court simply applies the literal meaning
• In determining a meaning of a term, a court will not only look to a dictionary, but the
usage of the term in the involved industry – can you think of any examples
CONTRACT INTERPRETATION - AMBIGUITIES

• When there is an ambiguous term, the court will look to the rest of the document to try
to discern the intention of the parties – four corners analysis
• In a standard form K, ambiguities are interpreted against the drafter
• In a limited way, the court may also look to other dealings between the parties (limited
by the Parol Evidence Rule)
• PER – requires that where the terms of a K are clear and unambiguous no outside
extrinsic evidence will be considered that contradicts those clear terms. Except for:
evidence of fraud, duress, or of a subsequent agreement ending or changing the K
MISTAKES

• When a K is challenged, they are most often challenged over the interpretation of particular
terms
• Very important to draft around ambiguous terms in contracts – for example term that states:
money to be paid by close of business. When is close of business (5pm or 9pm). Example of
clauses that reduce risk: INCOTERMs.
• A mistake refers to an error with respect to the actual terms or effect of the agreement itself
NOT simply an error in judgement – Ex. Just because you bought a stock and the share price
went down, that is your error in judgement.
• Three types of Mistakes: (1) One Sided Mistakes; (2) Shared Mistakes; and (3) Misunderstandings.
MISTAKES – ONE SIDED MISTAKES

• One sided mistake: occurs when only one of the parties is in error (also known as
unilateral mistakes)
• This type of mistake will not normally affect the existence of the K, unless the
mistake is so obvious to the other party
• This is where due diligence is important – caveat emptor
• When a party misleads themselves normally that party has no recourse
• A person who makes such a grave mistake by signing a contract believing it to be
another contract may have had a claim for mistake – principle of non est factum,
which would allow the party to void the contract
• Principle of non est factum may be blocked by claim for gross negligence – see
Supreme Court of Canada Marvco Colour Research Ltd. v. Harris.
• Today a claim for non est factum might succeed for illiteracy, blindness, or mental
disorder
MISTAKES – SHARED MISTAKES

• Shared mistakes occur when both parties have made the same serious error (aka
common error)
• This serious common error may destroy the consensus reached and result in K being
void
• Ex. Both parties think they are dealing one parcel of land when in fact they are dealing
with another.
• There are situations when court might rectify terms in K – ex. If parties agreed to sell
and purchase a boat for $50,000 and it was mistakenly written down for $5,000, the
court may be willing to rewrite the price to $50,000
• For Rectification to take place the actual terms of the agreement must be clearly
understood by both parties at the time of K and the error must be simply in the
recording of that agreement
MISTAKES – MISUNDERSTANDINGS
• Misunderstandings occur when both parties have a different understanding of the terms of a K
(aka mutual mistakes)
• These are the most common types of disputes that arise in a challenge to a contract
• These mistakes are resolved by the court imposing the most reasonable interpretation of those
terms on the parties
• Ex. If I thought the terms of a K required that you include the sheepskin seat covers with the sale
of your car, and you refused to supply them, the court would look at the terms of the K and the
surrounding circumstances to determine whether they were included – the court would impose
the most reasonable interpretation- however, if the court found both interpretations equally
reasonable that mistake may destroy the K
• Famous case of Raffles v.Wichelhaus (1894), two British merchants who agreed on the sale and
purchase of the cargo ship Peerless, on route from Bombay to Liverpool, ran into difficulty when it
was discovered that there were two ships of that name making that passage but at different times.
The purchaser intended the cargo to be sent on one ship and the seller intended it to be sent on
the other. Both positions were equally reasonable, thus the court void the K.
EXEMPTION CLAUSES

• Another area of numerous contract challenges

• Also known as, exculpatory clauses or limitation clause
• Stems from theory that individuals are free to K and one of the purposes of a K is to manage risk
• Courts are generally reluctant to interfere with such terms because there is an assumption that
there has been a calculation by the parties as to benefits and risks
• When a court must interfere to interpret any ambiguity they will do so narrowly and at the
expense of the party favoured by the clause
• For ex. If a hotel has a sign saying that it is not responsible for lost or stolen goods, and those
goods were destroyed by fire, the hotel would not be protected.
• The analysis a court will engage in is: (1) whether the wording of the clause catches the situation
or whether terms should be implied into the contract; (2) whether there was any undue influence,
equal bargaining positions, or duress; (3) whether there is some misconduct, such as fraud or
criminality on the part of the person seeking to hide behind the exemption clause
MISREPRESENTATION

• Misrepresentations involve false and misleading statements that induce a person to enter into a K
• Even half-truths, where what is not mentioned makes the statement misleading – for example: telling a
prospective investor that a finance company has several million dollars in assets in the form of outstanding
loans is misleading if the investor is not also told that half of those loans are unsecured and unrecoverable
• To be actionable, the statement must be a statement of fact and not an opinion
• The misleading statement must have induced the person to contract to be actionable – sometimes known
as the “reliance” element that must be proven to succeed on misrepresentation claim
• See table 4.1 of book for Remedies
MISREPRESENTATION – INNOCENT
• When a party misleads another without knowing and he or she is otherwise without fault, the
misrepresentation is said to be innocent
• The recourse is rescission – court attempting to restore the parties to their original positions (not
damages) – equitable remedy
• Damages are not available where misrepresentation is innocent
• For example: if a seller had misrepresented the year of production of a car sold to you, honestly
believing it to be true, and this was important enough to induce you to enter into that transaction,
you could seek to have the contract rescinded on the basis of innocent misrepresentation. In this
case you would return the car and the seller would be required to return the purchase price as
well as any incidental costs you have incurred.
MISREPRESENTATION – FRAUDULENT
• Fraudulent misrepresentation takes place when one person intentionally and knowingly
misleads another and induces him or her to enter into a contract
• Fraud is when it has been shown that you did not believe that what you were saying was true
• Aggrieved party can seek damages for the tort of deceit or rescission
• while the damages may be more lucrative for a plaintiff, the plaintiff may seek a claim for
innocent misrepresentation since it is easier to prove than fraud
MISREPRESENTATION – NEGLIGENT
• Historically there was not a difference between negligent misrepresentation and innocent
• Unlike innocent misrepresentation damages may be available when negligent misrepresentation has
been established
CRIMINAL FRAUD
• Inducing someone to enter a transaction through intentionally misleading statements may be a crime with
significant penalties
• See sections 361 to 365 of the Criminal Code, which prohibits knowingly making false representations that
are intended to induce someone to act on that representation
• For example: knowingly paying with a cheque without sufficient funds to back
• See sections 380 of the Criminal Code which contains provisions generally prohibiting fraudulent activities
that cheat the public “of any property, money, or valuable consideration or service”.
DURESS AND UNDUE INFLUENCE - DURESS

• Duress occurs when the free will to bargain is lost because coercion, involving threat of
violence, imprisonment, scandal, damage to property, or even inappropriate financial
pressure is exercised by one of the parties
• Your ability to recover is limited to the party is in the wrong – for example: if you sold
your car to A under threat, you could sue to have it returned because you sold it under
duress. But if A sold your car to B, you cannot force B to give it up (provided B is an
innocent bona fide purchaser). You would be limited to recovery from A.
• Economic duress case: Canada Life Assurance v. Steward (1994) see p. 105.
UNDUE INFLUENCE

• Undue influence is a more common challenge to a K

• It involves abuse of a trusting relationship
• Contract is voidable
• Undue influence is presumed in some situations – example of doctors,
lawyers, religious advisors, trustees, adults with infant children, adult
children with aging parents
• May have to prove in other situations
UNCONSCIONABILITY

• Similar to under influence but involves when vulnerable person is taken advantage of
• Allows the court to set aside or modify the K on the basis of vulnerability (ie poverty or mental
impairment)
• Must be shown that because of the vulnerability the bargaining power of the parties was grossly unfair
• Contract is grossly unfair to victim
• May be regulated by statute
PRIVITY AND ASSIGNMENT - PRIVITY

• Who has the rights and the claims under the contract and who can sue to enforce
• Only the parties to a K are bound to it and may enforce it
• For example: a shareholder cannot sue the accountants or others of a corporation who
negligently do business for that corporation, such as providing incorrect audited financial
statements. The corporation is considered a separate person and the K is between the
accountant and the corp. Not the shareholder.
• Exceptions:
• Interests in land bind subsequent owners of the property
• Trust – beneficiaries may enforce
• Life insurance – beneficiaries may enforce
• Some other statutory exceptions
PRIVITY AND ASSIGNMENT – PRIVITY (AGENCY)

• When an agent acts for a principal in dealings with third parties, the principle of privity does not enter
into the situation – the resulting K is between the principal and the third party – the agent is merely a
go between
• Novation: one person taking over the obligations of another in a contract; no privity issues as new
contract is require
• All parties must agree to the change substituting a new contract for the old one
• Employees – contract clauses often extended to employees, thus ignoring privity
PRIVITY AND ASSIGNMENT - ASSIGNMENT

• Assignment involves the assignor transferring a benefit to which they are entitled under a K to a third
party called the assignee
• Transferring a benefit under a contract to a third party
PRIVITY AND ASSIGNMENT - ASSIGNMENT
• Ex. If a debtor owes money to a creditor, that creditor can assign the claim to a third party – merchants selling
goods on credit, such as car dealerships, often do this. The business is selling cars, not extending credit, so they
assign the credit transaction they have entered into with their customer to a finance company for a fee, and
the payments are then made to the finance company.
PRIVITY AND ASSIGNMENT - ASSIGNMENT
• Usually the assignor and assignee must join together if they want to sue a debtor who fails to pay
• The rule of privity would bar the assignee from suing directly the debtor – statutes have enacted around this
problem hence statutory assignment
• Statutory assignment: most jurisdictions have enacted statutes that allow the assignee to sue directly if certain
criteria are met
• Statutory assignment allows assignee to sue directly if:
• Assignment is absolute (complete and unconditional)
• Assignment is in writing
• Property notice was given to debtor
PRIVITY AND ASSIGNMENT - ASSIGNMENT

• Assignor may only assign the benefits, not obligations

• For example: a car dealership who assigns its debt to the finance company, the car dealership is
still liable for a defective car
• Assigneed takes subject to the equities – cannot assign away the obligations
• The assignee cannot be in a better position than the assignor
NEGOTIABLE INSTRUMENTS

• Controlled by the Federal Bills of Exchange Act

• Freely transferable from party to party
• Must be enforceable at face value
• These are instruments that are passed between people or institutions and represent claims for funds
owing – examples: promissory notes, cheques, bills of exchange (aka drafts)
• First – allowing the holder to collect on it even though no notice of the various transfers that may have
taken place has been given to the original debtor
• Second – they are made enforceable at face value by giving the innocent third party (called a holder in
due course) who acquires possession without notice of any defect, the right to collect on it whether the
original contractual obligations have been met or not – innocent third party may enforce a negotiable
instrument against the person who made it
NEGOTIABLE INSTRUMENTS

• Promissory Note: when one person promises to pay another a certain sum of
money at some future date or on demand
• This is a signed written instrument whereby one person promises another
unconditionally to pay a specific sum of money at some future date or on
demand
NEGOTIABLE INSTRUMENTS

• Cheque – drawer orders bank to pay a certain sum of money to a third party (the
payee) on demand
• Involves 3 parties: (1) the drawer (; (2) bank; and (3) payee
NEGOTIABLE INSTRUMENTS
• Bill of Exchange (Drafts): a cheque must be drawn on a bank, but the bill of exchange can
be drawn on any person or business
• Bill of Exchange may be made payable at some future time, whereas a cheque must be
payable on demand
• Involves 3 parties: (1) drawer; (2) drawee; and (3) payee
 NEGOTIABLE INSTRUMENTS
• Holder in due course: innocent third party who acquires possession without notice of any defect, the
right to collect on it whether the original contractual obligations have been met or not with respect
to the instrument
• If the instrument is endorsed, that person may be held liable for amount owed – in both situations
below the holder who endorses has added his/her credit and may be liable to pay for amounts owed
• Where the holder merely signs his or her name, it becomes a bearer instrument negotiated
simply by passing it from one person to another
• When the holder adds the words “pay to the order of” it is an order instrument and the next
person must also endorse it before transferring it
DISCHARGING CONTRACTUAL OBLIGATIONS
 DISCHARGING CONTRACTUAL OBLIGATIONS -
PERFORMANCE
• Many disputes to a contract arise because of incomplete or improper performance of contractual
obligations – this is a breach of contract
• Difference between “warrant” and “condition”
• Condition is a major term in an agreement vs. Warranty is a minor term in an agreement
• To tell the difference, apply the reasonable person test: whether, if the contracting party had known
ahead of time that the term was going to be breached, he would still have entered into the K. if he
would have walked away, the term is a condition, but if it is likely that the contracting party would
still enter, then it is a warranty.
• If condition is breached, then the non breaching party may discontinue contract vs. if warranty breached,
the failure is not considered serious enough to discharge the contract or end the obligations of the non
breaching party
 DISCHARGING CONTRACTUAL OBLIGATIONS -
PERFORMANCE
• Substantial performance is when a condition is breached in a minor way
• The failure is so minor that the K is considered substantially performed and the non-breaching party is
still required to perform his or her obligations under the agreement
• May seek compensation for small part remaining
• For example: if you operated a fleet of cars and ordered 1000 cars from the dealership and only 999 were
delivered, this would be substantial performance of a condition of the contract
 DISCHARGING CONTRACTUAL OBLIGATIONS -
PERFORMANCE
• One party cannot prevent the other from performing and then claim to be relieved of his or her
obligations because the other party has failed to properly perform
• Tender of Performance: when a party is ready, willing, and able to perform
• Contract has been breach by refusal then performance is no longer required
• Debt treated differently – if party refuses to accept payment, money I still owed but debtor must seek
payment and bear all costs of collection
DISCHARGING CONTRACTUAL OBLIGATIONS -
BREACH
• Forms of breach
• Performance - Incomplete or improper performance of K
• Repudiation – breach by refusal to perform
• Anticipatory breach – repudiation before performance is due gives non breaching party two options:
• Treat K as breached
• Continue to demand performance
• If K is ended, the non breaching party may sue for breach immediately
• If non breaching party demands performance, unexpected events may discharge both parties
• If non breaching party of repudiation does not perform during waiting period, he/she will be in
breach
 DISCHARGING CONTRACTUAL OBLIGATIONS -
FRUSTRATION
• A K discharged by frustration is a recognition that the parties should not be penalized when events
happen that are out of their control
• Usually takes place when after the K has been entered into, performance becomes impossible, such as
when the subject matter of the K is destroyed before performance through no fault of the parties
• Outside of unforeseen events that is out of the control of either party and renders the K either
impossible to perform or completely different than what parties contemplated
• Caused by things such as illness, destruction of subject matter, government actions, natural disasters
• Ks often have a “force majeure” clause freeing both parties from any liability should any “act of god”
occur
DISCHARGING CONTRACTUAL OBLIGATIONS -
FRUSTRATION
• Historically the effect of a frustrated contract was simply to “let the loss lie where it falls” –
both parties were discharged of any further obligations keeping any benefits and bearing any
losses that had been incurred to that point
• Today all jurisdictions have enacted frustrated contracts acts that overcome this unfairness
• For example: BC Frustrated Contracts Act goes further by requiring the parties to share
equally any costs incurred, even where no deposit has been paid
 DISCHARGING CONTRACTUAL OBLIGATIONS

Table 4.3 Performance and Breach p. 116

Performance and Breach Option of the Other Party
Repudiation Can treat obligations as ended and sue or wait for performance
Before performance is due Election Can treat obligations as ended and sue
After performance is due Breach
Failure to perform Breach Can treat obligations as ended and sue
Partial performance
Serious failure Breach Can treat obligations as ended and sue
Minor failure Performance Must perform obligations, but can sue for compensation
Complete performance Performance Must fulfill contractual obligations
Performance tendered but refused
Goods and Services Performance
Money Must fulfill contractual obligations
Money still owed, but no obligation to seek out creditor
AGREEMENT

• May modify or end a K by agreement

• All elements of a K must be present (“it takes a K to change a K”)
• Cannot impose change on the other party
• Each side must receive new consideration
• May just be relieving each of his/her remaining duties
• If only side relieved, change is not binding
• Contract itself may contain conditions for changing or ending obligations
• Condition precedent – contract begins only if conditions are met
• Condition subsequent – terms in contract specify when continuing obligations will end
 REMEDIES FOR BREACH

• Rescission –
• returning parties to original position as a void K
• Damages –
• compensation to attempt to put victim in position he/she would have been in if contract properly
performed
• May sometimes include emotional stress or pain
• Liquidated Damages
• Term in a K to limit damages
• Usually a calculation and used when determining damages may be difficult
 REMEDIES FOR BREACH

• Deposit
• An amount forfeited as pre-estimate of damage
• Down Payment
• Firs payment of purchase price, not meant to be forfeited
• Mitigate
• non breaching party must mitigate losses
• Damage Foreseeability
• damages must be reasonably foreseeable at time contract entered into
REMEDIES FOR BREACH - EQUITABLE REMEDIES

• Equitable Remedies
• Only available if damages not sufficient
• Not available if any wrongdoing by party claiming (unclean hands)
• Not available if innocent third party affected
• Specific Performance
• Requires breaching party to perform k
• Only if subject matter of contract is unique
• Injunction
• Requires a person to stop doing something
• Accounting
• Disclose financial records and dealings
• Pay profits of wrongdoing to victim
• Quantum Meruit
• Pay a reasonable price for services rendered