In-depth Notes on Contractual Defects

Overview of Contractual Defects

  • Incapacity to Contract

    • Types:
    • Personal incapacity (Minors, mentally incapacitated, intoxicated)
    • Corporations
    • Indian Bands
    • Public Authorities

  • Absence of Writing

  • Mistake

  • Frustration

  • Unfairness During Bargaining

    • Duress (including person, goods, economic)
    • Undue influence
    • Unconscionable transactions

  • Illegality

Definitions

  • Void: Invalid from the beginning (Latin: void ab initio)
  • Voidable: May be either void or enforceable, depending on circumstances
  • Unenforceable: Neither void nor voidable; courts will not enforce in specific situations (e.g., Statute of Frauds)

Incapacity to Contract

Personal Incapacity
  • Includes: Minors, mentally incapacitated persons, intoxicated persons
  • Also applies to corporations, Indian Bands, and public authorities
Minors
  • Definition: Person under the age of majority (18 or 19 years in Canada)
  • Contracts can be:
    • Voidable: Many contracts are voidable to protect minors. A minor can choose to accept or void the contract upon reaching majority, but must return benefits if voiding.
    • Enforceable: Contracts for necessities (e.g., food, clothing, shelter) and beneficial employment contracts are enforceable.
Mentally Disabled Persons
  • Judicially declared mentally incompetent: contracts are void (total incapacity).
  • Not declared: contracts are voidable if the other party knew about the incapacity.
Intoxicated Persons
  • May render a contract voidable if they were not able to understand circumstances and the other party was aware of this.
  • Must avoid the contract promptly after recovery from intoxication.

Risk Management in Addressing Incapacity

  • Train employees to identify potential capacity issues.
  • Be aware of minors’ rules if entering contracts with them.
  • Document steps taken to show affirmation of contracts.
  • Consider requiring written representation of capacity from the other party.

Business Corporations

Types of Corporations
  • Chartered Corporations: Similar to a full legal person, allowed all actions except those forbidden by law.
  • Statutory Corporations: Limited contractual capacity; can only act within statutory powers.
Capacity of Statutory Corporations
  • Limited to powers listed in the statute; any contract outside this is ultra vires (beyond their powers) and therefore unenforceable.

Absence of Writing

General Rule
  • Contracts generally do not require a writing unless specified by law.
Exceptions
  • Statute of Frauds: Certain contracts must be in writing, including:
    • Guarantees for debt repayment
    • Sale of interests in land
    • Contracts not to be executed within one year
  • Non-compliance means contracts are unenforceable but not void, keeping transfer of property valid.
Consumer Protection
  • Some consumer agreements must be written to protect consumers.

Mistakes in Contracts

Types of Mistakes
  • Mistaken Identity: Possible to avoid the contract if the mistake was material and known at the time of the agreement.
  • Mutual Mistake: No contract exists if there isn’t a clear consensus.
  • Mistake Regarding Existence: If the subject matter does not exist at contract creation, no contract is formed unless there's a force majeure clause.

Doctrine of Frustration

Definition
  • A contract is frustrated when an event makes it impossible to fulfill or undermines its primary purpose.
  • Does not apply if performance just becomes more difficult or expensive.
Governing Rules
  • Applies only if neither party is responsible for the frustrating event.
  • Can be defined within the contract (force majeure clause).
Common Law Rules
  • Purchaser may recover price paid; seller can't claim if no benefit was given.

Unfairness During Bargaining

Types of Unfairness
  • Duress: Contract voidable due to threat (physical, goods, or economic).
  • Undue Influence: Internal manipulation, presumption if fiduciary relationships exist.
  • Unconscionable Transactions: Contracts judged harshly, presumed if unequal bargaining power existed.
Economic Duress
  • The assessment is based on illegitimate pressure versus commercial reality, considering circumstances like prompt action from the victim and legal advice received.

Illegality in Contracts

Categories
  • Statutory Illegality: Against regulations (e.g., selling ungraded apples).
  • Common Law Illegality: Contracts for illegal actions or public policy violations (e.g., agreements promoting corruption).
Restraint of Trade
  • Contracts limiting business operation must be reasonable in terms of time and geography, proven by the party imposing the restraint.