Study Notes for Contractual Defects

Managing the Law: The Legal Aspects of Doing Business

Chapter 10: Contractual Defects

Lexicon
  • Void: From the Latin void ab initio, meaning invalid from the outset.
  • Voidable: May be either void or enforceable depending on the facts of the case.
  • Unenforceable: Neither void nor voidable but a court will not enforce it; for example, in situations covered by the Statute of Frauds.
INCAPACITY
Incapacity to Contract
  • Discusses various parties that may have incapacity to enter into contracts:
    • Personal incapacity:
    • Minors: Individuals under the age of majority (varies between jurisdictions, typically 18 or 19 in Canada).
    • Mentally incapacitated persons: Individuals who have been judicially declared incompetent.
    • Intoxicated persons: Those who are too drunk to understand the contract terms.
    • Business corporations and associations: Different rules apply to these entities;
    • Indian Bands and Aboriginal Persons: Specific contractual capacities as defined by law.
    • Public Authorities: Have general contractual capacities subject to specific statutory regulations.
Minors
Definition
  • Minor: A person under the age of majority.
  • Age of majority varies between jurisdictions, generally 18 or 19 in Canada.
Contracts with Minors
  • Voidable or Enforceable: Most contracts with minors are voidable to protect against exploitation and immaturity.
Minors and Voidable Contracts
  • Most contracts entered by minors can be voided if:
    • The minor chooses to avoid the contract soon after reaching the age of majority.
    • They must return any benefits received if they opt to void the contract.
    • Acceptance of the contract after the age of majority results in loss of the ability to avoid.
Minors and Enforceable Contracts
  • Certain contracts are enforceable for minors, primarily those for necessities of life, including:
    • Food
    • Clothing
    • Shelter
    • Education
    • Medicine
  • Minors are obligated to pay a reasonable price for these necessities.
  • Employment contracts may also be enforceable if deemed beneficial to the minor.
Mentally Disabled Persons
  • Individuals judicially declared mentally incompetent possess total incapacity to contract; contracts made under this condition are void.
  • If an individual is not judicially declared but is mentally incompetent, contracts are usually voidable if the other party knew of the disability. However, this does not apply to necessities of life.
  • Risk Management: Organizations should train employees to recognize potential capacity issues when dealing with contracts involving such persons.
Intoxicated Persons
  • Contracts may be voidable if a party is intoxicated to the degree that they do not understand the circumstances and if the other party is aware of this level of intoxication.
  • A voidable contract must be avoided promptly once sobriety is regained; otherwise, it is considered affirmed.
  • The law often balances incapacity due to intoxication against principles of fairness.
Business Corporations
  • Corporations are recognized as legal persons with specific rules regarding contracting abilities.
Capacity of Chartered Corporations
  • Corporations are treated similarly to adults of sound mind; they can enter contracts unless explicitly prohibited by law.
  • Contracts created in breach of charter provisions are valid and enforceable, although the charter may be forfeited.
Capacity of Statutory Corporations
  • Statutory corporations have limited contractual capacities defined by statute; they can only enter contracts that fall within their authorized powers.
  • Contracts outside of these powers are termed ultra vires (beyond the powers) and are void and unenforceable.
Associations
  • Only legal persons (humans and corporations) have the capacity to enter contracts.
  • Many associations are unincorporated (e.g., clubs) and thus often lack capacity.
    • Exceptions: Indian Bands and certain activities of trade unions discussed in later chapters.
Avoiding Incapacity of Associations
  • Some provincial legislations allow limited capacity for associations (e.g., non-profit corporations).
  • Contracts made with members of associations transfer all burden and risk onto individuals; contracts are not enforceable against other members.
Indian Bands
  • Indian Bands represent a unique collection of Aboriginal individuals living collectively on land held by the Crown.
  • They possess full capacity to create contracts and to sue or be sued.
Native Persons
  • Native persons may have full contractual capacity if living away from their band area but limited capacity when on band land as defined by the Indian Act.
  • Certain limitations exist regarding property transactions, specifically around reserve land.
Public Authorities
  • Public authorities have a general capacity to contract unless restricted by specific statutes.
  • Their contractual powers are also affected by constitutional divisions of power within governmental structures.
ABSENCE OF WRITING
General Rule
  • Normally, contracts do not need to be in writing; however, there are important exceptions:
    • Statute of Frauds
    • Consumer Protection Laws
Statute of Frauds
  • Certain contracts are rendered unenforceable if not documented in writing, including:
    • Guarantees for the repayment of debts.
    • Sales involving interests in land (including leases).
    • Contracts not performable within one year.
  • This statute applies, barring any exceptions specific to provinces like British Columbia and Manitoba.
Requirement for Written Evidence
  • A contract can be documented in the form of:
    • A note or memorandum specifying essential elements (parties, subject matter, price).
    • A signature (interpretation is broad).
  • It is acceptable for several documents to collectively represent the agreement.
  • Non-compliance results in an unenforceable contract, retaining the ability to transfer property but prohibiting legal action in court for enforcement.
Consumer Protection and Writing Requirements
  • Specific consumer contracts must be in writing, including:
    • Contracts for personal development services.
    • Internet contracts requiring upfront payments over a certain value.
  • Writing requirements aim to prevent consumer exploitation and reduce disputes.
MISTAKE
Contractual Mistake
  • Mistakes in contracts can arise from inaccuracies, which may prevent contract formation:
    • Examples include mistaken identity and incorrect subject matter.
  • Mistakes can render a contract impossible to fulfill.
Mistakes Preventing Contract Creation
  • A mistake of identity allows for avoidance only if:
    • The mistake was material (significant).
    • The other party was aware of the mistake at contract formation.
  • A mutual mistake regarding the subject matter means no true consensus was achieved, and thus, no contract exists.
Mistake Regarding the Existence of Subject Matter
  • If parties believe subject matter exists but it ceases to exist before the contract is executed, it results in a mistake, and no contract is established.
  • If it ceases to exist after the contract is formed, it relates to frustration of the contract, an issue to be addressed later.
  • Contracts safeguarding against such mistakes may include a force majeure clause.
Documents Mistakenly Signed
  • Typically, signatures serve as proof of agreement; exceptions can be made for:
    • Harsh/unexpected terms.
    • Non est factum: a defense claiming the document executed is fundamentally different from what was expected. This defense is rare and does not apply if the signer was careless.
FRUSTRATION
Doctrine of Frustration
  • A contract is considered frustrated when an unforeseen event renders performance impossible or substantially undermines its intended purpose.
  • Merely increasing the difficulty or expense of performance does not constitute frustration.
Governing Rules
  • This doctrine applies only when neither party could have controlled the frustrating event ( such as natural disasters).
  • Contracts may outline loss allocation; force majeure clauses are common in this context.
  • Legislation regarding frustration exists in various provinces (e.g., Alberta, BC, Manitoba, Newfoundland and Labrador, New Brunswick, Ontario, PEI).
UNFAIRNESS DURING BARGAINING
Overview
  • Contracts may be voidable upon showing of unfairness due to circumstances like:
    • Duress
    • Undue influence
    • Unconscionable transactions
Duress
  • Defined as an illegitimate threat of harm which renders a contract voidable at the affected party's discretion.
  • Types of duress include:
    • Duress of person: Threat of physical harm.
    • Duress of goods: Threat to damage/retain goods.
    • Economic duress: Threat of financial harm.
Economic Duress
  • Economic duress centers on threats related to financial distress, requiring evaluation of both the pressure's legitimacy and the commercial realities.
  • Contracts are more likely to be voidable if:
    • The threat was made in bad faith.
    • The victim had no reasonable means to resist.
    • They acted promptly once under duress, especially if they protested at the time of the threat.
    • The victim did not have legal advice beforehand.
Undue Influence
  • Relates to manipulation, contrasting with duress where external threats are present.
  • Can be either deliberate or inadvertent; the manipulation negates the idea of consent.
  • Rules vary based on whether a pre-existing fiduciary relationship exists:
    • If such a relationship is present, undue influence is presumed.
    • The fiduciary must demonstrate that the transaction was fair and that the weaker party received independent legal advice.
Fiduciary Relationship
  • Defined as a relationship where one party has significant power over another (e.g., physician and patient, lawyer and client).
  • If undue influence is assumed, the burden shifts to the more powerful party to prove fairness in the transaction and the independent legal advice provided to the weaker party.
Unconscionable Transaction
Definition and Overview
  • An unconscionable bargain is characterized as one that no reasonable person would propose or accept.
Conditions for Unconscionability
  • Presumed when:
    • The contract is improvident.
    • There exists a substantial inequality of bargaining power.
  • This presumption can be countered by demonstrating:
    • A fair bargaining process took place.
    • The weaker party received independent legal counsel.
Legislation on Unconscionability
  • Some jurisdictions have legislated against unconscionable transactions, introducing:
    • Disclosure requirements.
    • Cooling off periods for agreements.
    • Prohibitions against unfair terms (e.g., exclusion clauses).
    • Courts have the discretion to nullify harsh or unconscionable agreements.
ILLEGALITY
Overview of Illegality
  • Contracts may be void for illegality due to:
    • Statute or regulation.
    • Common law provisions.
    • Breaches of public policy.
Statutory Illegality
  • Illegal transactions contrary to regulatory statutes (e.g., grading standards in the sale of produce).
  • Courts do not automatically set contracts aside; they consider:
    • The seriousness of the consequences of invalidation.
    • The social utility of maintaining the transaction.
    • The class of individuals the prohibition was designed to protect.
Common Law Illegality
  • Contracts for criminal acts or torts are void (e.g., an assassin cannot be sued for breach).
  • Contracts that infringe upon public policy are also void, covering acts that threaten national safety or promote immoral behaviors. This implies a degree of judicial discretion.
  • May include agreements tied to restraints of trade.
Restraint of Trade
  • Non-compete agreements restrict business operations and may impose:
    • Time limits (e.g., two years).
    • Geographic constraints (e.g., 200 km).
  • Typically included in contracts where an ex-employee is restricted from competing or where vendors are limited from opening new establishments.
  • The burden of justification falls on the party imposing the restraint to demonstrate its reasonableness based on the totality of circumstances.
TAKE AWAYS
  • Reflect on potential implications of unfair practices during bargaining, especially between large corporate entities.
  • Engage with concepts like duress to understand contract integrity and enforcement frameworks better.
  • Explore the relationship between various contractual defects and their broader legal and ethical implications regarding fairness, accountability, and capacity in commercial dealings.