Chapter 10 - Contractual Defects

Question 1

Capacity

Answer 1

A person must have capacity in order to enter into a contract, meaning they have legal power to give consent

Question 2

7 Groups of persons who may either have no capacity or only limited capacity to create a contract:

Answer 2

1. Minors
2. Mentally disabled persons
3. Intoxicated persons
4. Corporations
5. Associations
6. Indian bands and Aboriginal persons
7. Public authorities

Question 3

Minors

Answer 3

A minor person under the age of majority (18 or 19)

Contracts with minors are either: enforceable or avoidable at the option of the minor

Question 4

Minors and Enforceable Contracts

The Rule:

Answer 4

Some contracts with minors are enforceable (the minor cannot avoid these contracts) - ensures that minors will not be denied contracts, that are to their benefit (teen entering contract to rent apartment)

Contracts for necessities of life such as food, clothing, shelter, education, medicine, legal advice, employment contracts that are to their benefit

Question 5

Minors and Voidable Contracts

The Rule:

Answer 5

Most contracts with minors are avoidable. They can choose to accept or avoid. If the contract is affirmed, they lose the ability to avoid.

Rule applies even if child appeared older

Question 6

Mental Incapacity

The Rule:

Answer 6

1. If there is a Judicially Declaration/Court Order
   This person has no legal capacity: any contract entered into with this person will be void.
2. Mentally incompetent

Party should have known that the person that they were contracting with had mental incapacity

Question 7

Intoxicated Persons

The Rule:

Answer 7

1. The drunk person was “too drunk to understand circumstances” so they could not know or appreciate what they were doing; and
2. The other party was aware of the above.

In order to avoid, immediately upon becoming sober, take steps to avoid the contract…

Question 8

Business Corporations

Chartered Corporation

Answer 8

Full Contractual capacity

Question 9

Business Corporations

Statutory Corporation

Answer 9

Limited Contractual capacity

Contract enforceable if within valid powers (contract outside the statutory powers is ultra vires - beyond the powers)

Question 10

Associations

Rule:

Answer 10

Only legal persons can have capacity to enter into a contract

Legal persons can be human beings and corporations, therefore associations are unincorporated and do not have capacity

Question 11

Associations

Exception to Rule:

Answer 11

Indian Bands and Trade Unions do have capacity for some kinds of contracts

Question 12

Indian Bands

Answer 12

Body of Aboriginal people living on land given by the Crown.

Have full capacity to create contracts, to sue and be sued

Property on reserve land cannot be used as security for debt and cannot be transferred to another member without Crown’s consent

Question 13

Public Authorities

Answer 13

Public authorities are federal, provincial, and municipal levels that generally have full capacity to contract

Limited by Constitutional division of powers

Question 14

Absence of Writing

The Rule:

Answer 14

As a general rule, a contract is enforceable, whether it is verbal or written.

Question 15

Absence of Writing

The Rule Exceptions:

Answer 15

o Contracts to which the Statute of Frauds applies; and
o Contracts to which consumer protection legislation applies.

written documents for contract’s essential elements, namely: parties, subject matter, price

Question 16

Types of Contracts that must be Evidenced in Writing

1. The Statute of Frauds applies to: Contract of Guarantee

Answer 16

A Guarantee is a contractual promise by a 3rd party (called a Guarantor) to a creditor, in which the Guarantor promises to satisfy a debtor’s obligation if the debtor fails to do so.

Distinguish from indemnity: this is an unconditional promise to assume another’s debt completely.

Must be in Writing

Question 17

Types of Contracts that must be Evidenced in Writing

2. Contracts for the Sale of an Interest in Land

Answer 17

Contracts for the sale of land including farmland, a building, a house, and so on, must be in writing, to be enforceable.

o A short-term lease need not be in writing to be enforceable, but a long term lease must be in writing to be enforceable (i.e.. Duration of more than 3 months)

Question 18

Types of Contracts that must be Evidenced in Writing

3. Contracts not to be Performed within a Year

Answer 18

If a contract does not need to be performed within 1 year from the date of signature, then it must be in writing, to be enforceable.

Question 19

Consumer Protection Legislation

Answer 19

Some consumer protection laws require certain agreements to be made in writing to protect consumers and prevent the exploitation of consumers and to reduce the incidence of disputes

Question 20

Contractual Mistake - 2 Mistakes that prevent the contract from being formed and make it void

Answer 20

1. Mistaken identity

2. Mistake about subject matter of contract

Question 21

Mistaken Identity

Mistaken identity will render a contract defective if:

Answer 21

1. The mistake was known to the other contractual party (the crook);
2. The mistake mattered to the mistaken party in a material way.

Question 22

Mistaken Identity

Mutual mistake about subject matter

Answer 22

If the parties both have a mistake about the subject matter of the contract, then the contract has not formed, it is void, because there is no consensus ad idem.

Question 23

Mutual Mistake about an Existing Fact

General Rule:

Answer 23

The General Rule is that when there is a mutual mistake about an existing fact, the contract is impossible to perform. The contract is not void; however, it is usually not enforceable insofar as neither party can sue to enforce the contract/sue for damages

Eg.) Two parties sign lease agreement, but turns out the house was burned down, and neither of them knew at the time the contract was agreed upon

Question 24

Force Majeure Clause

Answer 24

A Force Majeure clause states which party will bear the financial responsibility if the contract cannot be fulfilled due to some circumstance outside of a party’s control.

Question 25

Mistake of a future fact - Frustration

Answer 25

 The doctrine of frustration applies if the parties make an erroneous assumption about a future fact.
 Frustration occurs not when a contract is difficult to perform; but when it is impossible to perform.

Only relevant if neither party is responsible for the relevant event that made the contract impossible to perform

Question 26

Frustration - Apportionment of Damages

Who bears the risk if the contract cannot be fulfilled?

Answer 26

 If there is a force majeure clause in the agreement, the risk of loss will fall upon the party stipulated.
 If there is no force majeure clause, then the Court must rely upon rules at common law and under statute. (All or nothing Rule)

Question 27

All or Nothing Rule

Answer 27

A purchaser can recover all of his contractual payments if he has not received any benefit from the seller. If he has received some benefit, he cannot recover any payments. The seller cannot demand payment from the purchaser, even if the seller has incurred substantial expenses under the agreement.

Question 28

Documents Mistakenly Signed

General Rule:

Answer 28

• The general rule is that signature is proof of assent, therefore if you have the other party’s signature on your contract, then they are bound by the terms of the contract.

Question 29

Documents Mistakenly Signed: Non Est Factum

General Rule Exceptions:

Answer 29

An unusual or onerous term is not binding on a party, unless the other party specifically brought it to their attention before they signed the contract (Tilden Rent a Car)

o Doctrine of Non est factum (“this is not my deed”)
This doctrine states that a signatory to a contract is allowed to avoid the contract when there is a fundamental or radical difference between what they signed and what they thought they were signing.

High Threshold to prove!

Question 30

Unfairness During Bargaining

Duress of Person

Answer 30

Threat of physical harm to party or loved one

Question 31

Unfairness During Bargaining

Duress of Goods

Answer 31

Threat to detain, damage, or destroy goods

Question 32

Unfairness During Bargaining

Economic Duress

Answer 32

Threat of Financial harm

Must determine if illegitimate threat is present or merely commercial reality!

Question 33

Unfairness During Bargaining

Undue Influence

Answer 33

Overpowering will

Duress is external threat of harm versus undue influence is manipulation of the other person through your relationship with them (psychological manipulation)

Question 34

Fiduciary Relationship

Answer 34

Occurs when a person is in position of dominance over another, it is based on a power imbalance/relationship is based on trust or confidence (physician-patient, lawyer-client)

Question 35

Fiduciary Relationship

General Rule:

Answer 35

There is a presumption of undue influence if there is a contract that occurs within a fiduciary relationship

Question 36

No Fiduciary Relationship

General Rule:

Answer 36

When there is no fiduciary relationship present, then the party alleging undue influence must prove it (Eg. there is no presumption)

Therefore, the party who wishes to avoid the contract must provide evidence that the other party took advantage of them, or in other words, unduly influenced them into entering into the contract.

Question 37

Unfairness During Bargaining

Unconscionable Transaction

Answer 37

o Unconscionable if:
no right-minded person would ever make
no fair-minded person would ever accept

Question 38

Unconscionable Transaction

General Rule is that the Court will presume that there is an Unconscionable bargain if the weaker party proves that:

Answer 38

1. Contract was improvident “one made without proper regard for the future”; and
2. Inequality of bargaining power

Question 39

Unconscionable Transaction

Presumption can be rebutted by proof that:

Answer 39

o Bargaining process was fair; and/or

o Weaker party received independent legal advice

Question 40

Illegality

Contract may be void for illegality by:

Answer 40

1. Statute or regulation
2. The common law or
3. Public policy

Question 41

Statutory Illegality

Answer 41

A contract that violates a regulatory statute may have statutory illegality

Question 42

Statutory Illegality

3 Factors of the contract to assess:

Answer 42

1. ) Seriousness of consequences of invalidating the contract
2. ) The social utility of the consequences
3. ) The class of persons for whom the prohibition/statutory regulation was enacted

Court can make contract void, or remove 1 paragraph and keep the rest of the contract intact

Question 43

Common Law Illegality

Answer 43

A contract will be illegal if it contravenes common law. The common law is unwilling to recognize agreements that are contrary to public policy generally