Legal Fundamentals

for Canadian Business

Third Edition

Chapter 4
Enforcing
Contractual
Obligations
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Learning Objectives
List the events that can bring a contract to an end
Identify the various mistakes that can end or
otherwise affect a contract
Describe four forms of misrepresentation
Explain the effects of duress and undue influence
on a contract
(Continued)

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Learning Objectives
(Continued)
Consider the implications of privity and
assignment for a contract
Describe how a contract can be breached or
otherwise ended
Outline the remedies that are available for breach
of contract
Summarize risk-reduction strategies when forming
or ending a contract

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Disputes
May revolve around
The existence of the contract
The conduct of the parties at time of negotiating
the agreement
Performance of obligations under contract

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Mistake
When parties have a different understanding
of terms of contract
Shared mistake
Both parties have made same mistake
Contract void for lack of consensus
If mistake only in recording the terms, may ask
court to rectify (correct) agreement
(Continued)

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Mistake
(Continued)

Misunderstanding
Each party has a different understanding
Courts will imply most reasonable
interpretation and enforce
If both interpretations equally reasonable,
contract void for lack of consensus
(Continued)

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Mistake
(Continued)

One-sided mistake
Usually has no effect on contract
Caveat emptor (let the buyer beware)
Only if different understanding is a result of
misrepresentation would it be actionable
(Continued)

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Mistake
(Continued)

If mistake as to nature of document signed,

contract may be void
Non est factum (It is not my act)
If mistake as to nature of document due to
carelessness, claim is ineffective

Contract Interpretation
Terms and words given reasonable meaning
Industry usage for special or technical terms
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Exemption Clauses
Also known as exculpatory, exclusion, or
limitation clauses
Attempt to limit or eliminate liability for
one party to the contract
Due to one-sided nature, courts interpret
As narrowly as possible
Against the favoured party
(Continued)

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Exemption Clauses
(Continued)

Must be brought to attention of other party

Usually found in standard-form contracts
Create an unequal bargaining position

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Misrepresentation
False and misleading statements that induce
a person to enter into a contract
If a term of contract, can sue for breach
Must be statement of fact
Statement of opinion actionable if made by
expert
Silence generally not misrepresentation,
unless duty to disclose (duty of good faith)
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Innocent Misrepresentation
Misleading another without knowing or
being careless
Only remedy is rescission
If goods destroyed or not available, no other
remedy possible
Not available if any wrongdoing by person
claiming rescission
Not available if contract affirmed
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Fraudulent Misrepresentation
Intentionally and knowingly misleading another to
induce him/her to enter into contract
Victim may seek rescission, damages, or both
If made innocent misrepresentation, and later learn
it is false, but fail to correct it, it becomes
fraudulent
May seek punitive damages in extreme cases
Easier to sue for innocent or negligent
misrepresentation
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Negligent Misrepresentation
If person making misrepresentation should
have known what he/she was saying was
false, he/she was careless
Victim may seek rescission, damages, or
both

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Criminal Fraud
Specific provisions of Criminal Code deal
with fraudulent activity Examples:
S. 361-365 prohibit knowingly making false
representations intended to induce someone to
act on the representation
Other sections deal with specific areas of fraud
including the falsification of employee records,
books, and other documents

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Duress
Entering into a contract because of coercion
Threats may be violence, financial pressure,
scandal, etc.
May be against you, your family, your
property, or business
Contract is usually voidable
Threats may also be criminal offence
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Undue Influence
Abuse of trust relationship
Contract voidable
Presumed in certain relationships
Lawyers, doctors, trustees, guardians, religious
advisors, adults with infant children, adult
children with aging parents
May be rebutted by evidence

May have to prove in other situations

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Unconscionability
Taking advantage of vulnerable persons
situation
e.g., poverty, mental impairment (short of
incapacity)

Bargaining positions of parties are unequal

Contract grossly unfair to victim
Court can set aside or modify contract
Also regulated by statute

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Privity
Only the parties to a contract are bound to it
or may enforce it
Exceptions
Interests in land bind subsequent owners of the
property
Trusts beneficiaries may enforce
Life insurance beneficiaries may enforce
Some statutory exceptions
(Continued)
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Privity
(Continued)

Agents acting for principals

Agent never a party, so no privity issue

Novation
One person taking over obligations of another
in a contract; no privity issues as new contract
is required

Employees
Contract clauses often extended to employees,
thus ignoring privity

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Assignment
Transferring a benefit under a contract to a
third party

(Continued)

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Assignment
(Continued)
Usually assignor and assignee must join together
to sue if debtor fails to pay
Statutory assignment allows assignee to sue
directly if
Assignment is absolute (complete and unconditional)
Assignment is in writing
Proper notice was given to debtor
(Continued)

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Assignment
(Continued)

May only assign the benefits, not the

obligations
Assignee takes assignment subject to the
equities
Assignee cannot be in a better position than
the assignor

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Negotiable Instruments
Controlled by federal Bills of Exchange Act
Freely transferable from party to party
Innocent third party (called a holder in due
course) may enforce a negotiable
instrument against the person who made it
Include promissory notes, cheques, and bills
of exchange (aka drafts)
(Continued)
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Negotiable Instruments
(Continued)

Promissory note
One person promises to pay another a certain
sum of money at some future date or on
demand

(Continued)

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Negotiable Instruments
(Continued)

Cheque
Drawer orders bank to pay a certain sum of
money to a third party (the payee) on demand

(Continued)

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Negotiable Instruments
(Continued)
Bill of exchange
May be an order to any person or business to pay
money to someone either now or at a future time

(Continued)

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Negotiable Instruments
(Continued)

Holder in due course

Innocent third party who acquires possession of
instrument
Right to collect whether original obligations
met or not
If instrument is endorsed, that person can also
be held liable for amount owed

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Discharge of Contracts

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Performance
Once parties have performed as required under the
contract, it is discharged
Conditions - major terms of contract
If breached, contract ends (if other party wants to end it)

Warranties - minor terms of contract

If breached, obligations continue
May seek damages from breaching party
(Continued)

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Performance
(Continued)

Substantial performance
Substantially all obligations have been fulfilled,
but a condition is breached in a minor way
May seek compensation for small part
remaining
If contract requires payment, must be cash
unless otherwise specified
Limits on coinage set under Currency Act
(Continued)

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Performance
(Continued)

Tender of performance
Ready, willing, and able to perform; other party
refuses to accept performance
Contract has been breached by refusal;
performance no longer required
Debt treated differently if party refuses to
accept payment, money is still owed but debtor
must seek payment and bear all costs of
collection
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Breach
Incomplete or improper performance of
contract
Repudiation breach by refusal to perform
Anticipatory breach repudiation before
performance is due gives victim two options
Treat contract as breached
Continue to demand performance
(Continued)
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Breach
(Continued)

Anticipatory breach (Continued)

If contract is treated as ended, victim may sue
for breach immediately
If victim demands performance, unexpected
events may discharge both parties
If victim of repudiation does not perform
during waiting period, he/she will be in breach
Choice of remedy is binding
(Continued)
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Breach
(Continued)

Exemption clauses attempt to lessen

liability for breach
Narrowly interpreted by courts

Fundamental breach
Breach of very essence of contract
Exemption clauses can still apply if properly
worded

In some cases, a breach of contract can be a

criminal offence
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Frustration
Outside, unforeseen event that is out of the
control of either party and renders contract
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
(Continued)
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Frustration
(Continued)

Effect used to be let the loss lie where it

falls
All jurisdictions now have legislation that
require payment for benefits received and
the return or apportionment of any deposit

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Agreement

May modify or end a contract by agreement

All elements of contract must be present
Cannot impose change on the other party
Each side must receive new consideration
May be just relieving each of his/her remaining
duties
If only one side relieved, change is not binding
(Continued)

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Agreement
(Continued)

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

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Remedies for Breach

Rescission
Returning parties to original positions

Damages
Compensation to attempt to put victim in
position he/she would have been in if contract
properly performed
Sometimes includes emotional stress or pain
(Continued)
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Remedies for Breach

(Continued)

Liquidated damages
Term in contract to limit damages

Deposit
Amount forfeited as pre-estimate of damages

Down payment
First payment of purchase price; not meant to
be forfeited
(Continued)

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Remedies for Breach

(Continued)

Victim must mitigate loss

Damages must be reasonably foreseeable at
time contract entered into
Equitable remedies
Only available if damages not sufficient
Not available if any wrongdoing by party
claiming
Not available if innocent third party affected
(Continued)
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Remedies for Breach

(Continued)

Equitable remedies (Continued)

Specific performance
Requires breaching party to perform contract
Only if subject matter of contract unique

Injunction
Requires a person to stop doing something
(Continued)

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Remedies for Breach

(Continued)

Equitable remedies (Continued)

Accounting
Disclose financial records and dealings
Pay profits of wrongdoing to victim

Quantum meruit
Pay a reasonable price for services rendered

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