April Exam Contracts Mini-Can

APRIL EXAM – CONTRACTS MINI-CAN

IS IT A TERM IN THE CONTRACT?

It must clearly be intended to be a term in the contract to be a term to the reasonable person standard (Heilbut– rubber tree – mere response to inquiry)
When it is both a term and representation, it becomes a term (Leaf – Constable)
Is it an implied term? (Machtinger– employment dismissal – reasonable notice)
Terms implied based on custom and usage (officious bystander test) – intention required
Terms implied in fact or implication because of necessity (officious bystander test)
Intention required – the law supplies a term which parties overlooked but obviously assumed
Terms implied in law (by CL or statute)
Most common examples: standard transaction types like insurance, employment contracts; NO intention is required
Test is of practical necessity  whether the term is a necessary condition of the contractual relationship in a practice sense to fair functioning of the agreement
When determining what is necessary, must consider inherent nature of contract and relationship
In Machtinger, requirements for reasonable notice in employment contracts was determined to fall into category of implied term in law
Terms implied in employment contracts imposing reasonable notice requirements must be determined on factual basis looking at factors: character of employment, length of service, age of servant and availability of similar employment, experience and qualifications of servant

IS IT A WARRANTY OR A CONDITION OR AN INTERMEDIATE TERM?

Look to the nature of the event and its practical effect – “Does it deprive the party of substantially the whole benefit of the contract? (Hong Kong Fir– ship said to be “seaworthy”)
If YES, it is a condition – major term of K that goes to the root K–can claim repudiation and damages
If NO, it is a warranty – minor term of K that is not central to existence of K – can claim damages but cannot end K
The word condition does not mean something is a condition – the contract needs to be interpreted as a whole and the word “condition” given an ordinary meaning (Wickman – visit 6 clients each week)
Although the use of the word condition is strong evidence of intention for it to have legal, rigid and inflexible meaning, this doesn’t mean breach is automatically a condition
If it is intended to be a condition, it must be the clear intention of the parties
More unreasonable result = less likely parties intended it.
In this case, would be practically impossible for W to successfully complete all the visits

HOW DO YOU GET OUT OF THE CONTRACT?

MISREPRESENTATION (VOIDABLE)

What is needed for operative misrepresentation? (Redgrave–selling law practice; didn’t check papers)
Is the statement false?
Is the statement one of material fact?
Must not be an opinion; reasonable person must see it as relevant to the transaction in question; statement is likely to be an opinion if the person making the statement does not seem to know much about the topic
In a sales contract, must differentiate between puffery (subjective legal promotion that cannot be verified + reasonable person would understand it as something to not take literally) and misrepresentation
Did the statement induce the other party to enter into a contract?
There must be actual inducement + reliance by the other party as one reason to enter into the contract
There is a presumption that any statement made to induce another to enter into K is relied upon as a condition if K is eventually formed (Redgrave)
Can be rebutted by proving knowledge to the contrary of the statement or express proof that party did not rely on statement
If these cannot be shown, then K can be rescinded upon discovery of fraud misrep

Misrepresentation in silence/non-disclosure
In general, no need or obligation to make statement unless asked or unless there is a legal duty to disclose
The representor is more likely to be liable if he knows the facts better than other party  makes it into a material fact (Smith– hotel + “most desirable tenant”)
They have a lot of knowledge about the subject and there is unequal knowledge about the subject
When facts are equally well known, what one party says is frequently an expression of opinion
Can you get monetary compensation from a misrepresentation? (Kupchuk– gave 2 buildings; one property torn down and new building set up)
Misrepresentation can provide monetary compensation when:
One party was at fault (Fraudulent misrepresentation)
Third party has acquired the rights
Restitution to original position is impossible
Kupchuk–one of the buildings was torn down + rebuilt  it was fundamentally altered than what it was originally
It is unclear whether courts will be as interventionist, however, in innocent misrep case

Remember — If both parties can’t get back what they put in, you can’t really rescind the contract — you need to show fraudulent or negligent misrepresentation to get some sort of damages! Innocent doesn’t work!

REPRESENTATION / CL REMEDY / REMEDY @ EQUITY / INTEREST PROTECTED
Mere puff / None / None / Caveat emptor (buyer beware)
Innocent Misrepresentation / None / Contract voidable. Rescission, Restitution / Prevent unjust enrichment
Fraudulent misrepresentation / Damages / Contract voidable, Rescission / Reliance
Negligent misrepresentation / Damages / Contract voidable, Rescission / Reliance

DURESS - VOIDABLE

Is it traditional duress? Modern test for duress: Universal Tankships
Consider nature of pressure:
Whether person alleging duress protested
Whether an alternative course was open
Whether the person was independently advised(Pao On)
Whether steps were taken to avoid it
Consider nature of demand:
Illegitimacy of pressure (actual or threatened violence to person or property rights)
Tort or breach of statutory duty usually meets test for illegitimate pressure
Consider whether victim implicitly approved after pressure ceases to exist.
If so, relief is denied

Remember – this is CL and therefore void but now voidable???

Is it economic duress? (Nav Canada– paying “under protest”) only for contractual modifications
Two conditions precedent required:
Contract variation MUST be extracted as a result of exercise of PRESSURE whether it is a demand or threat
Exercise of pressure is such that the other party had no practical alternative but to agree to the demands to vary terms of underlying contract
If evidence establishes other practical alternatives, plea of economic duress must fall at threshold level

Factors deciding economic duress – did party consent to variation?:
Whether promise supported by consideration
In general, no consideration supports that there was ED while consideration supports argument that it was simply commercial pressure
Whether coerced party made agreement under protest or without prejudice
This is the easiest way to prove demand was procured under ED
Failure to object is not fatal to a plea of ED but failure of promisor to voice any objection at the time variation was extracted may prove fatal
Whether coerced party made steps to disaffirm the promise as soon as practicable
A promisor who waits several years to challenge enforceability of variation is deemed guilty of acquiescence  even if ED is made out, it will fail on this ground
Pao On says we should consider independent legal advicein duress
This should NOT be an integral component of ED since most cases involve commercial parties that have access to their own legal counsel
However, may become relevant in cases where an unsophisticated promisor does not act as quickly because of a lack of independent legal advice

Remember – illegitimate pressure is NOT a factor for economic duress

The introduction of consideration – traditionally, duress did not care about what was in the contract
Economic duress only operates in equity (rare that it even works – must really show that it is much more than simple commercial pressure) and is therefore voidable

UNDUE INFLUENCE - VOIDABLE

Is it a situation of undue influence? Establishing undue influence (equitable = rescission)
There needs to be a relationship capable of giving rise to the necessary influence:
Actual undue influence – actual operating influence on the choice made (similar to duress); affirmative evidence is required to prove it
eg. Overt acts of coercion or illegitimate pressure
Proving special relationship between parties – recognized type of relationship that creates a presumption of undue influence that may be rebutted
eg. Fiduciary relationships – power imbalance, based on trust, confidence, more powerful party subordinating personal interest in favor of weaker party

For there to be a finding of undue influence (Geffen–Manic, depressive immature daughter left with mom’s estate; set up brothers as trustees):
Nature of relationship – there must be dominance, manipulation, and coercive abuse of power
Nature of the transaction
In commercial transactions, P must show undue advantage by P or benefit of D
In gift or similar transactions, it simply requires evidence of a dominant relationship, then there is onus on D to rebut
In Geffen, dominant relationship was established + undue influence presumed, however, since she had independent legal advice, D was able to rebut the presumption

Result: contract is presumably voidable – D has to rebut

CONTRACTS CONTRARY TO ILLEGALITY/PUBLIC POLICY – VOID

Illegality of K can make it void due to: statute/regulation, CL, restrictive covenants

A restrictive covenant is prima facie unenforceable unless it is shown to be reasonable with respect to the parties and reasonable with respect to the interests of the public (Shafron–“not to work for period of 3 years in insurance business anywhere within Metropolitan City of Vancouver”)
Restrictive covenant was deemed unenforceable because it was ambiguous  unreasonable
Restrictive covenants must be reasonable in accordance with 3 primary factors:
reasonable geographic scope
clause must have reasonable time limit
must be reasonable in activities it seeks to restrict

Statutory illegality - Where contract prohibited by statute, a court may grant relief to a party when, in all circumstance of the case, including regard to objective & purposes of the statute, it would be contrary to the public policy not to do so (Still)

Effects of illegality:

Void, voidable, unenforceable, whatever statute says or no consequences
Illegality can have no effect at all if it does not further the purpose of the law it goes against

Test for severability (Shafron)

Blue pencil – striking out portion of contract and leaving other legal portions untouched
eg. Simply removing “Metro” from Metro City of Vancouver
Notional severance - reading down an illegal provision to make it legal and enforceable
eg. Reading down to say that MC of Van = Van, UBC, Richmond and Burnaby (how the CoA erred)

UNCONSCIONABILITY – UNENFORCEABLE

How do we argue unconscionability?
Involves the assessment of the circumstances surrounding the creation of the contract through the “unconscientious use of power”(not just a lopsided contract)
It is overtly about the contents of the contract. Some possible reasons:
An advantage was unfair or very unfair
Consideration was grossly inadequate
Bargaining power grievously impaired
Divergent from standards of commercial morality

Doctrine of unconscionability (old test – Morrison– old widow; persuaded to borrow mortgage to help pay for two D’s cars at bank)
Inequality in the parties’ respective positions, arising from the ignorance, need or distress of the weaker party
There was substantial unfairness in the bargain obtained (need strong proof)
Once proven, presumption of fraud is on D to prove that it was fair, just and reasonable

Test from Lloyds Bank(loan to pay son’s debts using house as collateral –BAD LAW)
A contract is voidable for unconscionability if:
the terms were very unfair or consideration inadequate;
bargaining power was impaired by necessity, ignorance or infirmity;
undue pressure or influence was used, not necessarily consciously; and
there was an absence of independent advice

Remember: Denning’s view/test in Lloyds has not been generally accepted bad law in England

But, it is sometimes used to “inform” decisions like used by Lambert in Kreutziger in Canada

NOTE – HOW TO APPLY THE TESTS

Harry v Kreutziger–old man, inexperienced w/ business, little formal education, partially deaf; sell boat + fishing license for way less than value

There are 2 different approaches to a test for unconscionability:

McIntyre JA:
Inequality of both circumstances and process + substantial unfairness (Morrisontest)
Lambert JA:
Is the transaction, seen as a whole, sufficiently divergent from community standards of commercial moralitysuch that is should be rescinded(simplified Lloydstest)?

Remember: Canadian cases are more relevant to answering Lambert’s question about a particular set of facts as opposed to cases from abroad. For the same reason, recent cases should be more persuasive than older cases.

Problems to Lambert’s view:
What is the community? Morality? What is immoral? – closest we get to answering this is “Canadian”
Benefits of Lambert’s view:
Much more open-ended and less structured by an intricate list of pre-requisites
Lambert’s test tends to be used as an alternative/supplement to the Morrisontest formulation

FRUSTRATION - VOID

Absolute liability (Paradine–invasion of King’s enemy forced her out of possession – doesn’t want to pay):
When a party, by his own contract, creates a duty upon himself, he is bound to make it good notwithstanding any accident that he could have provided against in the contract

Implied theory (Caldwell– contract to use concert hall; destroyed by fire)
A party’s duty, under a contract is discharged if performance of the contact involves particular goods, which without fault of either party are destroyed, rendering performance impossible

No fault; radically different; impossible to perform (Davis– no fault, inadequate supplied of labour for finishing building K in allotted time)
Frustration occurs whenever law recognizes that without default of either party, a contractual obligation becomes incapable of being performed because circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the K

Remember, look for:

Event that is after K formation and not self-induced
Event was unforeseen
No party at fault
K totally different from what the parties intended
Disruption was permanent – not temporary or transient
Performance is impossible or drastically different
Change/event totally affects nature, meaning, purpose and effect of K

Examples:

Can Govt Merchant Marine – shipping delay that was foreseeable  K not frustrated
Capital Quality Homes – new legislation that was not foreseen  K frustrated
Victoria Wood Development – new legislation, foundation of K not destroyed  K not frustrated
Maritime National Fish – self-induced frustration is not actionable
Pacific Home Products – house construction could not be built due to high ground water  K frustrated
Klewchuk – gaming rules were changed  K frustrated
Doucette – freeze on issuing fishing licences  K frustrated
Employment law context: absenteeism due to disability  K may be frustrated

ESCAPING A LIMITATION OR EXCLUSION OF LIABILITY CLAUSE

Test for enforcing exclusion clause (Tercon):

Interpretation: exclusion clause must clearly and unequivocally apply to the circumstances (based on parties’ intention)

Unconscionability at time of contract formation?
Go to Unconscionability section

Public policy? (freedom of K vs harm to public)
The examples Binnie in Tercon provided suggested that freedom of contract should prevail unless conduct is criminal and puts risk to public safety
Post Tercon:
Loychuk– not public policy to prevent commercial enterprise (ziplining company) to negate themselves of liability from negligence
Horizon resource management– mere non-compliance with provincial safety regulations triggered invalidation of exclusion clause
Niedermeyer – It is contrary to public policy to permit owner/operator of a motor vehicle to contract out of liability for damages for potential injuries suffered in a MV accident in BC (a new public policy category created)
Dissent in Niederymeyer listed out the situations in which public policy doctrine has been historically confined to:
K injurious to the state, justice system
K involving immorality
K affecting marriage
K in restraint of trade

GOOD FAITH AND HONEST PERFORMANCE

Bhasin v Hrynew

Good faith is a general organizing principle of K law and there is an actionable duty on all Ks to act honestly in the performance of obligations (does not apply to negotiations)
There is no closed list of what types of situations this duty would apply to  it should expand where it is consistent with the CL and developments of society on a fact-specific basis
Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings  it is necessary to the proper functioning of commerce
This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the K
It is a simple requirement not to lie or mislead the other party about their contractual performance
Relevant factors in this case:
Bhasin and Hrynew were competitors and had animosity between them
H pressured CanAm to not renew B’s K
CanAm then made H into a PTO (superior position) that allows him to review B’s files
B refused to allow review but C threatened him with non-renewal
C claimed that he proposed to have a third party PTO but the AB Commission rejected this proposal
Bhasin’s K was not renewed, lost value in his business and H took most of B’s clients

Final decision:

No liability for H for inducing breach of K or unlawful means conspiracy. C breached implied term of good faith – they were dishonest with B and their exercise of non-renewal provision + H’s position as PTO

REMEDIES/DAMAGES – First select Damage interest

3 types of interests protected in damages:

Expectation: aims to put innocent party in position they would have been had contract been fulfilled
In the event that goods are not delivered, damage is [market price] – [K price]
Eg. Contract to sell TV for $1000 but seller fails to deliver, buyer has to buy substitute in market for $1200  $200 will fulfill expectation
In the event that the goods delivered is defective/wrong one, damage is [market price of what was supposed to be delivered] – [market value of what was delivered]
Eg. TV ought to be delivered is $1200 while market value of what is delivered was $700; expectation is $500
Cannot give expectation damages for something that is impossible to value (eg. McRae –expectation damages for a tanker that never existed cannot be given)

Reliance: aims to put innocent party in position they would have been in had they not entered into K
Often deals with wasted expenses made as a result of relying on the contract  claim in damages to get back those expenses (“give me what I lost”)
Eg. McRae– McRae showed that there were expenses incurred + incurred in reliance to K + the fact that there was no tanker made it certain that the expenses would have been wasted  prima facie RELIANCE damage case established
Burden then shifted on D to establish that if there was a tanker, expenses incurred would equally have been wasted (impossible to establish in particular case)
Where the defendant can demonstrate that, regardless of its breach, the claimant would not have recovered its expenditure, the claimant's claim is limited to the amount it would have recovered had the contract been performed
RELIANCE wont save you from bad bargain – amount you relied upon subtract to the extent of unprofitability = reliance damage

First, the court will not permit the claimant to use the reliance measure to escape the consequences of a bad bargain. Where the defendant can demonstrate that, regardless of its breach, the claimant would not have recovered its expenditure, the claimant's claim is limited to the amount it would have recovered had the contract been performed. Take a simple example. I agree to sell you my car for £5,000. You pay me the price but I have been involved in a traffic accident and the car has been damaged beyond repair, such that I cannot now perform. In any event, a car of that make, model and age is only really worth £4,000. Your claim is limited to £4,000 because, even had the contract been performed, you would only ever have had an asset worth £4,000, not £5,000.