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LAW110: Contracts
Winter CAN (2013)
Table of Contents
History of K Common Law
Guiding Principles for K Law
Offer
OFFER vs. INVITATION TO TREAT
COMMUNICATION OF OFFER
TERMINATION OF OFFER
Acceptance
COMMUNICATION OF ACCEPTANCE
Certainty of Terms
K FAILS FOR LACK OF CERTAINTY
Intention to Create Legal Relations
COMMERCIAL CONTEXT
SOCIAL/DOMESTIC CONTEXT
Privity
CIRCUMVENTING PRIVITY
EXCEPTIONS TO PRIVITY
Consideration
SEALS
FORBEARANCE
PAST CONSIDERATION
PRE-EXISTING LEGAL DUTY
Estoppel
PROMISSORY ESTOPPEL
WAIVER
Formal Pre-Reqs for Enforcement
PAROL EVIDENCE RULE
Representations and Terms
Classification of Terms
CATEGORIZING TERMS
TERMINATION FOR BREACH
Termination for Anticipatory Breach
ENTIRE VS. SEVERABLE OBLIGATIONS
Excluding and Limiting Liability
NOTICE
Notice Requirement – Signed Documents
Notice Requirement – Unsigned Documents
FUNDAMENTAL BREACH
Abolition/Reform of Doctrine of Fundamental Breach
Misrepresentation
OPERATIVE MISREPRESENTATION
RESCISSION
Mistake
MISTAKEN ASSUMPTION
Mistaken Assumption re: Quality
Mistaken Assumptions re: Existence of Subject Matter
Common Mistake in Equity
MISTAKE – TERMS
MISTAKE AND THIRD-PARTY INTERESTS
Mistaken Identity
Non Est Factum
RECTIFICATION
Protection of Weaker Parties
DURESS
Economic Duress in Canada
UNDUE INFLUENCE
UNCONSCIONABILITY
Illegality
COMMON LAW ILLEGALITY
Contracts Contrary to Public Policy
EFFECTS OF ILLEGALITY
Frustration
DEVELOPMENT OF DOCTRINE
APPLICATION OF DOCTRINE
EFFECTS OF FRUSTRATION
Remedies
DAMAGES = INTERESTS PROTECTED
Expectation Interest
Reliance Interest
Restitution Interest
DAMAGES – QUANTIFICATION
Speculations & Chances
Injured Feelings, Disappointment, Mental Distress
Minimal Performance
More than 1 Quantum of Damages
DAMAGES – REMOTENESS
DAMAGES – MITIGATION
TIME OF MEASUREMENT OF DAMAGES
LIQUIDATED DAMAGES, DEPOSITS AND FORFEITURES
Liquidated vs. Penalty
Formula for Liquidated Damages
Deposits & Forfeitures of Deposits
Debt
Equitable Remedies
History of K Common Law
Sources of K Law: Judgemade common law // statutes (i.e. Law and Equity Act)
Common Law: law is pre-existing; court there as a referee to decide if did or did not do something
Equity System: based on idea certain equity or fairness should be involved w/ decision-making (Chancery Court)
Not good at creating, good at modifying
Equity can order someone to do something they haven’t agreed to do b/c it’s good for their conscience
Equity always prevails follows common law, but it is superior if reaches diff. conclusion
Guiding Principles for K Law
Who is involved? (Capacity & quantum)
Voluntary involvement? (Desired consent)
Importance of individual (assumption of quality of power – ex. institutional element injected)
Change balanced w/ consistency
Predictability trying to fix the future, need element of change in case something unforeseen arises
Overarching value of fairness
When did the K come into existence? When does it expire?
Where did K come into existence?
Interventionist vs. Voluntarism (law there to help people = 20thc. idea
------FORMATION OF THE CONTRACT------
Offer
Offer must occur before acceptance can take place to create K. Offer determines what obligations of both parties will be under the K.
2 types of Ks:
1)Bilateral: both parties have obligations when K comes into existence
2)Unilateral: only 1 of the parties has obligations when K comes into existence.
OFFER vs. INVITATION TO TREAT
Invitation to Treat = communications from 1 party to another that precede the offer; statement of readiness to negotiate but not itself an offer (no legal significance)
Mere Puff: no legal significance
Objective Test of Intention: (Canadian Dyers Association Ltd v Burton, 1920[mere price quotation usually invitation to treat; statement of price at which willing to sell = offer])
- Look at language & actions (objective)
- Look at conduct of person – what did they intend? (Subjective)
Factors to Distinguish Offer from Invitation to Treat:
- Whether all details of eventual contract are clear or can be made out from the communication
- Whether treating a communication as an offer could lead to an absurdity(generally multiple contracts would be absurdity, but not always the case: Carlill v Carbolic Smoke Ball Co, (1893) – communication that results in multiple contracts can still be valid offer, look at the context.
- Determination of serious offer determined from words & actions
Possible that communication can be both offer & invitation to treat tendering situations
- Ex. Contract A & Contract B; multiple Contract A’s submitted, winning bid creates Contract B
Pharmaceutical Society of Great Britain v Boots Cash Chemists, [1953]display of goods = invitation to treat; customer makes offer when bringing item to the counter, acceptance of payment triggers K
Carlill v Carbolic Smoke Ball Co is ad an offer? Yes, reward contract (unilateral). Generally ads = invitation to treat, unless language is clear that ordinary person would construe intention to offer (reasonable person test)
COMMUNICATION OF OFFER
Offer must be communicated to the acceptor. Can’t accept offer in ignorance; intention to accept is required (R v Clarke, 1927– w/o consent; no K), but motive for doing so is irrelevant (Williams v Carwardine, 1833– as long as offeree fulfills duty of offer, offeree has viable contract w/offeror)
2 Types of Communication:
- Express
- Implied (conduct; inaction/silence)
TERMINATION OF OFFER
Offer can be terminated by action of offeror (revocation); action of offeree (rejection); or by lapse of time
Revocation:termination can come in any way but must be communicated (Byrne v Van Tienhoven, 1880V mailed offer to sell (tin boxes)-1 week later mailed revocation-in interim B accepted offer by telegram & resold tin before receiving revocation letter–can accept an offer if they don’t know it’s been revoked – acceptance makes offer irrevocable [Postal Acceptance rule doesn’t apply to revocations])
- Can be implied (Dickinson v Dodds, (1876)D offered to sell land to P-gave til Friday-D sold prop to X on Thursday- P tried accept Friday morningofferee can’t accept offer after already aware that offer has been revoked [selling to another person implies that original offer is revoked; offeror not bound by promise to keep offer open unless there’s consideration for that promise]
- To prevent early revocation must ensure offer becomes subject of preliminary contract (option): in exchange for some valuable consideration, offer kept open for stated period
- Doesn’t need to be direct from offeror to offeree
Unilateral Contracts:generally offer can be revoked prior to completion in unilateral K (Carlill); if offeree has already started actions necessary to accept the offer & offeror knows; offeror can’t revoke K(Errington v Errington and Woods, 1952father-gave house to son-had to complete payments before actually his house-evil step-mom tried to take it back before payments complete)
- Promise ceases to bind offeror if action left incomplete or unperformed
Rejection:offeree can terminate an offer, in so far as they’re concerned, by rejecting the offer (w/words or actions).Can reject an offer through counter-offer (Hyde v Wrench, 1840); original offer can only be resurrected by original offeror (Livingstone v Evans, 1925offer-P made counter-offer-D rejected-P accepted original offer in response to buyer’s counter-offer seller replied “cannot reduce” price = renewal of original offer & binding if accepted. Mere inquiry/clarification doesn’t kill K (Stevenson v Mclean, 1880))
Lapse of Time:no offer open for eternity. If no time specified it lapses afterreasonable time (Barrick v Clark, 1950 negotiated forever-C offered to purchase-B counter-offers-time passes-H inquires, buys land from B-C pissed when hears H bought, writes to accept offer reasonable time for acceptance to occur set by offeror, not offeree – dependent on the circumstances. Something must have happened to make acceptance ‘too late’ – time doesn’t expire arbitrarily)
Acceptance
More vital step of creating a K: when acceptance occurs, K comes into existence (consideration tested at time of acceptance).
Acceptance = way of saying “yes” to offer of offeror anything more or less at best = counter-offer. How offeree is permitted to say “yes” determined by offeror & notionally part of the offer.
- Can accept by conduct (Canadian Dyers)
Rules around Acceptance:
- A can’t accept offer from B if A isn’t aware of the offer (R v Clarke, 1927forgot about offer)
- If A aware of offer, but does what’s necessary to accept for another reason, can still create binding K b/c motive not relevant (Williams v Carwardine, 1833knew about offer-did actions to accept for diff. reason)
- If A counter-offers B; A can’t accept B’s original offer unless B revives it once revived A can accept & create binding K (Livingstone v Evans, 1925)
- Acceptance still takes effect if it makes specific something left vague in offer ex. Specifying quantity in order (Argue on policy – don’t have the authority that I need for this)
- Terms on last form wins in “battle of forms” = last offer & acceptanceone party makes entirety of offer, other party says yes(Butler Machine Tool Co v Ex-Cell-O-Corp, 1979) [not good authority for prop that courts can create a K out of parties’ communication BAD LAW]
Electronic/Internet K’s:use of a website where use involves going deeper into site than simply viewing home page can = acceptance of contract containing terms of use as long as there’s notice of terms (Century 21 Canada Limited Partnership v Rogers Communications Inc, 2011)
- Shrink-wrap agreements – software in “shrink-wrapped” box – purchase subject to a license & license found in manual in the box or on comp screen when software is used
- Click-wrap agreements – user accepts terms of use by clicking “I accept” button when using program for 1st time
- Browse-wrap agreements – similar to above w/o button; terms indicated on first page/home page of website & continued use of product/website = acceptance
COMMUNICATION OF ACCEPTANCE
In order for acceptance to be effective it must be communicated. If offeror stipulates by terms of offer that offer must be accepted in particular way, otherwise offeree can accept however they want (Carlillad can = unilateral K that is accepted by fulfilling conditions of K). K comes into existence as soon as offeree does stipulated act, whether offeror knows of the act or not, unless notice of acceptance by action is required: (Carlill)
Acceptance can’t be assumed:if no notification of acceptance, or implied acceptance through action can’t assume despite intention; can’t impose obligations on unwilling party (Felthouse v Bindley, 1862 – law may find insufficient offer: “if I don’t hear from you, I’ll assume acceptance”)
- Offer forces offeree to make an election (ex. acceptance – inaction means confirmation of status quo; silence is interpreted as rejection)
- To accept you have to do something (express acceptance)
Acceptance determines where K comes into being: w/ instant communication when & where acceptance is received = jurisdiction K falls under (Brinkibon Ltd v Stahag Stahl, 1983)
- Offeree is responsible for ensuring acceptance is received
- Telex (fax) = instantaneous communication (Entores Ltd v Miles Far East Corp, 1955)
Postal Acceptance Rule:acceptance happens as soon as acceptor puts letter into post office b/c post office acts as agent for both parties (Household Fire v Grant, 1879D applies for shares-P sends letter of allotment-D never receives letter-P goes into liquidation-liquidator sues D for sum of shares)
- Offeror can always make formation of K he proposes dependent upon actual communication to himself of acceptance
Exceptions to Postal Acceptance Rule:2 specified in Holwell Securities Ltd v Hughes, 1974(option to purchase clause-P sends letter of acceptance to D-D never received it)
- When express terms of offer specify acceptance must reach the offeror (in this case it says “by notice of writing)
- If application would produce manifest inconvenience & absurdity
No equivalent postal termination rule must actually communicate revocation to offeree (Byrne v Van Tienhoven, 1880)
Certainty of Terms
K can fail for lack of certainty (ex. missing/ambiguous info). If it’s impossible to ascertain what obligations of parties are, it’s impossible to determine a breach or appropriate remedy.
K FAILS FOR LACK OF CERTAINTY
Absence: if you don’t say anything about important element of K could make K unenforceable (may not even be at offer/acceptance stage) “an agreement to agree is not a contract” (May & Butcher Ltd v R, 1934 – essential term yet to be determined (i.e. price) means no K exists; not enforceableBad Law: narrows scope of legislation in Sale of Goods Act operates to imply terms in Ks, such as price)
a)If terms upon which K is based can be implied; it’s binding (Foley v Classique Coaches Ltd, 1934– in biz Ks strong presumption that courts will fill in details, especially if both parties believed & acted as if they have a K)
Ambiguity: unsure of what parties meant – may be too much or too little info (ex. B offers to sell his car to A; A says yes; but B has 4 cars – which one is he selling?)
- Attempt made by courts to interpret K to construe term so as to save K from failure for uncertainty when obvious that both parties intended to enter into K(Hillas & Co v Arcos Ltd, 1932 – apply maxim verba ita sunt intelligenda ut res magis valeat quam pereat [“words should be interpreted so as to make the thing they relate to effective rather than perish”])
- Infirm terms based on past terms & prior correspondence if given sufficient machinery
- Courts reluctant to “read in” terms can only be implied by statutes/common law
- Terms of K (if vague) will be interpreted purposively from K (Carlill)
Meaningless/Irrelevant Clauses: don’t need to be interpreted b/c irrelevant to K (ignore)
- Promise to negotiate in “good faith”/use “best efforts” have no legal meaning
- Empress Towers Ltd v Bank of Nova Scotia, 1991 implies term of negotiating in good faith as applicable in this K - agreement to agree is not a contract
- Mannpar Enterprises Ltd v Canada, 1999 throws water on above case; no common law obligation to negotiate in good faith, must be in K (expressly or impliedly) - agreement to agree is not a contract; duty to negotiate not workable w/o benchmark
- Severance = possible solution to save K; can isolate offending clause and sever it
Intention to Create Legal Relations
Argument that usually intertwined w/ certainty of terms question of certainty, still negotiating so lacks intention (generalized intent but lacks details = certainty of terms).
COMMERCIAL CONTEXT
Agreement, even if supported by consideration, is not binding as K if made w/o any intention of creating legal relations.
Test for Intention to Create Legal Relations:
- Importance of agreement of parties
- Fact that 1 of parties has acted in reliance on it
Agreements Expressly Not Meant to be Legal: “gentlemen’s agreement” not a K (Rose and Frank Co v JR Crompton and Bros Ltd, 1923 generally assumed parties in biz relationships intend to be bound, but if parties expressly state in agreement they don’t wish to be bound, courts must respect actual intentions
- Likely not valid law today arbitration can be used
SOCIAL/DOMESTIC CONTEXT
Not often thought that social situations like parties, dinner engagements, holidays etc. create legal relations
Balfour v Balfour, 1919 family agreements don’t constitute K; not enforceable b/c strong presumption not intended to have legal consequences (unless expressly stated)
------ENFORCEABILITY ISSUES------
Privity
Privity = only parties involved in a K (offeror & offeree) can enforce obligations or have obligations imposed on them. Doesn’t mean 3rd parties can’t be affected by K – can benefit, but can’t enforce obligations that would benefit them. (Beswick v Beswick, 1968 (HL) uncle & nephew have K that promise to pay aunt weekly $; after uncle dies nephew pays once & stops – aunt can’t enforce as herself, but as administrator of uncle’s estate she legally becomes uncle, who can enforce the obligations)
Privity often linked w/ consideration person outside K has usually given no consideration, thus can’t enforce anything under K (Tweddle v Atkinson (1861)2 fathers promise each other to pay T’s son in consideration for him marrying G’s daughter (other dad) – son sues G’s executor for not paying (T dead so can’t sue on son’s behalf)
- Can’t be a party to K in order to sue, but not be able to be sued in return
- Doctrine has been criticized, but still held firm in Canada
Horizontal Privity: arises in situation where A enters into K w/ B for something that benefits not only A, but also C (usually person closely related to A) – sometimes can benefit C alone. If B doesn’t perform obligation in K, C can’t bring action, only A. A can only sue for damages A suffers, not C. (Tweddle v Atkinson)
Vertical Privity: chain of events – each person in chain has K w/person above & below, no K w/ any other person higher or lower on the chain (Dunlop Pneumatic Tyre Co v Selfridge & Co, 1915Dew has K to buy tires from Dunlop, promise not to sell for less than list price. Dew has K w/ Selfridge that contains same stipulations as K between D & D. Selfridges sells for less, Dunlop sues) – action fails b/c no K between Dunlop & Selfridge
CIRCUMVENTING PRIVITY
Suit by a Party to the K: have somebody who is a party to the K take action to obtain satisfaction for person not a party (Beswick v Beswick exception rather than rule) If party to K brings claim for damages, usually only for losses that party personally suffered
- Argue for family unit to be lumped together and sue as one unit, but on policy basis (no authority)
Reconstructing the Arrangement as an Agency Situation: when A enters into K w/B that would benefit C, A is acting as C’s agent & so K is in fact between B & C (C now able to bring action against B)
- Could argue that B has 2 Ks: 1 w/ A (personally); 1 w/ C (A as agent)
- Must show consideration for this to work (Dunlop Pneumatic Tyre Co v Selfridge & Co Court rejects agency argument made by Dunlop, says argument would work far better if it was clear parties agreed to agency (court reluctant to create one out of the facts; also prefers to not be conflict of interest))
Collateral K: when A & B entered into K that somehow affects C, a collateral K was created between A & C. When it works often appears as highly artificial solution contrived by law as A & C will often not have met or negotiated sometimes a stretch to find C gave any consideration (Pao On divided into multiple Ks)
EXCEPTIONS TO PRIVITY
Abolition: many common law jurisdictions have abolished to varying extents horizontal/vertical privity through statutes
Limited Exception: modification to aspect of horizontal privity: ability of person not a party to a K but w/relationship to parties of the K to use a clause w/in the K meant to benefit 3rd parties as a defence against a tort claim (London Drugs Ltd v Kuehne & Nagel International Ltd, 1992if there’s defence in employer’s K that 3rd party could use in face of negligence claim, can use it;extended it to all K’s inFraser River Pile & Dredge Ltd v Can-Drive Services Ltd, 1999)
Can use “principled exception” if it’s shown that:
- Parties to K intended to confer benefit of K defence on 3rd party; and
- 3rd party be performing the activities contemplated in the K
Consideration