Unit 5: Contract law: Contractual Terms and Defects (Chapter 9 and 10)

Contractual term: is a provision in an agreement that creates a legally enforceable obligation

Pre-contractual representation: is a statement one party makes by words or conduct with the intention of inducing
another party to enter into a contract

Misrepresentation: is a false statement of an existing fact that causes a recipient to enter into a contract

Misstatement of Fact
Opinion: is the statement of a belief or judgment

Statement of future conduct: is not a statement of fact; it is a statement about a person’s future intentions

The failure to speak will amount to misrepresentation:

- When silence would distort a precious assertion
- When a statement is half-truth
- When the contract requires a duty of utmost good faith
- When a special relationship exists between the parties
- When a statutory provision requires disclosure
- When facts are actively concealed

Recission: is the cancellation of a contract, by the parties or the court, with the aim of restoring the parties, to the
greatest extent possible, to their pre-contractual state

Restitution: involves a giving back and taking back on both sides

Affirmation: occurs when the misled party declares an intention to carry out the contract or otherwise acts as though
it were bound by it

Damages: are intended to provide monetary compensation for the losses that a person suffered as a result of relying
upon a misrepresentation

Innocent misrepresentation: is a statement a person makes carefully and without knowledge of the fact that it is false

Negligent misrepresentation: is a false, inducing statement made in an unreasonable or careless manner

Fraudulent misrepresentation: occurs when a person makes a statement, they know is false or that they have no
reason to believe is true or that they recklessly make without regard to the truth
Express term: is a statement made by one of the parties that a reasonable person would believe was intended to
create an enforceable obligation

Parol evidence: is evidence that is not contained within the written contract
Parol evidence is admissible:
- To rectify or fix a mistake in a contractual document
- To prove that a contract was never really formed or is somehow defective
- To resolve ambiguities in the document
- To demonstrate that a document does not contain the parties’ complete agreement

Collateral contract: is a separate agreement one party makes in exchange for the other party’s entry into the main
contract
Literal approach: assigns words their ordinary meaning

Contextual approach: goas beyond the four corners of the document by looking at the parties’ presumed intentions
and their circumstances

Golden rule: states that words will be given their plain, ordinary meaning unless to do so would result in absurdity

Contra proferentem rule: ensures that the meaning least favourable to the author will prevail

Implied term: arises by operation of law, either through the common law or under a statute

Standard form agreements: are mass-produced documents usually drafted by a party who is in an economic position
to offer certain terms on a “take-it-or-leave-it” basis

Clickwrap: agreement is an agreement formed over the Internet where a consumer must consent to a website’s
terms before making a purchase or using a service

Exclusion clause: a contractual term that seeks to protect one party from various sorts of legal liability

Boilerplate clause: is a standard provision that can be reused in various contractual settings in a virtually unchanged
form

Legalese: is a slang expression designating the formal and technical language of traditional legal documents

- Exclusion clauses
- Force majeure clauses
- Confidentiality clauses
- Arbitration clauses
- Jurisdiction clauses
- Entire agreement clauses

Force majeure: clause aims to protect the parties when part of the contract cannot be performed because of some
event that is outside of their control

Confidentiality clause: prevents disclosure of certain information about the agreement to third parties

Arbitration clause: outlines who should act to resolve a dispute and what method of arbitration should be used

Arbitration clause: outlines who should act to resolve a dispute and what method of arbitration should be used

Entire agreement: clause is a provision stating that the entire agreement between the parties is contained within the
four corners of the contract

Capacity: is the legal power to give consent

Age of majority: is the age at which a person is held fully accountable in law

Minors: are people who have not reached the age of majority

Contract is voidable: if a minor is entitled to avoid the legal obligations that the contract would have otherwise
created
Mental incapacity: regardless of age, a person may also lack capacity because of challenges with comprehension.

Intoxication: Agreement is voidable if two conditions are met. First, the person must have been so intoxicated (by
alcohol or drug or otherwise) that they could have not known or appreciated what they were doing. Second, the
other contractual party must have been alerted to that fact.

Chartered corporations: are treated the same as individuals who have reached the age of majority

Statutory corporations: have limited contractual capacity

Associations: are usually unincorporated business organizations that lack contractual capacity

Indian band: is a body of Aboriginal people whose land and money are held by the Crown.

Managing Risk in Association with Incapacity

- Train employees to identify potential capacity problems in the types of contracts that your business forms
- Be aware of the rules governing contracts with minors, particularly if your business is likely to enter into
contracts with minors
- In potential cases of contracts involving minors, mental incapacity, or intoxication, take steps that will help to
show that the other party has affirmed the contract.
- Be aware of whether your company may contract with statutory corporations, associations, Indian bands,
individual First Nations people, and public authorities, and act accordingly
- Where you are not certain about the other party’s capacity, you might consider requiring a written
representation from the other party in the contract, which states that it has the capacity to enter into and
fulfil the contract. IF it later turns out that the party did not have capacity, then you may have an action
against them in tort for misrepresentation.

Public Authorities: Contracts are created on daily basis by public authorities at federal, provincial, and municipal
levels. The only limit on a particular official’s capacity to contract is the division of powers section of the Constitution
Act 1867-in order to have capacity, the action must be consistent with that division of powers.

Statute of Frauds: required some contracts to be evidenced in writing as a way of reducing the risk of perjury, or lying
in legal proceedings. It was intended to discourage people from falsely claiming the existence of oral contracts.

Types of Contracts that must be evidenced in writing

Only certain types of contracts fall under the Statute of Frauds.
- Sale of goods
- Guarantees
- Contracts for sale of an interest in land
- Contracts not to be performed within a year

Most provincial statutes require writing in other circumstances including:

- Ratifications of contracts made by minors upon reaching age of majority
- Promises by executors or administrators to be personally liable for the debts of a testator or interstate
- Contracts made upon consideration of marriage
- Assignment of express trusts
- Creation of trusts of land
- Leases or agreements to lease land for a term exceeding three years

A guarantee: is a contractual promise by a third party, called a guarantor, to satisfy a debtor’s obligation if that debtor
fails to do so
An indemnity: is an unconditional promise to assume another’s debt completely
Contracts for the Sale of an Interest in Land: these are unenforceable unless they are evidenced in writing.

Contracts Not to Be Performed Within a Year: Contracts that are not to be performed within a year of their creation
are unenforceable unless they are evidenced in writing.

Writing Requirements: If a contract falls within the Statute, the court must decide if the writing requirement was
satisfied.

Form and Content of the Note or Memorandum: Either the contract must be in writing or there must be a note or
memorandum that provides evidence of it.
The document must:
1) Provide evidence of the essential elements of the contract (such as the parties’ names, the subject matter
of the agreement, and the price)
2) Be signed by the party against whom the agreement is being enforced.

Effect of Non-Compliance: The Statute of Frauds renders some contracts unenforceable unless they are sufficiently
evidenced in writing. Such contracts cannot support an action for breach of contract where the defendant pleads the
Statute of Frauds as a defence. If one party does not perform, the other cannot demand a remedy.

Consumer Protection and Writing Requirements: Some consumer protection laws require certain types of
agreements to be made in writing to protect consumers’ interests.

Managing Risk in Association with Writing Requirements

- Ensure that guarantees, contracts for the sale of an interest in land, and contracts not to be performed within
a year are always made in writing
- To meet the writing requirement, you should, as a minimum:
o 1. Provide evidence of the essential elements of the contract (such as the parties’ names, the subject
matter of the agreement, and the price)
o 2. Ensure that the party against whom the agreement is being enforced has signed the written
document
- To avoid the uncertainty and debate that oral agreements can create, all contracts should be written
whenever possible.
- Businesses should ensure that they understand the requirements that may exist under provincial consumer
protection laws to put certain agreements in writing and to provide consumers with a copy.

Mistakes

- Third kind of contractual defect arises from mistakes

- Some mistakes occur when an error affects the basic process of contract formation. Mistake may negate the
existence of an agreement between the parties and without an agreement, there cannot be a contract.
- Other mistakes make it impossible for the object of the contract to be achieved. Mistake does not affect the
process of contract formation but rather pertains to the very existence of the contract’s subject matter. In
this case, the contract may be defective.

Mistakes Preventing the Creation of Contracts:

1. Mistaken identity
a. The mistake was known to the other contractual party
b. The mistake was material
-Material mistake is one that matters to the mistaken party in an important way
 2. Some mistakes put the parties at cross-purposes and therefore prevent the formation of a contract. This
often occurs when the parties are mutually mistaken about the subject matter of an agreement.

Mistakes Rendering Impossible the Purpose of the Contract

Even if a mistake does not pertain to the process of contract formation, it may be relevant if it makes the
contract impossible to perform.

1. Mistake about Existence of the Subject Matter

o Parties’ mistake may render the contract impossible to perform. In this situation, both parties make
the same mistake, one that is usually based on a false assumption.
o Common mistake about the existence of the subject matter of a contract does not always prevent the
enforcement of the agreement. Business should therefore protect itself by inserting into the contract
a force majeure, or “irresistible force”, clause, that states which party bears the hardship if the
subject matter of the contract is destroyed or if some other unexpected event occurs.

The Doctrine of Frustration:

- Tries to strike a fair balance between the parties
- Applies only if neither party is responsible for the relevant event. If one party is responsible, then that party
bears the loss.
- Even if neither party is at fault, they may have agreed that one of them would bear the risk of loss.
Contract is frustrated: when some event makes performance impossible or radically undermines its very purpose

Documents Mistakenly Signed

Another type of mistake occurs when a person signs a contractual document in error. As general rule that
sort of mistake is irrelevant. Exception to that rule is unusual or onerous terms are not binding unless they are
reasonably drawn to the attention of the person who signed the contract. The other exception – non est factum: “this
is not my deed”, allows the mistaken party to avoid any obligations under the contract.

Managing Risks Concerning Mistake and Frustration

- Ensure that contracts clearly describe the object, purpose, and conditions of the contract. Providing as much
detail as possible reduces the risk of unilateral and mutual mistakes.
- Ensure that all parties carefully read, understand, and indicate that they have both read and understood the
terms of the contract prior to agreeing to be bound by its contents.
- Include a force majeure clause (“irresistible force”) that clearly indicates which party will bear financial
responsibility if the subject matter of the contract is destroyed or an unforeseen event transpires.
- If the contract indicates that one party will assume a substantial risk, consider including an additional clause
articulating that the party assuming the risk understands the nature and scope of the risk. It is prudent to
require that party to sign their initials beside this clause.
- When entering into a contract, ascertain the other party’s ability to understand the language in which the
contract is written. If the contracting party does not understand the language in which the contract is written,
offer them an opportunity to have the contract translated.

Duress of person: refers to physical violence or the threat of violence

Duress of goods: occurs when one person seizes or threatens to seize another person’s goods to force that person to
create a contract

Economic duress: arises when a person enters into a contractual arrangement after being threatened with financial
harm

Undue influence: is the abuse of a relationship in order to influence someone and induce an agreement
Fiduciary relationship: is a relationship in which one person is in a position of dominance over the other

Unconscionable transaction: is an agreement that no right-minded person would ever make and no fair-minded
person would ever accept

Improvident bargain: is a bargain made without proper regard to the future

Illegal agreements: are expressly or implicitly prohibited by statute

Purpose of a regulatory statute: is not to punish individuals for wrongdoing, but rather to regulate their conduct
through an administrative regime

Covenant in restraint of trade: is a contractual term that unreasonably restricts one party’s liberty to carry on a trade,
business, or profession in a particular way