Table of Contents
Chapter 1: Knowledge of Law as a Business Asset …………………………………………………… 1
Chapter 2: The Canadian Legal System…………………………………………………………………. 34
Chapter 3: Managing Legal Risks…………………………………………………………………………. 65
Chapter 4: Dispute Resolution ……………………………………………………………………………… 97
Chapter 5: An Introduction to Contracts ………………………………………………………………. 132
Chapter 6: Forming Contractual Relationships……………………………………………………… 154
Chapter 7: The Terms of a Contract ……………………………………………………………………. 196
Chapter 8: Non-Enforcement of Contracts …………………………………………………………… 234
Chapter 9: Termination and Enforcement of Contracts ………………………………………….. 282
Chapter 10: Introduction to Tort Law ………………………………………………………………….. 316
Chapter 11: The Tort of Negligence ……………………………………………………………………. 346
Chapter 12: Other Torts …………………………………………………………………………………….. 393
Chapter 13: The Agency Relationship …………………………………………………………………. 434
Chapter 14: Business Forms and Arrangements ……………………………………………………. 472
Chapter 15: The Corporate Form: Organizational Matters ……………………………………… 523
Chapter 16: The Corporate Form: Operational Matters ………………………………………….. 565
Chapter 17: Personal Property ……………………………………………………………………………. 614
Chapter 18: Intellectual Property ………………………………………………………………………… 641
Chapter 19: Real Property ………………………………………………………………………………….. 689
Chapter 20: The Employment Relationship ………………………………………………………….. 723
Chapter 21: Terminating the Employment Relationship ………………………………………… 778
Chapter 22: Professional Services ………………………………………………………………………. 825
Chapter 23: Sales and Marketing: The Contract, Product, and Promotion ……………….. 858
Chapter 24: Sales and Marketing: Price, Distribution, and Risk Management ………….. 889
Chapter 25: Business and Banking ……………………………………………………………………… 918
Chapter 26: The Legal Aspects of Credit …………………………………………………………….. 948
Chapter 27: Bankruptcy and Insolvency ………………………………………………………………. 978
Chapter 28: Insurance ……………………………………………………………………………………… 1009
Sample chapter
Chapter 6
Forming Contractual Relationships
by Shannon O’Byrne
DETAILED TABLE OF CONTENTS
Business Law in Practice ……………………………………………………………….113
The Contract…………………………………………………………………………………114
An Agreement ………………………………………………………………………… 114
Offer …………………………………………………………………………………………… 114
Definition of Offer …………………………………………………………………..114
Certainty of Offer …………………………………………………………………….114
Invitation to Treat ……………………………………………………………………115
Termination of Offer ……………………………………………………………….. 118
Acceptance ………………………………………………………………………………….. 122
Definition of Acceptance ………………………………………………………….122
Communication of Acceptance ………………………………………………….122
Formalization ………………………………………………………………………….128
Consideration ……………………………………………………………………………….128
The Nature of Consideration ……………………………………………………..128
Pre-Existing Legal Duty ………………………………………………………….. 129
Variation of Contracts ………………………………………………………………130
© 2014 Nelson Education Limited 154
Promises Enforceable without Consideration ……………………………………131
Promise under Seal …………………………………………………………………. 131
Promissory Estoppel ………………………………………………………………..132
Partial Payment of a Debt ………………………………………………………… 133
Intention to Contract ……………………………………………………………………..135
Business Agreements ……………………………………………………………….135
Family Agreements ………………………………………………………………….135
Managing the Risks in Contract Formation ………………………………………135
Business Law in Practice Revisited …………………………………………………136
Chapter Summary ………………………………………………………………………… 137
Key Terms and Concepts ………………………………………………………….138
Questions for Review ………………………………………………………………. 138
Questions for Critical Thinking …………………………………………………138
Situations for Discussion ………………………………………………………….139
© 2014 Nelson Education Limited 155
I. TEACHING OBJECTIVES
After studying this chapter, students should have an understanding of how negotiations lead to a contractual relationship · how negotiations can be terminated the legal ingredients of a contract
how contracts can be amended or changed
The purpose of this chapter is to introduce the essential building blocks of a contract: offer, acceptance, consideration, and intention to create legal relations. As such, the chapter is formalist and technical at times but unavoidably so. Businesspeople require a basic understanding of the point at which negotiations start to have legal consequences, that is, when the “moment of responsibility” has occurred what the courts are looking for when they unravel negotiations to determine whether the constituent parts of a contract are in place
The Business Law in Practice scenario provides the opportunity to contextualize. The
scenario is intentionally straightforward to help students see how the rules of contract formation might actually apply to commercial negotiations.
The teaching objectives of this chapter are to help students understand the rules that govern contract formation how these rules can sometimes be difficult to apply perhaps most importantly, that these rules can be facilitative—they can provide a reliable means by which business commitments are defined, secured, and enforced
© 2014 Nelson Education Limited 156
II. TEACHING STRATEGIES
Offer/Acceptance/Certainty
The Business Law in Practice scenario has been classroom-tested to provide a helpful context for analyzing contractual constituents. The first two paragraphs of the Business Law in Practice narrative, along with the first two questions, provide a solid foundation for the first lecture. The instructor can lead discussion as to how negotiations feed into contract formation. This makes the point that until an offer is made, there are no legal obligations of any kind. At the same time, once an offer is made, it can immediately be accepted, resulting in a contract that obligates both parties. why Jason’s offer is complete and therefore capable of acceptance. To help students understand the role of negotiations in contract formation, consider having students work on the Student Activities in this Instructor’s Manual. Flow charts are particularly useful when approaching the area of offer and acceptance. Suggested models are shown in Figure A and Figure B on the next two pages.
In concluding the section on offer and acceptance, the instructor may want to emphasize that the way contracts are negotiated does not always resemble the formalist model given in textbooks. This is Nicholas Seddon’s point in “The Decline of Offer and Acceptance”:
It is quite possible for parties negotiating a commercial venture to “drift” into contract so that at some stage a court can say that a contract has been formed, even though it is not possible to say precisely when or even what constituted an identifiable offer or acceptance. It usually does not matter precisely when the contract was formed; it is enough to say that by the time the dispute arose the contract was formed.
See Nicholas Seddon, “The Decline of Offer and Acceptance,” Contract Law Information Network, http://www.anu.edu.au/law/pub/....
© 2014 Nelson Education Limited 157
Figure A
This flow chart analyzes potential contract situations. Assume a valid acceptance (see Figure B).
The status of the offer is at issue.
© 2014 Nelson Education Limited 158
Figure B
This flow chart sets out alternatives in the context of a valid offer.
© 2014 Nelson Education Limited 159
Consideration
The Business Law in Practice scenario contains a classic consideration problem, based on
Gilbert Steel Ltd v University Construction Ltd, [1976], 12 OR (2d) 19 (CA), a case that is
summarized in the text on page 130. Variation, unsupported by consideration, is also the subject of the third question following the scenario. The Gilbert Steel example was chosen because it provides a straightforward instance of how a business understanding may fall apart, leaving the innocent party without a remedy. Although there may be compelling business reasons and moral imperatives to keep a promise, gratuitous promises are—subject to the reach of the recent case of Greater Fredericton Airport Authority Inc v NAV Canada discussed on page 130 of the text— generally not legally enforceable, even when seriously made.
This part of the chapter ends with a discussion of promises that are enforceable without
consideration. As well, it devotes some time to the legal ramifications of settling a bad debt, a common business situation. This area provides a focus for debate as to why some legislatures have chosen to intervene with legislation, thereby altering the common law, while others have not.
For instructors who want to devote further time to the doctrine of consideration, a fruitful area relates to forbearance to sue. It is presented as a one-page handout on the next page so that it can be copied and distributed to the class.
© 2014 Nelson Education Limited 160
Forbearance to Sue
Most contractual disputes settle out of court, in part because of the expense and uncertainty of
litigation. To make such a settlement binding, however, it must be supported by consideration or be under seal. Considered generically, a settlement simply involves one party promising not to sue— or discontinuing an existing action—in exchange for a payment of money from the other party. Provided that the party gives up its cause of action honestly and in good faith, that is good consideration for payment by the other side—even if the claim itself turns out to be worthless and clearly invalid. The following example illustrates how forbearance to sue operates in practice: ABC Ltd. (ABC) sued XYZ Ltd. (XYZ) for breach of contract, alleging that a product XYZ supplied is substandard. In response, XYZ offered to pay ABC $2000 in exchange for ABC dropping its legal action. As the president of XYZ said to the president of ABC during settlement negotiations, “We don’t believe that our product is substandard, and we are confident that your action against us will fail. However, in the interests of continuing good relations between our companies, I will send you a cheque for $2000 and we’ll put this matter behind us.” The president of ABC was agreeable, replying, “I don’t have any more interest in spending my time in court than you do. Cut me the cheque, and I will arrange for my lawyers to discontinue the action we have brought against your company and have the appropriate releases signed.”
ABC and XYZ are now in a new contractual relationship. XYZ has offered to pay ABC
$2000 in exchange for ABC agreeing to discontinue its action. ABC has accepted this offer.
Clearly, there is consideration supporting the contract: ABC is purchasing XYZ’s promise to pay it $2000 by promising to discontinue its legal action. XYZ is purchasing ABC’s promise to discontinue its action by agreeing to pay it $2000. ABC’s promise—though not in monetary form—is still a benefit in the eyes of the law. Note that this benefit counts as consideration even if ABC’s prospects of winning its action against XYZ are acknowledged to be weak. XYZ is getting something for its money since there is a possibility that ABC would be successful in court, and XYZ would be liable to pay damages. The termination of this possibility is what XYZ is paying the $2000 for. Note that even giving up the right to sue on an invalid claim—that is, one that has absolutely no prospect of success—is good consideration, provided the party forbearing was acting in good faith and reasonably believed the claim to be valid.
© 2014 Nelson Education Limited 161
III. STUDENT ACTIVITIES
Task 1: What follows is a suggestion for a comprehensive, multipart study assignment that students would complete over the entire contracts section of the text. If the instructor also intends to teach the employment chapters, this assignment can easily be postponed until after that. The assignment is introduced here so that instructors have an opportunity to address commentary toward the assignment as the contracts part of the course is taught. The purpose of the assignment is to help students realize the following: Contract law is an integrated whole. There is a critical connection between the conduct of negotiations and being able to properly express in written form the agreement that has emerged. It is important to expressly address risk and assign it in the contract. This emphasizes the planning function of contract law.
The following assignment is based on Marlene Barken, “Integrating contract and property fundamentals with negotiation skills: A teaching methodology,” (1990) 9 Journal of Legal Studies Education 73. Since each part of the assignment is free standing, the instructor can scale it back—eliminating whole sections—if that would better suit the needs of the students.
Part 1: Negotiate a Contract
Divide the class into employers and potential employees, and have them negotiate a contract of employment. These negotiations would occur outside of class time. For background on employment law, students can review Chapters 21 and 22.
To give the exercise more precise content, the instructor can provide a biography of each party in as simple or as complex a fashion as is appropriate for the class (e.g., the employee
© 2014 Nelson Education Limited 162
could be seeking a job at McDonalds or the position of CEO of a large corporation). In this way, the instructor can evaluate students not only on whether all the contract elements were included but also on whether all issues raised in the negotiation received adequate treatment. Regardless of the detail provided, the instructor should ask students to keep notes during negotiations, describing their negotiations in terms of offer, counteroffer, lapse of offer, revocation, and so on. In short, have them indicate the process by which their negotiations culminated into a contract. It is also helpful to ask the students to operationalize the idea that a contract is a business tool for managing risk. Ask them to identify the risks associated with an employment relationship (for both employer and employee) and what clauses could be used to address or assign those risks.
Page 2: Draft a Contract
Direct students to draft an employment contract based on their negotiations, using plain language and avoiding legal jargon. The essentials of an employment contract are set out in Figure 20.2 of Chapter 20, which is reproduced on the next page for ease of reference.
Part 3: Prepare an Essay
In the essay, ask students to provide
a description of the negotiations a review of the contract, including an account of how each element of a valid contract had been met what obligations each side has
conditions that might excuse performance
in the event of breach, what the innocent party could seek by way of remedy
© 2014 Nelson Education Limited 163
Figure 20.2
Essential Content of an Employment Contract
An employment contract should contain the following information: names of the parties date on which the contract begins position and description of the work to be performed compensation (i.e., salary, wages, bonuses) benefits (i.e., vacation, vacation pay, health and dental plans, pensions, etc.) probation period, if any duration of the contract, if any
evaluation and discipline procedures
company policies or reference to employee policy manual termination provisions (i.e., cause for dismissal, notice of termination, severance package) recital of management rights (i.e., employer has a right to make changes to job duties and responsibilities) confidentiality clause, if appropriate ownership of intellectual property, if appropriate restrictive covenants, if any “entire agreement” clause (i.e., the written contract contains the whole agreement)
© 2014 Nelson Education Limited 164
The Barken article on which this task is based, asks students to negotiate and draft a purchase agreement for residential real estate. This is a relatively complicated task, which students in an introductory course may find too challenging. Instructors of an advanced law class who are interested in such an approach should review Barken’s article, since she also provides a factual profile for the proposed land transaction.
Task 2: An alternative task is to ask students to negotiate a move back home with their parents, dividing the class into parents and adult children. The object would be to negotiate and then draft a contract governing their relationship, along the lines suggested above. Instructors are referred to Sharlene McEvoy, “A contract writing exercise,” (1996) 14 Journal of Legal Studies in Education 81. In this article, a profile of the parent and adult child is provided, as well as their contractual expectations. As noted earlier, this gives the instructor an opportunity to grade student both on whether all the elements of a contract are in place and on whether all issues raised in the negotiation received adequate treatment.
Task 3: After reminding students of the profile of Canadian mass-spammer Adam Guerbuez, discussed on page 5 of the textbook, show the class the Venture video entitled “The Spammed” (on the DVD supporting this Instructor’s Manual). This video demonstrates the paralyzing effect of spam on business operations and complements Business Application of the Law: Spamming on page 117 of the text. Ask the class to address the Critical Analysis questions on page 118 of the text: “Critical Analysis: Do you agree that anti-spam legislation should be part of Canada’s strategy to combat spam? Why not leave the problem of spam to the marketplace to resolve?” For a brief suggested answer to these questions, see the next section.
© 2014 Nelson Education Limited 165
IV. EXPLANATION OF SELECTED FEATURES
Page 117
Business Application of the Law: Spamming
Critical Analysis: Do you agree that anti-spam legislation should be part of Canada’s strategy to combat spam? Why not leave the problem of spam to the marketplace to resolve?
There is a very strong argument that spamming is unethical and tremendously costly to the
unwilling recipients. Spam commandeers the time and resources of recipients without their
permission and without compensation. It also compromises the reputation of legitimate e-
marketers and interferes with functionality. From this perspective, legislation (as recommended by the 2005 National Task Force on Spam and currently in line to be proclaimed in force) is essential. The other perspective would argue that commercial email is an important, perhaps essential, way for a business to communicate with potential customers. All recipients have to do is press the delete button if they aren’t interested.
For anti-spamming websites and related links, see http://www.cauce.org http://spam.abuse.net
http://www.ftc.gov/spam
Page 117
Photo caption: Why is spam objectionable?
Spam is objectionable because it wastes the time and resources of others without compensation
© 2014 Nelson Education Limited 166
and without permission. It compromises the reputation of legitimate e-marketers. As well, it can interfere with the operation of the Internet.
Page 119
Photo caption: What factors will determine whether a contract will be the result of lengthy negotiations or will be easily and quickly concluded?
Inexpensive, generic, consumer-type purchases (such as for a pair of scissors or a box of paper clips) will obviously involve no bargaining at all. The consumer will pay for the purchase and leave. Where standard form contracts are involved, there is likewise no bargaining. The consumer is essentially told to take it or leave it. Even more expensive but generic items (like a personal computer) do not typically involve bargaining. The store will make a sale easily and quickly if the store can supply a computer within the consumer’s price range and quality specifications. It is the larger commercial transactions, often involving customized product (as in the Trackers-Coasters contract) that will generally involve protracted bargaining over quality, cost, warranties, and the like. The larger, more expensive, and customized the transaction is, the longer the negotiations will probably take.
Page 119
Case: Bigg v Boyd Gibbins Ltd, [1971] 2 All ER 183 (CA)
Critical Analysis: Who is the offeror and who is the offeree in this case? Do you agree with the court that a contract was in place? Should courts hold parties to the meaning of the exact words they use or should words be interpreted in their larger context?
The plaintiff-vendor is the offeror. The defendant-purchaser is the offeree. The court’s decision seems reasonable based on the correspondence between the parties, as assessed by the objective
© 2014 Nelson Education Limited 167
test. This case also illustrates that courts refuse to be overly formulaic in such disputes. The fact that in the last letter, “price” was used, as opposed to “offer” did not sway the judge given the overall sense of the transaction. This is much preferable and a more just approach than reverting to literal-minded interpretation. Contractual negotiations take place in the business world, not in an idealized, legal vacuum.
Page 120
Landmark Case: Dickinson v Dodds, [1876] 2 Ch D 463 (CA)
Critical Analysis: Being guided primarily by legal principles is certainly an acceptable way of doing business. However, what might be the impact on your business reputation of going back on your word and revoking an offer sooner than you had promised you would? Do you think that the method used by Dodds for revocation (i.e., relying on the fact that Dickinson had learned that Dodds was selling to someone else) is the usual way of revoking an offer? What would be a more certain way and reliable way of effecting revocation?
This question provides an opportunity for the class to step back from what the law says is
permissible and instead asks students to consider their choices from a business perspective and an ethical one. There is little doubt that people who revoke firm offers are legally entitled to do so, but they also jeopardize their reputation for reliability and trustworthiness.
Though this case is old (1876), it represents an tremendously durable common law rule about the revocability of a firm offer, thereby making a very important point about the conservative nature of the law. Indeed, many modern courts have considered and interpreted Dickinson, but its two central principles remain unchanged. Note: There has never been serious challenge to the Dickinson propositions that, first, an offer can be revoked, even when the offeror promises to
© 2014 Nelson Education Limited 168
keep it open for a specified period of time and, second, that an offer cannot be accepted when the offeree knows—either directly or from a reliable third party source—that it is no longer open. As for how to revoke an offer, this case nonetheless provides an approach fraught with danger. It is preferable to expressly revoke offers rather than to hope a revocation might be passed along to the offeree by a reliable third-party source.
Page 123
Photo caption: Why might a business decide to accept an offer by conduct instead of formally communicating acceptance to the other side? What are the risks of doing so?
If the parties regularly have done business in this way, a business might decide to accept by
conduct since the risk of misunderstanding is small. Another reason why a business might accept by conduct is to try to shoehorn itself into a better contract than had been negotiated to date, as illustrated by the Lowe case (page 123 of the text). The risk of accepting by conduct is that the parties may conclude a contract on terms not actually intended. This was the outcome in Lowe. The supplier of the crane ended up in an undesirable contract because his conduct of sending over the crane was classified by the court as acceptance of the lessee’s offer, not a fresh offer that the lessee accepted by retaining the crane without complaint.
Page 123
Case: Lowe (DJ) (1980) Ltd v Upper Clements Family Theme Park Ltd (1990), 95 NSR (2d) 397 (SCTD)
Critical Analysis: How can a business avoid unwanted obligations when there is insufficient time to properly negotiate a contract? Is it reasonable for the judge to decide the case based on the terms of one letter?
© 2014 Nelson Education Limited 169
The only sure way to avoid unwanted obligations is to walk away from a business opportunity that time constraints prevent from being encapsulated into an acceptable contract. Although business can—and does—take the chance that, in the end, an acceptable contract will emerge, it must also be willing to risk that matters will not conclude positively at all, as occurred in Lowe case. In essence, the manager of Lowe (D.J.) Ltd. gambled that he could acquiesce to terms proposed by the other side and, later, negotiate his way out of that contract into a more favourable one. This gamble did not pay off.
While it is true that the court relied on only one letter in defining the terms and conditions of the contract, this was the intention of the letter, objectively assessed. To the extent that Lowe (D.J.) Ltd. did not like those terms, it should have counteroffered. Instead, it simply delivered the crane and thereby sealed a contract on the precise basis recited in the letter. This case makes the important point that contracts can sometimes arise simply through conduct and do not always follow the formalist approach of this chapter. Note that the court in this case never does fully identify the nature of Buxton’s letter. (Was it an acceptance or a counteroffer?) In the end, the letter sets out the terms and conditions of the contract and the court is not unduly concerned as to how that happened.
Page 125
Landmark Case: Carlill v Carbolic Smoke Ball Co, [1893] 1 QB 256 (Eng CA)
This case is an example of an offer of a unilateral contract, though the court did not expressly identify it as such. Through such an offer, the offeror promises to pay the offeree a sum of money if the offeree performs the requested act. For example, a company might offer a $200 reward to anyone who finds a missing laptop computer. Unlike the ordinary business contract,
© 2014 Nelson Education Limited 170
where both parties have obligations, in the unilateral contract, only the offeror is bound because the offeree can perform the requested act—find the laptop—or not. He has no obligation even to try. If he does find the computer and returns it, the contract is complete, and the offeror is contractually required to pay. For obvious reasons, this kind of offer typically does not require people who decide to look for the computer to tell the company of their intention to do so. From the company’s perspective, it is enough to hear from the person who actually finds the computer. A.W.B. Simpson, “Quackery and contract law: The case of the carbolic smoke ball,” (1985)
14 J of Leg Stud 345, provides interesting historical information and illustrations, including
patent sketches of the smoke ball and a copy of the actual ad that ran in the Pall Mall Gazette on November 13, 1891.
Page 126
Technology and the Law: Electronic Contracting
Critical Analysis: Legislation has removed some of the uncertainty about online
contracting. However, questions still remain concerning whether communications on a website are an offer or invitation to do business and whether an electronic acceptance is effective on sending or receipt. What risks do these uncertainties pose for business? What steps can a business take to minimize these risks and avoid contractual disputes?
The general approach of the common law has been to treat most advertisements made in
catalogues, newspapers, and the like as invitations to do business. This approach has been
justified on the basis that merchants have a limited stock and a limited manufacturing capability and therefore could not reasonably be understood to be making offers. That said, advertisements can, in some situations, constitute offers if they are clear, definite, explicit, and leave nothing to
© 2014 Nelson Education Limited 171
negotiation, as per Carlill (cited in the text on page 125) and Lefkowitz (cited in the text in
footnote 1). This could be relevant to Internet sites that indicate not only the price but also
whether the item is in stock. Thus, online advertisements and other promotional materials should be carefully drafted to ensure that viewers interpret them as invitations, not as offers. Businesses should use express statements or online disclaimers to clarify the effect of the online advertisements.
The law distinguishes between instantaneous and non-instantaneous means of
communications. Where the communications is by instantaneous means of communication
(telephone, telex, fax), the acceptance is effective when it is communicated to the offeror (i.e., when the offeror hears or receives it). Non-instantaneous means (mail, telegrams, couriers) the acceptance is effective on sending, provided this means of communication was in the contemplation of the parties. Are electronic communications instantaneous? Electronic communications often exhibit characteristics of both instantaneous and non-instantaneous communications. Email is a lot like regular mail in that it is often sent through the electronic equivalent of the post office (an Internet service provider), and it is not always possible to immediately verify whether the recipient received the message. However, communications on the World Wide Web can in interactive and in real time—thus exhibiting characteristics closer to instantaneous means of communications. It is unclear whether the instantaneous or the non- instantaneous rule will apply to electronic communications.
An online merchant can overcome this uncertainty by specifying when the acceptance becomes effective (i.e., the merchant may specify that an acceptance is effective when it enters a specified computer in a form readable by the online merchant). The rules regarding the effectiveness of an
© 2014 Nelson Education Limited 172
acceptance can be overridden. (Source: Barry Sookman Computer, Internet, and Electronic Commerce Terms, 2002 ed. (Toronto: Thompson, Carswell, 2002) at 10-14 to 10-28.)
Page 130
Case: Gilbert Steel Ltd v University Construction Ltd, [1976] 12 OR (2d) 19 (CA)
Critical Analysis: Does this rule concerning performance of a pre-existing legal duty reflect the reasonable expectations of both the parties involved and the broader business community?
Businesspeople might well be surprised by the rule in Gilbert Steel, reasoning that if a party
agrees to a concession voluntarily, the party should be bound. However, this assumption fails to address the continuing importance of the doctrine of consideration in the law of contracts. Note too that a properly motivated court can avoid the rule in Gilbert Steel through a variety of methods, as noted by Boyle and Percy, Contracts: Cases and Commentaries (Scarborough: Carswell, 1999) at 206:
The courts have developed various techniques to avoid the pre-existing duty rule such as: finding consideration, albeit nominal; finding that the circumstances have so changed that the plaintiff’s later promise to do exactly what was agreed before is consideration for a promise of more from the defendant; enforcing a modification under seal; enforcing the modification if the parties have rescinded the original agreement and substituted a new one, rather than merely varying the original agreement; or finding a compromise. The use of such devices, however, may lead to arbitrary and unjust results.
Page 132
Photo caption: What is the purpose of placing a seal on a document?
A seal replaces the need for consideration.
© 2014 Nelson Education Limited 173
V. CHAPTER STUDY
Questions for Review, page 138
1. What must an offer contain? Page 114
An offer must contain a promise to perform specified acts on certain terms.
2. Is an advertisement an offer or an invitation to treat? Why? Page 115
As a general proposition, advertisements are classified as invitations to treat because they lack specificity. For practical reasons, however, the law also leans toward this classification. If an advertisement were an offer, the store would be potentially liable for breach of contract if the store ran out of an advertised item.
3. Are oral contracts enforceable? Page 126
Oral contracts are enforceable but very hard to prove.
4. What is a standard form contract? Page 116
A standard form contract is a “take it or leave it” contract. There is no bargaining. Instead, the customer agrees to a standard set of terms that favours the other side.
5. Explain why it might be a good idea to get a contract in writing. Page 126
Having a contract in writing is a good risk management strategy that can help to prevent disputes between parties and help to prove one’s case if a dispute were to go to trial.
© 2014 Nelson Education Limited 174
6. Does the acceptance of an offer have to mirror it exactly, or are slight variations permissible? Page 122
To be effective, the acceptance must manifest an unqualified willingness to enter into the
contract on the precise terms proposed. If the purported acceptance does not mirror the offer by agreeing to all its content, it is a counteroffer and no contract has been formed.
7. What is the “postal rule”? Page 126
The “postal rule” is a rule that changes the more typical laws that apply to offer and acceptance when entering a contract. It states that acceptance of an offer is effective when and where the acceptance is placed in the mail.
8. How is the postal rule different from the “ordinary rule” for acceptance? Page 126
The postal rule is an exception to the necessity of acceptance being communicated for it to be effective. The postal rule does not require acceptance be communicated.
9. When must an offeree communicate acceptance to the offeror in a specific form? Page 123
If the offer stipulates a mandatory method of communication an acceptance, then the offeree must follow that method to ensure legal acceptance.
10. Why is a counteroffer a form of rejecting an offer? Page 122
Though a counteroffer shows an interest in continuing negotiations, it still amounts to a rejection of the first offer. It is a rejection coupled with an attempt to interest the other side in a new offer.
© 2014 Nelson Education Limited 175
11. When can an offeror revoke or withdraw an offer? Page 118
The offeror can revoke the offer any time before acceptance simply by notifying the offeree of its withdrawal.
12. What is consideration? Page 128
Consideration is the price paid for a promise.
13. What is an option agreement? How is the concept of consideration related to the enforceability of such an agreement? Page 120
An option agreement is an agreement where, in exchange of payment, an offeror is obligated to keep an offer open for a specified time. If the offeror gets consideration for keeping the offer open, then the option agreement is an enforceable contract. The consideration provided by the offeree to the offeror (to keep the offer open) is usually money though any form of valid consideration will do.
14. What is a pre-existing legal duty? Pages 129-130
A pre-existing legal duty is a legal obligation that a person already owes.
15. Is a promise to pay more for performance of a pre-existing legal duty generally enforceable? Pages 130-131
The answer depends on jurisdiction. In Ontario and jurisdictions choosing to follow Ontario, the leading decision is Gilbert Steel. This case clearly states that such a promise is not enforceable.
© 2014 Nelson Education Limited 176
In New Brunswick and jurisdictions choosing to follow New Brunswick, such a promise is enforceable provided it was not secured via economic duress.
16. What is a gratuitous promise? Give an example. Pages 128-129
A gratuitous promise is a promise for which no consideration is given. A promise to give your best friend your car or a promise to hire someone when that person graduates from university is unenforceable because it has not been “purchased” by the other side.
17. Are the rules governing the formation of electronic contracts any different from those for written or oral contracts? Page 127
There is no difference between an electronic contract and a written or an oral contract. They all require offer, acceptance, and communication of acceptance.
18. How does the relationship between the parties affect presumptions concerning their contractual intent? Page 135
The law presumes that agreements between family members are non-contractual because of the personal nature of the underlying relationship.
19. What does Contract A refer to in a tendering context? Page 121
This is the preliminary contract that governs the relationship between tenderer and owner. Contract A typically requires the tenderer and the owner to follow a specific set of rules governing the tender selection process, including a promise by the tenderer not to revoke its tender for a specified time.
© 2014 Nelson Education Limited 177
20. What does Contract B refer to in a tendering context? Page 121
Contract B refers to the larger contract to perform the work in question.
Questions for Critical Thinking, page 138
1. The Ontario Court of Appeal in Gilbert Steel and the New Brunswick Court of
Appeal in Greater Fredericton Airport Authority take opposite views on the
enforceability of contractual variations unsupported by consideration. Which view do you prefer and why?
The classic rule in Gilbert Steel (Ont. CA)—that contractual variations must be supported by
consideration—provides a measure of certainty in the law and respects a traditional
understanding of consideration. However, it is also a rule that likely surprises many business
people and, moreover, can work an injustice in any given case. For the New Brunswick appellate court in Greater Fredericton Airport, the variation rule also lacks commercial reality. As quoted in the text, what follows is the CA’s view on the matter, at para. 28:
the reality is that existing contracts are frequently varied and modified by tacit agreement in order to respond to contingencies not anticipated or identified at the time the initial contract was negotiated. As a matter of commercial efficacy, it becomes necessary at times to adjust the parties’ respective contractual obligations and the law must then protect their legitimate expectations that the modifications or variations will be adhered to and regarded as enforceable.
Absent economic duress, the variation is enforceable.
The approach in Greater Fredericton Airport has a certain appeal because it prevents one of the parties from running out on an obligation that she or she had apparently freely chosen. Relying on the doctrine of consideration as an escape hatch is unpalatable in such circumstances. The other precedent, however, has history on its side.
© 2014 Nelson Education Limited 178
2. Based on information contained in the box Business Application of the
Law: Spamming, what risk management steps should a business take in order to
help ensure that any commercial email it sends out is compliant with Canada’s new anti-spamming legislation?
This question is not designed to elicit a detailed risk management plan, particularly because, to date, neither CASL (Canada’s anti-spamming legislation) nor draft regulations have been proclaimed in force. Beyond this, the CRTC (which will largely be in charge of CASL enforcement) has issued detailed bulletins as to how it plans to interpret anticipated legislative requirements. Practically speaking, these bulletins add yet another layer of compliance requirements and have been the immediate subject of criticism. According to Barry Sookman:
While certain of the Commission’s interpretations are helpful, some are troublesome as they would impose new requirements not contemplated either by the statute or the CRTC’s own regulations. They would necessitate costly compliance, which would particularly affect small and medium-sized businesses and mobile digital commerce.
See Barry Sookman, “CRTC issues CASL (Canada’s Anti-Spam Law) guidelines, background and commentary” (16 October 2012) at http://www.barrysookman.com/20... casl-canadas-anti-spam-law-guidelines-background-and-commentary/.
Students will be interested in learning that the road leading to the regulation of commercial electronic messages (CEMs) has been rocky. According to Bernice Karn, a partner at Cassels Brock,
CASL has not yet been proclaimed in force, and through the public consultations held by both Industry Canada and the CRTC on the draft CASL, it has become apparent that the business community is concerned about the far-reaching and severe consequences of this legislation. With administrative monetary penalties under CASL of up to CDN $10 million and the creation of a private right of action for breach of CASL, this statute will have a profound and possibly chilling effect
© 2014 Nelson Education Limited 179
on how responsible organizations communicate electronically with their customers and others.
See Bernice Karn, “While CASL in limbo, CRTC gears up with guidelines” (11 October 2012) at http://www.lexology.com/librar.... Whatever its final articulation, the regulatory framework surrounding CEMs produces a surprisingly detailed landscape.
Approaching the risk management question from a general perspective, possible risk management steps include the following: Ensure that at least one qualified individual in the organization is in charge of monitoring the status of CASL, regulations under that statute, CRTC bulletins, and any other relevant communications. It may be prudent for such an individual to enroll in a specialized training course to be up to the CASL management task. Compare the organization’s current procedures regarding commercial electronic
messages with what the new regulatory framework will apparently mandate. Pending enactment of the framework, begin creating a protocol for achieving anticipated CASL compliance, with a focus on two matters: (1) that the consent of the intended recipient is in place before sending a CEM, and (2) that messages sent comply with anticipated legislative requirements. For a very helpful and brief analysis of what these two matters apparently require, see “The marketer’s guide to applying CASL: How to leverage Canada’s newest internet law” (2010) at http://www.slideshare.net/TC- Media/the-marketers-guide-to-applying-casl. For more detailed analysis, see the CRTC bulletins and commentary by Barry Sookman in “CRTC issues CASL (Canada’s Anti- Spam Law) guidelines, background and commentary” (16 October 2012) at
© 2014 Nelson Education Limited 180
http://www.barrysookman.com/20... guidelines-background-and-commentary/. See too Constantinos Ragas, “FISA: legal obligations and business strategies” (2011-12) 11 I.E.C.L.C. 1 at http://www.mcmillan.ca/Files/1.... Keep close track of customers who have consented to receiving CEMs and customers who have refused or withdrawn their consents. When the institution’s CASL protocol is launched, be alert to system failures and address failures immediately. Improve the system accordingly. Ensure that organization keeps abreast of any regulatory changes.
3. Family members are presumed not to intend legal relations, while businesspeople are subject to the opposite presumption, namely, that an intention to create legal relations is present. Why should the relationship between the parties affect the enforceability of their promises?
This question goes to the requirement that there be an intention to create legal relations before
there can be a contract. The rationale for such a requirement is that an agreement between family members is like an agreement to meet and go for a walk in the park—there is no intention that any legal consequences should follow if one of the parties fails in the commitment. Therefore, the law provides that there is a presumption against there being an intention to create legal relations in such circumstances. The opposite presumption prevails, of course, when there is a commercial context at play.
The requirement of intention, as with any other rule governing contract formation, can
certainly be defended but also must be identified as somewhat arbitrary. Brian C.J. is quoted as
© 2014 Nelson Education Limited 181
stating, “It is common knowledge that the thought of man shall not be tried, for the Devil himself knoweth not the thought of man.”
Furthermore, it has been argued that, in light of the consideration doctrine, the search for intention serves no purpose. See Tuck, “Intent to contract and mutuality of assent” (1943) 21 Can Bar Rev 123.
More seriously, the presumption against an intention to contract in the context of family
arrangements has been identified as a rule that discriminates against women. What follows is an excerpt from analysis by Christine Boyle, “Gender and judicial policy-making in the law of contracts”:
What justifications have been offered for the intention doctrine? They could all well be applied to the commercial sphere—the floodgates argument; the social benefit in protecting relationships from litigation; and the need for flexibility. A critique could easily focus on the merits of these overstated and unprincipled arguments, but feminist concern goes beyond this. Contract law, in its contribution to the construction of the private sphere (i.e., of hearth and home), helps create the cultural idea that there is a haven beyond the market and beyond law where altruism, morality, and love rule. Contract law keeps away to avoid doing harm to that part of our lives. I do not think that there is necessarily anything intrinsically wrong with this, especially if love really did rule rather than self-interest. It is only when examined in context that it is disturbing. The sphere that contract helps create is not a place where egalitarian, trustworthy exchanges take place, but a place where women and children are in danger of being betrayed and exploited. The business world, on the other hand, has been shown to be relatively good at sorting out its own disputes without law. [This quotation, with footnotes deleted, is taken from an unpublished article by Christine Boyle, which the author has on file.]
This feminist analysis has particular resonance given that Balfour appears to be the first time that a litigant lost a case because intent could not be proven. For a discussion of how Balfour created the requirement for intent, see Stephen Hedley, “Keeping contract in its place—Balfour
v. Balfour and the Enforcement of Informal Agreements” (1985), 5 Oxf J of Leg Stud 391.
© 2014 Nelson Education Limited 182
4. When the common law rules of contract were being formed by the judiciary, paper correspondence was the only form of distance communication. Are the traditional rules of contract formation appropriate for modern methods of communication?
Courts can adapt common law rules to new forms of communication. Legislation, in line with international standards, is probably a preferable route, however, since it would establish a set of rules on which the parties can rely, in advance of contract formation. Ontario’s Electronic Commerce Act is a good example of how statute law can facilitate business simply by setting out clear and workable ground rules governing, for example, when an electronic document is deemed to have been received.
5. What risks do negotiators face if they lack knowledge of the rules of contract?
The risk is that the negotiator will inadvertently end up in a contractual relationship that is not wanted. Contract law imposes “a moment of responsibility” on the parties, whether they fully understand that at the time or not. This means that when a negotiator makes what counts as an offer in law, the other side is entitled to accept. This is the case whether the negotiator realizes he or she has made an offer or not—the objective standard by which conduct is measured decides the matter.
6. Do you think that the doctrine of promissory estoppel serves a useful purpose? Would it not be easier if the law simply insisted that all contractual variations be supported by consideration?
Promissory estoppel is a complicated doctrine but it also accords, in many cases, with reasonable commercial expectations. When parties to a contract negotiate a change that fits the definition of
© 2014 Nelson Education Limited 183
promissory estoppel, it is equitable for the party relying on the other side’s promise to have that promise enforced. The purpose of promissory estoppel is to prevent abuse by the other side in an extreme case while retaining consideration as the hallmark of when a contract or a contractual variation is enforceable. Though from a risk management perspective it is preferable to have a variation supported by consideration, the doctrine of promissory estoppel comes to the rescue in the more compelling situations.
Note that promissory estoppel would not have assisted the plaintiff in Greater Fredericton Airport. As the appellate court observes at para. 22:
Another rule that prevents the enforcement of a variation to an executory contract was articulated in Combe v. Combe, [1951] 1 All E.R. 767 (C.A.), [1951] 2 K.B. 215, namely that a plea of detrimental reliance is not a valid basis for enforcing an otherwise gratuitous promise. The plaintiff who argues detrimental reliance is in fact pleading that the defendant should be estopped from asserting that the agreement is unenforceable because of a lack of fresh consideration for the promise. Regrettably, the fact that the plaintiff may have relied on the agreement to his or her detriment is of no consequence as promissory estoppel may be invoked only as a sword and not as a shield. Thus, Nav Canada’s estoppel-based argument—that it relied to its own detriment on the Airport Authority’s gratuitous promise—must be rejected also.
Situations for Discussion, page 139
1. Mr. Gaff made the following written offer to Ms. Paulo: MEMO FROM: J. Gaff
TO: R. Paulo
DATE: June 7, 2000
I hereby agree to sell to R. Paulo my entire fleet of Rolls-Royce automobiles for the sum of $1 million. This offer is open until Friday, June 9, 2000, at 9:00 a.m.
© 2014 Nelson Education Limited 184
On Thursday, June 8, Gaff decided to sell the cars to his well-to-do neighbour instead. Paulo heard about the alleged sale later that same day and rushed over to Gaff’s house, stating that she wished to accept Gaff’s offer. Gaff smiled and said, “Sorry, you’re too late. I’ve sold to someone else.” Is Gaff obligated to keep the offer open until the specified time? What could Paulo have done to better protect her position?
This scenario is based directly on Dickinson v Dodds. As already noted, the law provides that firm offers can be revoked because there is no consideration from the offeree to support the offeror’s promise not to withdraw the offer for a set time.
The law also provides, however, that an offer is open for acceptance until it is revoked. Has the offer in this fact scenario been revoked before acceptance? This will turn on whether the source of Paulo’s information that the cars had been sold was a reliable source or not. There are not enough facts provided to make this determination.
Paulo could have better protected her position by acquiring from Gaff an option to purchase the cars or otherwise providing consideration to Gaff in exchange for Gaff promising to hold the offer open till June 9, 2000. Alternatively, the promise could have been put under seal.
2. An advertisement similar to the following appeared in a popular Canadian business magazine. What legal obligations does it create for Star?
The Star ad (shown on the next page) is a clearly an invitation to treat. At most, it contains a promise to “try hard,” but this would be a difficult promise to sue on. There is also a serious question as to whether such an ad intends to create legal relations.
© 2014 Nelson Education Limited 185
In these regards, the ad can be usefully be contrasted to the ad in Carlill v Carbolic Smoke Ball, set out as Figure 6.2 on page 125 of the text and reproduced below for ease of reference. Figure 6.2
Carbolic Smoke Ball Advertisement
£100 REWARD
WILL BE PAID BY THE
CARBOLIC SMOKE BALL CO.
To any person who contracts the increasing Epidemic, INFLUENZA
Colds, or any diseases caused by taking cold, AFTER HAVING USED the BALL
3 times daily for two weeks according to the printed directions supplied with each Ball.
£1000
Is deposited with the ALLIANCE BANK, REGENT STREET, showing our sincerity in the matter.
During the last epidemic of Influenza many of our
CARBOLIC SMOKE BALLS were sold as Preventives against this Disease, and in no ascertained case was the disease contracted by those using the
CARBOLIC SMOKE BALL.
© 2014 Nelson Education Limited 186
Unlike the Star ad, which makes general claims that have no particular content, the Carlill ad leaves nothing to be negotiated—the terms and conditions are clear. As noted by the court in Carlill v Carbolic Smoke Ball Co, [1893] 1 QB 256 (Eng CA):
[The ad] is written in colloquial and popular language, and I think that it is equivalent to this: “100£ will be paid to any persons who shall contract the increasing epidemic after having used the carbolic smoke ball three times daily for two weeks.” And it seems to me that the way in which the public would read it would be this, that if anybody, after the advertisement was published, used three times daily for two weeks the carbolic smoke ball, and then caught cold, he would be entitled to the reward. [As for how long the ball was warranted to provide protection] I think, more probably, it means that the smoke ball will be a protection while it is in use.
3. Jack and his sister Lisa inherited their parent’s cottage. Jack suggested to Lisa that he would be willing to buy her out for $50 000. Lisa thought about it for a minute and then quickly agreed. “A deal is a deal,” said Lisa and shook hands with her brother. “There is no need for us to go to a lawyer and get a big fancy contract written up.” If Lisa ever has to prove this contract in a court of law, what are the problems she faces?
Lisa faces several problems. First, it is not clear that Jack has made an offer because he merely expressed a willingness to buy, as opposed to actually offering to buy. However, since the two shook hands with the purchase price of $50 000 having been identified, perhaps an offer and acceptance exist on that basis. Beyond this issue, it could be argued that the contract fails for uncertainty as not all of the critical components of the contract have agreed to, including a closing date. More fatally, as this is a contract for an interest in land, it must be reduced to writing (though in Manitoba there is apparently more give on this matter perhaps). Third, Lisa must prove an intention to create legal relations since she is dealing with a family member and
© 2014 Nelson Education Limited 187
the presumption is therefore of no contract. Fourth, she must prove the terms of the contract and since it has not been reduced to writing, this will be a more difficult matter than it otherwise would be.
4. On October 30, Casgrain offered to purchase some farmland from Butler for
$14 500 with possession in January. On November 15, Butler made a counteroffer, by telegram, at $15 000. The telegram was delivered to Casgrain’s home on November 20 but Casgrain was absent on a hunting trip. Casgrain’s wife opened the letter and wrote back to Butler saying that her husband was away for 10 days and asked that he hold the deal open until Casgrain could consider the matter. Butler did not respond. On December 10, Casgrain returned home and immediately wired Butler, purporting to accept Butler’s offer of $15 000. The wire was received on December 12. By this time, Butler had already sold the land to someone else. Has Casgrain accepted the offer in time or has it lapsed?
This problem is based on a simplified version Barrick v Clark, [1951] SCR 177 and focuses on the issue of lapse. More specifically, was Butler’s counteroffer still capable of acceptance on December 12 or had the offer lapsed?
According to the SCC in Barrick, since no time of expiration was specified, the offer lapses after a reasonable time. According to Justice Estey, what constitutes a reasonable time depends on the “nature and character and the normal or usual course of business in negotiations leading to a sale, as well as the circumstances of the offer including the conduct of the parties in the courts of negotiation.”
© 2014 Nelson Education Limited 188
Here, the subject matter is a non-perishable, namely, farmland. This would lengthen what a reasonable period would be. Farming could not occur until spring so this would also presumably lengthen the period. If there were a demand for the land, this would shorten the period since the vendor would want to sell in a hot market, rather than a tepid one. Any language in the offer requiring a quick reply (though not on these facts) would shorten the period as well. Though Casgrain’s wife asked that the offer be held open longer, this could not function to lengthen the period since Butler did not reply and could not be unilaterally bound by her conduct. An important point to make about such scenarios is that one simply cannot predict, in advance, when an offer will lapse. Courts will look to factors that tend to shorten the period of time and to factors that lengthen it. A judge will then make a decision based on an assessment of these factors. To avoid unwelcome judicial surprises, offerors should seek to avoid litigation on such a matter by ensuring that all offers specify an expiration date. Likewise, the quicker the offeree responds to an open offer, the less likely he will face a successful argument that the offer in question has lapsed.
5. Mr. and Mrs. Smith were regular participants in a lottery pool with their friends. Each Friday, the group would meet at the local pub and contribute to a pool of cash that would then be used to purchase lottery tickets. The group agreed that if a winning ticket were purchased, the amount would be shared among the participants. There was also discussion that if someone in the group did not come to the pub on the day in question, another person present would contribute on the missing person’s behalf and get paid back later. On one Friday, the Smiths did not attend the pub nor, therefore, contribute to the pool of lottery cash but they trusted
© 2014 Nelson Education Limited 189
that their friends would contribute on their behalf. This did not happen. One of the tickets purchased turned out to be a winner. Mr. and Mrs. Smith say they are entitled to a share. The others in the group say that only those who actually paid into the pool for that winning ticket are entitled to a share of the prize. Which view do you think is correct and why? [footnote deleted]
This Situation for Discussion is based on Clancy v Clough, 2011 ABQB 439. The Alberta Court of Queen’s Bench found against the plaintiff in this case. The plaintiff was unable to show, on a balance of probabilities, that the parties had formed a contract whereby an absent member’s contribution to the lottery pool would be contributed by another, who would then secure reimbursement from the absent member. The idea was that the members of the core group would be included in the ticket purchase every time. The judge aptly summarized the important aspects of the matter in a separate decision she rendered going to costs at 2011 ABQB 778, as follows:
[3] …The issue at trial was whether the Plaintiffs were entitled to two shares of the lottery winnings. The thrust of the Plaintiffs argument was an agreement the Plaintiffs allege existed between them and other members within the lottery pool. Pursuant to that purported agreement, every person in the pool undertook to ensure that no other member was left out of a lottery draw on account of not being personally present to make their monetary contribution. That is, if one or more persons were not present on the day money was being collected, then, according to the Plaintiffs, the agreement stipulated that those who were present would contribute on behalf of the absentees and later recoup that contribution. The Plaintiffs also advanced several other arguments premised on breach of trust, unjust enrichment, and negligence—though breach of the alleged contract was the primary basis of the claim.
[4] The matter was decided in favour of the Defendants. While I found the Plaintiffs had a genuine and subjective belief that such an agreement did exist, I concluded that other members of the group were not operating under the same belief as to the purported obligations. The evidence was that other participants, and in particular the members of a ‘core group’, did not ensure that every person was included in the lottery pool every week: Clancy v. Gough, 2011 ABQB 439 (CanLII), 2011 ABQB 439 at para. 55.
© 2014 Nelson Education Limited 190
This Situation for Discussion starkly underlies the fact that the plaintiff must prove its case, including that there is an agreement between the parties. As the plaintiffs could not show that there was a contract among the parties in the terms expressed—or at all—the plaintiffs’ action failed. On a related front, this case also shows importance of getting agreements in writing.
6. ABC Ltd. is owed $10 000 from Mr. Smith for home repair. Mr. Abbott, a senior officer with ABC Ltd., went to the Smith’s home to secure payment and spoke with Smith. Abbott explained that without payment, ABC faced bankruptcy. In response, Smith began complaining about the poor quality of the work done (even though he knew the work was perfectly fine) and that he would only pay $4000. “Take it or leave, buster,” he said. Abbott took his cheque and cashed it, feeling that he had no choice in the matter. He would now like to go after Mr. Smith for the balance. Can he do so? [footnote deleted]
This problem is based on D & C Builders v Rees, [1965] 3 All ER 837 (CA).
ABC’s promise is gratuitous and at common law, it could sue for the balance. It is possible that ABC could rely on the defence of duress, but it would depend on how strictly the court viewed the test and how the facts struck the court. Duress is discussed in more depth in Chapter 8 so students are not in a position to do much with it at this point. Some Canadian jurisdictions have legislation making such promises binding even though there is no consideration supporting them. Once a lesser sum has been freely agreed on and paid, the creditor cannot latter claim the full amount. At issue here is whether the lesser sum has been freely agreed to, given ABC’s precarious financial position. This is an open question given the
© 2014 Nelson Education Limited 191
brief facts. If the legislation does not cover the scenario or if the scenario occurs in a jurisdiction without such legislation, ABC may nonetheless be estopped from claiming the full amount. The doctrine of promissory estoppel may bind ABC but only if Smith can show all the ingredients: Has ABC made a promise or an assurance to Smith that was intended to affect their legal relationship and to be acted on? Here, ABC has agreed to accept a lesser sum so as to affect the contract between them. At face value, it seems ABC intended Smith to act on it. Has Smith acted on it or in some way changed his position? There is no evidence in the fact pattern that he has done so, though perhaps simply arranging his financial affairs on the basis of ABC’s promise to accept a lesser sum is sufficient. Smith’s own conduct has been above reproach such that he is deserving of the court’s assistance. If a court were willing to extend Greater Fredericton’s test for duress to apply to a situation involving partial payment of a debt, it could be argued that economic duress existed in that context—it seems that ABC had no practical alternative and that it essentially did not consent to the variation.
7. April manufactures leather chairs and sofas, and she is happy because she has just negotiated a contract with Bob’s Fine Furnishings, Ltd., to supply them with her handmade furniture. The terms of the contract are that on the first Monday of every month, April is to send over 10 chairs and two sofas, and Bob’s Fine Furnishings will pay her $7000. She is excited to learn that her furniture is so popular that Bob’s Fine Furnishings has a waiting list of customers who have pre-
© 2014 Nelson Education Limited 192
paid for their chairs, as her last shipment sold out in only a week. April is a little worried, however, as she has just received a phone call saying that her leather supplier will not be able to send her any leather for the next three months, because of a local shortage. Without the leather, she knows she cannot fill her order for Bob’s Fine Furnishings by the first Monday of next month, much less for the two months after that. What could April have done when negotiating the contract with Bob’s Fine Furnishings to help manage the risk of a situation like this? What should she do now that the contract is already in place?
April could have inserted into her contract with Bob’s Fine Furnishings a clause allowing an
extension of time if April’s suppliers are short or late on their delivery to April. In addition, she could have negotiated a clause that allows a discount for late delivery. From a business perspective April should have more than one supplier to avoid such situations. She also should have negotiated contracts with her suppliers that they would provide discounts if the supplies to April were delivered late. In this way, April could discount to a similar amount to Bob’s and possibly avoid financial losses. Now that the contract is already in place, April could try to renegotiate the terms in light of the new circumstances. She could offer a discount with Bob’s to try and keep the business relationship.
8. Mr. M, living in British Columbia, and Ms. A, living in England, met online and
struck up a relationship. Mr. M promised Ms. A that if she would come to live with him in Canada, with a view to marriage, he would pay off the balance on her mortgage on her home in England. Relying on this promise, Ms. A gave up her job and moved to Vancouver. The relationship proved to be an unhappy one,
© 2014 Nelson Education Limited 193
particularly because Mr. M did not pay off Ms. A’s mortgage, though he did lend her $100 000. She applied that money to her mortgage but was soon thereafter evicted from M’s home. Can Ms. A enforce Mr. M’s promise to pay off her
mortgage by relying on the doctrine of promissory estoppel? Is Ms. A’s reliance on Mr. M’s promise enough to make that promise enforceable? [footnote deleted] This problem is based on M(N) v A(AT). At trial, Ms. A’s action was dismissed and the BCCA dismissed her case on appeal for largely the same reasons as that of the trial judge. In short, Ms. A could not show the existence of a pre-existing legal relationship, which is a critical step in Canada to establishing promissory estoppel. Reliance is simply not enough. The BCCA (in M(N) v A(AT), 2003 BCCA 297 (CanLII)) stated the followings:
[3] The only issue on this appeal is whether the trial judge erred in refusing to enforce the promise on which Ms. A. relied to her detriment. About that claim, the trial judge wrote 2001 BCSC 1358 (CanLII), (2001 BCSC 1358):
[37] In my opinion, the defendant has not established the primary requirement for the application of the doctrine of promissory estoppel. While I am satisfied that the plaintiff did promise to pay off the mortgage on the defendant’s house, and that the defendant relied on his promise to her detriment, the defendant has failed to establish the existence of a legal relationship between the parties at the time the promise was made.
…
[58] In my opinion, the evidence supports the defendant’s allegation that she resigned her employment with the Bank and moved to Vancouver to live with the plaintiff largely in reliance upon the plaintiff’s promise to pay off the mortgage on her house.
[59] I am also satisfied that the defendant relied on the plaintiff’s promise, to her detriment. In the spring of 1993 the defendant was employed by the Bank in the position of Assistant Vice-President in the Capital Markets Europe Group from August 15, 1989 until she resigned her employment effective July 26, 1993 ………
© 2014 Nelson Education Limited 194
[60] The defendant testified that she looked for work when she returned to England in 1994 but could not find a permanent position … As of the date of trial she has certainly not been able to replace the substantial earnings and favourable benefits she received as an employee of the Bank.
[61] However, notwithstanding my finding that the plaintiff promised to pay off the mortgage on the defendant’s house and that the defendant relied on the promise to her detriment, I find that the first element necessary to a successful claim in promissory estoppel has not been made out because the defendant has failed to establish that there was a legal relationship between the parties at the time that the plaintiff promised to pay off the mortgage on her house.
[64] I adopt the conclusion reached by C. L. Smith J. in Fraser Valley Credit Union, supra, that the necessity of an existing legal relationship is a prerequisite to the application of the doctrine of promissory estoppel. While the doctrine of promissory estoppel, as an equitable remedy, has developed to provide some flexibility against the otherwise strict application of the law of contract, it only affects existing contractual rights, and cannot manufacture contracts out of promises or representations: Fraser Valley Credit Union, supra, at para. 29. Thus, in the absence of a pre-existing legal relationship, the doctrine of promissory estoppel stops short of allowing relief for what would otherwise be an unenforceable gratuitous promise. Accordingly, I find that the defence and counterclaim based upon estoppel must be dismissed.
Chapter 7
The Terms of a Contract
by Shannon O’Byrne
DETAILED TABLE OF CONTENTS
Business Law in Practice ……………………………………………………………… 141
The Content of a Contract …………………………………………………………….. 142
Terms …………………………………………………………………………………… 142
The Parol Evidence Rule ………………………………………………………… 148
Using Contractual Terms to Manage Risk ………………………………………. 151
Changed Circumstances ………………………………………………………….. 151
Conditional Agreements …………………………………………………………. 152
Limitation of Liability Clause ………………………………………………….. 154
Exemption Clause (or Exclusion Clause) ………………………………….. 155
Liquidated Damages Clause ……………………………………………………. 158
Business Law in Practice Revisited ……………………………………………….. 158
Chapter Summary ……………………………………………………………………….. 160
Key Terms and Concepts ………………………………………………………… 161
Questions for Review ……………………………………………………………… 161
Questions for Critical Thinking ……………………………………………….. 161
Situations for Discussion ………………………………………………………… 161
I. TEACHING OBJECTIVES
After studying this chapter, students should have an understanding of
the difference between implied and express terms
how judges determine and interpret the content of a contract
how a party can include terms as a business tool to protect itself from liability
Because the purpose of this chapter is to illustrate how the contract is an extraordinarily
effective business tool for managing risk, it dovetails with the risk management theme informing the entire textbook. Through contractual terms, one can secure desirable obligations while avoiding or excluding the unwanted ones. To demonstrate this point, the Business Law in Practice scenario provides a narrative context and a series of contractual clauses—these show how terms are actively used to define the nature and scope of duties owed by one party to the other.
II. TEACHING STRATEGIES
To set the stage for this chapter, the instructor can lead discussion on how the “ideal” contract
comes into existence. This helps students visualize the process by which a contract is created and what its generic objectives and content might be.
Creating the “Ideal” Contract
Prefatory Matter The parties must be prepared for negotiations and have a clear understanding of what they want. The parties must have legal capacity and authority to act. Content
The contract must cover the rights and obligations of the parties in a comprehensive and unambiguous way. It should address risk
contain guarantees
not rely on implied terms consider foreseeable events or contingencies define terms
Both parties need to be aware of all terms, understand those terms, and accept them.
Form The contract must be complete and a reasonable length. The contract should be in writing. The contract should be signed by the parties.
Are witnesses needed?
Should the contract be in duplicate?
The framework constructed by class discussion can then be applied to the terms of the
Business Law in Practice contract created by Jason and Amritha (i.e., for the sale and purchase of roller coaster tracking). At this point, the question becomes, “How well have the parties done with their contract?” This narrative scenario helps students answer this question, thereby providing an immediate context to the textbook’s discussion of contractual terms. Throughout class discussion, it is useful to refer back to the actual terms negotiated between Amritha and Jason. This assists the students in understanding what the clauses mean, how they manage risk from the perspective of one party or the other, and why parties should take care to make important terms express and not just simply rely on assurances they may have received from each other. For example, Clause 13 limits liability to “the unit price of defective goods.” Presumably this clause creates an absolute cap on damages equivalent to the contract price of $1.5 million. This means that Trackers’ worst position is set by contract and will provide some comfort in the event of breach. Clause 13 also excludes Trackers from liability for any loss of profit by Coasters. This means, of course, that any profit that Coasters might lose—including the profit it anticipates from its American customer—cannot be extracted from Trackers even if Trackers is the cause of that loss. Clause 14 exempts Trackers from any responsibility for defective design. In short, should the tracking fail because of design problems, Coasters must look to the person who provided the design for compensation. Trackers has not been hired to provide advice on
the contract specifications. It has been hired to manufacture tracking according to those specs and nothing more. Clause 20 (the entire contract clause) forecloses, or at least attempts to foreclose, any subsequent suggestions—by the buyer, for example—that additional promises or warranties were given in relation to the goods sold. The purpose behind such a clause is to manage the risk that, in the future, the parties will differ as to what was part of the contract and what was not. Though courts can decline to enforce such a clause—as when there is fraudulent misrepresentation, for example—these clauses are useful in forestalling arguments that the contract is not, in fact, complete as written. Late delivery charges ($5000 a day). The example in the text under the heading “Judicial Interpretation of Express Terms” specifies a term in which Trackers agrees to pay $5000 for each day it is late in delivering. As noted in the textbook, the probable intent of such a clause is to give Trackers additional incentive to complete on time. This is essential, from Coasters’ perspective, since it has a contractual obligation to its American purchaser to deliver on time.
Note that this last clause can also be used to illustrate liquidated damages. That is, if Trackers is late with delivery and refuses to pay the specified amount, the legal question is whether this amount was a genuine estimate of loss or an attempt to punish Trackers for late delivery.
The content of this chapter can be channelled through a risk management model that requires the negotiator to develop a comprehensive approach to entering into a contract; that is, first, the negotiator must anticipate what kinds of risks surround the proposed contract, both at present
and in the future, and, second, the negotiator must then decide how to handle these risks—should they be eliminated or reduced by contractual terms, or should they be retained? The first three Questions for Discussion expressly address these themes. For ideas on how to handle these questions, see infra.
It is very useful to spend time at the end of the chapter on whether the contract negotiated between the Amritha and Jason was effective and whether it could have been improved. For example, in Clause 12 of the Business Law in Practice scenario, the term “best quality” is used. In the absence of any definition in the contract, a key source for defining this term would be any standards in the steel industry. Does “best quality” have a recognized meaning in the trade? Are there several levels of quality of steel that could fit this description? What quality should Coasters expect for the price it is paying? Could the parties have been more precise? Similarly, in Clause 14, Trackers is made exempt for defects “relating to design of goods.” If a dispute arose about liability, is the phrase sufficiently clear?
III. STUDENT ACTIVITIES
The instructor is referred to Chapter 6 of this Instructor’s Manual, which provides a detailed assignment designed to span the contracts part of the course. Specifically, in relation to this chapter, Part 2 of that assignment directs students to draft an employment contract, based on mock negotiations, using plain language and avoiding legal jargon. In Part 3, students are asked to provide, among other things, a review of the employment contract, including an account of how each element of a valid contract had been met what obligations each side has
conditions that might excuse performance
in the event of breach, what the innocent party could seek by way of remedy
IV. EXPLANATION OF SELECTED FEATURES
Page 144
Business Application of the Law: 911 Emergency Access
Critical Analysis: Who do you think should win this action?
Anderson’s class action is set to go to trial in March 2014, according to Miranda Scotland, “Bell forced to reveal 911 documents,” Northern News Service (3 August 2012) at http://www.nnsl.com/frames/new.... It is, of course, difficult to predict whether the plaintiffs’ action will succeed, but there appears to be a strong claim based on breach of contract. As a motions judge succinctly noted in response to an earlier application by Bell to strike Anderson’s statement of claim in this matter: “It would be an unusual contract which let one party charge for doing nothing, and clear words would be needed.” See Bell Mobility Inc v Anderson, 2009 NWTCA 3 (CanLII), http://canlii.ca/t/23jz2 at para 6. On a related front, The Globe and Mail offers this quote from Anderson: “I’m not a very sophisticated man … but to me it’s fairly straightforward … The phone company tells you there is no 911 service, then they charge you for 911 service.” See Grant Robertson, “911’s reach leaves North in the cold,” The Globe and Mail (updated 22 August 2012) at
http://m.theglobeandmail.com/n... cold/article71487/?service=mobile.
In this same story, The Globe and Mail notes that “at least $13-million a month is collected in 911 fees on wireless bills across the country.” While some of that money (between 10 and 20 percent) helps to fund 911 dispatch centres, the cellphone companies simply keep the rest, it states.
Page 145
Landmark Case: Gateway Realty Ltd v Arton Holdings Ltd (1991), 106 NSR (2d) 180 (SC), aff’d (1992), 112 NSR (2d) 180 (CA)
Critical Analysis: The Gateway case has been followed or cited with approval by
numerous Canadian courts, but the case has not yet been expressly considered by the
Supreme Court of Canada. Other courts have determined that a good faith clause is not an automatic term of every contract and can be implied only when it is consistent with the parties’ intentions. Should all parties to a commercial deal be bound by a duty to act in good faith, or should parties be expected to take care of themselves?
This question raises the issue of what the default standard for contractual behaviour is or should be. As noted in textbook, most courts are reluctant to say that parties automatically owe a good faith standard since they are uncertain about where this might lead as a general proposition of law. That said, many courts go on to say that in the circumstances of this case, a good faith duty is owed so, in the end, the outcome can be identical.
Part of the definition of good faith provided by the Nova Scotia court includes the notion that a party cannot, without reasonable justification, act in relation to the contract in a manner that would “substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other.” It seems likely that, in the ordinary case at least, such a term would exist by implication, but this is a point of some contention.
Page 146
Case: Glenko Enterprises Ltd v Ernie Keller Contractors Ltd, [1994] 10 WWR 641 (Man QB), aff’d [1996] 5 WWR 135 (Man CA)
Critical Analysis: Why should industry or trade practice be relevant to understanding the parties’ contractual obligations? Would it not be simpler for a court to apply the contractual terms as stated and refuse to look outside that document? What are the risks of relying on industry practices as a way of implying terms into a contract?
Courts look to industry or trade practice when they are so notorious that they are presumed to be present in the parties’ contract. The motivation is to enforce some honesty and fairness within the contractual context. To simply enforce the contractual terms as stated may lead to a tremendously unfair outcome given the notoriety of the custom at issue (i.e., one party may, with great justification, assume that the practice applies and that is it so obvious, it almost goes without saying). The party purporting to rely on industry practice is, however, taking a big risk given the standard of notoriety that is required before such an industry practice will be found. As always, it is preferable to recite express terms rather than hope that implied terms will materialize.
Page 147
Photo caption: How can a business avoid having terms implied into a contract?
This can be accomplished by the business inserting an entire contract clause and specifically excluding any implied terms, either by statute or by common law.
Page 150
Case: Corey Developments Inc v Eastbridge Developments (Waterloo) Ltd (1997), 34 OR (3d) 73, aff’d (1999), 44 OR (3d) 95 (CA)
Critical Analysis: Is the Corey decision a welcome development? What are the
justifications, if any, for abolishing the parol evidence rule in a commercial context?
Most students would agree that Corey is a welcome development. It is problematic to apply a rule in a vacuum, particularly when to do so would allow one person to benefit from his or her own duplicity.
Though Corey did involve a commercial relationship, there is much less justification for abolishing the parol evidence rule in a commercial context, since parties tend to be more sophisticated, have access to legal advice, and overall are better positioned to take care of themselves. The parol evidence rule forces the parties to pay attention to the wording of their contract and to ensure that it is correct and complete. These kinds of checks can be preventative and thereby reduce the possibility of conflict as to what the obligations are.
Page 150
Business and Legislation: Evidence of Electronic Contracts
A new set of practical problems emerges when there is an emphasis on computer systems—such as corrupt files, electronic documents that disappear into cyberspace, and fraudulent alterations to electronic documents, but paper poses analogous challenges. In short, under either a paper or an electronic system, documents are always at risk of being lost, destroyed, or wrongfully altered. For discussion of the unique and common problems associated with e-commerce, see John Gregory, “Solving legal issues in electronic commerce” (1999) 32 Can Bus LJ 84, which continues to have resonance more than a decade later. Gregory’s main conclusion is that the more one studies the legal issues surrounding e-commerce, the less daunting they become “and the less radical the measures needed to ensure that the law does not unnecessarily impede e- commerce” at 85.
Some legislative amendments are necessary, however, to facilitate greater ease and certainty in the marketplace. The Ontario legislation referenced in this box is just such an example, since it seeks to make proof of electronic contracts subject to a uniform set of rules.
Page 151
Photo caption: Why do well-drafted contracts anticipate events that can affect performance?
Contracts are documents that allow for planning for contingencies, such as work stoppages. In relation to the Coasters-Trackers scenario, the main contingency that occurred was a substantial price increase on the supplier’s end. Unless a tracking supplier like Trackers is prepared to risk that the cost of performance may increase when the time comes to perform, it is advised to build some contingencies into its contracts. By anticipating events that can affect performance (such as a sudden price increase), Trackers is better able to meet its obligations and not be caught in a
losing contract.
Page 154
Case: Wiebe v Bobsien (1984), 14 DLR (4th) 754 (BCSC), aff’d (1985), 20 DLR (4th) 475
(CA), leave to appeal to SCC refused (1985), 64 N1R 394 (SCC)
Critical Analysis: Do conditions precedent introduce too much uncertainty into contracts?
Although the law surrounding conditional agreements can be complex, businesspeople need a
mechanism whereby their contractual agreements can be made conditional on events that are not certain to occur–like securing the necessary financing, zoning variation, or subdivision
approval. As the textbook observes, it is also important that the law provide a mechanism for making the contract binding on the parties during the time set aside for that condition to occur.
Page 155
Landmark Case: Tilden Rent-A-Car Co v Clendenning (1978), 83 DLR (3d) 400 (Ont CA) Critical Analysis: Courts may be less helpful to the customer in a non-consumer context, since parties are expected to look after their own interests. In a 1997 decision from the Ontario Court of Appeal, for example, the court emphasized that inadequate notice of the kind complained of in the Tilden case will not ordinarily be grounds for attacking an exemption clause in a commercial situation. The court affirmed the rule that a person will be assumed to have read and understood any contract that she signs. Should consumer and commercial contracts be treated differently? [footnote deleted]
There is a very strong argument that in a commercial setting, parties should be bound by the
document they sign and not be able to rely on the kind of arguments that were successful in the Tilden case. This is discussed in the Fraser Jewellers (1982) Ltd v Dominion Electric Protection Co et al (1997), 34 OR (3d) 1 (CA), cited in footnote 18, page 156 of the textbook. Robins J.A. reversed the trial judge’s ruling that the limitation of liability clause did not bind the plaintiff because the defendant did not draw its attention to it:
As I view the matter, there was no special relationship exiting between these parties that imposed any such obligation on the defendant. This is an ordinary commercial contract between business people … in this commercial setting, in the absence of fraud or other improper conduct inducing the plaintiff to enter the contract, the onus must rest upon the plaintiff to review the document and satisfy itself of its advantages and disadvantages before signing it. There is no justification for shifting the plaintiff’s responsibility to act with element prudence onto the defendant.
Page 156
Photo caption: What risks do lengthy contracts—as found in the car rental industry— pose to the consumer and to the business supplying the vehicle?
The customer may have agreed to the terms without reading them, understanding them, or even being aware that they form part of the contract. The business must make the customer aware of any restrictive or unexpected terms in the contract, such as exemption clauses or limitation clauses, or risk them being found unenforceable by the court.
Page 156
Technology and the Law: Shrink-Wrap, Click-Wrap, and Browse-Wrap Agreements
Critical Analysis: The enforceability of terms in click-wrap agreements depends on
notification prior to assent. What steps can a business take in preparing and presenting an agreement to ensure that the terms will be found to be enforceable? What steps could a business take to increase the chances that a shrink-wrap agreement is found enforceable? Do you think that browse-wrap agreements should be enforceable? Why or why not? As a businessperson, how confident would you be at this point concerning the enforceability of a browse-wrap contract in Canada?
Click-Wrap Agreements
In the Rudder v Microsoft decision referenced in this box, Winkler J. makes a number of points as to why the click-wrap agreement was enforceable: The entire agreement was readily viewable by using the scrolling function. There was a requirement to acknowledge acceptance by clicking an “I accept” button. All terms were displayed in the same format (i.e., no fine print in the document).
The customer is presented with the terms of the agreement twice during the contracting process.
In short, the vendor’s objective must be to ensure that the consumer understands the legal relationship being contemplated. To advance this goal even further than Winkler J.’s analysis, a business could include, as the first screen, a summary explaining the nature of the agreement proposed and that the entire contract appears over several screens, not just one. Based on Tilden, any unexpected or onerous clauses should be particularly conspicuous, perhaps by using large font in a distinctive colour. These onerous clauses could also be referenced in the first screen summary so that the consumer is aware of their presence in the agreement. And, of course, the more clearly worded the agreement is, the more likely a court is to hold the consumer bound.
Shrink-Wrap Agreements
As for shrink-wrap agreements, the safest course is to put all the restrictions on the box so that the consumer is made aware of those terms before purchase. An alternative is to place a prominent warning on the box that the product is subject to important restrictions on use and that by purchasing the product, the consumer is agreeing to those restrictions or agreeing to return to product unused if those restrictions are unacceptable. It has been suggested that shrink-wrap contracts could be valid if key terms were on the outside of the package and clearly readable (“This is a licence. You may not transfer or copy this software.”) and the purchaser were permitted to return the product if he or she were not content with the subsidiary terms contained inside (John Gregory, “Solving legal issues in electronic commerce” (1999) 32 Can Bus LJ 84 at 90). (For further discussion on shrink-wrap agreements, see analysis of Situation for Discussion 2, infra.
Browse-Wrap Agreements
The question of enforceability of browse-wrap agreements is problematic. Unlike click-wrap
agreements in which the party assents to the agreement by clicking, the browse-wrap agreement merely has a link to the terms and conditions. Just as shrink-wrap agreements have some uncertainty to their enforceability, browse-wrap agreements would have the same uncertainty. In fact, it can be argued that browse-wrap agreements are less enforceable than shrink-wrap agreements because browse-wrap agreements may not necessarily point out the terms and conditions or even where the terms and conditions can be read.
V. CHAPTER STUDY
Questions for Review, page 161
1. What is the difference between an express and an implied term? Pages 142-144
An express term is a provision of a contract that states a promise explicitly. An implied term is a provision that is not expressly included but is necessary to give effect to the parties’ intention.
2. What are two major rules of construction used by the courts in interpreting a contract? Page 143
The courts will either apply the plain-meaning rule or give effect to the party’s actual intentions.
3. Who decides the content of a contract and on what basis? Pages 143-144
If the parties cannot make this determination between themselves, a judge will decide for them. The court will rely on rules of construction to do so. Additionally, the court is free to imply terms, based on the four sources discussed in Question for Review 4.
4. What are four sources that the court can rely on to imply terms? Pages 145-147
First, the doctrine of business efficacy entitles a judge to imply terms necessary to make the
contract workable. Second, a court can rely on trade custom to imply a term, though this is
unusual since the custom must be notorious. Third, previous dealings between the parties can be the source of implied terms. Finally, contractual terms may be implied as a result of statute law.
5. Why are express terms preferable to implied terms? Pages 142-143
Express terms have more certainty. Though courts will imply terms based on a number of
grounds (mentioned in question 3 above), the court’s assistance cannot be relied on with any certainty.
6. How does the doctrine of business efficacy affect the interpretation of implied terms? Page 145
Through the doctrine of business efficacy, a judge is permitted to imply terms necessary to make the contract workable.
7. How do the courts deal with ambiguities in the contract? Page 142
If the existence of the contract is not in doubt, the court will assign as reasonable a meaning as possible to vague or ambiguous terms. As well, if the contract has been drafted by one of the parties, any ambiguity in language will be constructed against that party in favour of the other.
8. What is the expression used to describe an implied legal promise to pay a reasonable price for goods or services? Page 148
The term is contractual quantum meruit.
9. What are three ways that a party can control its exposure to liability for breach of contract? Pages 151-158
First, a party could insist on a conditional agreement should its ability to perform be contingent on financing or other approvals. Second, it could also seek a limitation of liability clause
whereby its liability for breach is limited to something less than would otherwise be recoverable. Third, it could insist on an exemption clause that is a term that identifies events causing loss for which there is no liability. Finally, a party can insist on a liquidated damages clause—a term that specifies how much one party must pay the other in the event of breach.
10. What is a limitation of liability clause? Page 155
It is a term of a contract that limits liability for breach to something less than would otherwise be recoverable.
11. How is a limitation of liability clause different from an exemption clause? Page 155
A limitation of liability clause only limits the liability to something less than would otherwise be recoverable in the event of a breach of contract. An exemption clause identifies events causing loss for which there is no liability at all.
12. Why are conditional agreements important? Pages 152
Conditional agreements are essential when one party wants to incur contractual obligations but only under certain circumstances. For example, a business enterprise may be interested in buying a warehouse but only if it is able to secure financing from the bank. If the offer is made contingent on financing and the offer is accepted, then the offeror is only obligated to complete if and when financing is approved. Also important is that, in the interim, the agreement is binding in that the vendor is contractually obligated to wait and see if the condition is fulfilled by the stipulated deadline.
13. What is the parol evidence rule? Pages 148-149
The parol evidence rule applies to written contracts and limits the kind of evidence a party is able to introduce. The rule states that if the language of the written contract is clear and the document is intended to be the sole source of contractual content, then no evidence outside the contract can be used to change or add to the contract.
14. What is a separate or collateral agreement? Page 149
A collateral or separate agreement is one collateral to or separate from the main agreement. It is one of the exceptions to the parol evidence rule. If there is a separate or collateral agreement to the main agreement, it will be enforceable even if it is an oral agreement.
15. What is an entire contract clause? Page 153
An entire contract clause is term in a contract in which the parties agree that their contract is complete as written.
16. What assumptions do the courts make about how contract terms relate to changing circumstances? Page 151
Numerous circumstances may arise that prevent a party from performing its contractual
obligations or that make performance much more expensive than anticipated. The rule, however, is that the terms of a contract are settled at the time of acceptance.
17. What is the difference between a click-wrap agreement and a browse-wrap agreement? Pages 156-158
A click-wrap agreement is an agreement that appears on a user’s computer screen when a user attempts to download software or purchase goods or services online. The user is instructed to view a set of terms and click “I Accept” before proceeding. A browse-wrap agreement, however, is formed simply by the user accessing a specific website, which actually binds the user to the terms and conditions associated with the website.
18. What is a liquidated damages clause? Page 158
A liquidated damages clause is a term of a contract that specifies how much one party must pay the other in the event of breach. The parties decide beforehand how much that breach will be worth by compensation.
Questions for Critical Thinking, page 161
1. Entering a contract can create a great deal of risk for the parties. What are examples of these risks, and how can they be managed?
Several risks are created when entering into a contract. If the parties are not careful in the
drafting of the contract, they could include terms that are vague or use ambiguous language and therefore become unenforceable. The parties may disagree on the meaning of the terms. In addition, there may be some implied terms in the contract. The parties could insert an entire contract clause in an effort to avoid this. The circumstances between the parties may change after the contract is signed. A frustrations clause can avoid some of the problems associated with such changes. Condition precedents protect a party from having to perform the obligations until a certain event takes place. A condition subsequent allow a party to terminate a contract if certain
events take place. Limitation of liability clauses and exemption clauses also protect parties from being bound to something that is unintended and help limit liability, including statutory liability.
2. Do you think conditional contracts contribute to uncertainty in the marketplace since parties will not know their obligations pending the outcome of an event?
It may be said that conditional contracts create uncertainty in the sense that whether the contract advances or fails cannot be known until a future date. However, it may be more accurate to say that conditional contracts reflect uncertainty as opposed to create it. Beyond this, conditional contracts actually advance the commercial value of certainty in the context of a contingency that the parties have freely chosen to adopt.
3. Courts are increasingly willing to imply into contracts a term requiring the parties to act in good faith. Is this a welcome development? Why or why not?
On the one hand, implying such a term introduces uncertainty in the law and could take at least one of the parties by surprise. On the other hand, a good faith term ensures that one party cannot take unfair advantage of the other as this would be contrary to the parties’ intentions at the outset. In this way, implying such a term actually advances the goal of certainty.
4. Why does contract law refuse to enforce a penalty clause? Why are penalty clauses inherently objectionable?
Contract law focuses on compensating the innocent party, not punishing the party in breach. A penalty clause is therefore inherently objectionable because it is at odds with an important goal
of contracts, namely, compensation. Courts do not want to permit parties to hold a clause in terrorum over the other side.
5. Do you agree that contracts should be interpreted based on an objective assessment of the parties’ intentions? What would be the advantages and disadvantages of interpreting contracts based on evidence of what the parties subjectively intended?
Although not a perfect method, it is safer to interpret contracts according to an objective
assessment rather than using a subjective assessment. Trying to follow the parties’ subjective intention would create great uncertainty. Floodgates would be opened and parties would try to introduce evidence to show what they intended not what they actually agreed to. Such an approach could lead to abuse by those who would want to reinterpret contracts in a manner favourable to their present situation. This is the reason for the parol evidence rule and the plain- meaning rule.
6. Do you think the law is unreasonable to require business owners to point out to
consumers any unexpected clauses in a standard form contract if it appears that the consumer has not assented? Should customers simply be required to take care of themselves and read the contract before signing it?
Although the default rule is that you are bound by what you sign, it is important for the law to
create exceptions or the rule would cause too much hardship. It is a simple matter for business to train its personnel to explain a contract to customers and perhaps to have customers initial the more onerous clauses as an indication that such clauses had been brought to their attention.
Ask the class to consider this technique: the company could require customers to physically write out the exemption clauses and sign it. If the person has written out the clause, it is very difficult for that person to later claim that he or she was unaware of the clause in question. What, however, might be the public relations fall out from such an approach?
Situations for Discussion, page 161
1. Former U.S. administrative law judge Roy Pearson famously sued a local dry
cleaner over a lost pair of pants. Among other things, he sought $2 million for
mental distress and discomfort, as well as $15 000 for a rental car he said he would need in order to drive to another dry cleaner outside his neighbourhood. Pearson claimed, for example, that the dry cleaner owners committed fraud by not living up to the sign in their window that stated “Satisfaction guaranteed.” According to Pearson, this guarantee was unconditional, he was by no means satisfied, and the defendants had thereby committed an unfair trade practice. How should a judge interpret the “satisfaction guaranteed” sign? [footnotes deleted]
The meaning of term “satisfaction guaranteed” cannot be freighted with the subjective and, in
this case, tremendously unreasonable interpretation by Pearson. As the court in the case stated in Pearson v Chung (Superior Court, District of Columbia) (June 25, 2007) at pages 19-20:
The plaintiff’s claims regarding the “Satisfaction Guaranteed” sign are premised on his interpretation that the sign is an unconditional and unlimited warranty of satisfaction to the customer, as determined solely by the customer, without regard to the facts or to any notion of reasonableness. The plaintiff confirmed at trial that in his view, if a customer brings in an item of clothing to be dry cleaned, and the dry cleaner remembers the item, and the customer then claims that the item is not his when the dry cleaner presents it back to the customer after it has been cleaned, the cleaner must pay the customer whatever the customer claims the item is worth if there is a “Satisfaction Guaranteed” sign in the store, even if the dry cleaner knows the customer is mistaken or lying.
Nothing in the law supports that position. To the contrary, a claim of an unfair trade practice properly is considered in terms of how the practice would be viewed and understood by a reasonable consumer. Alicke v. MCI Communications Corp., 111 F.3d 909 (D.C. Cir. 1997) (practice of rounding up telephone bills to the next full minute could not mislead a reasonable consumer and therefore could not be a material misrepresentation or omission). See also Rossman v. Fleet Bank Nat’l Assn, 280 F. 3d 384 (3rd Cir. 2002) (duration of advertised offer of credit card with “no annual fee” properly determined based on assumptions that would be made by a reasonable person; one year is a reasonable assumption). A reasonable consumer would not interpret “Satisfaction Guaranteed” to mean that a merchant is required to satisfy a customer’s unreasonable demands or to accede to demands that the merchant has reasonable grounds to dispute.
2. Louise purchased a shrink-wrapped piece of software from a local software
developer. She used the software properly but, much to her dismay, the product contained a virus that destroyed the hard drive of her computer. When Louise looked in the software packaging, she found a card that contained a number of terms of conditions, including a limitation of liability clause. Is this term a part of the contract or can Louise argue that she is not bound by it? Explain.
It is not clear from the hypothetical what warnings, if any, were present on the packaging. Only if she had fair warning of the terms limiting liability for viruses would Louise be bound. Otherwise, based on the following analysis, Louise can argue that the terms contained on the card in the box came too late and form no part of the contract between the parties. Generally speaking, a shrink-wrap licence is a licence for which the terms and conditions cannot be viewed until the package or box containing the software is unwrapped. The consumer automatically accepts those terms simply by unwrapping the package. At common law, the shrink-wrap license is problematic for the following kinds of reasons given by John Gregory (“Solving legal issues in electronic commerce” (1999) 32 Can Bus LJ 84 at 89).
The terms of the license are part of the contract, and the buyer must agree to the terms of the contract before he or she can be bound to them. How can the buyer even know that he or she is making a license, not buying goods? If the terms cannot be known until the contract is in effect, how can they be incorporated into it? The contract must have been made in all its essential elements before the terms came to the buyer’s attention, so those terms are not part of the deal.
Two cases assist in the analysis of the hypothetical:
Summary: North American Systemshops Ltd v King (1989), 68 Alta LR (2d) 145 (QB)
The plaintiff sued for breach of copyright because the defendant King had installed the program “With Interest” on the hard drives of other microcomputers he owned, although he had only purchased one copy of the program. The plaintiff sought an accounting, an order declaring the infringing copies to be the property of the plaintiff, an order prohibiting the defendant’s use of unauthorized copies, an order of delivery of the infringing copies to the plaintiff, damages in the amount of $15 000, punitive damages in the amount of $25 000, and costs of the action on a solicitor-client basis.
Justice Veit concluded that the program was sold to the defendants shrink-wrapped with no evidence on the packaging of copyright restrictions. She accepted the defendant’s argument that, under such circumstances, the sale itself carries with it an implied right to make use of the copy of the program in any way the purchaser may devise (i.e., the copy of the software had been sold on an unrestricted basis, not on a licensed basis).
According to the court:
Shrink-wrap licenses commonly contain restrictions in the rights of use of the software, including restrictions relating to copying, modifying, renting, and re-selling the software. Such licenses often also exclude the conditions of merchantability and fitness for purpose implied under sale of goods legislation, contain limited repair and replace remedies, and limitation of damage provisions.
The enforceability of shrink wrap licences has not yet been tested in the courts in Canada. It is submitted that they will not be enforceable against an ordinary vendee, unless there is some clear communication of the shrink wrap terms at the
time of purchase to the party to whom the software is sold. The reason is that an ordinary vendee without knowledge of any restrictions affecting the use of goods is not bound to honour any restrictions concerning the goods since restrictive conditions do not run with them.
If the vendor sells, imposing no restriction or condition upon his purchaser at the time of sale, he cannot impose a condition subsequently by a delivery of the goods with a condition endorsed upon them or on the package in which they are contained. Unless the purchaser knows of the condition at the time of sale, he has the benefit of the implied licence to use the article free from conditions. Furthermore, the buyer will only be restricted to the limitations expressly brought home to his attention, and has no obligations to make inquiries of the owner of the rights in the article to ascertain if there are other restrictions that have not been brought to his attention.
In view of this law, which would likely be applied to restrictions imposed pursuant to shrink-wrap licences, licensors of mass-marketed software should make every effort to ensure that prospective licensees are made aware of the terms to be imposed on them before the transaction is completed.
Summary: Paterson Ross and Santan Management Ltd v Alumni Computer Group Ltd, [2000] MJ No. 630 (QB)
The plaintiff purchased software by phone from the defendant. Printed on the sealed software package delivered to him was a software license agreement. Paragraph 10 of this agreement stated, in part, “This agreement shall be governed by the laws of the Province of Ontario, Canada.” On the flip side of the packaging was the following note, “Warning—Do not open unless you have read and agreed to the Software License Agreement.” Paterson acknowledged reading the agreement by signing an acknowledgment/warranty registration card. Notwithstanding, he brought an action in Manitoba, alleging deficiencies in the software. The defendant argued that the Manitoba court had no jurisdiction, as Paterson had agreed to be bound by Ontario law. Paterson countered that he was not bound by the agreement on the package, as it constituted an amendment or further agreement after the completion of the contract made over
the phone. According to Paterson, the contract was completed once he ordered the software over the phone and gave a credit card number as payment.
Hearing Officer Toews dismissed Paterson’s action, noting that Paterson had the opportunity not to accept the agreement until he opened the package, which contained clear warnings. By opening the package and sending in the completed registration form, Paterson had agreed to be bound by the terms of the agreement. This included the term that provided that any disputes were to be governed by the laws of Ontario. The Manitoba court therefore had no jurisdiction. Note that the hearing officer had a practical and elastic view of when the contract between the parties was formed:
While Mr. Paterson noted that he was not made aware of any terms of the Agreement over the phone on September 11th 1997, it would be naive to suggest that the software purchaser would expect to be utterly unfettered in his use of the software from that point forward. As noted by Lord Penrose, there “is no reason why one should not imply a suspensive condition in a contract if that was necessary to give the contract business efficacy.” The packaging surrounding the discs was not only sealed but contained ample warning that the defendant considered the opening of the package to have legal implications. In addition, by filling out and returning the warranty card, Mr. Paterson is representing to the defendant that he intends to bind the defendant and to be bound by paragraph #4 of the Agreement. There was no evidence that the defendant’s representative read this portion of the agreement to Mr. Paterson on September 11th. Therefore, it is incongruous to argue that paragraph #10 doesn’t apply because it was “imposed” after the contract was completed. The plaintiffs can not pick and choose which terms of the Agreement they prefer to bound by unless they comply with paragraph #10, which allows for amendment to or modification if it is in “writing and signed by a duly authorized representative of Alumni.” As noted by Lord Penrose, Mr. Paterson also had the absolute right to reject until he opened the package. Therefore, despite Mr. Paterson’s self-described inexperience with computer matters, it would be clear to both lawyer and lay-person alike reading the packaging that opening same could have significant implications.
It has been suggested that shrink-wrap contracts could be valid if (1) key terms were on the outside of the package, (2) they were clearly readable, and (3) the purchaser was permitted to
return the product if he or she were not content with the subsidiary terms contained inside (John Gregory, “Solving legal issues in electronic commerce” (1999) 32 Can Bus LJ 84 at 90). In the present hypothetical, it is not clear what warnings, if any, were present on the packaging. Only if Louise had fair warning of the terms limiting liability for viruses at time of contract would her action fail. Otherwise, she could argue that the terms contained on the card in the box came too late and form no part of the contract between the parties.
3. Ms. Weir was engaged by Canada Post to deliver advertising flyers for a five-year term. She was entitled to payment on a per-piece basis. The contract provided that Canada Post could terminate the agreement on 60 days’ notice if it changed its ad flyer distribution system and “alternatively, Canada Post may in its sole discretion terminate this agreement immediately on giving written notice to the Contractor.” Payment per piece became costly for Canada Post, and two years later it instituted a new payment system based on packages (containing several pieces). Is Canada Post entitled to terminate the contract with Ms. Weir? What evidence is the relevant? Is it a contract at all when one party has so much discretion? [footnotes deleted] This problem is based on Weir v Canada Post Corp (1995), 142 NSR (2d) 198 (SC) and provides a serviceable account of the facts. In Weir, Justice Cacchione, for the Nova Scotia Supreme Court, had to assess the plaintiff’s case for wrongful termination of the contract. He ruled that cost was the real reason for Canada Post terminating the plaintiff:
[W]hat is abundantly clear from all the evidence heard is that the defendant was surprised at the rapid growth of this … market and, once it realized that it had negotiated a contract which was now disadvantageous to its interest, it sought to terminate it under the guise of a restructuring of its transportation and distribution network. Ultimately, what is very obvious is that the plaintiff [sic; should read “defendant”] made a bad deal by agreeing to a per-piece of Admail handled
pricing structure and then sought to get out of it by relying on [the sole discretion clause.]
With this finding in place, the court went on to accept the plaintiff’s argument that Canada
Post’s power to terminate the agreement was not absolute. On construction of the entire contract, and applying contra proferentem, the court ruled that the power to terminate could only be done for reasons relating to the restructuring. As the court observed:
The first part of [the clause] requires the defendant to give the plaintiff sixty (60) days’ notice of termination if, in the face of an appropriate restructuring, the defendant chooses to terminate the contract. The second sentence [containing the termination clause] recognizes that, in some instances, leaving a contractor who has been terminated on the job for an additional sixty (60) days might be detrimental to the interests of Canada Post since it might be faced with an unhappy or even vengeful contractor. The right to immediate termination in such cases would be the alternative to the sixty (60) days’ notice.
On this footing, the defendant did not have the right to unilaterally terminate the contract under the circumstances. The defendant was therefore liable for breach of contract. The instructor might ask the class to consider whether, in addition, Canada Post would be required to exercise its discretion honestly and in good faith.
4. Kristin signed a user agreement with Hagel’s Cable, Inc. upon installation of high- speed Internet service in her home. Included in the agreement was a provision that the agreement could be amended at any time and that customers would be notified of changes on Hagel’s website, by email, or through regular mail. Hagel’s later added a clause to the agreement that any right to commence or participate in a class action suit was waived. The agreement, including the new clause, was posted on its customer support website, and a notice was posted on the main website that the agreement had been amended. Kristin has continued using the service since this
time. However, she now wants to join a class action suit that is alleging a number of breaches of the agreement. Will the clause in the amended user’s agreement prevent her from bringing such an action? Did she receive adequate notice of the amended term? Does the fact that the user agreement relates to Internet services make a difference in whether the notice was adequate? How is this situation similar to the Rudder v Microsoft Corp case discussed in this chapter? [footnote deleted]
The fact that the clause was in the contract and Kristin signed it will usually be enough to
warrant the enforcement of the clause. In particular is the fact that Kristin signed the contract, which is prima facie evidence of agreeing to the terms of an agreement. In addition, she cannot argue that she did not receive adequate notice of the clause as she signed the agreement. When one signs an agreement, it is presumed by law that that same person has read the agreement. It would be different if it was a standard form contract that was on a ticket or a website or the like. It should make no difference that the agreement relates to Internet services. Banks in Canada amend the terms of bank account agreements all the time; in particular, they raise the service charges. In such instances, customers do not always sign an agreement. The situation is quite different from the situation in Rudder v Microsoft Corp. That case was an example of the click- wrap agreement. This case is not. Kristin signed a contract; she did not go to Hagel’s website and sign up through a click-wrap agreement.
5. Jason and Floë booked a two-week vacation in the Caribbean with The Nation’s Vacations Inc. (“Nation”), having reviewed Nation’s brochure regarding destinations there. The brochure also contained an exclusion of liability clause, which stated:
Please review with care the terms and conditions below as they govern your purchase of travel services from Nation. Your booking with Nation constitutes acceptance of these Terms & Conditions.
LIABILITY
Liability for suppliers: Nation makes arrangements with third-party
suppliers who provide travel services such as flights, accommodation, and car rentals. Nation endeavours to choose the most reputable suppliers but is not responsible for their acts and omissions. Disappointed customers must sue those third party suppliers directly for any loss or damages.
Nation assumes no responsibility for any claim, loss, damage, cost or expense arising out of personal injury, accident or death, loss, damage, inconvenience, loss of enjoyment or upset caused by Nation’s third party suppliers.
The brochure itself was designed to open to the page quoted above when flipping through the brochure from back to front. It was in easy-to-read font and with the emphasis indicated above. Though Jason and Floë had spent about
90 minutes reading over the brochure before booking their vacation package, they say that they did not know about the exclusion clause. Moreover, Jason, a construction firm manager, says that he does not know even what an exclusion clause is so reading it would have been pointless in any event.
When Jason and Floë arrived at the Caribbean resort, they were
immediately disappointed. Though the resort was a 4-star resort as advertised by Nation, Jason and Floë say that when they went to eat dinner in the resort buffet restaurant, they found the conditions to be unhygienic because, among other
matters, several small tropical birds were walking around on the floor of the
restaurant, having gained access through open doors. At a later point, a cat strolled into the restaurant and, they say, defecated in the corner though the resort disputes this. Jason and Floë also claim that the bathroom in their suite was unhygienic and
the staff were uniformly unfriendly, even hostile. Jason and Floë hotly refused
management’s offer of a free room upgrade and demanded to be flown home
immediately. The resort made those arrangements. Jason and Floë left the next day. Jason and Floë have now sued Nation for breach of contract, seeking, among other matters, reimbursement for their flight to and from the resort, as well as ground
transportation and accommodation costs. Nation says it delivered the requested travel services contracted for and in any event has successfully limited its liability through the exclusion clause. What do you think a judge will say? [footnote deleted] This situation for discussion is based on Eltaib v Touran Ltd Partnership, 2010 ONSC 834. The court offered this summary of the exclusion clause in question:
[32] …I note that the disclaimer page is written in the same font as found elsewhere in the book. The words “Terms and Conditions” are at the top of the page, in white letters measuring one inch high against a bold orange background. I do not consider that it is hidden at the back of the book. In fact, the brochure is designed so that it naturally opens to that page when opened from the back.
[33] I am satisfied that the terms and conditions are set out in a way that they would come to a customer’s attention. Moreover, the plaintiffs are clearly intelligent people with backgrounds and experience that persuade me that,
notwithstanding their evidence otherwise, they would be familiar with limitations of liability and disclaimers.
[34] The language of the disclaimer pertains to the situation about which the plaintiffs complain, namely “loss of enjoyment, upset, disappointment, distress or frustration” arising from an act or omission of a third party—in other words, the resort operator. That is the very nature of the plaintiffs’ claim. The claim falls squarely within the disclaimer and liability is therefore excluded.
Out of an abundance of caution, the court nonetheless considered the viability of the
plaintiffs’ actions in tort and in contract. He found that the plaintiffs failed to establish that any misrepresentations were made by the defendant. As for the action for breach of contract, the court concluded,
[47] For the same reasons enunciated immediately above, the plaintiffs have not proved on a balance of probabilities that there was a breach of contract. The authorities relied on by the plaintiffs are distinguishable on their facts. They involved situations where the resort was in a deplorable state and certain promised amenities were not delivered. So, for example, in Sokolsky, supra. the plaintiffs’ room was in a terrible state. The bed was unmade, the towels were dirty and on the floor. The carpet was water stained and water was pooling to a depth of 3-4 inches at the room’s entrance. The promised sailing and kayaking were not delivered. The swimming pools were dirty. That is not at all the case here.
[48] Having made these findings, it should be understood that I accept that the plaintiffs were bitterly disappointed with the Almond Beach Resort. However, they did not really give the resort a chance to improve their stay as it attempted for the Chavezs. They ate only at the Reef Restaurant, which had proved to be disagreeable to them. It is hard to understand why they would do so when other opportunities were available. They did not explore other areas of the resort and made no attempt to try the à la carte restaurants. The irresistible inference is that the plaintiffs never really gave the resort a fair chance to live up to their expectations.
[49] For these reasons, the plaintiffs’ claim is dismissed.
6. Lunar Inc. had developed a mechanism that harnessed heat from the sun. What the company lacked, however, was a method for storing the heat until it was needed.
Trays-R-Us had developed a unique tray that appeared to solve this problem, so the parties entered into negotiations. It was agreed that Trays would sell the trays to Lunar at a set unit price per tray for a term of one year. No particular sales volume for the year was agreed upon or guaranteed. After the trays were produced, however, Trays discovered that they leaked and were unable to hold any solar heat, owing to a design flaw that could not be fixed. As a result, Trays refused to fill any orders for the trays placed by Lunar. Lunar sued for breach of contract, alleging that there was an implied term in the contract that Trays would make trays available to Lunar as required. Does the business efficacy rule require that such a term be implied in the contract between Trays and Lunar? Do you think that such a term might have been left out on purpose? How can a business avoid having terms implied into a contract? [footnote deleted]
It is probably unlikely that the court would use the business efficacy rule in this particular case. The rule is used by the court to imply terms to make the contract workable. The fact that the trays did not work would make the contract unworkable. If Trays were to sell the product to Lunar, the trays would be of no use because of the fact that they do not hold any solar heat: the whole purpose of buying the trays. In addition, the parties did not agree on a particular amount of sales volume. Parties usually do not leave out terms on purpose but if one was aware of the potential problems of including a term as an express term, there are probably situations in which parties do leave out certain terms to create some ambiguity and hope that the implied term will be in their favour. The easiest way for a business to avoid having terms implied by a court is to have them inserted into the contract as express terms. Lunar may have a separate action under
misrepresentation if they can show that Trays represented to them that the trays did work, (i.e., they could hold solar heat).
7. The decision of Wiebe v Bobsien, discussed earlier in this chapter, went on to appeal and at that level, the dissenting judge would have found for the vendor. According to the dissent, the conditional agreement was unenforceable because its scope was too uncertain. The dissent stated:
I think this case falls in that category of incurable uncertainty. What
term should be implied? A term requiring the purchaser to make all
reasonable efforts to sell his house sounds alright … [but] it leaves
unresolved the question of whether he must sell at the price he can get, on the market, in the time allotted, or whether he is entitled to insist that the sale can only take place at a price he considers reasonable and is willing to accept.
I think that what the parties usually intend by this type of clause is the second alternative. That is, that the purchaser is only committed to sell his own house if he gets the price he has in mind. The reason is that in the residential housing market the purchaser is likely to be unfamiliar with the market, but he is almost sure to know how much cash he has and what size of mortgage he can count on being able to service. … The way to deal with this problem in the real estate market is for the form of subject clause to state the price and the essential terms upon which the purchaser must sell his own house. Then a court would have no
trouble in implying a term that the purchaser must make all reasonable efforts to sell at that price and on those terms. And the court could assess whether the purchaser had made reasonable efforts to do so.
Do you think that the dissent is asking for too much precision and detail in a subject to clause. Why or why not?
There is no doubt that the clause in Wiebe skirted the line of uncertainty and that the dissent’s
analysis at the appellate level has much to recommend it from a cautionary perspective. That said, and as the majority points out, it could be difficult to embody in advance exactly how the plaintiff should be bound in dealing with offers on his own residence. What follows is the pivotal passage from the majority’s decision, at (1985) 20 DLR 4th 475, enforcing the “subject to” clause:
8 We were referred to Black Gavin & Co. Ltd. v. Cheung et al. (1980) 20 B.C.L.R. 21 and to Murray McDermid Holding Ltd. v. Thater (1983) 42 B.C.L.R. 119. I agree with Bouck, J., that those are cases in which the purchaser, only promised that he would buy the vendor’s house if he decided that he wished to. No contract is created in such cases. The purchasers made no promise that could constitute consideration for the vendor’s promise. There was no intention to make binding contracts.
9 This is not such a case. The parties intended this to be a binding contract and the court should not be quick to release them from their promises.
10 I agree with the trial judge’s conclusion that the plaintiff was obliged to use his best efforts to sell his own home, and that if he was able to sell he was bound to buy the defendant’s house. The plaintiff’s promise was adequate consideration for the defendant’s promise.
11 We are told that the plaintiff had listed his home for sale prior to the interim agreement being executed. A number of the difficulties that could arise as a result of this interim agreement could be avoided by annexing that listing agreement and spelling out in the interim that the purchaser would use his best efforts to sell in accordance with it. There would then be no doubt about the price and terms that the purchaser was bound to accept as reasonable.
12 It does not follow that I think this interim agreement void. I do not. Once the terms that the purchaser would act in good faith and use all reasonable efforts to sell his home are implied, the difficulties of interpretation are surmountable….
8. Trackers is three days late in delivering the tracking to Coasters. Amritha now wants to rely on the clause in the contract that Trackers will pay $5000 for each day that the tracking is late, and she is claiming that Trackers owes Coasters $15 000. However, Trackers points out that Amritha has not been inconvenienced by the late delivery, because construction on the roller coaster had already been delayed by two weeks. It has been a week and a half since Trackers was able to deliver the tracking, and Coasters has still been unable to use it. Is Amritha entitled to rely on the clause and collect the $15 000? Do you need any additional information to make your decision?
Both parties in this scenario have legitimate arguments. Amritha is relying on the strict
interpretation of the meaning of the late clause within the contact. It is clear that the tracking is late and therefore, as per the term of the contract, Trackers owes Coasters $15 000. However, because the construction is behind schedule, even if the tracking was delivered it could not be installed and therefore Coasters has not incurred any damages from the late delivery of the tracking. Coasters could also argue that such a clause was a liquidated damages clause. Unless the court were to find that the liquidated damages clause was a penalty clause (a genuine pre- estimate of the damages that the innocent party will suffer and the amount is not exorbitant amount meant to punish instead of compensate), then it will probably be an enforceable clause. One would have to determine whether there were other clauses in the contact that may overrule the late delivery clause. There may be a limited liability clause, exemption clause, or even an extension of time clause that may take precedent over the late clause.
