Chapter 10 Contractual Defects

Incapacity to Contract
-capacity: legal power to give consent
i. minors: people who have not reached age of majority (age which person held fully accountable
in law)
 contract voidable if minor is entitled to avoid legal obligations that contract would have
otherwise created
 contract that minors x avoid: goods & services (food, clothing, education, medical treatment,
legal advice, employment)
ii. mental incapacity (deficient intellect)
 contract can void & x be enforced at all; case of minor (x court declaration) voidable only if
other party recognized problem
iii. intoxication (drunk that could not know/ appreciate what they were doing; other contractual
party must alert to that fact)
iv. business corporations
 chartered corporation: treated same as individuals who reach age of majority
 statutory corporation more limited contractual capacity
- when contract exceeds statutory power (ultra-virus), agreement unenforceable
v. associations (unincorporated business org.- private clubs, charities, religious societies)
 do not enjoy independent legal existence & incapable of contracting
 some involved contractual capacity: education, religion, charity, trade unions
 if intends to contract: manage risk (pg. 242) by ensure association has capacity/ individual
has resources to perform obligations
vi. Indian bands & aboriginal persons (whose land & $ held by Crown)
 have contractual capacity, can sue/ be sued
 restrictions: property x use as security for credit transaction nor transfer to another member of
band w/o Crown’s consent
vii. public authorities
 acting on governmental body has capacity to contract, independent of statutory authority to do
so
 limit capacity to contract: division of power (must consistent)

Absence of Writing
Statue of Frauds: required contract to be evidenced in writing to reduce risk of perjury/ lying in legal
proceedings
Type of contracts that must be in writing
 guarantee: contractual promise by third party (guarantor) to satisfy debtor’s obligation if
debtor fails to do so
 contracts for sale of interest in land
 contracts not to be performed w/in a year
Managing Risk in Association w/ writing requirements pg. 245

Mistakes
General Principles
 occur when error affects basic process of contract formation-> mistake negate agreement-> x
contract
 mistake pertains to existence of contract’s subject matter-> contract may defective
Mistakes preventing creation of contracts
 mistaken identity not render contract defective unless
- mistake known to other contractual party
- mistake was material: one that matters to mistaken party in important way
 mistake about subject matter (cross-purposes)
Mistakes rendering impossible purpose of contract
 mistake about existence of subject matter not always prevent enforcement of agreement
- protect by insert into contract force majeure (irresistible force) clause that bears hardship if
subject matter of contract destroyed/ unexpected event occurs (insurance)
The Doctrine of Frustration: event makes performance impossible/ radically undermines its very
purposes
- apply if neither party is responsible for relevant event
- if neither party is at fault, may agree that one of them bear risk of loss
- managing risk concerning mistake & frustration pg. 251
Documents mistakenly signed
- non est factum (’this is not my deed’): allow mistaken party to avoid obligation under
contract (available if fundamental, total/ radical difference btw what person signed & what
person thought they were signing)

Unfairness during Bargaining (contract may voidable due to unfairness)

Duress (problem w/ circumstances around creation of contract)
 duress of person: physical violence/ threat of violence against person/ person’s loved one
 duress of goods: one person seizes/ threatens to seize another person’s goods to force that
person to create contract
 economic duress: person enter contractual agreement after being threatened w/ financial harm
(external threat of harm; must determine if legitimate pressure/ commercial reality)
- contract more likely voidable if
 threat made in bad faith
 victim could not have reasonably resisted
 victim started legal proceeding promptly after effects of pressure passed
 victim protested when presented w/ pressure
 victim succumbed to pressure w/ legal advice

Undue Influence (problem w/ relationship btw parties)

 abuse of relationship to influence someone & induce agreement (overpower will)
 internal manipulation (may deliberate/ inadvertent; ‘innocence’ is x defence)
i. fiduciary relationship: one person in position of dominance over other (based on trust/
confidence; duty of care)
 physician-patient, law-client, priest-pertinent
 rebut presumption if prove transaction was fair; ensure weaker party receives ILA bf
enter agreement
ii. no presumption of undue influence
 party alleging undue influence must prove it
- there is x presumption of undue influence
- difficult to prove if x imbalance in power
 opposing party can adduce evidence of equality
- show fairness of transaction
 - show fairness of bargaining power
 risk management: refrain from bullying tactics; ILA

Unconscionable Transactions (problem w/ agreement itself)

 agreement that no right-minded person would ever make & no fair-minded person would ever
accept
 weaker party must prove
- contract was improvident bargain (bargain made w/o proper regard to future)
- inequality of bargaining position of two parties
 presumption rebutted by proof that
- bargaining process was fair, right & reasonable after all
- weaker party receive ILA
 legislative/ regulatory protection against unconscionable practices
- disclosure requirements
- ‘cooling-off’ periods
- prohibit use of unfair terms (exclusion/ forfeiture clause)
- broad discretion to render harsh/ unconscionable agreements ineffective (moneylending
institutions; insurance companies)
 other protections
- contract formed in contexts (door to door sales)
- certain contracts must be in writing (‘personal development’ contracts)
- requirement to use ‘plain language’ (mobile service contract)

Illegality
illegality agreement: expressly/ implicitly prohibit by statute & void
 agreements prohibited by statue: not punish individuals for wrongdoing, but rather regulate
conduct through administrative regime
 common law illegality: unwilling to recognize agreements that contrary to public policy
 the doctrine of public policy
- covenant in restraint of trade: agreement may ineffective if contractual term that unreasonably
restricts one party’s liberty to carry trade, business/ profession in a way

Ethical Perspectives 10.2

1. Given that Kinney was a friend of Waters, he might have already been aware of Waters’ state of mind
when he started to discuss the sale of Waters’ company. Waters’ lawyer also expressed his concern
about Waters’ state of mind prior to the sale. Nevertheless, Kinney conducted the sale without Waters’
lawyer present. Additionally, the sale price seems unfair in light of Waters’ purchase price for 5/6 of
the shares. This may have been balanced by the flight discounts but these were later denied. Kinney’s
failure to provide Waters with a copy of the sale agreement also suggests that there was more going on
than a simple business transaction. This was clearly an improvident bargain made between two parties
of unequal bargaining power. A court would presume unconscionability. The fact that Kinney
conducted the sale without the presence of Walters’ lawyer will make it difficult to rebut the
presumption. Consequently, the transaction is likely unconscionable.
2. The importance of ensuring that Waters had an independent legal advisor (his lawyer) present when
the sale agreement was finalized. This would help manage the risk of Waters later claiming
unconscionability. Students might also suggest delaying the closing of the deal until Waters’ health
improved; obtaining form of independent cost assessment of the company to demonstrate that the
purchase price and travel discounts amounted to a fair deal; and providing Waters with a copy of the
sale agreement to avoid any accusation that the transaction was conducted in a high-handed manner.
3. The judge found that Kinney and Sun Route Tours were liable for Waters’ losses. The judgment
emphasized Water’s vulnerable position at the time of the sale, particularly his mental health and his
lack of legal representation during the meetings at which the sale was completed. It also noted the
substantial unfairness in the bargain.

Case and Problems 10

1. At the time that Erin entered the contract, she was a minor. If the car is found to be a “necessary”,
the contract will be enforceable. The dealership wants to claim that the car is a necessary and that Erin
therefore cannot back out of the contract. The rule that makes contracts for necessaries enforceable is
premised on the need to ensure that people are willing to sell the necessities of life to a minor without
having to worry that the minor will renege on the deal. However, this factor does not by itself make a
car a necessary. The relevant question is whether Erin could survive without the car. Is the car like food,
shelter, or education? It is unlikely that the court will see this car as an item necessary to Erin’s life.
Although the car might be necessary to some livelihoods, the fact that Erin has decided her business no
longer requires a car is persuasive of the fact that the car is not a necessary. It is likely that Erin will be
permitted to avoid her contract with the dealership. This is especially true if the burnt out bearings were
the fault of the dealership.

2. Elwood’s ability to avoid liability will depend on whether he was sufficiently intoxicated to render
the contract defective. At issue is whether Elwood entered a state that rendered him incapable of
knowing or appreciating what he was doing. He will have to prove that Hank was aware of this
incapacity but entered contract anyway. Although Hank knew that Elwood had been drinking, Elwood’s
state of inebriation did not prevent him from winning at darts and having lunch. Thus it is unlikely that
Elwood was incapable of appreciating what he was doing, nor would Hank have perceived it that way.
Elwood also remembered and acknowledged the contract afterwards and made no attempt to repudiate
it until the price shot up. Thus, Elwood will not be able to avoid contractual liability.

3. To determine whether a contract is voidable for mental incompetence, the court must determine
whether the party was incompetent at the time the contract was entered and whether the other party was
aware of this incompetence. Michael has medical evidence to show his incompetence, but there are no
facts to suggest that the bank was aware at the time. It appears Michael filled out the application forms
on his own and did not communicate with anyone at the bank. In this case, the bank will likely be able
to sue for the outstanding balance. However, it would be helpful to have confirmation that the bank did
not know of Michael’s incompetence to make a conclusive determination.

4. Mistaken identity is often used as a contractual defense. A mistake as to a person’s identity makes a
contract defective and therefore voidable at the mistaken party’s option. Usually, mistaken identity
involve a rogue who is purposely trying to trick the other party into thinking that he or she is someone
else. In this case, the mistake is that Nunzio is the owner of the restaurant when in fact he is not. It is
arguable that this is a mistake as to attributes rather than a mistake as to identity. You were not under
the mistaken impression that Nunzio was someone else, only that he was in fact the owner of the
restaurant. The doctrine of mistaken identity is inapplicable because the mistaken party is seeking to
enforce the contract, not avoid it.

5. Because this is a contract for the sale of an interest in land, the Statute of Frauds requires that it be
evidenced in writing and signed by the parties to the contract. Consequently, the Agreement of Purchase
of Sale, which contained LCE’s “essential” amendments and was not signed by HIO, is probably not
sufficient to meet the terms of the statute. However courts have held that the writing requirement is
satisfied by the combined effect of several documents. One question here is whether the tape-recorded
conversation can constitute such evidence. Ontario court held that a tape-recorded conversation cannot
substitute for a written document in a contract for the sale of land.LCE considered the amendments to
the draft agreement to be essential, it can hardly claim that HIO was bound to agree to them and that
the sale was therefore a done deal. In contract law terms, the amended agreement can be characterized
as a counter-offer, which HIO was entitled to accept or reject at its own option. Consequently the
putative agreement is not enforceable.
6. In this contract, the parties agreed that Waggles would provide amount of lentils to L&L, a human
food distributor. Through no fault of either party’s, the performance of the contract became impossible
when weather conditions destroyed the crop. When some event makes performance impossible or
radically undermines the purpose behind the agreement, a contract is said to be frustrated, with the
result that both parties are relieved of having to perform the relevant terms unless there is an express
term in the contract outlining their respective responsibilities under such circumstances. In this case,
neither party conferred any benefit to the other, so the legislation on frustration of contract does not
come into play, but the common law may still apply. The doctrine of frustration tries to strike a fair
balance between the parties. The main question here is whether Waggles is correct in saying that L&L
is bound to accept any kind of lentils, in which case the contract would not be frustrated. A court likely
to find that L&L, a health food distributor, would never have agreed to a term that bound it to buying
cattle feed. On these facts, a court is likely to find that, due to a lack of clarity in the contract, neither
party has a claim on the other and the contract is frustrated. In forming contracts, risk managers should
consider including clauses that define what constitutes a breach and what consequences will follow –
otherwise it is left to a court to determine.

7. There are different ways that this problem could be addressed. The first is apply the law of
misrepresentation, the issue will be whether the representation that the land title was for about a
thousand acres is a representation of fact, opinion or law. To determine the nature of the
misrepresentation, one would need to know more facts. It will also be important to know whether
Prospectus cared about having a thousand acres or was only concerned about getting the land with the
diamond stash. Were the diamonds on the saleable part of the land or on Crown land? Perhaps the most
appropriate answer to this question is to view it as a mistake rendering impossible the purpose of the
contract. Whether one views this as a mistake about the existence of the subject matter (it turned out
that there did not exist non-Crown land with a diamond stash) or frustration (because the Crown revoked
Joe’s title, he was no longer in a position to perform as promised), both parties made a mistaken
assumption about the future. Given the 90 per cent reduction and the likelihood of losing the diamond
stash, it is clear that the mistake was a material mistake. On either analysis, Prospectus would likely
succeed in proving that the contract was defective. Joe could have protected himself in different ways.
The first thing that he could have done was to ensure that there would be no mistake by obtaining a
proper legal opinion on the title to the land. The second thing Joe could have done is to contemplate
and allocate the risk as to title and specify who in the contract bears that risk. Just as parties use force
majeure clauses to allocate the risk of unforeseen events beyond their control, a clause with a similar
purpose might have been utilized here.

8. Emond is trying to argue that after the contract was formed, the low supply of fish frustrated the
contract. The doctrine of frustration is not triggered where an event simply makes performance of the
contract more onerous. Emond could have gone to another location to perform the contract and collect
all of the fish. This may have been more onerous, but the added time and effort to collect fish elsewhere
did not substantially alter the nature of Emond’s obligation under the contract. Emond will not succeed
in his defence of frustration.

9. Mr. Bundy’s non est factum defence is unlikely upheld by a court. This defence requires Mr. Stone
to show that the agreement of purchase and sale was fundamentally, radically or totally different from
what he thought he was signing. On these facts, Bundy claims only that he did not read the agreement,
essentially out of carelessness. He has not indicated that he had no opportunity to read, or was prevented
by his nephew from reading the contract, or in fact that the document he signed is in any way different
from the one being used to enforce the contract. As a general rule, a party seeking to rely on the non est
factum principle must not have been careless or negligent in the execution of the agreement, and
consequently the principle does not apply here. Bundy could argue that his nephew was aware that the
purchase price was a mistake and did not reflect the bargain they had negotiated before putting it into
writing, and that the nephew had “snapped up” the deal.
10. Given that the parties had originally agreed to a flat rate and only later amended that agreement, it
is necessary to look the amendment to determine whether Mind Games is obliged to pay the additional
amount. At issue is whether Marinka was under economic duress when she agreed to the amendments.
On the facts, it is arguable that CompuNerd was acting on Marinka’s fear of impending financial injury
and thereby coerced her to enter into the amendment agreement against her will. Given her reluctance
to amend the original agreement and her unwillingness to honour it, Mind Games will be able to claim
that the economic duress applied by CompuNerd vitiated her consent to the amendments and that the
amendment agreement can therefore be avoided.

11. Maya’s claim is based on the doctrine of undue influence. Undue influence involves the use of any
form of oppression, persuasion, pressure, or influence which overpowers the will of a weaker party and
induces an agreement. Maya’s husband is acting as her physician and owes her a fiduciary obligation.
As a result, the transaction entered with her husband will be presumed to be the result of undue influence
and it will be up to Coby to rebut that presumption. He will need to demonstrate that Maya entered into
the separation agreement freely. Given that she was heavily sedated and that the agreement was
improvident from Maya’s perspective, the presumption will not easily be rebutted. Coby will have to
show that agreement was reached freely and independently. Such proof is highly unlikely on the facts.

12 This question raises the issue of unconscionability. Several factors point to the contract being
improvident: the purchase price to be paid five years in the future was almost half the value of the land
at the time of entering the contract, no interest was to be paid on the unpaid purchase price, and the
purchase price was to be paid out in small installments over a very long period of time meaning that the
vendor would be 113 years old by the time the price was paid. The value of the land at the time of
exercising the option was more than quadruple the purchase price. There is also evidence of an
inequality of bargaining power given the respective ages and states of health of the parties and the
evidence suggesting that Mr. Bonli had no idea what he was signing. Mr. Turner could not rebut the
presumption of unconscionability because there is no evidence suggesting that the bargaining process
was “fair, right and reasonable”. Not only did Mr. Turner not encourage Mr. Bonli to obtain independent
legal advice, he appears to have discouraged it by having Mr. Bonli attend at his office to sign the
contract that he wrote early in the morning when no one else was around.

Essay Question
2) Charlie has bipolar disorder (also known as manic-depression). Usually, medication helps to control
her disorder. Lately, Charlie stopped taking her medication and started drinking heavily. During a manic
(up) phase, she dressed in an elegant suit, went to a BMW dealership and signed a contract for the
purchase of a new sports car. She financed the transaction by putting a large deposit on her credit card,
and drove the car off the lot that same day. Charlie's family became very concerned. Describe the law
as it pertains to Charlie's capacity to contract. What should Charlie do? What should the car dealer do?
Answer:
Mentally disabled adults who are unable to appreciate the nature and consequences of their acts do not
have capacity to contract. Courts will consider whether the other party was aware of the mental
deficiency at the time that the agreement was struck, or whether the other party wilfully disregarded the
disabled person's condition. Persons who enter contracts while intoxicated will only avoid liability if
they prove that the state of inebriation rendered that person incapable of knowing or appreciating what
they were doing, and that the other party was aware of this incapacity but entered the contract. The
party seeking to avoid the transaction must make a prompt election to avoid it once sober. Charlie (with
the help of her family) should attempt to return the car and rescind the contract immediately, explaining
that Charlie lacked the capacity to contract because of her manic state, exacerbated by the alcohol. If
the car dealer does not allow her to avoid the deal and sues for breach of contract, Charlie can raise her
mental illness and intoxication to avoid the contract. She may also try to demonstrate that transaction
was unconscionable if she can show that the dealer took advantage of her condition. Charlie has a
compelling case to obtain a declaration that no contract was formed because of lack of capacity to
contract.
3) Elsa is a member of an active neighbourhood association. The association runs frequent community
events, issues a monthly newsletter to residents, lobbies municipal government, and engages in
fundraising. Recently, they have decided to create a staff position to coordinate their efforts. Their
advisory committee has been discussing whether or not to incorporate. Outline how the association's
ability to enter contracts in conducting its activities might impact its decision about incorporation.
Answer:
The community association's regular activities demand the capacity to contract with many parties for
things such as venues for events, printers for newsletter, donors to funding campaign, and staff. An
unincorporated association must have someone who is willing to enter contracts on its behalf and to
accept all liability. Parties they contract with may be wary about extending credit because of the
possibility that the person contracting is not able to make good on the contractual obligations. If they
incorporate, the association will have the capacity to enter into contracts on its own behalf (with signing
authorities) and there is less risk involved for members of the board of directors of incurring personal
liability as agents of a fictitious principal.

6) Ling is about to enter into a contract that will be carried out over the next year and a half. Is it safe
for her to assume that the contract will not be enforced if it is not evidenced in writing in a jurisdiction
where the Statute of Frauds applies?
Answer:
This is not a safe assumption for Ling to make. Because the Statute of Frauds has been given a liberal
and remedial construction by the courts, it can catch parties by surprise. For example, the court might
say that the contract is not caught by the Statute if the contract possibly performed within one year.

7) Tinh agrees to purchase a block of land that Ed plans to sever from his property. Tinh pays a large
cash deposit to Ed, the closing date is set for six months away, and they shake hands on the deal. Ed
falls on hard times and he realizes he cannot subdivide his land since he cannot afford to lose any
equity or the bank will foreclose on his mortgage. On the agreed closing date, he sends Tinh an email
to back out of the deal. Worse still, Ed lost the cash deposit at the horsetrack, and cannot afford to pay
Tinh back. Ed feels terrible and avoids Tinh's calls. Tinh sues Ed for breach of contract and specific
performance. How will the Statute of Frauds be applied in this case? What is the legal effect of Tinh
and Ed's deal?
Answer:
Pursuant to the Statute of Frauds, any contract for the sale of an interest in land must be evidenced in
writing to be enforceable. Since there is no written evidence of their deal, Tinh will not be able to force
Ed to sell him the land, but the court will likely compel Ed to refund the deposit so the parties are placed
in the same position they were in before they entered the unenforceable contract.

10) Rosa immigrated to Canada as a teenager. She worked her whole life to support her family and
never received a formal education. While her spoken English is good, her ability to read English is
limited. An elderly woman now, Rosa lives in a care facility. A representative of the facility presented
her with several pieces of paper to sign. He said that they were simply standard forms that every resident
had to sign. She took the forms and returned them signed the following week. Later, she mentioned to
her son, Paulo that she had signed some forms, but had been too ashamed to admit that she could not
read them. The forms required Rosa to give permission to the facility, evidenced by her signature, to
make automatic withdrawals from Rosa's bank accounts. Rosa is not comfortable with this. Will Rosa
be bound to her signature? Why? Describe the defence she is most likely to raise and explain whether
it is likely to succeed.
Answer:
The general rule is that, absent fraud or misrepresentation, people are bound by the documents that they
sign. This rule is not applied in the signor is not afforded proper time to read the document, and it
contains an onerous or unusual term that has not been brought to the attention of the signor. In this case,
Rosa is likely to be bound by her signature as she had ample time to review the documents or get help.
By signing, she indicated her intention to be bound. Rosa may try to plead the defence of non est factum.
Non est factum is applicable only when there is a radical difference between what a person signed and
what she thought she was signing. Rosa knew that she was signing forms to do with administration and
fees for her stay at the facility. Although the plea of non est factum originated to protect illiterate people
from being taken advantage of, Rosa could speak English perfectly well and read it to an extent. She
could have asked for help or indicated to the counter-party that she could not read English. It is likely
that the people at the facility had no idea that she hadn't known what she was signing. Given that she
had spent most of her life in Canada, Rosa would have had the resources, including asking Paulo, to
ensure that she knew what she was signing. For these reasons, it is unlikely that the plea will succeed.

12) As part of a large multinational corporation, you are working on a deal to buy a small company
from a group of young upstarts who will all benefit handsomely from the transaction. It is your custom
to include a restrictive covenant in such contracts to prevent such young upstarts from directly
competing with the company they just sold. Explain the approach taken by courts to covenants in
restraint of trade and then provide an example of a restrictive covenant that is likely to be upheld if
challenged in court, and an example of one that is likely to be struck down if challenged in court.
Answer:
Any covenant in restraint of trade will be presumed contrary to public policy unless the party seeking
to enforce it can prove that it is reasonable. An example of a covenant that is likely to be upheld will
merely restrict the upstarts, individually or as a group, from using their knowledge in the field to develop
a new company that is identical or almost identical to the one they have sold for a period of two years.
An example of a covenant that is likely to be struck down will restrict the members of the selling
company from obtaining work in a related field ever again, in any part of the world.