LAW122 - 071 Lecture 8

LAW122 - 071 Lecture 8 Contractual Defect : A contract that is defective is flawed in its formation. It is not the same as a contract that is breached. Incapacity concerns the legal authority of a person to enter into an agreement. The legal capacity to contract can be challenged on various grounds: o Age : The law provides that those persons who are minors lack legal capacity. The age of majority in Ontario is 18, and so people who are 17 and under cannot enter into contracts. This does not mean that in all circumstances minors cannot enter into binding agreements. Some contracts are not void but only voidable at the option of the minor. Contracts entered into by minors that are not void may still be voidable. A contract can be voidable even if the other party was not aware the person was a minor. Any benefits received under the voided contract are to be returned. Contracts entered into by minors for necessaries and contracts of employment are binding and enforceable. The question to be answered is: Is there reason to believe the other party is younger than 18? o Mental Incapacity : If a person has been legally declared to lack mental capacity, their contracts are void and not enforceable. If they lack mental capacity, even though it is not declared, their contracts are voidable if they lacked mental capacity at the time of contracting.
A contract is voidable only if the other contracting party(s) should have recognized the mental incapacity. The contract must be voided within a reasonable period of time after competency is re-established. The question to be answered is: Is there awareness that the other party has been declared lacking in mental capacity? Or is there reason to believe the other party is mentally unstable? o Intoxication : A contract entered into while one of the parties is intoxicated may be voidable, provided the intoxicated party could not appreciate what it was doing, the other party(s) was/were aware of the intoxicated party's incapacity to appreciate what it was doing, and once sober, the intoxicated party promptly voids the contract. The question to be answered is: Is there reason to believe the other party was intoxicated when executing the argument? o Corporate Status : Contracts of a chartered corporation (corporations directly chartered by the Parliament) in breach of its charter are binding, and contracts of a statutory corporation (corporations established pursuant to corporate statutes) acting beyond its statutory authority are not enforceable. The question to be answered is: Is there reason to believe the corporate party may be contracting outside of its chartered/statutory authority? o Associations : Associations are unincorporated business organizations, such as clubs and charities. Unlike corporations, they are not independent legal
persons; they lack the capacity to contract in their own name, unless specifically provided with the statutory power to do so. The question to be answered is: What is the legal basis for contracting with an unincorporated association? o Public Authorities : Public authorities acting on behalf of a governmental body have legal authority to contract. This is subject to the public authority acting within its constitutional powers. The question to be answered is: Is there reason to believe that the contracting party is not a legitimate public authority or is acting outside of its constitutional powers? Contracts may be written or verbal, but there are exceptions: o Contracts that fall within the Statute of Frauds. o Certain consumer agreements. Statute of Frauds : The Statute of Frauds is an ancient legislation dating back to 1677. It requires certain types of contracts to be written in order to minimize instances of fraud. Although certain jurisdictions have repealed their Statute of Frauds, Ontario has not. o It has been amended over the years to remove promises made on consideration of marriage, and a provision pertaining to contracts not to be performed within one year. o It includes no formal written requirements for sale-of-goods contracts. Writing is required for: Contracts for the sale of an interest in land. Leases for more than three years.
Ratification of a promise made during minority. Guarantees. Declarations or creations of trusts of land. o There is no prescribed format for the contract under this statute. Essential elements of the contract are required however, including the parties, the subject matter, and the signatures. Statutes to protect the consumer require agreements to be in writing and, in some instances, that a copy be provided to the consumer. For instance, the Ontario Consumer Protection Act (2002) covers contracts for personal services, and internet contracts requiring advance payment above a prescribed amount. Mistake : A contract requires a meeting of the minds. However, mistakes occur during the formation of contracts, and these can be distinguished as: o Mistakes Preventing Contract Creation : Mistaken Identity : A mistake as to the identity of the other party does not necessarily render a contract defective and unenforceable. The questions to be answered to determine this mistake are: Did the other party know of the mistaken identity? Was the mistake important? Mistake about Subject Matter : A mutual mistake occurs regarding the subject matter of the agreement. The mistake must have a meaningful effect on the performance of the contract. o Mistakes Rendering Impossible the Contract Purpose : Mistake about Existence of the Subject Matter : This is a mistake made by all parties to the contract.
o Contract Frustration : Frustration concerns circumstances or events after contract formation, rendering its performance impossible or profoundly different from what was agreed to. For instance, death, incapacity, destruction, and illegality can be considered as frustrations. A contract automatically terminates as of the moment of frustration. Frustration does not void the contract ab initio, the rights and obligations accrued prior to the frustration remain enforceable, and it does not allow for choice, which means the parties cannot elect to continue the contract. Events or circumstances that cause performance to be more difficult or expensive do not meet the test of contract frustration. Precise consequences vary depending on whether the contract in question is governed by common law rules of contract frustration, or by statute. o Documents Mistakenly Signed : Non Est Factum : This is Latin for 'it is not my deed'. This defence is available only where the subject matter/content of the document is profoundly different from what the party believed it was signing. A party cannot claim this defence simply for not reading the contract. The protection of weaker parties concerns the circumstances under which the law will not hold weaker parties to their bargain. o Duress : There are three types of duress that can occur: Duress of Person : Violence of the threat of physical violence.
Duress of Goods : Seizure or threat of seizure of another party's goods to force a contract. Economic Duress : A contract entered into as a consequence of threatened financial harm. o Undue Influence : Undue influence is established in one of two ways: Proof of actual undue influence on a choice made by a party. Proof of a special/fiduciary relationship between the parties that raises the presumption that undue influence was exerted. o Unconscionability : An unconscionable transaction is an agreement that is manifestly unfair and one-sided (improvident bargain, or inequality in bargaining positions). If the above elements are present, there is a rebuttable presumption that the contract is unconscionable. The fact that a contract is clearly more favourable to one party than the other alone is not sufficient. Tough bargains are enforceable, and the facts must demonstrate that the weaker party was clearly impeded or disadvantaged for reasons beyond its control. Illegality : There are various forms of illegalities in contracts: o Agreements Prohibited by Statute : For instance, loan agreements charging an excessive rate of interest. o Common Law Illegality : Agreements that offend public policy or community morals/standards. For instance, promotion of corruption, sexual immorality, and criminal activity.
o Covenants in Restraint of Trade : Contract provisions that restrict a party's ability to work or conduct business. They are frequently included in employment contracts and are designed to restrict employees from competing with or otherwise harming the employer's business after termination of the employment relationship. There are two types: non-solicitation and non-compete. They are presumed at common law to be unenforceable. They can be presumed rebuttable if the restriction is acceptably limited in time and geography, it protects a bona fide interest of the employer, and it is not contrary to the public interest.
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