Problems in Canadian Business Law

Problems in Canadian Business Law Pol/Soc Sci 3165 6.0A Tuesdays, 2:30-5:30 pm Simon Archer sarcher@torys.com

Oh, ya • www.arts.yorku.ca/politics/sarcher/ • Ought to have stuff on it by now • Lectures go up 3-4 days after I submit them to York (e.g., by Friday if I submit Monday night)

Last class • Contracts • Forming a contract • Failure to form a contract • Extent of contractual rights • Discharging a contract • Breach of contract • Remedies

This class • Review some elements from last class • Sample contract problems • Questions

Review last class • Estoppel • Failure • Performance

Estoppel • You have a valid, contract you want to amend it after the K has been formed • The K is valid • You make a promise that alters a term of the K. That promise is not made for “new” consideration • The promisee relies on your promise, to their detriment. They change their position or behaviour as a result of your promise. • Later on, you both get in a lawsuit • Theory of estoppel: you are “estopped” from arguing that the gratuitous promise is not a valid amendment to the K • BUT the other person must show: • Reliance on gratuitous promise • Reliance to detriment of promisee

Central London v. High Trees, [1947] KB 130 CA • In 1939 Central London leased a block a flats to High Trees, at an annual rental of £2500. • Due to the outbreak of war, High Trees had difficulty in filling the flats and, accordingly, in 1940 the parties agreed in writing that the rental would be reduced by half. The parties did not, however, stipulate the period for which this reduced rental was to apply. • High Trees paid the rent at the reduced rate for five years and in 1945, the flats began to fill again. In fact, by the second half of 1945, the flats were full and Central London sued for payment of the full rental in respect of this period.

High Trees cont’d • Court held that • the 1940 agreement was intended to accommodate the peculiar circumstances brought about by war only • had Central London sued for the arrears for the years 1940-45, it would have failed. It would have been estopped from going back on its 1940 promise to accept a reduction in rental, even though that promise had not been supported by any consideration from High Trees because to hold otherwise would have been unjust. • Estoppel is, in reality, a rule of evidence. It prevents an 'unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations'.

Failure • For “undue influence” • Where one party can prove that there was undue influence by another, the K is voidable • vs duress: the complainant in undue influence may act willingly, not in duress • vs mistake, mispresentation and misleading or deceptive conduct: not primarily concerned with quality of information per se, although this is a relevant factor • Actually, a lot like duress and a lot like illegitimate pressure – such as threats, intimidation, pressure of some sort • Rebuttable presumption in certain cases of special relationships • solicitor - client • doctor- patient • parent - child • guru - disciple

Failure cont’d • For “duress” • Contract entered into due to actual threat – a lot like extreme undue influence, often confused (is there a need to distinguish?) • Economic duress: • Getting renegotiated rate of hiring services through threats that they would go bankrupt if the rate were not lowered. • The threat to terminate the contract unless the plaintiff agreed to increase the price of building.

Performance of K • Key is question is what constitutes “discharge” of the K terms? • By performance of K • By breach of K • Discharge by following terms of K • Fulfill all terms • By a termination clause in the K • Conditions precedent (really a weird form of performance) because CP is required to take place before there is a valid K

Performance cont’d • Discharge by means other than performance • External events, explicit or implied terms of the K • Condition subsequent / force majure / Act of God • War breaks out, SARS, earthquakes, whatever • Doctrine of frustration …

Frustration • Extraordinary events which will trigger the application of the doctrine • themselves defined by the Supreme Court of Canada in Atlantic Paper Stock Ltd. v. St. Anne-Nack as events that are “unexpected, something beyond reasonable human foresight and skill” • Such events “strike at the root of the contract” and result in a radical change in the obligation undertaken by the contract • Like Act of God? (Yes). Like forcemajeur? (Yes).

Legislation & frustration • Legislation gives • The right to recover money paid • The right to set off expenses against prepayments • Restitution of benefits other than money • Severance of terms of K where possible

Discharge • Operation of law: merger doctrine • It's not unusual for buyers and sellers in a real estate transaction to pass several offers back and forth before a final agreement is reached. And while each side may have made promises, demands, and concessions during the bargaining process, only the understandings written into the final contract will be binding • At settlement the sales contract is "merged" into the deed, the document that actually transfers title and truly establishes the rights and responsibilities of each party • Once the sales contract is merged, it no longer exists in the eyes of the courts. And since it no longer exists, buyers and sellers can't go back and rehash the deal unless they both elect to do so • Do not confuse with merging corporations – that is a matter of legal identity but does not discharge the contract

Discharge • By breach • If successful, court action discharges agreement, replacing it with a judgment, which itself has terms • Some limits to actions for breach • Doctrine of laches • Limitations Acts

Discharge • By agreement of parties to terminate • Waiver of rights under K – a form of new K • Novation – assigning rights under K • Material alteration of terms by agreement (not by breach), but beware estoppel/gratuitous promises

Breach of K • Express or implied • Express breach: you say something • Anticipatory breach - before time of performance – express indication of breach • Implied breach: your actions breach the K • Anticipatory implied breach? You act like you might breach the K before time for performance? Going to the Caymans? • Usually party not in breach can set aside K and sue, but…

Breach • Where substantial performance and/or breach does not go to key terms of K, must perform K and sue for damages

Fundamental breach • Arises because of exemption/disclaimer clauses • Conditions (key terms) vs. warranties (usually minor terms) • Some confusion as to when fundamental breach is available, if at all • Depends on construction of K as a whole

Fundamental breach • Hunter v Syncrude 1989, SCC • Syncrude purchased gearboxes for its tar sands extraction plant in Alberta. The contract expressly excluded any warranty 'statutory or otherwise.' After the expiry of the time-limit of the express warranties, the gear boxes failed because of a design defect in the welding of the gear boxes. • The SCC agreed that the failure of the gear boxes did not amount to a fundamental breach of the seller's obligations. All members of the court also agreed that an exclusion clause was not per se invalid because it involved a breach of the sellers' fundamental obligations unless it was unconscionable or unless it ought not to be enforced in the circumstances of the breach.

Sample Problems • True/False: 20 questions, 30 minutes • Short answer: 5 questions, 30 minutes • Long answer: 1 question, 30 minutes

True/False • Q: Administrative tribunals enforce the Criminal Code. • Guesses? • A: False. The courts enforce the Criminal Code, administrative tribunals enforce other statutes.

True/False • Q: At a public meeting, Jakobeek accuses Halle of using her office to improperly improve her financial position. It turned out to be true. Halle sues for slander. Halle will win. • Guesses? • A: False. Truth of the statement is a valid defence to slander.

True/False • Q: In Ontario, all contracts for land must be signed and sealed. • A: True. The Statute of Frauds requires it. • Q: You can recover out-of-pocket expenses when a counter-party breaches contract. • A: True. When you can show that your losses flowed from the breach, you may recover them. This is a reliance interest.

Short Answer • Robert has just mailed a letter of acceptance in response to James’ letter offering to sell his hardware store to Robert when he is knocked down by a car and killed. Jane, Rob’s wife and sole heir, has all James’ rights assigned by the estate. She wants to run the business, but James does not believe that a woman can run a hardware store and tells her the deal is off. What is Jane’s position?

Answer • There was deemed acceptance when Rob mailed the letter, before Rob died. As Jane is his heir, she can enforce the contract. James’ misogeny is irrelevant. Jane can sue for breach of contract, probably for lost profits from the K. If Rob had died and somehow then mailed the letter (?), there would not be a K.

Long Answer • Harris Paving Co. was informed by the Ministry of Transportation that they would need $600K worth of asphalt for a road project. Bids were to be entered by 3 pm on October 28th. HPC hired “Knotty” Domi to prepare the bid. Domi called Purolater to deliver the bid he had written the night before with Tom on a flight home from the Leafs game. Domi asked Purolater to deliver by next day noon. Purlolater said they’d try, and took the bid for delivery. Purolater gave a receipt which said “maximum $2 liability per package, not responsible for any further loss, damage, injury or liability however caused”, drafted by their legal team, Tories LLP. The envelope was missed by the delivery man and ended up being delivered 3:30 on the 28th. HPC lost the bid because it was not received in time. Domi is fired for being a moron. Later, it turns out that they had the lowest bid, and HPC estimates that they still could have made $25K on the deal. What are the parties rights and remedies in this situation?

Brief, point-form answer • HPC can sue Purolater for breach of K. But they have to prove that the damages were caused by Purolater, that the damages were foreseeable as a result of the breach, and that Purolater is not protected by the exclusion clause.

Cont’d • Pretty clear there is a causal connection, but could be argued • Don’t make up facts • The damages are probably foreseeable, the driver knew it was a tender and knew it was due at 3:00, so they were drawn to his attention. Becomes foreseeable.

Cont’d • Could argue that the nature of the damages was foreseeable, but the quantum not (given the 2$ limit exclusion clause), and requires special amount of damages to be brought to attention (200K contract).

Cont’d • The exemption clause covers all liability, and was not negotiated specifically, and was not drawn to the attention of HPC, all factors against a court upholding it. • However, the nature of the breach could be characterized as “not fundamental” because it was only a bit late, but the delivery was substantially made. • Could say that timing was in this case “fundamental” to the contract, and was made known to both parties.

Cont’d • However, because attempts to limit liability in ALL cases, regardless of what the actual fundamental term was, then is probably not going to be upheld as a valid term • Will be severed from the contract • Purolater will likely be liable for all losses flowing from breach that are foreseeable, and losing the tender is foreseeable • Domi may have a case for wrongful dismissal (breach of contract), but we don’t have a lot of facts on this (e.g., we don’t know the terms of the contract) so it is hard to prove more than speculation.

Any questions • Time: 2:30. • Place: Curtiss Hall D. • Time to write: 1.5 hours. • Excuses: Written proof of medical or family emergency, with contact information to verify data. • GOOD LUCK!

Problems in Canadian Business Law