Business Law - Summary - Chapter 8 PDF

Preview

Summary

Download Business Law - Summary - Chapter 8 PDF

Description

CHAPTER 10 Contractual Defects INCAPACITY TO CONTRACT Contractual defects are particularly significant because they often provide one of the parties with a defence when the other party commences a lawsuit.  Capacity: the legal power to give consent SUFFICIENT AND ADEQUATE CONSIDERATION  Sufficient Consideration: may be anything of value  Adequate Consideration: has essentially the same value as the consideration for which it is exchanged  Peppercorn Theory: the law presumes that people are able to look after their own interest, and generally allows them to decide what price they will demand under a contract i.e. two people create an agreement by exchanging a peppercorn for a horse. The peppercorn has some value (and therefore is sufficient consideration), but it certainly is not worth as much as a horse (and therefore is not adequate consideration). The contract is still enforceable.

Forbearance to Sue  Out-of-court settlement of a lawsuit usually involves one party paying an amount in exchange for the other party promising not to pursue any further legal claims  Forbearance as consideration o If underlying legal claim was valid  Valid consideration: sacrifice right to sue for full amount o If underlying claim was invalid  No actual right of action to be sacrificed  Valid consideration: loss of right to pursue apparent claim  However, invalid consideration if no honest belief in underlying claim Note: In some situations, the courts will not enforce forbearance agreements especially if the party that threatened to sue did not honestly believe that they had a valid claim in the first place

PAST CONSIDERATION  Mutuality of consideration: requires that each party provide consideration in return for the other party’s consideration.  Past consideration: consists of something that a party did prior to the contemplation of a contract i.e. promise to pay $100 given after service is provided Note: If an agreement to provide services or goods does not include any mention of price and those services or goods are actually provided, courts may find an implied promise to pay a reasonable price, instead of finding a lack of consideration due to past consideration

PRE-EXISTIING OBLIGATION  an obligation that existed, but was not actually performed, before the contract was contemplated Type of Pre-Existing Obligation

Consideration for a New Contract?

Pre-Existing Public Duty • Public officer promises to perform for extra pay • Example: police officer says, “I’ll investigate if you promise to pay $500” Pre-Existing Contractual Obligation Owed to a Third Party • A classical quartet agrees with a promoter to perform a concert in exchange for $15,000 • The quartet subsequently persuades a music publisher, under a separate contract to pay $20,000 for the right to record the concert • If all goes well, the quartet will receive $15,000 from the promoter and $20,000 from the publisher, even though it essentially did one thing Pre-Existing Contractual Obligation Owed to the Same Party • “I’ll perform our contract if you pay me $500 extra”

• • •

public official gives nothing new police already obliged to investigate against public policy to enforce agreement • avoid incentive for public servant to misbehave • Old obligation is a new benefit for the other party under the new contract

• •

no new benefit for same party against policy to enforce agreement • avoid incentive to threaten breach to get extra pay

Pre-Existing Obligations and Consideration Situation Pre-Existing public duty Pre-Existing contractual obligation owed to a third party Pre-Existing contractual obligation owed to the same party

Can a Pre-existing obligation generally provide consideration for a new contract? No Yes No

Promise to forgive an existing debt • Promise to discharge debt upon part payment o “You owe me $500…pay $200 and forget the rest” • Problem: Promise to discharge debt is unenforceable because no new consideration is provided by the debtor • Solutions: o Ontario Mercantile Law Amendment Act – can have a valid contract to accept part payment to fully discharge a debt obligation, even though there is no new consideration o Promise under seal o Promise exchanged for new benefit (i.e. early payment) PROMISES ENFORCEABLE WITHOUT CONSIDERATION  A promise is enforceable only if it is contained in a contract that is supported by consideration.  Two major exceptions! No consideration? No problem! We can still have an enforceable contract with: Seals  A special mark that is put on a written contract to indicate a party’s intention to be bound by the terms of that contract, even though the other party may not have given consideration -“Magic sticker; used for loan guarantees  Essential purpose is to draw the parties’ attention to the importance of the occasion and to ensure that they appreciate the seriousness of making an enforceable promise outside the usual bargaining process

i.e. Bank may be willing to lend money to me, but only if you guarantee my loan by promising to repay bank if I fail to do so. Loan therefore will likely require you to put promise under seal. Guarantee will be enforceable even if you received no consideration.

Promissory Estoppel  Doctrine that prevents a party from retracting a promise that the other party has relied upon  Creates important exception to the general rule that enforces only promises that were acquired in exchange for consideration Note: Estoppel= rule that precludes person from retracting a statement that they made earlier i.e. Suppose you trick me into building a house on your property by saying that land is mine. When I complete the project, the law will not allow you to unfairly assert your ownership of the property. You will be estopped from denying the truth of your earlier statement that I owned the land. I therefore may be entitled to keep the property + the house.

Four Requirements 1. Promise made within existing legal relationship to vary existing legal rights 2. Promise that existing rights will not be enforced 3. Other party relied on promise in a way that would make it unfair to retract it 4. Other party is innocent of inequitable behaviour Enforcing a Promise to Forgive a Debt Fresh Consideration - A promise to give something new - A promise to pay a lesser sum early - A promise to pay the same sum by cheque instead of cash Legislation (some jurisdictions only) -Actual acceptance of a lesser sum with intention to discharge whole debt Seal -Symbolic indication of intention to create gratuitous obligation Promissory Estoppel -Representation that rights will not be enforced -Reasonable reliance upon the representation -Absence of inequitable behaviour by the representee -Variation of existing relationship-not creation of new rights

PRIVITY OF CONTRACT Refers to relationship that exists between individuals who create a contract -Only those parties may sue or be sued on the contract  Stranger: someone who did not participate in the creation of the contract

i.e. Simple situation: You agree to sell your car to me. You can sue me if I fail to pay the money, and I can sue you if you fail to transfer the car. Complex situation with stranger: Suppose you agreed to transfer your car to me if I paid $5000 to your sister. If I get the vehicle but refuse to pay the price, the real complaint lies with your sister. She is the one who suffers from the broken promise. She cannot compel me to fulfill the contract I made with you because a contract is used to distribute benefits/burdens amongst the parties. You and I cannot impose an obligation on someone who is not part of our agreement.



Only a person who provided something of value can sue/be sued on contract

Exceptions to Privity of Contract 1. Assignment

2. Trusts 3. Statute 4. Employment 5. Himalaya Clause Assignment  Process in which a contractual party transfers their rights to a third party - Assignor: the contractual party who assigns their contractual rights - Assignee: stranger whom the contractual rights are assigned - Debtor: original contracting party against whom assigned right is enforced  Provides the best way to avoid the harsh consequences of the privity doctrine Types of Assignment 1. Equitable Assignment -Traditionally enforced by the courts of equity - Can be done orally or in writing; no need for debtor’s consent - Good idea to give notice to debtor so debtor knows who to pay - Debtor has same defenses as if sued by the original party -An assignment is subject to the equities (debtor can generally use the same defenses and counterclaims against the assignee that they could have used against the assignor) 2. Statutory Assignment (Ontario Conveyancing and Law of Property Act, s. 53(1))  an assignment that conforms to the requirements of a statute - Must be in writing; must give written notice to the debtor - Assignment must be full and absolute, not conditional and not incomplete 3. Operation of Law - On bankruptcy, bankrupt’s rights and liabilities are assigned to the trustee in bankruptcy - On death, deceased rights and liabilities are assigned to the personal representative (i.e. executor)

4. Vicarious Performance  occurs when a contractual party arranges to have a stranger perform their obligations - “subcontracting”; Assignment of contractual obligations to a third party - Available where original party’s personal skills are not essential to performance Trusts  Occurs when one person holds property on behalf of another -Trustee: person who holds the property on behalf of the other -Beneficiary: person on whose behalf the property is held i.e. suppose elderly couple want to provide for grandchildren’s education, but are afraid that the money may be wasted. They may give money to a trustee, who will sensibly spend it on grandchildren’s behalf.

(a) Contract is created between the debtor and the trustee. The debtor gives its promise under that contract. (b) When the contract is created, the trustee acquires the debtor’s promise on

behalf of the beneficiary. (c) The beneficiary enforces the promise against the debtor Statute  A person who wants the benefit of a trust must show that the contractual parties truly did intend to enter into such an arrangement  Legislatures have created a number of true exceptions that allow strangers to enforce promises  Automobile accident insurance for families, life insurance policies, etc. Employment When a company agrees to do work for a customer, it is usually obvious that the company’s employees will perform the actual task. Furthermore, the contract that is created between the customer and the company may include an exclusion clause that expressly states that the customer cannot sue either the company or its employees if something goes wrong. However, if the employees do perform carelessly, the customer may sue them in tort and argue that they cannot rely upon the contractual exclusion clause.

Himalaya Clause  Special term of contract that protects a third party beneficiary from liability  Not really an exemption to the privity rule. Instead, it involves a process that leads to a new contract being created for the benefit of the stevedores....