Chapter 7 Contract Capacity and Legality PDF

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Chapter 7 Formation of a Contract: Capacity to a Contract and Legality of Object (181) THE BURDEN OF PROVING ESSENTIAL ELEMENTS OF A CONTRACT - Once plaintiff shows there was offer, acceptance and consideration, court will presume an intention to create legal relations - Courts will also presume 2 additional elements are present o 1) defendant has the capacity to make a contract o 2) contract is legal THE MEANING OF CAPACITY TO CONTRACT - Usually is assumed the other party has the capacity to make a contract, but this is not always the case - Legal capacity: competence to bind oneself legally - In addition to age there are other reasons that contracting may lack capacity and attempt to repudiate their contract o Repudiate: reject or declare an intention not to be bound by MINORS OR INFANTS Contractual Liability of Minors - Minor/infant – person who has not attained the age of majority according to the law in their province - Age of majority – age at which a person is recognized as an adult according to the law in their province - Contract made by a minor is not binding whether or not the other party was aware of it - When a minor needs to own assets/make a contract their guardian look after their affairs o Guardian: person appointed to manage the affairs of a minor in the place of his/her parents - Exceptions are made so the minor is not disadvantaged o Minor who is need of necessities – essential g/s

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Necessaries and Beneficial Contracts of Service Minor is bound by any contract for supply of necessaries, and essential g/s Not bound to pay the contract price, but rather at a reasonable price (based on quantum meruit) What are necessities? – food, clothing, lodging, medical attention, legal advice, and transportation needed for work Minor is bound by beneficial contracts of service: contracts of employment found to be in the minor’s benefit and are not exploitive

Contracts Creating No Liability for a Minor - Minor can always back out of a contract with non-necessaries (even if they are beneficial to them) - Each case is judged on its own facts o Ex. Minor living with parents: purchases less likely to be considered necessities b/c it is assumed that they are cared for - Not liable for necessaries they order but has not arrived - If the minor is a seller, rather than a buyer, he cannot repudiate the contract to recover the goods delivered unless they return the money paid

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Nothing to prevent minors from purchasing non-necessities if they can find a vendor willing to sell it to them Vendors cannot rely on statements from minor saying their parents will pay for the good o Parents can be held liable if they have paid for a child’s purchase in the past Contracts Indirectly Affecting a Minor Minor who has benefited from a contract for a non-necessity cannot recover money already paid out but can repudiate his remaining liability Adult can recover LENT money lent to a minor only if they used it to purchase necessary goods Minor’s freedom from liability is LIMITED TO CONTRACT ONLY o Remain liable for tort (negligence, defamation, deceit) o If they cause loss by doing acts UNDER contract, and the minor can escape liability The Contractual Liability of Minors Upon Attaining Majority Minor is still liable for necessities/beneficial contracts of service once they reach majority + become liable for obligations (that could not have been enforced when they were a minor) The non-necessary contracts are voidable contracts: contract that be rendered non-binding at the option of one of the two parties o 1) minor acquires an interest of permanent, continuous nature  Paid in installments (bills, memberships)  Needs to repudiate out of the contract BEFORE reaching majority to avoid liability  Minor loses right to repudiate (if they don’t do so) as soon as they come of age o 2) does not have interest/continuous and is NOT BINDING UNLESS they ratify the contract after reaching majority  Acknowledges the contract and promises again to perform

OTHER PERSONS OF DIMINSHED CONTRACTUAL CAPACITY Law protects those of unsound mind or incapacitated though alcohol/drugs in the same way minors o Bound to pay reasonable price for necessities o Other contracts are voidable at his option but enforceable by him against the other contracting party - Difficult to prove that you are so intoxicated or insane to the point you don’t know what you’re doing o Must show they were incapable or rational decision o Show that the other party was aware of the above fact o Person must act quickly after sobering up or it may be too late to repudiate the contract - With an aging population there is an issue now among the elderly CORPORATIONS - Corporation has no physical existence; it cannot think/act/sign its name as a natural person can - Law may give corporations the capacity to make any contract or enter into any obligations that a natural person possesses - Not all corporations have a wide contractual capacity, many are subject to statues that created them

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Obligations that they may claim to undertake but are outside their statue will be declared by the court as ultra vires (beyond their powers) and therefore void: never formed in law o Promisee cannot enforce such obligations against the corporation Law relating to principal and agent determines if the person acting on behalf of the corporation have the power to bind it in contracts o Is important for corporations b/c ALL contracts are made through agents (since they are not an actual being)

LABOUR UNIONS, ASSOCIATIONS, AND OTHER ORGANIZATIONS - In our legal system, a group of individuals coming together does not make it a legal entity o Must apply to the right govt agency and can then be recognized as a legal entity and enter into contracts - Legal status of unions remains limited - Legal status of business corporations as employers is clearly settled - Differences seen in the process for negotiation and enforceability of collective agreements b/w corporations and labour unions o Negotiation  Business has capacity to make offer in negotiating process  Acceptance by union must be ratified by majority of the union members o o Enforcement  Provinces have statues that provide arbitration in the event of a dispute  If union rejects arbitrator’s decision and causes an illegal strike, damages have been awarded against the union - Labour unions may bring actions/defend against them when they so wish o Representative action: an action brought by one or more persons on behalf of a group having the same interest ENEMY ALIENS - Alien: non-citizen - Usually they have the same rights as a citizen when it comes to making contracts and all other matters in private law - Declaration of war, enemy loses all contractual capacity - Is identified not by their citizenship BUT BY the fact that either their residence or business interests are located in enemy territory - Any evidence that a contract made with an enemy alien is detrimental to the public interests will make the contract void as being against public policy ABORIGNALS PEOPLES - Aboriginal Peoples: Indian, Inuit, and Metis people of Canada - Those living on reserves are considered wards of the Crown - Reservations are held by the Crown in trust for the benefit of the Indian Band o Any attempt to dispose of such property to an outside property is void unless the transaction has been approved - Indians not living on reserve have the same capacity as any other citizen BANKRUPT DEBTORS

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During proceedings, debtor is under certain contractual liabilities until given discharge from the court

THE ROLE OF LEGALITY IN THE FORMATION OF A CONTRACT Object or purpose of a contract must be legal - Contract is illegal when it offends the public good or violates a stature o When it is contrary to public policy: goals or principals benefiting the society or good for the general public - Courts presume transaction is legal unless defendant proves otherwise - Easy to tell when contract violates a statute, but not easy to tell if it violates public policy o Must decide if contract offends the public good based on a general sense of what is right/wrong - General rule is that illegal contracts are unenforceable: no court assistance or remedy is available to parities of that contract DIFFERENCE B/W VOID AND ILLEGAL CONTRACT - Void = parties have no created a legally binding agreement/it does not exist. Court will do their best to restore parties to their pre-contract position - Court may find only one part to be void, and the other parts are valid o If this term can be severed: removed from the contract, without harming other parities it will do so -

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Illegal = completely unenforceable o Party cannot sue for the money promised or property already transferred o When both parties are aware its illegal, the plaintiff is without remedy and the defendant may keep the ill-gotten gain Both parties are equally wrong, defendant’s position is stronger

CONTRACTS AFFECTED BY STATUTE Significance of the Wording of the Statue - On rare occasions, a statute may prevent a particular type of contract from having any legal affect by stating that such agreements shall be void - They may even declare that performance of the agreement shall be a criminal offense, subject to penalties Examples of Contracts Void by Statute Agreements Contrary to the Purpose of Legislation - Ex. Workers compensation Legislation o Specially says some contracts are void b/c it undoes the purpose of the Act o Any provision agreement that deprives employee of benefits is VOID under the Act o Act’s purpose is to provide money to workers who are injured - Ex. Bankruptcy and Insolvency Act o Purpose: gather assets of bankrupt person in order to pay off creditors and release them from any other obligation to pay o Disposing of assets before paying off undoes the Act o If a person transfers property by gift OR unreasonably low price, the transfer is VOID

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Examples of Statues Affecting Public Policy Promises to Pay a Betting Debt Consideration of both public policy and statues Look at subject matter of the bet to see if it is against public policy (such as bribing voters) Distaste for betting contracts as well as the harm to society put statues into place prohibiting it  not illegal, but winner cannot collect through court action Large body of Canadian case law regarding betting The parities to a wager: an agreement b/w 2 persons in which each has some probability of winning or losing MUST BE DISTINGUISHED from a stakeholder: person/organization that manages a betting arrangement for a fee and redistributes winnings

Insurance Contracts - One does not hope to win the “bet” with the insurance company, but rather wishes they will receive compensation if the suffer a loss - The fear of loss is expressed in the idea of insurable interest: an interest where a person has financial benefit from the continues existence of the property/life insured it would suffer financial detriment from its loss/destruction - Insurance statues describe circumstance where insurable interest exists o Ex. Life insurance  Ones own life or family member = the detriment is obvious and presumed to be the loss of that life  For all other persons = policy holder must show the financial interest in the life of the person they have insured

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Stock Exchange Transactions The contract itself in an actual sale of personal property Good faith contracts for the purchase and sale of shares are therefore valid and enforceable IF subject of agreement is a wager about the price of a share without intention of selling, acquiring etc. THIS is illegal Whenever goods are bought/sold for future delivery at an agreed upon price, one party may gain at the expense of the other due to the price change b/w the time of contract and time of delivery

Examples of Agreements Illegal by Statute - Some statutes describe certain types of agreements as illegal - Number of others do not deal directly with contracts but impose penalties for certain kinds of conduct - Ex. Income Tax Act – imposes penalties for false returns and evasion - Ex. Customs Act – penalties for smuggling - Any contract that involves such conduct is illegal ITSELF, b/c common law holds that when the OBJECT of a contract is illegal by statute, then the contract itself is illegal - Provincial statues/municipal laws require licencing of various occupations  when a person sues to collect fees for services provided the defendant may raise a defense that they were not properly registered and therefore cannot legally bill for such services o When an action is brought AGAINST a person who has not been licenced o Defendant cannot use his own misconduct in not complying with the statute as a defense to an action by an innocent person - More???

Examples of Agreements Made Legal by Statute - Attitudes about what is right change over time, therefore so does Public Policy - Legislation passed to make previously illegal contracts legal - Arbitration agreements: contract that requires all disputes to be resolved in arbitration, not the courts o Previously unenforceable contracts made legal by statutes - To avoid continuously changing legislation, most decisions about the legality of a contract are left to the courts to be decided on public policy grounds with the help of precedents from past cases CONTRACTS ILLEGAL BY THE COMMON LAW AND PUBLIC POLICY The Common Law -  precedents developed over time from the decisions of many cases - Has identified certain types of conduct that harm others and granted remedies - The conduct is considered a private wrong or tort and so whenever a contract involves commission or a tort , the contract is illegal - Torts that typically arise n an agreement are slander and libel, trespass, deceit, and inducement to break an existing contract with someone else - Exceptions to the rule for contracts of insurance - More??

Public Policy - Even though a contract does not contemplate the commission of a crime it may still be regarded as illegal b/c it is contrary to public policy - If is in conflict with the interest in Canada, the court will declare the contract illegal although its performance is neither tort not crime in itself - Arrangements by which a person accused of a crime may be released under bail are intended to be fair and humane o Party putting up the bail shall forfeit the bail money should the prisoner escape - Common crime committed is embezzlement o “borrow” funds without permission o When they are discovered, they usually repent and promise to pay back everything - Agreements that promote unnecessary legislation are also considered to be attempts to obstruct the course of justice o Take up time when more serious matters can be heard Agreements in Restraint of Trade - Most common reason for business agreements being challenged on grounds of public policy is that they may restrain or reduce competition - Competition is needed for economic life - Agreements in Restraint: restraint of trade, also known as non-competition agreements or restrictive covenants when they are included in a larger contract o They are simply enforceable o Others may violate the Competition Act

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Even if the contract contains a restrictive covenant: a term in restraint of trade (ex. Promise not to carry on a competing business activity) that is found to be against public policy may NOT invalidate the entire contract Courts initially presume that any term in restraint of trade is against public policy o Party seeking to enforce the covenant may rebut/overcome this if it can prove there is a reasonable agreement b/w the two parties that that does not adversely affect public interest Rebutting is likely due for two types of contracts in restraint of trade o 1) agreements b/w vendor and purchaser of a business in which the vendor undertakes not to carry on a similar business practice with the purchaser o 2) agreements b/w employee and employer in which the employee undertakes that after leaving their present employment , she will not compete against her employer either by setting up her own business or taking up position with a competing business Presuming any term in restraint of trade is against public policy is void is NOT ALWAYS THE CASE

Agreements B/w Vendor and Purchaser of a Business - Important asset of a business is goodwill – trade and commercial connections established overtime - Vendor of a business can persuade purchaser to pay for goodwill if he can promise he will do nothing to destroy the image of the company in the future o Must promise purchaser he will not enter business that is likely to compete with what he is selling  No danger of attracting his old customers and diminishing the value - Law recognizes both purchaser and vendor of a business may have a mutual advantage in a restrictive covenant and that is may not be against public interest Agreements b/w Employee and Employer - Difficult to convince courts that covenants b/w employee/employer restricting the future economic freedom of the employee are reasonable and not in restraint of trade - Employee contract = no payment of good-will and bargaining power is unequal o Employer can pose whatever terms they like - Protecting employees by striking down unreasonable restraints, courts also have a second interest – protect mobility of labour and encourage efficient allocation of HR -...