CHAPTER
4
The Enforceability
of Contractual
Rights
PowerPoint® Presentation Prepared By
Susan McManus, Mount Royal College
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
CH 4
LEARNING OBJECTIVES
 Identification of contracts that require special form
or writing to be enforceable
 Examination of the effects of misrepresentation,
mistake, undue influence and duress on
enforceability
 Outline assignment of contracts
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-1
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Requirements of Form and Writing
 Formal contracts: required to be in specific written
form
 Informal or simple contracts: no prescribed form,
but some must have written or electronic
memoranda as evidence of the contract
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-2
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Requirements of Form and Writing (Cont’d)
Statute of Frauds (1677 – Britain)
 Requirement that certain contracts have:
 Written evidence
 Signed by the party to be charged
 To be enforceable – to have any legal enforcement by
the court, however, the contract is valid between the
parties
 Business contracts under the Statute of Frauds
requiring written evidence:
 Contracts of guarantee
 Assumed tort liability
 Contracts concerning an interest in land
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-3
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Figure 4-1
Guarantee
Relationship
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 1-4
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Requirements of Form and Writing (Cont’d)
Guarantees:
 Guarantor promises to pay the Creditor IF the
Debtor defaults
 Creditor promises to provide the Debtor with
goods, services or money on credit
 Must be in writing and signed by the Guarantor to
be enforceable
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-5
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Requirements of Form and Writing (Cont’d)
Alberta: additional process for personal
guarantees to be enforceable
 Guarantee Acknowledgement Act – notary public
(usually a lawyer) must certify that the guarantor
understands the obligations
What elements of guarantees brought about this
legislation?
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-6
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Requirements of Form and Writing (Cont’d)
Assumed Liability: Tort
 A third party agrees to compensate a person
injured by the tort of another – must be in writing
Contracts Concerning Interests in Land
 Limited to sale or disposition of interests in land
(such as leases)
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-7
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.1
Contracts Concerning Interests in Land
Must be in writing to be enforceable
Doctrine of Part Performance
 Used by a party adversely affected by the
requirement of writing; performance is evidence
of the contract, four criteria:
1.
2.
3.
4.
Acts clearly refer only to the land agreement
Unenforceability creates hardship & fraud
Agreement relates to an interest in land
Agreement itself is a valid contract, with verbal
evidence to establish its existence
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-8
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.2
Requirements for the Written Memorandum
Written evidence required by the Statute
of Frauds:
 All essential terms (parties, price, property) can be
determined from the written documentation
 Signed by party to be charged; the party that is
using the Statute of Frauds as a defence
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-9
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.2
Requirements for the
Written Memorandum (Cont’d)
Parol Evidence Rule:
 No oral evidence can be used to contradict a clear,
unambiguous written contract
 Oral explanation of contract terms or to prove facts
(fraud) may be allowed
 Exceptions (oral evidence accepted) :
 Condition precedent
 Doctrine of implied term
 Collateral agreement
 Subsequent agreement
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-10
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.3
Sale of Goods
Sale of Goods
 Most provinces have legislation (Sale of Goods Act) that
require written evidence for the contract to be enforceable
Exceptions (alternate evidence of the contract):
 Payment of a deposit
 Acceptance of part delivery of the goods
 “Something in earnest” – trade-in
Consumer Protection legislation:
 requires writing and disclosure for certain types of contracts
(door to door)
Is the requirement of writing necessary and relevant in
our current business environment?
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-11
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.4
Failure to Create An Enforceable Contract
Terms and remedies:
 Void – contract is declared a nullity or non-existent
 Voidable – contract may be avoided
 Rectification – judicial correction of the contract
 Rescission – revocation of a contract based on
contract being voidable; parties are placed back in
the same position as prior to the contract
 Damages – for losses, if rescission is not possible,
and even punitive damages
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-12
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Figure 4-2
Failure to
Create a Legal
Relationship
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 1-13
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.4
Failure to Create An Enforceable Contract (Cont’d)
Mistake:
 One or both parties have made an error (as
determined by the courts and precedence)
regarding an essential part of the contract
rendering the contract unenforceable
 Unilateral Mistake:
 only one party is mistaken, the other is aware of the
error
 Mutual Mistake:
 both parties make an error or mistake
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-14
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.4
Failure to Create An Enforceable Contract (Cont’d)
Mistake of Fact – unilateral and mutual
 Existence of the subject matter at the time of
contracting – contract will be void
 Identity of one of the parties – contract will be
voidable (nullified) if the identity was essential
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-15
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.4
Failure to Create An Enforceable Contract (Cont’d)
Non est factum – S.C.C. has limited this defence
and the contract is voidable if:
 Person was not careless in signing
 Nature (not degree) of contract is different from the
representation of the contract
 Person making the mistake is illiterate or infirmed
 Independent opinion was not possible
Rectification – typographical or omission errors in
a written contract; neither party is aware of the
error:
 Court will “save” the agreement by changing the written
words to equal the original agreement
 Requires clear & unequivocal evidence of original
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-16
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.5
Misrepresentation
Misrepresentation
 Contract may be voidable at the option of the
innocent party, providing they act promptly and
take no further benefits
1. False statement (may be by conduct) of material fact,
not just opinion by the maker
2. Reliance by the other party to enter a contract
(inducement to enter the contract)
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-17
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4.x
Misrepresentation (Cont’d)
Misrepresentation
 Innocent: maker honestly believes in the truth of the
statement
 Fraudulent: maker knows the statement is false and intends
to deceive
 Negligent: maker is careless to a degree that constitutes a
breach of the requisite standard of care
 Nondisclosure: in contracts of “utmost good faith” (where
there is an obligation based on trust and confidence) one
party fails to disclose material facts – example is insurance
contract rendering the contract voidable
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-18
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.6
Undue Influence
 Prompt action by the weaker party is required to
avoid the contract
 Contract entered due to domination or influence of
a dominant party over a weaker party
 Proof is required of the domination
 Confidential relationship:
 Onus shifts to the dominant party to show no undue
influence
 Court will review:
 Fairness of the bargain – adequacy of price
 Full disclosure at time of contract
 Availability of independent legal advice
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-19
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.7
Duress
Duress (rare business occurrence)
 Threat of violence, injury or imprisonment to force
a contract
Economic duress
 Exploitation of a weaker party to extract unfair
benefits to the stronger party under a contract
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-20
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights
Privity:
 limits the enforcement of rights and duties under a
contract to the parties in the contract
Exceptions:
 Partnership – a partner can bind the partnership to
a contract
 Subsidiary agreement – acceptance of contract
liability with the goods or property
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-21
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights (Cont’d)
Exceptions
 Land: many restrictions binding third parties “run
with the land”
 Doctrine of Constructive Trust: courts will find a
contract benefits a third party (beneficiary)
 Legislation: statutory enforcement of third party
rights (beneficiary under a life insurance policy)
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-22
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights (Cont’d)
Novation: replacement or substitution of
one party under a contract
 Requires mutual consent
 Terminates original contract and establish a new
contract with the third party
 Not available for specific personal performance
contracts
 Vicarious performance – employee or independent
contractor performs contract obligations; primary
liability remains with the original contract party
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-23
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights (Cont’d)
Novation (Cont’d)
 Elements:
 New party (third party) assumes complete liability
 Remaining party accepts or consents to the new party
 New contract is in full satisfaction for ending the
original contract
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-24
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights (Cont’d)
Assignment: Assignor assigns contract rights
(usually debts owed by a debtor) to the Assignee
(third party)
 Assignee
 Gains the same title or rights as the assignor
 Subject to same defences or use set-off as against
the assignor
 May recover from assignor
 First assignee to give notice would be entitled to
payment
 Upon notice of the assignment the debtor is
obliged to pay the assignee
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-25
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
4.8
Assignment of Contractual Rights
Statutory Assignment
 Legislation governs complete or absolute
assignments, allowing the assignee to begin action
under the original contract
 Conditions
 Written assignment signed by assignor
 Absolute assignment
 Express, complete written notice to the debtor
 Title was taken subject to equities or conditions under
the original contract (same title as assignor)
 Assignment by law – statutes declare assignments
(death and bankruptcy)
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-26
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
CH 4
SUMMARY
 Statute of Frauds – written evidence for certain contracts to
be enforceable
 Parol Evidence Rule – excludes oral evidence to alter a
written contract with exceptions
 Failure to enforceability of contracts rendering them
void or voidable: mistake, misrepresentation, undue
influence or duress
 Privity of Contract – bars third parties from obtaining
contract rights
 Novation – mutual consent allows the formation of a new
contract with a third party by replacement
 Assignment – assignee receives rights under a contract
from the assignor
Essentials of Canadian Business Law, 1st Canadian Edition
Slide 4-27
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.