Contract Law Essentials: Mistakes, Misrepresentation, and Discharge

Posted on Sep 8, 2024 in Law & Jurisprudence

Setting Aside a Contract

A contract may be set aside due to mistake, misrepresentation, undue influence, or duress. Consumer protection relief through statutes may also set aside contracts.

Meaning of a Mistake

• Legal mistake: A mistaken belief about a factual situation, not the law itself.
• Unilateral mistake: One party is mistaken about the facts.
• Common/mutual mistake: Both parties are mistaken about the facts.

Only certain kinds of mistakes will make a contract void or voidable by equitable relief of the courts.

Mistakes in law are errors with respect to:

• Terms of the contract
• Subject matter of the contract
• Identities of the parties
• Nature of a signed document

Void vs. Voidable Contracts

Void: The contract never comes into existence, and no rights or title pass to anyone.

Voidable: The contract exists until set aside by a court; rights may pass to third parties before it is set aside.

Equitable Relief

Equitable relief: A discretionary remedy first developed by the Court of Equity to undo an injustice.

Rescind: Set aside, undo, or revoke a contract and return the parties as nearly as possible to their original position.

Set aside: Rescind, undo, or revoke a contract and return the parties as nearly as possible to their original position.

Rescission: An equitable remedy that rescinds a contract.

Mistakes and Contract Validity

In situations where a mistake is found, the contract is said to be void or voidable. It is the court that decides if it is equitable to set aside the contract, but in special circumstances, the court may “rectify.”

Prior to the time that the court may set aside a contract, rights, title, and interests pass as set out in the contract. Despite this, the contract may still be rescinded, and title and/or possession will return to the seller.

An innocent third-party purchaser for value will obtain good title to goods passed under a voidable contract. The difference between void and voidable contracts is important if goods have been conveyed to an innocent third party for value (who paid) for the goods prior to the contract being set aside.

Equity determines that the ITPV can usually keep the goods even though the original contract is rescinded. In some cases, goods obtained under a void contract may be reclaimed by the seller (even if sold to a third party), and the ITPV does not hold good title.

Factors Determining Contract Voidability

Whether any given contract is void/voidable depends on three things:

1. The type of mistake (meaning of the words, subject matter and its existence or value, error in recording, identity of the parties, nature of the signed document)
2. The reasonableness of the behavior
3. The understanding of the parties

Words Used Inadvertently

Mistakes about the terms of the contract may arise because:

• One party may inadvertently use the wrong words in stating the terms (unilateral mistake).
• Relief is granted if the reasonable person would have recognized that a mistake was made (price absurdly low or unrelated to the range of prices in negotiation).
• Courts will not allow “snapping up.”

Errors in Recording an Agreement

Sometimes a contract contains an error, but one party does not wish to be released from the obligation. Instead, they want the corrected deal enforced. It is not easy to seek rectification, and courts will not correct an error in judgment or lack of due diligence. Parties must be in complete agreement = the situation is just an error in writing down the agreement.

Courts will also grant relief (rectify a contract) if five conditions exist:

1. The court is satisfied there was a complete oral agreement between the parties.
2. Parties did not engage in further negotiations to amend the contract.
3. The mistake in the written document may have, but does not have to have, occurred from fraud.
4. When the written document was signed, the defendant knew/should have known of the mistake, but the plaintiff did not.
5. Any further attempt to enforce the inaccurate written document would be equivalent to fraud.

Misunderstanding about the Meaning of Words

Both parties may put forward certain words, deliberately, but have different interpretations of an ambiguous term, which equals a mutual mistake, so usually, the contract is void. The court will apply the most reasonable interpretation in light of all the circumstances based on the subject matter of the contract and intentions of the parties.

Mistakes about the Existence of the Subject Matter of a Contract

A party may make a mistake about the very existence of the subject matter of the contract (e.g., did not know the goods in the hold of a ship were destroyed at sea, perishable goods sold prior to delivery). If the subject of the contract was destroyed prior to contract formation, the contract is void. The court will remedy the situation about the buyer paying for goods not delivered and the seller being liable for breach of non-delivery.

Mistake about the Value of the Subject Matter

The subject matter of the contract still exists, but the parties may have radically different ideas about its qualities or quantity affecting its value. For example, a party may make a mistake about the value of goods in the contract: paying too much & the other party receives a windfall, wide price fluctuation, quantity or quality does not equal value expected. The court will determine if key characteristics of the subject matter accurately reflect its $ value. If so, then relief may be granted by finding the contract voidable.

Test for Relief in Mistake Cases

Test: Mutual intention of the parties, reasonableness of the parties’ expectations, and if it would be unfair or unconscionable not to grant relief.

Test: Rescission may also be available if three things are present:

1. Seller made a misrepresentation.
2. Discovery of which was impossible.
3. Both parties believed the same mistaken characteristics / delay works against relief: NOTIFY EARLY / mistake about the party to the contract = unilateral mistake / often involves fraud (innocent party is deliberately tricked into believing the party is someone they are not)/where party assumes an identity: contract = void/if parties deal in person then the contract=voidable/subsequent purchasers are better protected when the first transaction is in person rather than by mail, internet, phone.

Mistake about the Nature of a Signed Document

Defense of Non Est Factum (not my doing). When one party may have been illiterate and relied upon a literate party to describe the nature of a document. If misrepresentations were made to the illiterate party, then he could rely upon the doctrine of non est factum (he did not know what the document stated because he could not read or understand it). Was used for centuries but became misused, allowing people to carelessly enter into agreements and avoid liability. Courts have restricted its use. The principle of the law is based not only upon the principle of placing loss on the person guilty of carelessness but also upon recognition of the need for certainty and security in the commerce of those persons who rely upon signed documents…the application of the principle…must depend on the circumstances of each case. Buyers are expected to take the time to familiarize themselves with the contents of a contract and should not escape liability for failing to do so.

Contract vs. Tort

A court may rescind a contract for any material misrepresentation.

Misrepresentation

Misrepresentation: A false statement of fact which induces the other party to enter into a contract. If made fraudulently or negligently = a tort. If made innocently, must notify the other party of the error ASAP. Delay can lead to fraud or negligence.

Silence is not misrepresentation. A statement of opinion is not misrepresentation.

Types of Misrepresentation

1. Innocent: Person making the statement honestly believed it to be true (rescission is the aggrieved party’s remedy).
2. Fraudulent: An innocent misrepresentation becomes fraudulent if not corrected when discovered.
3. Negligent: Person making the statement was careless in not ascertaining the truth.

Remedies for Misrepresentation

When the party relied upon misrepresentation learns of the truth, they must renounce the contract promptly. Rescission undoes the contract, putting both parties in their original positions because the contract is voidable. The remedy is indemnity/compensation: a money award given as a supplement to rescission for loss sustained in performing a contract.

Misrepresentation by Silence or Omission

Conduct/silence may also be misrepresentation (as in torts). Certain types of contracts give rise to a positive duty to disclose all pertinent information. Will be voidable if discovered. If there is a duty not met due to silence or omission, then misrepresentation exists. Duty of utmost good faith: Duty of disclosure owed when a special relationship of trust exists between the parties. That duty almost always exists in:

• Continuing business relationships
• Partnerships
• Directors and officers toward their corporation
• Contracts of insurance
• Contracts involving the sale of securities
• Contracts involving the sale of goods
• Contracts with consumers

Rescission is not available where the contract is affirmed and where bona fide third parties would be prejudiced. Recall that negligent and fraudulent misrepresentations are torts. The remedy is rescission and/or damages.

Signed Documents and Misrepresentation by Omission

Legal presumption = signing a document indicates acceptance of terms. The presumption is rebuttable where any unusual/unexpected terms are not drawn to the signor’s attention. If the contract requires utmost good faith due to the type of relationship between the parties, then there is a positive obligation to disclose material information.

Types of Contracts Requiring Disclosure

Contracts of utmost good faith require disclosure of all pertinent information.

• Partnership agreements
• Contracts of insurance
• Contracts involving the sale of securities
• Contracts involving the sale of goods
• Contracts with consumers

Undue Influence

Undue influence: Domination of one party over the mind of another to such a degree as to deprive the weaker party of the ability to make independent decisions. Undermines presumed freedom of contract. The contract will be voidable if the victim acts promptly – delay will hinder the court’s assistance. When parties stand in a special relationship to one another, trust is involved (lawyer/client; dr/patient). One party has a special skill, position/knowledge. One party places confidence & trust in the other. Presumed in family relationships with inequality/relationships where one party possesses special skill or knowledge/relationships where one person is in dire straits/presumption may be rebutted. Importance of independent legal advice received by the weaker party will rebut the presumption.

Consumer Protection

Statute and common law protect the inequality of bargaining power in business-to-consumer transactions.

Unconscionable Contracts

Unconscionable contracts: Contracts where there is unequal bargaining power between the parties, and the powerful party gets an extremely advantageous deal. Example: loan transactions.

Duress

Duress: Actual or threatened violence or imprisonment as a means of coercing a party to enter into a contract. The threat of violence renders a contract voidable. Viewed the same as undue influence. Includes coercion: improperly forced payment under protest.

STMLR

• Ensure that all information relied upon by a business is accurate.
• Before agreeing to sell or purchase, carefully investigate and research claims.
• Perform credit checks.
• Search title to product and goods (Personal Property Registry, Land Titles).
• Carefully examine the proposed contract to ensure terms are as expected.
• Put the contract into writing/do not use oral contracts.
• Retain all emails or pre-arrangement documentation until the contract is fully performed as may be necessary to resolve a dispute over contract terms.
• Standard form contracts will ensure common provisions are properly worded, key words defined.
• Exemption and entirety clauses should be included (thus excluding any outside terms, conditions, representations and confines agreement to the single written document.
• Note any express warranties (repairs or replacement of product to clarify expectations and reduce uncertainty and surprise).
• Parties in special relationships or with power imbalances should seek independent legal advice during negotiations.
• Consumers should receive full copies of the contract at the time of purchase.
• Businesses should ensure a proper “cooling-off period” per consumer protection legislation.
• All sales staff should be properly trained so as to not make unapproved representations or inducements to encourage a sale prior to the contract.
• Pressure tactics or threats are not acceptable.

Discharge of Contracts

Methods of Discharge

When a contract comes to an end (discharged), neither party has further obligations under it. This is what parties want, but sometimes other events intervene, and parties want out early. There are different ways of discharging a contract other than breach of contract.

Four Ways to Terminate a Contract

1. Discharge by Performance
2. Discharge by Agreement
3. Discharge by Frustration
4. Discharge by Operation of Law

Discharge by Performance

Parties who enter into a contract expect it to be completed (discharged) by performance. Both parties perform their contractual obligations. Performance occurs in several ways. A bilateral contract (formed by the offer of a promise for a promise) has three stages:

1. Neither party has performed.
2. Then one performs.
3. Then the other does, and only at this end stage is the contract discharged.

Tender of Performance

One party may attempt to perform, but the other party might refuse to accept the performance. An attempt to perform by one party is called “tender of performance.” Tender of performance may be accepted or rejected by the other party (but with consequences). For example, if a seller of goods delivers the intended goods to the buyer, who refuses to accept them, the seller is not obligated to re-deliver and may immediately sue for breach of contract.

Discharge by Agreement

Waiver

Waiver: An agreement not to proceed with the performance of an existing contract. A waiver is a voluntary agreement to end the contract between the parties themselves and call off the deal.

NOTE: Neither party can impose a waiver on the other.

NOTE: Since neither party can impose a waiver on the other, a party who fails to perform without securing a waiver commits a breach of contract.

There are two situations in which a waiver may occur:

1. If neither party has performed its part, they can agree to call off the deal. There is automatic consideration because each party still has outstanding rights & obligations, and a promise by each party to waive is sufficient consideration to make an agreement to end the agreement.
2. If only one party has fully performed its part, the first party receives no consideration for giving a waiver of the other party’s duty to perform. Can be actionable in the breach. To be binding, such a promise should be under seal.

Substituted Agreement

Sometimes performance becomes too difficult, and one party may offer the other a $ payment or some other type of performance (substitute performance) to be released from further obligations. If agreeable, they create a substituted agreement. Material alteration of terms: The parties are more concerned with creating a new arrangement with new terms. The discharge of the old contract is incidental. This is different than accord and satisfaction.

Accord and Satisfaction

Accord and satisfaction: A compromise between contracting parties to substitute new contractual obligations and release the party from the existing one. Parties often agree to an out-of-court settlement (court costs are high, the outcome is a risk, liability is difficult to prove, etc.). A&S substitutes a new contract and discharges the existing contract without full performance.

Novation

Novation: Another method of discharge which occurs when the original parties to a contract agree to terminate it and create a new contract in place of the original one. A new contract is formed and must be with the mutual consent of all parties. Two types of important changes trigger novation:

1. Change of Material Terms
2. Change of Parties

Two types of NOVATION:

1. Change to material terms (terms which go to the heart of the contract; subject matter; price; etc.)
2. Change in parties (one party wants out, and the remaining party(s) allows another party to replace the exiting party; the original contract is discharged and replaced with a new one; must be evidence of intention and agreement to abandon the original contract. Can be by conduct of the parties without an express agreement; must show that the new party has assumed all the liabilities of the other party and has acted on that contract; novation involving creditors: good business practice to obtain express consent of creditors (e.g., in the sale of a business) and verify the names of all creditors and $ owed.

Contract Provides for its Own Dissolution

Before agreeing to a contract, one party may be worried about a possible future event affecting its willingness or ability to perform. If the other party agrees, parties can include a term in the contract stating what would happen if this event occurs. A contract may include three common types of terms for its own discharge:

1. Condition precedent
2. Condition subsequent
3. Option to terminate

Condition Precedent

Condition precedent: A future event that must happen before the parties are obligated to perform the new contract (not just time passing). If the CONDITION IS NOT MET & AND IS NOT WAIVED, the promised performance need not be given. May be included as a term of a written contract. Gives the parties only ONE REASON for non-performance of the contract: thus parties are not discharged UNLESS/UNTIL that condition precedent becomes impossible to fulfill.

Condition Subsequent

Condition subsequent: A future event that, if it happens, brings the promisor’s liability to an end. Liability begins when the contract is formed, but one of the parties has reserved the right for “an out” before the contract ends, in specific certain circumstances. For example, a baseball ticket has a clause that if the game is rained out by a certain inning, the fan will get a new ticket. Another clause may also limit liability for the same situation. Can be difficult to tell between precedent and subsequent. Consider the nature of the act, whether its occurrence triggers liability or ends it, and the order in which events must happen. Getting an engineer report before work can begin.

Option to Terminate

Option to terminate: The contract may include a term giving one party, or could be both, the choice to bring the contract to an end before full performance, usually by giving notice. This discharges the agreement because it was agreed upon when drawing up the contract. Tenant giving landlord notice to end a lease.

Discharge by Frustration

Doctrine of Frustration

Impossible to foresee all future events and address them as conditions to a contract; too costly, uncertain. Courts discharge parties for failure to perform their contracts in many circumstances (frustration).

Definition: External, unforeseen events, beyond the control of the parties, make performance impossible or completely unlike what was intended. The frustrating event must be outside the control of the parties and not a flimsy excuse.

NOTE: Any expenses incurred to fulfill a contract is NOT a frustrating act.

Self-Induced Frustration

Definition: A party willfully disables itself from performing a contract to claim that the contract has been frustrated. It is really a breach of contract and NOT frustration. Distinguish between “real” frustration and “self-induced” frustration; not every degree of fault or irresponsibility will bar a party from claiming that the contract has been frustrated. EXAMPLE: Cannot sell a vehicle promised to someone else before the buyer picks it up; or deliberately damage a ship laden with goods to avoid selling them at a set price.

Effect of Frustration

Courts have been harsh in dealing with frustration. Held that the contract is terminated at the moment of the frustrating event and that future obligations also had to be paid. But, work can be done over some time, but payment may be only upon completion. What if frustration occurs during that process? Common law: let the loss fall where it lies is the rule. The court will enforce the contract up to the moment of discharge. Obligations due before the frustrating event remain; obligations arising after the frustrating event are discharged.

Fibrosa Case

The buyer gave a $ deposit for equipment, but WWII began and could not get equipment. $ returned. The seller said he also incurred costs in preparing for sale. The court held, no relief for expenses incurred. The court held that Fibrosa was entitled to a return of the payment under the doctrine of frustration. Where the plaintiff received no benefit under the contract, there was a failure of consideration.

Discharge by Operation of Law

Definition: The law deems that a contract is discharged once certain obligations have been completed. A bankrupt debtor may be discharged from contractual liabilities after the process of bankruptcy has been completed if he can assert that the bankruptcy was caused by misfortune and not by misconduct. Thus existing contracts (debts by contract) may be discharged by the federal Bankruptcy and Insolvency Act.

Effect of Statute Barred Contracts

Applies to creditors seeking repayment of debt. If the process is delayed too long, the remedy of court action may be “statute-barred” (i.e., rather than completely discharged, it is banished from the courts) by The Limitations Act of each province. The deadline by which an action can be commended runs out, according to limitation periods set out in the above statute or other statutes with specific limitation periods. PUBLIC POLICY: Must be a definite end to the opportunity to sue.

NOTE: Creditor’s rights may be rehabilitated and made enforceable so may not be permanently discharged.

STMLR

• Prepare well-written contracts that give parties maximum control over how/when contracts are discharged.
• Identify specific circumstances in the business that might warrant non-performance and include them as conditions subsequent to the agreement.
• Identify any situations that could give rise to conditions precedent (i.e., what might happen before the business is interested in the deal).
• Option to terminate: Include this term, with written notice, in the contract if there is any lingering uncertainty about whether to contemplate a certain contract.
• If the deal requires one party to expend time, effort, $ in preparation for performance = call for a deposit and partial payment to be made.
• Make sure the contract addresses the return or forfeiture of the deposit if performance is not completed as expected.
• As frustration is only available in unanticipated or unforeseeable events, and the rules are arbitrary, ensure the contract itself deals with all possible obstacles.
• Spend some time imagining situations that might occur and include customized frustration clauses in the contract, particular to the industry or business (e.g., standard form real estate contracts specify what happens to the agreement for sale if the house burns down) to enable frustration if necessary.
• Maintain insurance policies until the deal closes.
• If a dispute develops, PUT IN WRITING, UNDER SEAL, any settlement agreement, waiver, or release to avoid agreements around lack of consideration.

Breach of Contract

Implications of Breach

Any breach of a term of a contract entitles the non-breaching party to claim damages. However, usually, only serious breaches may DISCHARGE a contract and release the non-breaching party from further performance of it. That is, it must be so significant that it undermines the whole contract or a fundamental term of the contract (defeats the contract) and further performance is pointless.

NOTE: A breach does not automatically discharge a contract. The non-breaching party makes the choice to treat the contract as discharged. Must communicate that to the breaching party. Disagreements may arise over the importance of the breach and whether a contract should be discharged.

Minor Breach

Minor breach: A breach of a non-essential term of a contract or of an essential term in a minor respect.

Major Breach

Major breach: Breach of the whole of the contract or of an essential term so that the purpose of the contract is defeated.

HOWEVER, the non-breaching party (innocent party) can lose its option in two ways, as follows:

1. If the innocent party chooses to proceed with the contract and accepts benefits under it, despite the breach; and
2. The innocent party may have received benefits despite the breach and not learned of the breach until their performance was completed.

Terms of the Contract

Conditions are essential terms. Warranties are minor terms.

Contract is Discharged Only If:

• The entire contract is breached.
• An essential term of the contract is breached.
• The party that suffers breach elects to treat the contract as discharged.

Breach May Occur in Three Ways By:

1. Expressly repudiating (rejecting) its obligations.
2. By acting in a way that makes performance of the promise impossible.
3. By failing to perform at all or tendering an actual performance that falls short of its promise.

Express Repudiation

Definition: One of the contracting parties advises the other that it does not intend to perform as promised. That is, there is a stated intention not to perform. It may be for the whole contract or a fundamental part. The non-breaching party (promisee) is entitled to do three things:

1. Treat the contract as at an end.
2. Find someone else to perform it (novation).
3. Sue for damages sustained.

One Party Renders Performance Impossible

A deliberate or negligent act by the promisor destroys its ability to fulfill the contractual promises (not an involuntary response to forces beyond its control). A promisor may not have said so in words but has implied as much by conduct. That is a breach of contract and is also a repudiation of the contract. It is a form of self-induced frustration. It is the same as express repudiation: conduct rendering performance impossible may occur either before or during performance.

Failure of Performance

Types of Failure

Failure of performance becomes apparent at the time set for that performance to occur. The degree/extent of the failure may vary and affects remedies which are available: Total Failure / Gross inadequate performance / Very minor / Satisfactory performance of all but one of the terms of the contract, or only part of a main term.

ISSUE: Often the innocent party faces a dilemma: should the inadequate performance of the other party trigger her decision to excuse that party from all further performance, or must they still perform? If she is really concerned about defective continuing performance, she should seek legal advice before claiming to be discharged of her obligations. Otherwise, she risks being held liable for wrongful repudiation if the court finds that the other party was only in minor default. That is, the delivery of goods by installment should still continue despite a one-time problem.

Doctrine of Substantial Performance

Doctrine of substantial performance: A promisor is entitled to enforce a contract when it is substantially performed even though its performance does not comply in some minor way with the contract. The contract is not breached where there is substantial performance. The contract may be enforced in spite of a breach of warranty, and if the injured party proceeds with the contract in spite of a breach of a condition, he or she may sue for damages ONLY.

NOTE: Important difference between warranties and conditions.

Mistakes in Performance

1. May arise upon overpayment (one party over performs an existing obligation by paying more $ than owed / May be done in a mistaken belief (insurance company pays out a claim in error for risk not covered by the policy or someone pays the wrong person.

Remedy

Where there has been unjust enrichment (an unfair benefit), the recipient must repay the money (restitution). The mistaken party remains obligated to perform to the correct party even if they honestly believed the benefit should have been given to that party.

Principle: “Performance to the wrong person is no performance at all.”

Exemption Clauses

Their purpose is to protect business parties from potential liability. Exemption clauses are included in contracts to exempt or limit liability even in the case of breach. They allocate risk so the parties know who should insure against what, allows a complete defense against liability, and gives the ability to recover legal costs. It is important that notice of the clause must be given to the other party. Works well in agreements between parties with equal knowledge and bargaining power. For example, one party may be willing to assume a risk in return for a benefit, such as a lower price, knowing they already have adequate blanket business insurance coverage in place.

Principle: Exemption clauses are “strictly construed against its drafter.” For example, okay when both parties are equal, if there are unequal parties, the court will redress this advantage in unfair cases.

Unconscionable Clauses

If a significant imbalance in bargaining power exists between the parties, the stronger party may extract an agreement by the weaker party to “unconscionable terms.”

Definition: Terms agreed to by parties of unequal bargaining power that give an unfair advantage to the powerful party over the weaker party. Courts may carefully scrutinize them and refuse to enforce them if the injured party can point to a paramount reason as a contract to public policy.

Types of Remedies

• Damages
• Equitable remedies (specific performance, rescission, and injunction)
• Quantum meruit

Damages are awarded to put the victim in the same economic position as if the contract had been completed. Intended as compensation for the loss suffered by the injured party when the other party fails to perform. Not intended as punishment. Damages are said to be morally neutral. BUT courts are beginning to award damages for non-economic injury such as mental distress and to punish bad faith or malicious behavior (punitive).

Prerequisites for an Award of Damages

• Loss must result from the breach and be within foreseeable limits of what the parties would have expected as a consequence of non-performance.
• Unusual losses are not compensated for by damages.
• Actual and supposed knowledge of the parties at the time the contract was performed, not when it was breached.

Damages

Mitigation of Damages

Principle: A party that has suffered losses must do what it can to keep losses as low as reasonably possible. Recovery is only for losses resulting from the breach which could not be avoided by acting reasonably. Victims of a breach must take reasonable steps to mitigate the loss. Businesses selling perishable goods cannot let them spoil but should resell them at the best price at the soonest opportunity to recover some of the $.

Liquidated Damages

When forming a contract, the parties may agree on the amount of damages to be awarded for any type of damage should in the event of a breach (“liquidated damages”). These are a pre-determined amount of $. Must be a genuine estimate of expected loss (not a penalty amount). PURPOSE: Provides some degree of economic certainty.

Penalty Clause

:defn:a term specifying an exorbitant amount of breach of contract intended to frighten a party into performance#NOMINAL DAMAGES:sometimes court will award nominal damages to acknowledge a breach of contract where there was no real loss suffered by the non-breaching party#very low amount to signal a principle#eg) the award of $1 acknowledges the validity of the plaintiff’s claim where a question of principle is at stake but does not award any more damages#should not be used to encourage litigation because plaintiff still has legal costs#EXPECTATION DAMAGES:typical remedy for breach of contract#eg)value of the expected benefit of the performance#damages are based on LOSS OF ACTUAL PROFIT#eg)seller failes to deliver on time. if buyer can obtain goods elsewhere the damages will be for any additonal price the buyer had to pay to obtain the same goods, over the original contract price. however if the buyer obtains the goods at a lower price=>no damages#different than damages in tort which are damages for actual harm or loss suffered#may include lost opportunity cost#eg)what a party has given up in not being able to make a similar contract with someone else because they contracted with the first party who then breached#CONSEQUENTIAL DAMAGES:are secondary losses#eg)one stage removed from the immediate effects of the breach#can also be serious and reasonably foreseeable at the time of contract. a defendant will be liable for loss that follows naturally from the breach#eg)seller fails to deliver goods that the buyer was to use as components to build another product for resale. damages arising from the breach of the subsequent sale contracts are consequential damages. seller is thus liable for lost profits of the buyer#GENERAL DAMAGES:an estimated amount that the court may award over and above specific losses for harm#defn:non-monetary harm arising from the breach#loss that cannot be calculated in precise monetary terms but will compensate the aggrieved party#eg)surgeon performed plastic surgery on an entertainer but disfigured her. general damages, over and above out of pocket costs for medical and hospital expenses: pain and suffering, mental distress, lost of professional morale#RELIANCE DAMAGES:defn:costs of expenditures and wasted effort reasonably made in preparation for performance#alternative to expectation damages#an injured party may claim for wasted time, effort, and expenses preparing for performance-putting the injured party back in its pre-contract position#may yield more $ than expectation damages if mitigation efforts have been successful#eg)consultant spends 2 months preparing for performing a contract and then client cances. the consultant may have lost new clients in the meantime, as well as spending time, effort and $ preparing for this contract. while she may get another client soon, she has still wasted resources on a cancelled contract#she is entitled to reliance damages, reasonably made, in preparation for her performance of the first contract#PUNITIVE DAMAGES:punishment is not the purpose of contract damages#in rare circumstances, courts may award punitve damages for malicious or bad faith behaviour of the breach party in breaching a contract#eg)whitten case where insurance company had been “high handed, malicious, arbitrary or highly reprehensible misconduct”#CHALLENGES IN MEASURING DAMAGES:Mental Anguish:In tort cases, court recognizes pain and suffering, nervous shock, humiliation, mental anguish as harm for which they grant general damages#in contract cases, courts beginning to allow compenstation for mental distress in cases of WRONGFUL DISMISSAL: (wallace damages for terrible manner of termination; egregious conduct) / FAILED VACATION PLANS#difficult to measure in monetary terms and have been small and only in exceptional cases#EQUITABLE REMEDIES:where damages are inadequate, an equitable remedy may be ordered such as: Specific Performance / Injunction / Rescission / Quantum meruit#Equitable remedies will be denied if: plaintiff does not have clean hands (acted in bad fath or caused their own misfortune / delayed unreasonably in bringing the action/innocent 3rd party would be affected/consideration was nominal or only under seal/equitable remedy could not be ordered against the plaintiff#Specific Performance:makes parties fulfill the contractual obligation#will not be ordered if court supervision would be required#usually only for contracts for sale of land#may be awarded for contracts for unique goods#innocent party very much wants the specific goods in question and nothing else is comparable#Injunction:court order restraining a party from acting in a particular manner#prohibits a party from committing a breach by having a negative covenant (promise not to do something)#court may grant an interlocutory injunction as a temporary restraining order to prevent the harm from occuring pending formal resolution of the matter at trial#Rescission:returns parties parties to their original positions as nearly as possible before the contract took place#contract is set aside (rescinded)#NOT the usual remedy for a breach;usual approach is 2 return the parties to the position they should be in if the contract was performed#however,may be better remedy for some trxn (eg:return defective goods to store for refund rather than suing for cost to repair)#plaintiff may elect rescission, provided the outcome is feasible to accomplish#Quantum meruit:claim arises when a valuable benefit is given at the request of a promisee#can also be for serious breach when non-breaching party has partially performed obligations#defn:fair amount a person deserves to be paid for benefit conferred (as much as is deserved)#eg)construction contracts when breach occurs after work begun but prior to completion:FMV of work already done is requested based on the value of the benefit conferred not based on the cost of doing work#
STMLR:take steps in advance to reduce costs and losses in contract associated with breach of contract#determine the potential risks likely to make performance difficult for the business or customer#quantify the value of those risks#business should adopt these strategies: party may obtain insurance against risk and raise its price accordingly/business may self-insure (eg:charge higher fee and build up a reserve fund to pay any claim that arises from later harm to a customer# for recurring trxn, the biz should develop a standard form contract that addresses these types of risks from the business’ perspective#include an exemption clause in the contract excluding itself from liability for the risk and transferring the risk of harm to its customer#parties should identify essential terms of the contract, breach of which will trigger their discharge from the contract, to avoid arguments about the seriousness of the risk#biz should collect financial information about their customers by pre-contract credit applications, including banking, employment and asset information to make enforcing judgement easier#biz should keep detailed records of expenses incurred in preparation for, or in relation upon a contract, as well as mitigation expenses#if a biz is unable to perform as promises, notify the other party asap so as to allow non-breaching party to take immediate steps to mitigate any loss that the breach may cause#this minimizes unnecessary reliance and consequential damages which may be awarded to the breaching party##INSURANCE AND GUARANTEE##best way of purchasing protection against a possible loss and transferring risk to another party#insured enteres into a contract with an insurer to be compensated for a specified loss, in return for payment of insurance premiums#2 types of risk Property & Assets Damaged/Risk of being held liable for loss/injury to persons on their premises#4 essential terms in contract of insurance are important to determine:nature of risk covered (cause of loss)/$ amount for which the cause of loss is insured (extent of damages)/duration of the protection (term)/amount of the premiums(cost of insurance contract to the insured)#2 types of risk to insure against:PERSONAL:covers risk to life/health#life insurance/medical insurance/AD&D insurance/workers comp# PROPERTY:insures against damage to property and equipment on premises#regulation:each province has statutes which regulate the practice of insurance within its jurisdiction#purpose of the legislation:protection of public, requiring responsible behaviour of the insurance companies and others in the biz#superintendants of insurance:the govt agency which oversees the operations and financial stability of licensed insurers, especially regarding terms in policies and the scope and limits of liability offered by companies#compulsory registration:federal, foreign insurance companies must register with the Superintendant of Insurance persuant to the Insurance Companies Act#2 types of biz insurance:Loss or damage to one’s own property or assest/liability of others#Property Loss/Damage:damaged to bldgs and contents (inventory, fixtures, equipment) due to a fire or storm/loss due to theft/loss or damage to vehicles used in biz#biz interruption (loss of profits due to biz closure or work stoppage)/credit insurance (bad debt losses)/fidelity insurance(loss by theft or fraud of employees)/key person life insurance (loss due to death or injury of important biz personnel)#Biz may be liable to others (customers/distributors/suppliers/general public)#should have public liability insurance for:liability for negligent acts and omissions (torts)/for defective products/for dangerous state of premise (occupiers liability)/for breach of prof duty of care (prof liability)#for 3rd party (motor vehicle)#Comprehensive General Insurance:rather than issue a variety of policies for various specific risk to a biz, use CGI instead#one policy coves all#covers both property loss/damage and liability to others in one policy#may be more costly#Principle:courts will not enforce a policy when a claim arises out of criminal or deliberate wrongful act of the insured#2 reasons:contrary to public policy to allow an insured to profit from his own crime/contract to the purpose of insurance which is to allow insured to benefit from a loss he caused#Insurable Interest:defn:genuine risk of loss that may be suffered from damage to the thing insured#contract of insurance transfers the risk of loss from the insured to the insurer#who has insurable interest is not purely ownership of the insurable matter#TEST:an interest is found if the insured benefits from the property’s existence and is prejudiced by the property’s destruction#proposal prepared by insurance agent is invitation to treat and not an offer#the offer to purchase coverage is made by the person seeking insurance by signing the application form#acceptance of life insurance occurs when policy is delivered by the company & first premium paid by the insurer ($ paid is condition precedent to delivery)#RENEWAL:expectation of renewal in most cases#unless there is evidence of an agreement between company & insured, or can be inferred from past dealings = no contract formed unless/until insured communicates acceptance in a reasonable period of time#Terms of the Contract:insurance policy = standard form contract#unilaterally prepared in advance#courts will subject such contracts to strict interpretation#construe word for word most strongly against insurer (contract proferentem applies)#any limitation clauses must be stated in clearest and most unambiguous terms#Good Faith, Fairness and Disclosure(Insured):has duty of utmost good faith and an insurer may deny a claim because of UGF#must notify insurer of material changes to the risk and within the control or knowledge of the insured (except for life insurance policies)#Insurer has 2 options: Cancel the insurance and return the unused premiums/inform insured insurance will continue but with higher premiums#must respond promptly#GF,F,D(Insurer):DoGF owed by insurer as well#applies both to making the contract and its performance#insurer must deal with claims fairly in the way it investigates a loss and places a value on a claim in the way it defends the lawsuit# cannot take advantage of its power over a vulnerable insured#Subrogation:defn:where one person becomes entitled to the rights and claims of another#Principle: when an insurer has fully compensated an insured for all losses, then insurer is entitled to step into the shoes of the insured and sue the person liable for the loss#insured cannot recover twice for same loss#right of subrogation cannot place the insurer in a better position than the insured#Recovery:in many types of policies, property is insured for a specific $ amount#insurer liability is generally limited to that amount#Principle: insurer may not recover more than the amount of the actual loss#eg)biz insures whse for $300K but FMV is $275K. Lower amount is max that can be claimed#Nature of Guarantee:defn:a promise to perform the obligation of another person if that person defaults#creditor may need assurance that a party will perform its obligations#creditor may be satisifed if 3rd party promises to perform the obligation of the debtor if the debtor defaults#debtor: principal debtor#debt: principal or primary debt#guarantor=surety#promise is guarantee or contract of suretyship#3 Characteristics of a Guarantee:guarantor makes the promise to the creditor, not the principal debtor#obligation arises only on default of primary debtor (contingent liability)#obligation arises immediately upon default of primary debtor#NOTE:customarythat the creditor always makes demand on the guarantor before suing -if principle debtor has defaulted, the creditor can sue guarantor and/or principal debtor#3 common biz situations in which guarantee arises#prospective creditor may refuse to advance $, G&S only on debtor’s promise to pay/Creditor may start an additional action against a debtor for overdue debt unless additional security is offered/ prospective assignee of rights may only do so if receiving a guarantee#2 types of guarantees:Limited guarantees(limited to specific trxn)/continuing guarantees(covers a series of trxn between creditor and principla debtor where debtor is continually liable for the debt, for specific time period, and/or to a certain amount of money. death ends liability#contract will determine extent of liability)#Discharge of a Guarantee:4 ways:ends if creditor breaches terms of contract and breach materially affects risk (failure to notify)/ends if contract between creditor and debitor is varied without guarantor’s consent#ends if creditor acts in breach of contract where that breach materially affects the risk assumed by the guarantor#liability is reduced if creditor impairs value of security given by principal debtor#eg)only partially discharged because does not materially affect the guarantor’s risk under the original contract#Rights of Guarantor on Default:may defend an action by the credtior using same defences as open to principal debtor#eg)any misrepresentation to the principal debtor by the creditor can be relied upon by the guarantor#if principal contract is VOID#eg)prohibited loan to a company) then guarantee is also VOID#Subrogation also applies to a guarantee#guarantor who pays off creditor becomes subrogated to the rights of the creditor against the debtor and debtors assets#may claim against principal debtor by stepping into creditors shoes#may take action against the debtor even before the creditor does(sees debtor failing financially)#Requirement of Writing:contract of guarantee MUST BE IN WRITING and signed by debtor(Statute of Frauds)#most guarantees are in writing regardless of whether writing is required in law. Important to ensure that you have a copy#STMLR: