Breach of Contracts

If you are involved in a contractual dispute, there may be a number of legal issues. Was an agreement actually reached by the parties? If yes, is the agreement enforceable? Is the contract vitiated in some way or has it been breached? If a breach is found, what is the remedy?

Below, we review the general principles of contract law. It is a combination of common law and statutory law. In some contexts, like the sale of goods, the legislative branch has created an entire statutory scheme (e.g. Sale of Goods Act) that takes precedence over the general law of contract.

  1. What is a contract?

A contract is any enforceable promise with respect to the future, made between two or more parties, which can be written or verbal.

  1. The formation of a contract

A consensus ad idem (a Latin expression meaning ‘meeting of the minds’) must be present for the formation of a contract. It means that there must be an offer and an acceptance. The test for whether the offeror has communicated an offer to the offeree is whether the offeree reasonably understood the communications of the offeror to constitute an offer. The test of an intention to accept is whether the offeror reasonably understood that the communications of the offeree constituted an acceptance.

Another necessary component of a contract is certainty of terms. If the parties fail to reach an agreement on all the essential terms, or if a particular term of a contract is so vague or imprecise that the Court cannot give a meaning to the term, the agreement will fail on grounds of uncertainty.

Lastly, the parties must each possess the capacity to contract and there must be an intention to create legal relations. The test for the presence of the intention is objective: Was the conduct of the promisor such that the promisee reasonably believes that a binding agreement is intended?

  1. Writing requirements

While many types of agreements can be verbal, the Statute of Frauds, R.S.O. 1990, c. S.19, requires that certain agreements – guarantees and contracts for the sale of an interest in land – be in writing and signed by the party against whom the agreement is to be enforced.

Parol evidence (from Parole, French for “verbal”), i.e. verbal discussions made earlier in the contract negotiation process, was traditionally considered to be inadmissible in a legal proceeding that involved a controversy about the precise terms of an agreement. The modern approach is that a written document creates a presumption of completeness that is weaker when the parol evidence merely supplements the document and that is stronger when it contradicts the document.

  1. Enforceability

The modern doctrine of consideration holds that a promise will be enforceable only if it forms part of a bargain, i.e. was given in return for good consideration. In order to be good, valid or sufficient, the consideration must not be vague or illusory. It can be an act or forbearance. It does not have to be adequate, however, and can be nominal. A promise made in the form of a written document signed under wax seal is another accepted device for making a promise enforceable.

There are a few exceptions to the requirement of consideration.

One is called promissory estoppel: If one person, Alfred, makes a clear and unambiguous promise to another person, Belinda, and Belinda detrimentally relies on Alfred’s promise, then Alfred may be prevented from denying the existence of the contract on grounds of lack of consideration. The Court usually restricts the remedy to the plaintiff, Belinda, to what is necessary to avoid injustice. Since this type of estoppel functions basically as a defence to a defence, it is often called a “shield”.

Another exception is called proprietary estoppel: If, in the above type of situation, the promise concerns the creation of an interest in land, the promise may be enforceable. Proprietary estoppel can ground a cause of action; as such it is referred to in academic legal literature as a “sword”.

Lastly, the doctrine of privity of contract applies to situations in which one of the parties to an agreement has undertaken to confer a benefit on a third party. E.g. Alice and Brad may enter into a contract where, in return for services provided to Alice by Brad, Alice promises to pay money to Clarissa. According to the doctrine, Clarissa has no standing to enforce Alice’s undertaking. The rationale is that 1) Clarissa is not a party to the contract and thus lacks standing and 2) lack of consideration given by Clarissa to Alice.

Application of the third party beneficiary rule can be avoided if other doctrines provide a foundation for a claim by the beneficiary (Clarissa) against the promisor (Alice), such as the existence of an agency relationship or trust relationship between Brad and Clarissa.

  1. Vitiating factors

Various remedies may be available (e.g. rescission of the agreement) where one or more of the following circumstances is present:

  • Misrepresentation – if a party has induced another party to enter into the agreement by making a material statement of fact that is false;
  • Duress, undue influence or unconscionability – if a party was coerced by the other party (by threats, pressure etc.) to enter into the agreement;
  • Common law or statutory illegality – if the formation or performance of the agreement is illegal, either at common law or by virtue of some statutory prohibition;
  • Misunderstanding – such as if a party to the agreement was mistaken as to the character or nature of the document they signed; or
  • Frustration – if performance of the agreement has been rendered impossible by the happening of an unexpected fortuitous event.

 

  1. Types of contractual breach

If there is a breach of the agreement, the innocent party will want to get legal assistance to determine what their rights are under the agreement. If the term was a condition, the innocent party may be able to discharge the agreement for breach. But if the term was a warranty, the innocent party’s remedy may be limited to an award of damages.

Likewise, if notice of an anticipatory breach has been given, the innocent party may be able to terminate the agreement and seek damages or affirm the agreement and seek damages.

  1. Interpretation of agreements

If there is a dispute about the meaning of a term in the contract, the Court engages in a process called contractual interpretation. The Court applies a literal approach and a set of canons of construction that the Court has developed over time. Although the list of these canons is too long to reproduce in this article, an example is contra proferentum: Ambiguities are to be construed against the party who drafted the term.

In some cases, it is necessary to fill in gaps in the agreement with an implied term – an attribution of a hypothetical intention to parties that they would, as reasonable persons, have articulated. One type is that the Court may imply a term based on custom or usage. Another type is that the Court may imply a term that is obvious in the circumstances.

Lastly, an exculpatory clause (EC) is a clause that attempts to preclude or qualify the liability of a party for breach of contract (e.g. by imposing a limitation on the extent of liability). They have become a pervasive feature of consumer and commercial contracts. Due to the power imbalance between the parties to such contracts – the companies who draft them and the consumers who sign them – the Court applies a version of the doctrine of fundamental breach, scrutinizing ECs narrowly and in the light of unconscionability and public policy.

  1. Remedies

A common remedy for a breach of contract is damages (or compensation).

The expectancy principle is the basic principle for calculating an award of damages in a breach of contract claim. Its objective is to provide the plaintiff with a monetary equivalent of performance. For instance, in a sales contract, if the seller refuses to deliver the goods, damages will equal the market price of substitute goods minus the contract price.

A party may be entitled to other remedies. An injunction is an order that the other party do or refrain from doing something. And specific performance is a declaration by the Court compelling the other party to perform their contractual obligations. Since these two remedies are from the area of law called equity, they are subject to the Court’s discretion and various equitable defences such as laches where there is delay coupled with prejudice to the defendant.

This is a broad survey of issues that can arise in a contractual dispute. If you are in involved in such a case, our office can review with you your legal options and the best course of action.

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