Chapter 21: Basic Forms of Business Organizations

Types of Organizations
 Sole Proprietorship
 General Partnership
 Limited Partnership
 Corporation

Sole Proprietorship
 The sole proprietorship is the simplest form of business organization
 Starts arising once person begins to conduct business
o E.g. cutting someone’s lawn for money
 A sole proprietorship exists when a person carries on business on their own, without
adopting any other form of business organization such as a corporation
o Example, if you agree to cut your neighbour's grass for money each week, you
are carrying on business as a sole proprietor
o You could enter into a contract to employ someone else to cut your neighbour's
grass, but you remain the sole owner of the business
 The sole proprietorship is exclusively responsible for performing all contracts entered
into the course of the business (incl. contracts with customers, suppliers etc.)
 The sole proprietorship is exclusively responsible for all torts committed personally in
connected with the business
o That person is also vicariously liable for all torts committed by employees in the
course of their employment
 Main advantage: it is simple and easy to set up; it is equally easy to dissolve
 Main disadvantage: unlimited personal liability
 Unlimited Personal Liability means that third parties may take all the sole proprietor’s
personal assets to satisfy the business’s obligations
 Legal Requirements:
o Business License is government permission to operate a certain kind of business
  No formal registration as a “sole proprietorship” is required. (Compare this to
incorporation, where formal steps are required.)
 But sole proprietors must comply with the general requirements imposed on all
businesses.
o e.g. may need to register a “doing business as” (DBA) name
o e.g. May need to acquire a particular licence,
o e.g., hot dog vendor permit or spectrum licence

General Partnerships
 A General Partnership is a form of business organization that comes into existence
when two or more persons carry on business together with a view to a profit
o All partners cannot be employed by the partnership
o All benefits of the partnership business accrue directly to the partners
o All partners, even those who did not consent to a particular obligation, are
personally liable for all the obligations of the business, including torts committed
by a partner or an employee in the partnership
o Partners have unlimited personal liability
o There are no formal requirements for creating a partnership. The creation of a
partnership is automatic: a partnership comes into existence in law when 2+
people carry on business together with a view to profit, without the need for any
further formality
 Partnership Agreement is a contract between partners regarding the operation of the
partnership
 In a Limited Liability Partnership, individual partners are not personally liable for the
professional negligence of their partners and some other obligations if certain
requirements are met

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Limited Partnerships
 Limited Partnership is a partnership in which the personal liability of at least one
partner is limited to the amount of the partner’s investment of the business
 Limited Partnerships allow people to become partners but avoid unlimited personal
liability so long as they restrict their involvement in the partnership business
 An LP must have at least one general partner whose liability is not limited
 Fiduciary Duty: partners must act honestly and with a view to the best interests of the
partnership

Corporations
 A Corporation is the most common form of business organization. It is used for all types
and sizes of businesses, from one-person operations to large multinationals
 A Corporation is a legal person, with a separate legal existence from its directors,
shareholders, and officers

Incorporation Process
 Under the CBCS and the provincial Acts that follow it, the main filings required to
incorporate are:
o Articles of Incorporation which set out the fundamental characteristics of the
corporation: its name, the class and number of shares authorized to be issued
etc.
o A name search report on the proposed name of the corporation
o The fee
 The Characteristics of Corporations
o Separate Legal Existence: the corporation itself carries on business, owns
property, possesses rights, and incurs liabilities
o Shareholders have limited liability: shareholders cannot lose more than they
invest in the corporation in return for their shares
o A court may pierce the corporate vein by disregarding the separate legal
existence of the corporation to impose personal liability on a shareholder for a
corporation’s obligation
 Residual Value= value of the corporation after all the debts and other claims have been
paid off

Corporations: Incorporation Process

 Created upon filing with government agency
 Governed by laws of jurisdiction of incorporation

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 o Provincial or Federal
 Canada Business Corporations Act requirements”
o Articles of incorporation
o Name search report
o Fee

Separate Legal Existence

 Corporation is a separate legal person
o Corporation (not shareholder) carries on business
o Corporation owns the property (not shareholders)
o Corporation (not shareholder) incurs liabilities
 The shareholder owns a bundle of rights
 Rare Exception: Piercing the Corporate Veil
o Serious fraud, wrongdoing, or unfairness
o Court willing to impost liability on true culprit
 Court pierces corporate veil
 Court imposes liability on shareholder

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Chapter 7: The Nature and Creation of Contracts
 A Contract is an agreement that contains legally enforceable rights and obligations
 Meeting of Minds is a shared decision to enter into a legal transaction on a particular
basis
 Mutual Exchange of Value occurs when both parties each give up something as part of
the deal
 Every contract requires a number of distinct steps or elements:
o The parties must have an intention to create legal regulations
o They must reach a mutual agreement through the process of offer and
acceptance
o They must enter into a bargain by each giving consideration

Intention to Create Legal Relations

 A contract will not arise without an intention to create legal relations
o Intention to create legal regulations arises if a reasonable person would believe
that the parties intended to create a legally enforceable agreement
 Objective Test: would a reasonable person think that the parties intended to create a
legally binding agreement?
 Meeting of the Minds/ Consensus: shared decision to enter into a legal agreement on
specific terms and conditions

Offer
 The parties must enter into a mutual agreement through the process of offer and
acceptance
o An offer is an indication of a willingness to enter into a contract on certain terms
o A person who offers to into a contract is called the offeror
o A person who receives an offer is called an offeree
 Remember: offer turns into contract by acceptance
o But, offer may be terminated before acceptance

Firm Offers vs. Options

 Firm Offer= gratuitous promise to not revoke an offer
o General Rule: it is unenforceable

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  Option
o Exception: it is enforceable
 Put the promise under seal
 Options: a contract in which the offeror receives something of value in
return for a binding promise to keep the offer open for a specific period

Killing the Offer

 Lapse of Time: offeror can set termination date

o If no termination date set, court will infer reasonable time
 Rejection: “no thanks”
o Offeree cannot subsequently revive offer
 Counter offer: “Yes, but…”
o Offeree responds to an offer but modifies the terms
o Effect: rejects old offer and creates new offer

Invitation to Treat
 Invitation to Treat is an indication of a willingness to receive an offer
o It is an invitation for others to make offers

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 o Example, if you enter a barbershop, sit silently in the chair, and get a trim, you
have offered, and the barber has accepted, a contract to cut your hair

Life of an Offer
 An offer does not last forever. If it is accepted, it gives way to a contract. And if it is not
accepted, it may cease to exist in a variety of ways:
o Revocation
o Lapse of time
o Death or insanity
o Rejection
o Counter-offer

Revocation
 Revocation occurs if the party who made an offer withdraws it
o The offeror is the master of the offer and is generally entitled to revoke it at any
time
 (1) Firm offers occurs when the offeror promises to hold an offer open for acceptance
for a certain time period
 An Option is a contract in which the offeror is paid in exchange for a binding promise to
hold an offer open for acceptance for a specific period
 (2) A Tender is an offer to undertake a project on particular terms
o Example, a city wants to build a new library; in calling for tenders, the city issues
an invitation to treat and promises to award the project to a company that
submits the best offer

Lapse of Time
 An offeror is entitled to limit the lifespan of an offer, possibly by stating that acceptance
must occur by a specific time

Death or Insanity
 It is often said that an offer is automatically revoked if either the offeror or the offeree
dies

Rejection
 Rejection occurs when the offeree refuses an offer and the offer is terminated upon
rejection
 The person cannot later accept the offer after declining unless the offeror approves

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Counter-Offer
 Counter-Offers occurs when an offeree responds to an offer by indicating a willingness
to enter into a contract but on different terms
 Has the effect of rejecting an existing offer and creating a new one
 Battle of the Forms occurs when each party claims to have entered into a contract on
the basis of its own standard form document

Acceptance
 Acceptance by Promise
 Acceptance by Performance
 Acceptance: agreement to offeror’s terms
o Contract created immediately upon acceptance
o Acceptance must in response to offer

Acceptance by Promise
 Many contracts are bilateral
o A Bilateral Contract occurs when a promise is exchanged for a promise
o Therefore, when a contract comes into existence, both parties have promises to
fulfill
 E.g. I’ll promise to pay $7500 and you’ll promise to give me your car
 Acceptance occurs through words (written or spoken); conduct may signify acceptance
(e.g. handshake)
 Rule: silence alone cannot be acceptance
o Exception: silence plus prior agreement may be acceptance
 E.g. book club
 Acceptance occurs when an offeree agrees to enter into the contract proposed by the
offeror
o Acceptance has to be communicated to the offeror
o An acceptance must also be a response to an offer; for that reason, no contract is
formed if I send you a letter that says, “I will sell you my car for $5000,” at the
same time you send me a letter that says, “I will buy your car for $5000”

 Acceptance at a Distance:
o The General Rule states that acceptance by instantaneous communication is
effective when and where it is received by the offeror

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 o Instantaneous Communication is any form of communication in which there is
little or no delay in the interaction between the parties (acceptance spoken;
acceptance heard)
o The Postal Rule
 States that an acceptance that is communicated in a non-instantaneous
way is effective where and when the offeree sends it
 A non-instantaneous communication is any form of communication that
involves a substantial delay between the time that it leaves one person
and reaches another (acceptance placed in mailbox; acceptance received
by mail

Acceptance by Performance
 Unilateral Contract occurs when an act is exchanged for promise
o In this situation, the offeror promises to pay a reward to anyone who performs a
particular act

o No contract exists unless and until the offeree fully performs

o If the offeree performs and the contract is created, the offeror is the only one
with an outstanding obligation to perform

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Chapter 8: Consideration and Privity

Consideration
 Consideration exists when a party either gives (or promises to give) a benefit to
someone else or suffers (or promises to suffer) a detriment to themself
 The main goal of contract law is to enforce bargains
 Gratuitous Promise is a promise for which nothing of legal value is given in exchange
o I have promised to give you something, but you have not promised to do
anything in return

 Consideration can be either a benefit or a detriment

o Each party must either…
 (promise to) provide benefit to someone or
 (promise to) suffer detriment to self

Sufficient and Adequate Consideration

 Sufficient Consideration may be almost anything of value
 Although consideration must be sufficient, it does not have to be adequate
o Adequate Consideration has essentially the same value as the consideration for
which it is exchanged
o “Adequate”: exchange of value
o Law does not protect people from foolish bargains
 Forbearance to Sue is a promise not to pursue a lawsuit; is sufficient consideration if
legal claim is valid

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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
o No mutuality in this situation; past consideration is NO consideration at all
o Past consideration is not given in exchange for the other party’s consideration
o Pg 187 for examples

Pre-Existing Obligation
 Pre-Existing Obligation is an obligation that existed, but was not actually performed,
before the contract was contemplated
 There are three types:
o Pre-Existing Public Duty
 A person who owes a pre-existing public duty cannot rely upon that
obligation as consideration for a new contract
 Firefighters and police officers who are called to your office during
an emergency cannot sell their services to you under a contract
o Pre-Existing Contractual Obligation Owed to a Third Party
 Can be good consideration for a new contract
o Pre-Existing Contractual Obligation Owed to the Same Party
 The courts usually hold that the same person cannot be required to pay
twice for the same benefit
 If a promise is merely repeated, it does not provide anything new
 E.g. “I’ll perform our contract if you pay me $500 extra”

Promises Enforceable Without Consideration

 A promise is enforceable only if it is contained in a contract that is supported by
consideration. That rule is subject to two major exceptions:
o Seals
o Promissory Estoppel

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Seals
 A seal is a mark that is put on a written contract to indicate a party’s intention to be
bound by the terms of that document, even though the other party may not have given
consideration

Promissory Estoppel
 Estoppel is a rule that precludes a person from disputing or retracting a statement that
they made earlier
 Promissory Estoppel is a doctrine that prevents a party from retracting a promise that
the other party has relied upon
o Will apply only if four requirements are met:
 The representor (the party making the promise) must clearly indicate that
they will not enforce their legal rights against the representee (the party
receiving the promise)
 The representee must rely upon the statement in a way that would make
it unfair for the representor to retract their promise.
 The representee must not be guilty of inequitable behaviour. This means
that the doctrine of promissory estoppel does not apply, for example, if
the representee unfairly pressured the representor into making the
statement
 The representor’s statement must be made in the context of an existing
legal relationship

Privity of Contract
 Consideration is necessary for the creation of a contract
 Privity= a relation between two parties that is recognized by law (i.e. by blood, lease or
service)
 Privity of Contract refers to the relationship that exists between the individuals who
create a contract. Only those people are parties to the agreement, and in most
situations, only parties can sue or be sued on the contract
 Privity of Contract identifies the people who can be involved in the enforcement of a
contract
o For example, you agree to sell your car to me for $5000. You can sue me if I fail
to pay the money, and I can sue you if you fail to transfer the car
o Complications can arise if the facts involve a stranger

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  A stranger is someone who did not participate in the creation of a
contract
 Stranger (or third party): someone without privity
 Cannot sue or be sued under contract
 Irrelevant that stranger is beneficiary of contract
 “I’ll pay you $5,000 to you sister if you give me your car”
 Sister has no standing
 Exceptions to Privity of Contract
o Assignment: a process of transferring contractual rights to a third party
 The assignor transfers their rights under the contract to the assignee;
debtor now owes obligation to the assignee

Chapter 9: Representation and Terms

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Pre-Contractual and Contractual Statements
 Contractual Term is a provision in an agreement that creates a legally enforceable
obligation
 A Pre-Contractual Representation is a statement one party makes by words or conduct
with the intention of inducing another party to enter into a contract
o Objective Test: would a reasonable person have thought that the parties meant
this to be a term of the K?

Misrepresentation
 A Misrepresentation is a false statement of an existing fact that causes a recipient to
enter into a contract
 If a non-contractual statement is false, we say that one of the parties has made a
misrepresentation

Misstatement of Fact
 A misrepresentation occurs only if the speaker claimed to state a fact
 People often make non-factual statements during negotiations
o For example, they sometimes state their own opinions
o An Opinion is the statement of a belief or judgement
 For example, a person offers an opinion when they estimate the potential
future revenue of an income-earning property
 During pre-contractual negotiations, a person may describe how they (or someone else)
will act in the future
o A statement of Future Conduct is not a statement of fact; it is a statement about
a person’s future intentions
 A statement of future conduct is a misrepresentation if it is made
fraudulently or if the future conduct is based in terms of a present
intention

Silence as Misrepresentation
 There are at least six occasions when the failure to speak will amount to
misrepresentation

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 o When silence would distort a previous assertion
o When a statement is half-truth
o When the contract requires a duty of utmost good faith
o When a special relationship exists between the parties
o When a statutory provision requires disclosure
o When facts are actively concealed

Inducement
 For a statement to be actionable as a misrepresentation, the deceived party must prove
that the false statement induced the contract

The Legal Consequences of Misrepresentation

 There are two possible consequences of an actionable misrepresentation. The deceived
party may receive:
o The remedy of recission
o The right to damages

Recission
 Recission is the cancellation of a contract with the aim of restoring the parties, to the
greatest extent possible, to their pre-contractual state
o The remedy is awarded on the basis of the court’s judgement about what is best
according to the rules of reasons and justice
 Remedy:
o The remedy of recission is often accompanied by an order for restitution
 Restitution involves a giving back and taking back on both sides
o The victim of misrepresentation may be barred from rescission in certain
circumstances
 Affirmation occurs when the mislead party declares an intention to carry
out the contract or otherwise acts as though it were bound by it
 Damages:
o Damages are intended to provide monetary compensation for the losses a
person suffered as a result of relying upon a misrepresentation

Types of Misrepresentation
 Innocent Misrepresentation is a statement a person makes carefully and without
knowledge of the fact that it is false

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  Fraudulent Misrepresentation occurs when a person makes a statement that they know
is false or they have no reason to believe is true or that they have no reason to believe is
true or that they recklessly make without regard to the truth
o Liability will arise under the tort of deceit

Contractual Terms
 Contractual terms arise from statements that impose obligations under the contract

Express Terms
 An Express Term is a statement made by one of the parties that a reasonable person
would believe was intended to create an enforceable obligation

Proof of Express Terms

 If an agreement is written, oral evidence generally cannot be used to add to, subtract
from, qualify, or vary the terms of the document
o That is known as the parol evidence rule
o Parol Evidence, in this context, refers to evidence that is not contained within
the written contract
o Parol evidence rule generally means that such oral assurances are unenforceable
 There are several exceptions to the parol evidence rule:
o To rectify or fix a mistake in a contractual document
o To prove that a contract was never really formed or is somehow defective
o To resolve ambiguities in the document
o To demonstrate that a document does not contain the parties’ complete
agreement
 A Collateral Contract is a separate agreement one party makes in exchange for the
other party’s entry into the main contract

Interpretation of Express Terms

 Even if the parties agree on particular terms and write them into a document, they may
disagree on the interpretation of those words
 The Literal Approach assigns words their ordinary meaning
o Example, a university reserves the right to change fees without notice
 The Contextual Approach goes beyond the four corners of the document by looking at
the parties’ presumed intentions and their circumstances

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 o Example, a student would argue that the intent of the clause was to contemplate
an “adjustment” --- that is, a slight alteration, not a 400% increase in tuition
 The Golden Rule says that words will be given their plain, ordinary meaning unless to do
so would result in absurdity
 The Contra Proferentem Rule ensures that the meaning least favourable to the author
will prevail

Implied Terms
 A contract may also contain implied terms
o Express terms may not fully reflect intention of parties
o Parties’ remaining intentions may be implied by law
 Common law (implied by court)
 Statutory law (implied by statute)
 An Implied Term arises by operation of law, either through the common law or under a
statute

Standard Form Agreements

 Standard Form Agreements are mass-produced documents usually drafted by a party
who is in an economic position to offer certain terms on a “take-it-or-leave-it” basis
o Example, a bank does not want to negotiate a completely new contract every
time it lends money to a customer. As a matter of risk management, it is better
to avoid the risk of trouble by using a model that has been refined and tested
over the years
 An Exclusion Clause is a contractual term that seeks to protect one party from various
sorts of legal liability
o Example, an outdoors adventure company might try to use an exclusion clause
to preclude the risk of being sued by customers who are injured during their
expeditions
 Signed Standard Form Contracts:
o Signature is proof of assent to terms
 Signer bound even if document not read
 Signer bound even if terms not understood
o Possible exception: if no reasonable chance to read
 E.g. customer rushed

Boilerplate Clauses

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  A Boilerplate Clause is a standard provision that can be reused in various contractual
settings in a virtually unchanged form
 Common types of boilerplate clauses:
o Exclusion clauses
o Force majeure clauses
 Clause aims to protect the parties when part of the contract cannot be
performed because of some event that is outside of their control
o Confidentiality clauses
 Clause prevents disclosure of certain information about the agreement to
third parties
o Arbitration clauses
 Clause outlines who should act to resolve a dispute and what method of
arbitration should be used
o Jurisdiction clauses
 Predetermines the locale of the court and whose law will apply in the
event of a legal dispute between the parties
o Entire agreement clauses
 Clause is a provision stating that the entire agreement between the
parties is contained within the four corners of the contract

Exclusion Clauses
 Four Requirements for Enforceability
o Term must be clear and unambiguous
 Ambiguities interpreted against drafter
o Reasonable notice to affected party
 Heavier onus for unusual or harsh terms
o Assent by affected party
 Signature is best evidence of acceptance of clause
o Usually not enforced if unconscionable or unfair

Standard Form Ticket Contracts (I.e. no signature)

 Terms often printed on tickets and receipts
o Ski tickets
 Enforcement depends upon notice
o Reasonable notice must occur before contract is created
o Heavier burden for unusual or harsh terms
o Perhaps no burden for obvious terms
 Enforcement depends upon assent
o Signature is best evidence of acceptance

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  Generally effective even if term not read

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