Business Law in Canada Canadian 11th

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 Chapter 7
The Elements of a Contract:
Capacity, Legality, and Intention
Learning Objectives

 Explain the capacity of minors

 Compare the capacity of the insane and the drunk
 Review the law for others of limited capacity
 Discuss the law relating to contracts performed illegally
 Discuss the law relating to contracts formed illegally
 Review the contractual element of intention
 Examine the requirement that contracts be in writing
 Explain the principle of part performance

Discussion

EXPLAIN THE The courts have always recognized that some people must be protected in
CAPACITY OF their contractual relations with others because they are more vulnerable. Over
MINORS the years, several categories of people have had their freedom to enter into
contracts limited or in some cases done away with altogether. The age of
majority varies from province to province, but people under that age in all
provinces are protected to some extent in their contractual relations.
Contracts with infants are voidable at the request of the infant unless they are
for items or services that are classified as “necessaries”. The adult with whom
the infant contracts, is bound. When necessities are involved, the infant must
pay a reasonable price. If services beneficial to the infant are involved (e.g.
apprenticeships) an infant is bound by that contract. In B.C. all contracts with
infants are “unenforceable” except those made enforceable by statue. An
infant who affirms a contract upon reaching the age of majority is bound by
it. Parents are generally not responsible for their children’s conduct either in
contract or tort, but infants are not protected by infancy when a tort is
involved.

COMPARE THE People who can be classified as insane are also protected in their contractual
CAPACITY OF relations. This rule also applies to the intoxicated. Intoxicated or insane
THE INSANE AND persons must not only demonstrate that they did not understand the nature
THE DRUNK
and quality of the act performed, but also that the other person knew or ought
to have known of the incapacity. They must also show that the contract was
repudiated within a reasonable time of regaining their capacity.

REVIEW THE “Indians” under the Indian Act, corporations, enemy aliens during wartime
LAW FOR and bankrupts have had their freedom to contract restricted. Importantly an
OTHERS OF undischarged bankrupt often cannot act or continue to act as a director of a
LIMITED
corporation.
CAPACITY

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DISCUSS THE When discussing legality, it is necessary to distinguish between illegality as

LAW RELATING to formation of the contract (the contract itself is illegal) and illegality as to
TO CONTRACTS performance (the contract is performed in an illegal way). An example of a
PERFORMED
lawful contract that is performed illegally is a renovation contract that is
ILLEGALLY
undertaken by contractors who are not properly licensed and who do not
obtain the necessary permits.

DISCUSS THE A reference to an “illegal contract” is illegal at the time it was formed. An
LAW RELATING illegal contract will not be enforced. It is void. Usually, when faced with a
TO CONTRACTS void contract, the court will restore the parties to their original position,
FORMED
ordering them to return any deposits advanced and property that had been
ILLEGALLY
transferred. However, because an illegal contract involves unacceptable or
immoral conduct the courts will not assist the parties by restoring them to
their original position unless one of them is innocent of any wrongdoing.

There are many examples of illegal contracts, including those formed to

commit a crime, to commit a tort or to restrain trade.

REVIEW THE The parties to a contract must have intended that serious obligations and
CONTRACTUAL rights would flow from their agreement. Where domestic relations are
ELEMENT OF involved, the court assumes that there was no intention to be bound. In
INTENTION
commercial relations the presumption is that there is an intention to be legally
bound. In other situations the court will use a reasonable person test to
determine whether intention is present.

EXAMINE THE Most contracts are verbal. There are, however, provisions in place that
REQUIREMENT require some types of contracts to be evidenced in writing to be enforceable.
THAT The Statute of Frauds requires that a contract be evidenced in writing if it
CONTRACTS BE
cannot be performed within one year, if it deals with land, if guarantees are
IN WRITING
involved, if a promise is made in consideration of marriage, or if an executor
of an estate promises to pay the debts of the estate out of personal funds.
The written document that records the details of a contract must contain
all essential terms. It may arise after the agreement has been struck or be
surmised from a compilation of documents.

EXPLAIN THE The court will waive the requirement of writing if the parties can produce
PRINCIPLE OF evidence to show that a contract dealing with an interest in land has been
PART partially performed. There are some important limitations to this principle.
PERFORMANCE
The part performance must be evidence of the existence of the contract and
consistent only with the existence of the contract.

Answers to Questions

1. “In determining whether a child has contractual capacity, the court will attempt to
determine if she actually understood the transaction.” True or false? Explain your
answer.

False. For those under the age of capacity in your province, by law they lack the legal
capacity to enter into a binding contract.

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 Chapter 7: The Elements of a Contract: Capacity, Legality, and Intention

2. Explain the circumstances in which an infant may escape liability for a contract and the
circumstances in which an infant is bound by a contract.

Infants are not bound by the contracts they enter into unless they are for necessities or are
beneficial contracts of service. But once an infant’s contract is completely performed or the
infant has paid for the goods or services, the contract cannot be voided unless there is a
complete failure of consideration.

3. What is the significance of a minor’s contract being designated as a beneficial contract

of employment or for service?

It is binding on the minor in most provinces.

4. In addition to debts incurred for necessaries, when will a minor be liable for a debt he
incurred?

This varies depending on the province. In B.C., there will be no liability other than for
student loans. In other jurisdictions it may include contracts of employment, apprenticeship
or service.

5. What are the three stages of a contractual relationship? Describe the legal situation of a
minor in each of these stages.

First stage – executory contract – the parties have entered into the contract, but the minor
has not yet received any benefit from it and has not yet paid. A minor is not bound to the
contract.
Second stage – partially executed contract – the minor has received the goods but has not yet
paid. The minor may not be bound, but must return the goods and is then entitled to a refund
of any money already paid. If the goods have been destroyed or title passed to a third party,
the vendor is still not entitled to payment, and cannot pursue the third party.
Third stage – executed contract – Minors have received benefit under the contract and have
paid. In most provinces, minors will be bound unless what they received was of no value.
If the contract is prejudicial to the interests of the minor, it will be void.

6. If there is no relevant legislation, when will the parents of a minor be responsible for the
minor’s contracts? When will they be liable for the torts of the minor?

In contract law parents are not responsible for the contracts of their children unless it can
be demonstrated that an agency relationship existed between parent and child. Similarly, in
tort law parents are not liable for the tortious conduct of their children unless it can be
demonstrated that they were negligent in their own right.

7. When can an adult sue a minor in tort even though there is a contract between them?

When the minor uses the subject matter in some way that is not anticipated under the
contract, (e.g. drag racing) and damages it, the adult can sue in tort and escape the limitations
imposed by the minor’s lack of contractual capacity.

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8. What must an insane or drunk person establish in order to escape liability under a
contract?

Each must establish that they were unable to understand the nature of the contractual
relationship and that the other person knew or should have known of that drunkenness or
insanity as determined by the application of the reasonable person test.

9. Explain what care business people must exercise when entering into contracts with
government corporations or bodies.

Crown corporations and government bodies are often empowered to enter into contracts
generally but some may have that power specifically limited by the legislation or regulations
authorizing their operations. Business people should be aware of statutory limitations to the
capacity of these bodies when dealing with them.

10. Explain four other situations where business people must be careful that those they deal
with have the capacity to contract.

Foreign governments and their representatives, bankrupts, “Indians” under the Indian Act,
and government agencies.

11. Explain the difference between a contract that is performed illegally and an illegal
contract.

An illegal contract is one that covered an illegal activity. It is unlawful and cannot be
enforced. But if the contract itself is legal, and it was only in the performance that an illegal
activity occurred, then innocent parties are entitled to the benefits of the contract.

12. What decisions can a court make if performance of a contract violates a regulatory
statute?

The legislation itself may provide for the contract being void, or other mandated outcomes,
which the courts must follow. If there are no such provisions, the court may treat the contract
as being void, but not illegal and may grant rescission. If the illegal performance can be
separated from the rest of the performance of the contract, the court may rule only that part
void and enforce the rest of the contract.

13. What are the two reasons that can cause contracts to be illegal?

Commission of some prohibited conduct set out in a statute, or immoral conduct that is
against public policy.

14. How has the law regarding the judicial treatment of illegal contracts changed?

The classic approach was that every illegal contract was deemed to be void. The court may
now sever just the illegal portion of the contract, leaving the balance of the contract
enforceable, even to the point of re-writing part of the contract.

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 Chapter 7: The Elements of a Contract: Capacity, Legality, and Intention

15. Give five examples of contracts deemed by the court to be against public policy and
describe the effect of such a designation.

At common law, these are any contracts to commit a crime or a tort, to commit immoral acts,
obstruct justice, injure the state, contracts that unduly restrain trade, restrict competition,
contracts as bets and wagers, contracts to promote litigation, contracts to injure public service
and contracts in restraint of marriage. Most of these types of contracts are void and the courts
usually will not assist the parties to return to their original positions. Some, however, such as
contracts that unduly restrain trade or restrict competition, may have only that portion of the
contract that is tainted invalidated.

16. “All contracts that restrain trade are illegal.” True or false? Explain your answer.

False. Only those contracts which unduly or unreasonably restrain trade are against public
policy. For example, when a business is sold it is often necessary to restrain the vendor’s
freedom of activity through a restrictive covenant in order to protect the value of the goodwill
in such a contract.

17. Describe the test the courts will use in determining whether the parties had an intention
to be bound when they made an agreement.

With close family relationships there is a presumption of lack of intention and in commercial
transactions there is a presumption of intention to be legally bound. In other situations a
reasonable person test is applied and the courts will give effect to the stated intention of the
parties.

18. With respect to the element of intention, explain how the courts’ treatment of domestic
agreements differs from their response to commercial transactions.

When agreements involving close family relations or friendships are involved, the courts
presume that there is no intention to be legally bound and, thus there is no contract. When a
commercial contract is involved, however, the presumption is that there is an intention to be
legally bound and this has to be disproved by the parties in order to escape a contract on the
basis of lack of intention.

19. How will the court determine if there was a contractual intention when there is a
dispute between a brother and his sister over how to operate their business?

The courts presume there is no intention to be bound if the contract is between family
members. However, if the party wishing to enforce the contract can bring forth sufficient
evidence to convince the court that they did intend to be bound, the presumption will be
rebutted and the court would enforce the contract.

20. What is the significance of a written document in contractual relations?

(1) It has important practical evidentiary effects since it will be a permanent record as to
what the parties have agreed. (2) Such a written record might be essential to satisfy the
requirements of the Statute of Frauds in order to be enforceable.

21. Explain why some people have suggested that the Statute of Frauds has led to more
frauds than it has prevented.
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The Statute of Frauds imposes a technical requirement on the parties to a contract which must
be satisfied for that contract to be enforceable. That can work to the disadvantage of either
party, not just to the benefit of the victimized party. Therefore many verbal contracts that
could be enforced between people allow one of the parties to escape because the Statute of
Frauds is not satisfied.

22. Give examples of the types of contracts currently included under the Statute of Frauds?

The answer will vary based on jurisdiction and the relevant legislation i.e. B.C. Law and
Equity Act. (1) Contracts not to be performed within one year. (2) Land dealings. (3)
Guarantees and indemnities. (4) Promises in consideration of marriage. (5) The promise of an
executor. (6) Other special statutory requirements such as the Sale of Goods Act.

23. What “evidence in writing” is required to satisfy the requirements of the Statute of
Frauds?

This is usually identification of the parties, consideration, the description of the property
involved, but may include other provisions as well.

24. “A contract that does not satisfy the Statute of Frauds is void.” True or false? Explain
your answer.

False. The contract would merely be unenforceable. If the parties have already partially
performed, or if there are other remedies that do not require the court’s involvement, the
contract would still be binding. Further self-help is available, such as exercising set-off.

25. Will a contract formed online with electronic signature be enforced by the courts? Why
or why not?

A contract formed online with electronic signature will be enforced by the courts. The
Uniform Electronic Commerce Act (UECA) has been adopted by the Uniform Law
Conference of Canada, following the lead of the United Nations, to create a more certain
legal environment for ecommerce. The governing principal of the UECA is that information
shall not be denied legal enforceability solely because it is in electronic form. The use of
electronic signatures is allowed but the signature must be created or adopted with the intent to
sign the document. However, in most provinces, this does not apply to wills, trusts, powers of
attorneys, land transfers, or negotiable instruments. Other exclusions exist as well in
individual provinces.

25. Under what circumstances will a contract falling under the jurisdiction of the Statute of
Frauds be enforceable even though it is not evidenced by writing?

If a contract relating to land has been partially performed by the parties it is not necessary to
have evidence in writing. Partial performance has to be consistent only with the existence of
the contract and therefore the mere payment of money is not enough.

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 Chapter 7: The Elements of a Contract: Capacity, Legality, and Intention

Solutions to Cases

1. National Money Mart Co. v. Tazmania Auto Sales Inc., 2001 ABPC 254.
The court held that the infant defendant lacked the capacity to endorse the cheques and
therefore would not allow the cause of action against him. The court could not find an
alternative course of action against the infant at common law (tort) or in equity.

2. Graham v. Capital Cabs Ltd., 2005 N.W.T.T.C. 6 (CanLII).

The court found that the company was contractually bound to pay Graham the sum of $2000
and would have also ordered that sum be paid on the principles of unjust enrichment and
quantum meruit. However, the court found that the agreement to provide Graham shares in
the company was unenforceable as it was not in writing as required by section 14(2) of the
Business Corporations Act.

3. Harvey v. Newfoundland and Labrador, 2005 NLTG 198 (CanLII).

The Court should not enforce the contract. The use of one’s political position to benefit
another party is illegal and known as “influence peddling”. The courts should not assist
Harvey to receive such a benefit under what would have been an illegal act.

4. Dhingra v. Dhingra, 2012 ONCA 261 (CanLII).

The public policy rule should not apply prohibiting a person from benefitting from his
criminal acts if not found criminally responsible. Since Dinghra was found to be not
criminally responsible, he was therefore also found to be not morally responsible.

5. Whitrow v. Hamilton, 2010 SKCA 7 (CanLII).

The Court of Appeal should not uphold the trial judge’s decision to sever all of the interest
from the debt obligation. Whitrow is not a loan shark. He is a businessman. Furthermore,
severing all the interest created an unjustified windfall for Hamilton. A more appropriate
approach would be for Hamilton to pay a rate of interest common at that time on the
processing fee. Hamilton had that money over that period of time which belonged to
Whitrow.

6. Steinke (o/a Muscle Mechanics MassageTherapy) v. Barrett, 2012 MBQB 49 (CanLII).

The Court should ascertain if the defendant, Barrett, is in fact harming Steinke’s business.
Also, the Court has to determine if it is right to deny Barrett the ability to earn income.
Furthermore, how can Steinke’s claim be quantified? What value of loss of clients is
attributed to Barrett locating within the 5km distance? If Steinke cannot prove that her
business has suffered from Barrett’s location, then the restrictive covenant should not be
upheld.

7. McKnight v. Grant (2009), 340 N.B.R. (2d) 386 (C.A.), 2009 NBCA 4 (CanLII).
The Court of Appeal held that the agreement to re-convey the cottage was not subject to the
Statute of Frauds. The court stated that “(a)lthough there are no cases in this Province on
point, as a matter of policy, the application of the Statue of Frauds must be restricted to its
original purpose (to prevent perjury and fraud) and not to be invoked as a tactical measure to
avoid an otherwise enforceable bargain.”

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8. Leoppky v. Meston, 2008 ABQB 45 (CanLII)

The electronic emails suggests there was sufficient writing to satisfy the Statute of Frauds.
The emails were electronically signed by Meston and although signed just by her first name,
showed her connection to the emails. Electronic signatures are considered agreement to a
contract when the signature is created or adopted with the intention to sign the document.
Assuming the Court found there was an agreement between the two parties, the agreement
does comply with the Statute of Frauds.

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