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Business Law Midterm Review

Chapter 1 Law, Society, and Business

Legal systems resolve and help avoid disputes

Law sets basic standards of behaviour enforced by government and individuals
with help of government
Why do we have law?
1. To protect people/property/society and prohibit conduct that society
believes to be harmful to others
2. Gives government power to act for benefit of society
3. Regulates individuals interactions with each other
rule of law: established legal principles that treat all persons equally and that
government itself obeys
public law: regulates government conduct and relations between government and
private persons
private law: regulates relations between private persons and groups of private
Most laws evolve from basic moral principles that all people accept
legal liability: responsibility for consequences of breaking law
criminal liability: from committing an offence against government/society
e.g. murder
regulatory/quasi-criminal liability: from less serious breach pf public law,
enforced through specialized regulatory tribunals set up by government
e.g. speeding
civil liability: from breach of private law, enforced through lawsuit initiated
by victim
e.g. lawsuit against tenant not paying rent
Why is law significant for business?
Law is central to businesss interaction with its stakeholders
Businesses may face all types of legal liability if they do not comply
Too much regulation can restrict economic freedomless competitive
business for country
Business execs use legal risk management in making foreign investment
decisions (legal certainty = key factor)
legal risk: when business activities expose business to legal liability
legal audit: review of business to identify potential legal liability/risk
strategies to manage legal risk
avoid by discontinuing conduct
reduce by using quality control
transfer consequences to insurance company/consumer
absorb by factoring cost into product price and self-insuring

Who makes law?

Constitution basic law (legitimate and binding)
Legislation statutes (legislation passed by gov.) and regulations (rules by
Court decisions case law (collection of cases decided by courts)
ultravires: court finds act/provision to be outside legislatures jurisdictionbeyond
residual powers: all fields not allocated to provinces fall within federal
concurrent powers: overlapping powers of both levels of gov. to regulate
same activitiesfederal legislation prevails
Charter of Rights and Freedoms: places limits on many aspects of gov. action
and protects human rights (traditional freedoms, civil liberty, human necessities)
1. Charter entrenched in Constitution
Cannot be repealed by ordinary act of parliament/provincial
Can only be changed by consent of parliament and legislatures of
at least 2/3 of provinces containing at least 50% of population of all
2. Rights entrenched in Charter cannot be infringed upon by ordinary
To extent that statute offends right in Charter, statute declared
3. Overriding sections
Section 33 Notwithstanding clause - permits legislature to override
certain sections if statute states that it shall operate
notwithstanding those specified sections
Section 33 Sunset clause overriding section of statute expires 5
years after it comes into force unless re-enacted by legislature
4. None of rights set out in Charter is absolute
Section 1 All rights subject to such reasonable limits prescribed
by law as can be demonstrably justified in free & democratic society
burden: requirement that unless party can establish facts and law to
prove its case, it will loseonus on gov. when burden shifted
5. Charter applies to governments and governmental activities
Limited application between private persons
3 Ways to Challenge Statute/Statute can be declared invalid if:
1. Ultravires (outside relevant jurisdiction)
2. Legislation violates Charter
3. Interpretation of legislation = wrong/statute does not apply to particular
Chapter 2 The Machinery of Justice

substantive law: rights and duties that each person has in society (what)
procedural law: rules dealing with enforcement of substantive rights/duties (how)
public law (government)constitutional, criminal, taxation
private law (non-government)contracts, tort, property
common law: case-based system of law (Theory of Precedent/Stare Decisis)
o typescanon (Church), feudal (land ownership by Lords), merchant
civil law: law system involving comprehensive legislated code (Legislation)
Need for consistency and predictabilityLike cases need to be treated alike
stare decisis: to stand by a previous decision
distinguish: identify factual difference to justify different outcome than precedent
overrule: declare existing precedent no longer binding/effective
Sources of Law
o Statutes
Used to codify and modify law, authorize government programs
strict interpretation: provision applied only when facts covered
specifically by statute (content)
liberal approach: statutory interpretation that considers legislative
intent, purpose, history of statute, and context of language (context)
o Legislation Framework
passiveprohibit formerly permitted activity or remove prohibition
activegives government power to carry on program
equity: rules developed by courts of equity as exceptions to existing common law
equitable remedies: created by courts of equity when money damages did not
solve problem
specific performance: order by court of equity to carry out binding obligation
contempt of court: punishment for party refusing to obey courts order
Procedural Law: Using Courts
o Sue
citizens, non-citizens, and corporations may sue
unincorporated collectivity: group of people that cannot sue
individuals whose rights are specifically affected have standing
o Class Action: individual represents group of possible plaintiffs and
judgement decides matter for all members of class at once (e.g. group of
members can opt to get out of class
res judicata: case that has already been decided by court and
cannot be brought before court again (binds all class members)
avoiding multiple actions and inconsistent results
allowing economic access to justice
deterring wrongful behaviour of defendants
o Settlement Out of Court

settlement: out-of-court procedure where one of parties agrees to

pay sum of money or perform act in return for waiver by other party
benefitsknown outcome, quick compensation, avoids litigation
expense, insurance claims have immediate access to claims
process & settlement funds
o Procedure Before Trial
action = lawsuit
issuing = commencing lawsuit by filing claim in court
serving = providing copy of issued claim to each defendant
cause of action = event that causes legal liabilitylawsuit
statement of defence = reply to claim statement, admit/deny facts
counterclaim = claim by defendant arising from same facts as
original action by plaintiff, tried along with action
pleadings = documents filed by each party to action, info to be
proven in court
examination for discovery = parties examine each other to narrow
o Trial
admissible evidence = evidence acceptable to court
hearsay = words attributed by witness to person who is not before
reserve judgment = postpone giving decision after hearing ends
o CostsSolicitor-client fee = payment to lawyer
o Economics of Civil Litigationunwise for party to proceed with claim if it
leads to minor sum collected (legal risk management needed before
starting an action)
o contingent fee: fee paid to lawyer only if client is successful
Alternative Dispute Resolution
o arbitration: parties arbitrator adjudicates matter and parties agree to be
bound by their decision with right to appeal to court
o adjudicate: hear parties and deliver decision with reasons
o mediation: neutral acceptable third party helps parties reach settlement
with no binding decision
Legal Profession
o solicitor-client privilege: clients right to have all communication with lawyer
kept confidentialensures best legal advice
lawyer cannot be forced to reveal unless client approves
o obligations not based on agreement, consent, contract

Chapter 3 The Law of Torts

tort: wrongful act causing harm to person or property of another, identifies set of
circumstances that create right to claim
purpose of tort law is to COMPENSATE victim, NOT punish offender!
strict liability: imposed based upon causation regardless of fault
evolution of tort law
o fault of defendant: unjustifiable injurious conduct that
intentionally/carelessly disregards others interests
basis of liability = fault
justified with deterrent effect of liabilitypeople will be more
careful if they have to pay for consequences
compensation system based on fault = defectiveaccident
victims go uncompensated
o causation did defendants conductharm?
public policy: considerations/objectives that are considered beneficial to society
as a whole
o no-fault insurance: compulsory insurance that eliminates fault as a basis
for claims (e.g. auto insurance)
o workers compensation: employers contribute to fund used to compensate
workers injured in industrial accidents regardless of how it was caused
vicarious liability: liability of employer to compensate for torts committed by
employee during employment
o public policy reasons
just & practical remedyemployees have limited assets to
compensate victim
benefit burdenperson who makes profit should bear loss from tort
o exceptions
employee liable when harm results off-duty
employee liable if they delegate work to someone else without
employers consent
intentional torts: activity/conduct done deliberately, relates only to behaviour and
not resulting damage
o trespass: unlawful entering or remaining on others land without
o assault: threat of violence to person
o battery: unlawful physical contact with person
nuisance torts
o public nuisance: interference with lawful use of public amenities
o (e.g. blocking public roads)
o private nuisance: interference with occupiers (including tenants and
owner) use and enjoyment of their land (e.g. excessive noise)
courts must consider 2 issues
1. degree of interference with occupiers use & enjoyment
2. economic importance of offending activity

malicious prosecution: causing person to be prosecuted for crime without honest

belief that crime was committedrare
defamation: making an untrue statement that causes injury to anothers
o requires publication (communication of offending statement to other than
person defamed)
o libel (written) and slander (spoken)
o onus on defendant to prove truth of statement
o absolute privilege: complete immunity from liability for defamation (e.g.
members of Parliament)
o qualified privilege: immunity from liability for defamation provided
statement was made in good faith (e.g. employers reference letter)
o responsible communication on matters of public interest: defence to
defamation when publication of statement is in public interest and done
responsibly (e.g. journalists)
economic torts
o inducing breach of contract: intentionally causing one party to breach their
contract with another
o unlawful interference with economic relations: using threats to induce one
person to discontinue their business relations with another
unintentional torts: not done deliberately
o negligence: careless causing of injury to person or property of another
3 elements of proof
1. Duty of Care: relationship so close that one must take
reasonable steps to avoid causing harm to other
o Would reasonable person foresee harm?
2. Standard of Care: level of care that person must take in
o How much care is reasonable?
o Courts must balance competing interests
Degree of likelihood/severity of harm
Social utility of activity & feasibility of risk
3. Causation of Damage: injury resulting from breach of
standard care
o but for testbut for negligent conduct of
defendant, injury would not have occurred (onus on
plaintiff to prove)
o material contribution testfinds causation when
defendants behaviour creates unreasonable risk
o remoteness of damagedefendant not responsible if
too remote (unrelated/far removed from conduct)

o thin skull doctrineallows injured plaintiff to recover

all damages even though they are great than ordinary
plaintiffs (defendant takes victim as found)
o reasonable foreseeability testif type of damage
considered reasonably foreseeable, court will
compensate victim for actual damage
contributory negligence: partial defence to negligent action when
plaintiffs conduct also contributed to injuryloss will be
apportioned based on degree of fault (e.g. car accident)
mitigate: duty to act reasonably and quickly to minimize
extent of damage suffered (e.g. getting surgery after
voluntary assumption of risk: defence to negligence action
when plaintiff was aware of risk and continued with activity
anyway (e.g. medical consent forms) legal risk
management strategy
o subrogation: where one person becomes entitled to rights and claims of
another (e.g. right to claim passes to insurance company if insured)
o product liability: tort imposing liability on manufacturers for harm caused
by defective productsburden of proof on manufacturer
duty to warn: manufacturers responsibility to make users aware of
risks associated with use/misuse of product (e.g. warning labels)
remediespurpose of tort law is to compensate injured party
o damages: sum of money awarded as compensation for loss/injury
punitive/exemplaryto punish wrongdoer
o restitution: order to restore property wrongfully taken
o injunction: restraining order against person

Chapter 4 Professional Liability: Legal Challenges

Use of professional services reduces risks but results are not guaranteed (not
Liability of professionals
o Contractual Obligationsbreach of contract
o Fiduciary Duty: duty imposed on person who stands in special relation of
trust to another (e.g. doctor-patient, lawyer-client)
scope for exercise of some discretion/power
can unilaterally exercise discretion/power to affect clients
client vulnerable/at mercy of fiduciary with power
professional must act honestly, in good faith, and only in best
interests of client (complete loyalty & fidelity)
must avoid conflict of interestcannot fulfill duty if conflict

o Tort Liability
allowing tort liability expands possible plaintiffs beyond clients (e.g.
audited financial statements given to lenders and investors)
third-party liability: liability to other person who stands outside
contractual relationship (e.g. real estate agent)
deceit: intentional tort imposing liability when damage is caused by
false statement made with intention of misleading another person,
can also occur when information is deliberately concealed/withheld
fraudulent misrepresentation: intentional tort imposing liability for
incorrect statement made knowingly with intention of causing injury
negligent misrepresentation: unintentional tort imposing liability
when incorrect statement is made without due care for accuracy
and injury is caused as result
disclaimer: express statement to effect that the person making it
takes no responsibility for particular action/statement
accuracy of statementassessed as of time info was given
Standard of Care for Professionals
o professionals must take reasonable care before making representation
o compare quality of professional work with standards of profession at that
time (e.g. comply w/ GAAP)
o reasonable standard includes not omitting essential info
reliance: acting in certain way because one believed info received
detrimental reliance: worsening of ones situation after acting upon false info they
believed to be true

Chapter 5 Formation of a Contract: Offer and Acceptance

contract: voluntary legal relationship but not legal obligation, set of promises that
law will enforce (not always)
offer: description of promise one party is willing to make, subject to agreement of
other party
o brings contract into existence
o advertisement = invitation NOT offer!
o Courts look for mutual intention of parties
o offer by consumer at checkout must be accepted by seller for contract to
o offer must be communicated in any form
o still an offer if not received
o no contract if offeree not aware of offer
o cross offers = no acceptance
o no contract when work done without offer
offeror: person making offer
offeree: person to whom offer is made

standard form of contract: offer presented in printed document/notice, terms of

which cannot be changed by offeree but must be accepted as is or rejected (take
it or leave it)offeree cannot change
o offeror tempted to think about self-interests
How do courts interpret notice of terms?
o presumption offeree accepts all terms by accepting offer
o offeree must prove that she did not know of underlying terms
o offeror must prove that they took steps to bring terms to offerees attention
best proof = signed contract/written notice
o courts may find unusual terms ignored by offeree who signed, but offeror
must make effort to give notice of unusual terms by bolding
lapse: termination of offer when offeree fails to accept within specified time,
reasonable time, or when either of parties dies/becomes insane prior to
o reasonable time is dependent on circumstances
does wording indicate urgency?
Revocation must be communicated to offeree through notice of revocation to be
o exceptions
1. When offer is specified as irrevocable
2. Subsequent contract (option) made to keep offer open for specified
time in return for sum of money
counter offer = rejection and end of earlier offer
offer end in following ways: lapse, revocation, rejection/counter-offer, acceptance
elements of acceptance = certain, unconditional, positive act (e.g. handshake)
o silence can be acceptance if parties agree to that mode in advance
o offer may be made to indefinite number of people unknown to offeror even
after acceptance
o moment contract is formed, each party is bound to terms
can identify: who made offer, when communicated, when and by
whom accepted
o if offer expressly states how acceptance must be communicated, then it
must be completed in exactly that way
o postal rule = acceptance by mail communicated when sent!
properly addressed and stamped letter of acceptance in mail
can be changed to when received by offeror
revocation by mail only effective when notice received by offeree
o telephone rule = offeror must receive acceptance before they are bound
jurisdiction: province, state, or country whose laws apply to a particular situation
o where contract formed is important in deciding which law applies
o general rule = contract formed at place where acceptance becomes
mailwhen and where acceptance dropped into mailbox

telephone/e-mailwhen and where offeror receives acceptance

unilateral contract: contract in which offer is accepted by performing act/series of
acts required by terms of offer
bilateral contract: contract where offeror and offeree trade promises and both are
bound to perform
o promisor: party who accepts obligation to perform according to terms of
o promisee: party who has right to performance according to terms of
internet contracts
o traditional rules altered by statutory provisions
o internet consumer = offeree (therefore advertisement by retailer = offer)
o contract not formed until retailer communicates acceptance with
confirmation number
uncertainty in offer wording
o courts will not enforce agreement to agree
o to agree, there must by certainty about essential terms
o rule = law does not recognize contract to enter into contract!
Strategies to manage legal risks in contracts
o Offeror
advertisements should clearly state that they are not acceptable
offers should be made in writing especially in bilateral contracts
should prepare standard form contract to be used for similar
subsequent transactions
design standard form contracts in way that one-sided, onerous, or
unusual terms are brought to attention of non-drafting party
exclude advertisements, representations, or pre-contract
discussions as terms from standard form contracts
if advertising statements are important, include in terms of offer
specific time for acceptance should be set
offer should set manner (act and mode of communication) for
essential terms should be clear or have manner set for
o Offerees
ensure acceptance is made within designated time period and by
designated manner
review standard form contracts/online terms and conditions to
identify one-sided/onerous terms prior to acceptance

alter offer only when intent is to reject and make counter-offer;

clarification should be discussed with offeror prior to lapse if
intention to clarify meaning
Chapter 6 Formation of a Contract: Consideration and Intention

quid pro quo: something for something

consideration: price for which promise of other is bought, makes contract legally
bindingno consideration = no bargain
bargain: each party pays price for promise of other
forbearance: when someone has legal right to do something but promises not to
gratuitous promise: promise made without bargaining for or accepting anything in
returnno legal contract, promisee has no contractual remedy
consideration must have some value (e.g. paperclip)courts do not have task to
assess adequacy of consideration
past consideration: gratuitous benefit previously conferred upon promisorno
Where A has existing contractual duty to B, a later promise by B to pay A
something extra to perform obligation is not binding
o Performance is not good consideration for later promise
Early payment before due date is sufficient new consideration to make agreed
reduction in debt binding on creditor
quantum meruit: amount a person deserves to be paid for goods/services
provided to person requesting themequitable right not contractual
document under seal: convenant (serious promise) recording in document
containing wax seal showing that covenantor adopted document as his act and
o promise made properly under seal of promisor does not require
consideration to make it bindingseal makes legally binding
Intention to create legal relations = essential element for formation of contract
o No contract in law unless mutual intention by parties to create legally
enforceable agreement (agreement on all essential terms of deal)
o Defendant can rebut (overcome) by using reasonable bystander to testify
about parties intentionsno binding contract if they say

Chapter 7 Formation of a Contract: Capacity to Contract & Legality of Object

Who has the burden of proving essential elements of a contract?
o Plaintiff must show that there was offer, acceptance, and consideration for
o Court will presume intention to create legal relations and that:
1. defendant has capacity to make contract
2. contract is legal

legal capacity: competence to bind oneself legally

repudiate: reject/declare intention not to be bound bymust return goods
Minors (under 18 in Ontario) have general immunity from contractual liability
except for necessaries
o contract by minor is not binding on them but binding on the other side
whether or not person is aware they are dealing with minor (e.g. vendor
legally bound to sell toy to minor, but minor not obligated to buy)
o minor bound by contract for supply of necessaries but only bound by
reasonable price based on quantum meruit & not contract price
voidable contract: contract that may be rendered non-binding at option of one of
the partiesmust return other party to position they were in before contract
law protects mental person/alcoholic/drug addict in same way as minor
o additional burden of evidence on party seeking to avoid contract
must show that they were incapable of rational decision at time of
agreement and other party aware of their condition
Legality = essential element in formation of contract
o void: never formed in law
o illegal: offends public good/violates statute
o unenforceable: no court assistance/remedy available to parties
o severed: removed from contract
o contracts void by statute (e.g. Ontario Employment Standards Act)
o agreements illegal by statute (e.g. Income Tax Act)
o contracts illegal by common law and public policy
Agreements in Restraint of Trade: non-competitive agreement/restrictive
covenants in larger contractunenforceable
o restrictive covenant: promise not to carry on competing business activity
o two types of contracts
agreements between vendor and purchaser to not compete
limits: geography, time, scope court will not enforce if too
broad (e.g. cannot practice anywhere in Canada)
agreements between employer and employee to not open same
business or work for competition aftercourts will not enforce this
but will enforce restriction on marketing to previous employers
o exceptions
may be enforceable in sale of business and employment
party seeking enforcement must first prove clause is clear & unambiguous
if clause is unambiguous, must also prove that it is reasonable as to
restricted activity, geographic area, and time period
employment agreements will be subject to greater scrutiny
severance not available to cure employment contract