Instructions Specific to This Exam

1. This examination contains four questions of unequal value, worth a total of 100 marks.

2. Suggested time allocations are provided for guidance only. Candidates remain responsible for managing their examination time.

3. You will be assessed primarily on your knowledge and application of the cases, principles and materials contained in the assigned Contracts readings, together with your ability to:

   • identify the contractual issues raised by the facts;

   • state the relevant legal principles accurately;

   • apply those principles closely to the facts;

   • assess competing arguments; and

   • reach reasoned conclusions.

4. No marks are awarded for merely reproducing or summarizing the facts. Use the facts in your legal analysis.

5. Each question is independent. Do not import facts from another question.

6. In analyzing contract formation, distinguish among:

   • an offer;

   • an invitation to negotiate;

   • acceptance;

   • counter-offer;

   • request for clarification;

   • revocation;

   • and acceptance by words or conduct.

7. Where a promise is said to remain open for a fixed period, consider whether it is merely a revocable offer or whether a separate enforceable commitment exists to keep the offer open.

8. Do not assume that leaving some matters for future agreement automatically makes a contract void for uncertainty. Consider:

   • whether the allegedly incomplete matter is essential;

   • whether the agreement supplies an objective standard or mechanism;

   • whether the parties objectively intended to be bound; and

   • whether subsequent conduct assists in determining that intention.

9. Where a contract is expressed to be conditional upon a future event, distinguish between:

   • a condition affecting whether contractual obligations arise;

   • a contractual termination right;

   • and a condition that may be waived or satisfied by the parties’ subsequent conduct.

10. In questions concerning consideration, identify:

• • the relevant promise;

  • what was requested in exchange for that promise;

  • whether the alleged consideration moved from the promisee; and

  • whether an existing legal duty affects enforceability.

11. Keep consideration and privity analytically distinct. A promise may be supported by consideration and yet raise a separate question concerning who has the legal right to enforce it.

12. Where a third party seeks the benefit of a contractual provision, consider whether the ordinary privity rule applies and whether any recognized exception permits that third party to rely upon the provision.

13. Where mistake is alleged, consider:

• • what fact was mistaken;

  • whether both parties shared the mistake;

  • how fundamental it was to the bargain;

  • whether the contract itself allocated the relevant risk; and

  • whether another contractual doctrine provides the more appropriate analysis.

14. Frustration concerns a supervening event occurring after formation. Do not confuse frustration with:

• • a bad bargain;

  • unexpected expense;

  • a risk the contract allocated to one party;

  • or a circumstance existing when the contract was made.

15. In addressing protection of weaker parties, do not assume that inequality in wealth or bargaining strength alone invalidates an agreement. Apply the relevant equitable doctrine to the actual circumstances in which the agreement was made.

16. Where a third-party guarantee is involved, distinguish the contractual obligations of:

• • the principal debtor;

  • the creditor;

  • and the guarantor.

17. Unless required by the facts, do not discuss:

• • tort liability;

  • consumer-protection statutes;

  • corporate law;

  • secured transactions;

  • or procedural matters.

18. Full citations are unnecessary. Where authority is relevant, identification of the case or principle with sufficient precision is enough.

19. Answer the question actually asked. Avoid generic essays or memorized lists of contract doctrines not reasonably raised by the facts.

20. Write clear and organized answers in complete sentences.

QUESTION ONE

30 marks — suggested time: 54 minutes

FACTS

Wintermere Data Infrastructure Inc. (“Wintermere”) operates large data centres in Ontario.

It plans to open a new facility in October and requires a backup electrical system capable of operating the entire facility during prolonged grid outages.

After several weeks of negotiations, Solvane Power Systems Ltd. (“Solvane”) sends Wintermere a document dated April 2 entitled:

PROPOSAL 24-117

The proposal provides that Solvane will supply:

• four industrial backup generators;

• four battery-storage modules;

• control software;

• installation;

• testing; and

• commissioning

for a total price of $2.8 million.

The document states:

“The System shall be capable of supplying not less than 8 MW of continuous backup output under the Site Load Study.”

It provides for:

• equipment delivery by August 15;

• commissioning by September 1;

• a two-year equipment warranty; and

• payment of 30% upon acceptance, 50% upon delivery and 20% upon commissioning.

The proposal also states:

“Final site-integration details, including cable routing, cabinet positioning and interface configuration, shall be agreed following completion of the Site Load Study.”

Another provision states:

“This Proposal may be accepted by delivery of a signed purchase order received by Solvane no later than April 12.”

Finally:

“In consideration of payment of a $20,000 reservation fee, Solvane agrees that this Proposal will remain open for acceptance until 5:00 p.m. on April 12. The reservation fee will be credited against the purchase price if the Proposal is accepted and will otherwise be retained by Solvane.”

Wintermere pays the $20,000 on April 3.

Solvane confirms receipt.

On April 8, Solvane’s sales director, Oren Pell, telephones Wintermere’s chief operating officer, Celestine Rook, and says:

“Another customer wants these generators and is willing to pay more. Unless you commit today, I’m pulling our proposal.”

Celestine responds:

“You were paid to keep it open until Friday.”

Oren replies:

“Talk to your lawyers if you want. I’m telling you where we stand.”

On April 9, Wintermere emails Solvane a signed purchase order.

The purchase order begins:

“Wintermere hereby accepts Proposal 24-117 for the supply and installation of the System at the price and on the terms set out therein.”

At the end of the document, Wintermere adds:

“Please also confirm that:

(a) annual System availability will be at least 99.95%; and
(b) delay beyond September 1 will result in compensation of $20,000 per day.”

Solvane’s proposal had contained no annual availability guarantee and no stipulated amount for delay.

Two hours later, Oren replies:

“Order confirmed. We can commit to the 99.95% availability standard. Legal will not agree to $20,000 per day, but we can work out reasonable delay consequences before commissioning. Production slot 7B is yours.”

The next morning Solvane sends an invoice for the contractual 30% payment.

The invoice states:

“30% deposit — Proposal 24-117 / Wintermere Order.”

Wintermere pays $840,000.

Solvane begins manufacturing the equipment.

The Site Load Study

The Site Load Study is completed on April 25.

It confirms that the system must supply 8 MW continuously.

The parties quickly agree upon:

• cable routing;

• battery placement; and

• connection points.

They do not agree on the type of exterior acoustic enclosure.

Wintermere wants a premium enclosure that reduces generator noise to 55 dBA.

Solvane proposes its standard 65 dBA enclosure.

The premium enclosure costs approximately $140,000 more.

Proposal 24-117 does not specify a numerical noise standard.

The surrounding municipality’s bylaw permits up to 70 dBA at the property boundary.

Wintermere says:

“A first-class data centre obviously requires the quiet enclosure.”

Solvane responds:

“The contract requires an 8 MW backup system. Noise treatment was one of the integration details to be agreed later.”

Utility Approval

Proposal 24-117 also contains this clause:

“This transaction is conditional upon Wintermere obtaining utility interconnection approval on or before May 15. If approval has not been obtained by that date, either party may terminate this Agreement by written notice delivered within five business days thereafter. If neither party gives such notice, the condition shall be deemed waived.”

Utility approval is delayed.

It is finally granted on May 18.

Neither party gives termination notice.

On May 20, Solvane orders $600,000 of custom transformers for the Wintermere project.

On May 24, Wintermere pays another $100,000 after Solvane requests an advance toward imported equipment.

The Dispute

By July, market prices for industrial generators have increased sharply.

Solvane concludes that it could sell the equipment to another customer for approximately $700,000 more.

It tells Wintermere that there is no binding contract because:

1. Oren withdrew Proposal 24-117 before Wintermere accepted it;

2. Wintermere’s April 9 purchase order was a counter-offer because it added the availability and delay provisions;

3. the parties never agreed on an acoustic enclosure and therefore never reached complete agreement;

4. the utility condition was not satisfied by May 15; and

5. in any event, the discussions show that significant matters were still being negotiated.

Wintermere insists that a contract exists and demands performance.

QUESTION

Advise Wintermere and Solvane concerning whether a binding contract was formed, the terms of any resulting agreement and the effect of the utility-approval condition.

30 MARKS

QUESTION TWO

25 marks — suggested time: 45 minutes

FACTS

Braemont Museum Foundation (“Braemont”) operates a large public art museum.

It retains Quillon Exhibition Services Ltd. (“Quillon”) to transport and install an international sculpture exhibition.

The contract price is $1.6 million.

Quillon regularly performs projects through specialist subcontractors.

The Braemont-Quillon contract states:

Clause 22

“Quillon’s total liability arising from loss of or physical damage to artwork during performance of the Services shall not exceed $250,000 in respect of any one occurrence.”

Clause 23 provides:

“Every exclusion, limitation, defence and protection available to Quillon under this Agreement is intended to extend to every employee, agent and independent subcontractor engaged by Quillon in performing the Services. Quillon contracts for those protections on its own behalf and for the benefit of such persons.”

Braemont negotiated both clauses with legal advice.

Quillon retains Ternwell Rigging Ltd. (“Ternwell”) to perform the heavy lifting.

The subcontract requires Ternwell to complete all rigging by June 20.

The Completion Bonus

One week before work begins, Braemont’s director becomes concerned that the opening gala will fail unless all sculptures are installed by June 20.

She meets directly with Ternwell’s president.

She says:

“If your company gets all rigging finished by June 20, Braemont will pay Ternwell an additional $75,000.”

Ternwell’s president replies:

“We are already required to finish by June 20 under our contract with Quillon.”

Braemont’s director says:

“That does not matter to me. I want your company personally committed to us. Finish on time and the $75,000 is yours.”

Ternwell hires additional weekend workers at its own expense.

It finishes the rigging by June 20.

Braemont refuses to pay the $75,000.

It argues:

“Ternwell gave us nothing it was not already legally required to do.”

Damage to a Sculpture

During installation, a Ternwell crane operator incorrectly secures a lifting strap.

A sculpture falls and is damaged.

The cost of restoration and resulting loss in value is approximately $1.1 million.

Braemont sues Ternwell directly.

Ternwell accepts responsibility for the operator’s negligence but says Clause 22 limits its exposure to $250,000 because Clause 23 expressly extends the protection to subcontractors.

Braemont responds:

“Ternwell did not sign our contract. Contractual rights and defences belong only to the parties.”

The Conservation Payment

The Braemont-Quillon agreement also contains this provision:

Clause 31

“Upon successful opening of the exhibition, Quillon shall pay $60,000 to the Verdant Art Conservation Society in support of sculpture restoration programs.”

The Society is not a party to the agreement.

Braemont publicly announces the promised funding.

Relying on the announcement, the Society orders specialized conservation equipment costing $42,000.

The exhibition opens successfully.

Quillon later refuses to pay the $60,000.

It says the clause was inserted only:

“as a goodwill gesture during negotiations.”

The Society threatens to sue Quillon.

Braemont also wants to know whether it can compel Quillon to make the promised payment.

QUESTION

Advise Braemont, Quillon, Ternwell and the Verdant Art Conservation Society concerning the enforceability of the relevant promises and contractual protections.

25 MARKS

QUESTION THREE

25 marks — suggested time: 45 minutes

FACTS

This question contains two independent transactions.

Transaction A — The Film Library

Gannet House Media Ltd. (“Gannet”) owns a large archive of Canadian documentary films.

Orchardline Streaming Corp. (“Orchardline”) wishes to acquire the exclusive Canadian streaming rights to a collection of 400 films.

Both companies rely on Gannet’s electronic rights-management database.

The database indicates that Gannet controls exclusive Canadian streaming rights to every film in the collection until at least 2034.

After three months of negotiations, the parties sign an agreement on January 12.

Orchardline agrees to pay $2.4 million for a ten-year exclusive licence over all 400 films.

The agreement contains the following provision:

“Orchardline acknowledges that it has reviewed the chain-of-title materials made available by Gannet and has conducted such due diligence as it considers appropriate.”

It also states:

“Gannet makes no representation concerning the expected audience, profitability or commercial value of the Library.”

The agreement contains no express warranty that Gannet presently owns the streaming rights listed in the electronic database.

Neither party knows that, eight months before the agreement was signed, the rights to 235 of the 400 films had automatically reverted to the original producers.

The reversion occurred because Gannet’s predecessor failed to exercise a contractual renewal option.

An employee had mistakenly updated the electronic database to show that renewal had occurred.

No one discovers the error until after Orchardline pays the first $1 million.

The 235 films include most of the archive’s best-known titles.

The remaining 165 films can legally be streamed, but Orchardline’s valuation expert says they are worth only about $650,000 on their own.

Orchardline says:

“We both contracted on the basis that Gannet controlled a 400-film library. The subject matter we actually received is fundamentally different.”

Gannet responds:

“You agreed that you had conducted your own title review. The contract placed due diligence on you. This is simply a bad assumption made by both sides.”

Assume that neither party made a fraudulent or negligent misrepresentation.

Transaction B — The Cryogenic Analyzers

Helixmere Clinical Systems Ltd. (“Helixmere”) contracts with Arden Vale Scientific Inc. (“Arden Vale”) for five specialized cryogenic analyzers.

The total contract price is $3.5 million.

The machines are to be delivered by December 1 for use in a new clinical testing program.

The agreement requires each machine to incorporate a QX-9 cryogenic sensor manufactured by Norheim Technik GmbH in Germany.

The QX-9 specification was selected because Helixmere’s existing regulatory validation was based on that particular sensor.

The contract states:

“Arden Vale is responsible for procurement of all components required to manufacture the Analyzers.”

It also provides:

“No component substitution may be made without Helixmere’s written approval.”

Four months after formation, the European Union unexpectedly prohibits the export of QX-9 sensors to Canada because the technology has been added to a controlled dual-use list.

The parties agree that:

• the export prohibition was not reasonably contemplated when they contracted;

• no lawful source of unused QX-9 sensors is available outside Europe; and

• the ban is expected to remain in place for at least two years.

A Japanese manufacturer produces a technically comparable sensor known as the QX-11.

Arden Vale could redesign the analyzers to use QX-11 sensors.

Doing so would:

• increase Arden Vale’s cost by approximately 45%;

• delay completion by about five months; and

• require Helixmere to obtain new regulatory validation before clinical use.

Helixmere says it will not approve the substitution because it needs the analyzers by December.

Arden Vale announces that the contract has been frustrated.

Helixmere responds:

“You promised to procure the parts. A supply-chain problem is your risk.”

QUESTION

Advise:

A. Orchardline and Gannet concerning the effect of their shared mistake about the film rights; and

B. Helixmere and Arden Vale concerning whether the analyzer contract has been frustrated.

25 MARKS

QUESTION FOUR

20 marks — suggested time: 36 minutes

FACTS

Harbour Vale Hospitality Ltd. (“Harbour Vale”) operates two independent boutique hotels.

Its sole shareholder and president is Lenora Vey.

A major renovation unexpectedly exceeds budget.

Harbour Vale needs $300,000 within 48 hours to meet payroll and prevent its general contractor from suspending work.

Its bank refuses additional financing.

Lenora approaches Redfern Capital Partners Ltd. (“Redfern”), a private commercial lender.

Redfern knows:

• Harbour Vale’s bank has refused further credit;

• payroll is due in two days;

• the renovation contractor is threatening to leave the project;

• and another lender would probably require at least three weeks to complete due diligence.

Redfern offers to advance $300,000 immediately.

Its proposed agreement requires Harbour Vale to:

• repay $465,000 in six months;

• pay all of Redfern’s legal and monitoring costs;

• grant Redfern an option to acquire 25% of Harbour Vale’s voting shares for $10 if any payment is more than ten days late; and

• provide a personal guarantee from Lenora’s uncle, Edric Vey.

Lenora protests that the terms are:

“extreme.”

Redfern’s representative says:

“We lend where banks will not. These are the terms. The offer disappears at 5:00 p.m.”

Lenora asks for two days to obtain legal advice.

Redfern refuses to extend the deadline but says:

“You are free to call a lawyer before five if you can find one.”

Lenora signs for Harbour Vale at 4:40 p.m.

She does not obtain legal advice.

Redfern transfers the $300,000 the next morning.

Edric’s Guarantee

Edric is not involved in Harbour Vale.

He receives no money from the loan.

Lenora asks him to attend Redfern’s office and sign the guarantee.

Before the meeting, she tells him:

“It is just a backup form so Redfern can release the money. The hotels are worth far more than the loan. You will never have to pay anything.”

At Redfern’s office, Edric says to Redfern’s representative:

“Lenora says this is basically just paperwork and there is no real risk to me.”

The representative responds:

“It is a legal guarantee. You should read it.”

Edric says:

“I trust Lenora. I do not understand financing documents.”

The representative does not explain that the guarantee makes Edric liable for:

• the full debt;

• interest;

• enforcement expenses; and

• Redfern’s legal costs.

The representative does not recommend independent legal advice.

Edric signs.

The meeting lasts approximately twelve minutes.

Default

Five months later, Harbour Vale experiences another cash-flow shortage.

A monthly payment is 14 days late.

Redfern:

1. demands the full outstanding amount;

2. purports to exercise the option to acquire 25% of Harbour Vale’s voting shares for $10; and

3. demands payment from Edric under the guarantee.

By that time, Harbour Vale has already paid Redfern approximately $110,000 in interest and fees in addition to part of the principal.

Harbour Vale and Lenora argue that the financing agreement is unconscionable.

Redfern responds:

“This was a commercial transaction between businesspeople. Lenora knew the terms were harsh and signed because she needed the money. Financial pressure does not make a contract unconscionable.”

Edric says his guarantee should also be set aside.

Redfern responds:

“We never lied to him and never pressured him. Any influence came from his own niece.”

QUESTION

Advise Harbour Vale, Redfern and Edric concerning the enforceability of the financing agreement and Edric’s guarantee under the doctrines protecting weaker contracting parties.

20 MARKS