CANADIAN BUSINESS CONTRACTS HANDBOOK

Nishan Swais, LLB

Self-Counsel Press(a division of)International Self-Counsel Press Ltd.Canada USA

Copyright©2011 by International Self-Counsel Press Ltd.

All rights reserved.

No part of this book may be reproduced or transmitted in any form by any means — graphic, electronic, or mechanical — without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review. Any request for photocopying, recording, taping, or information storage and retrieval systems of any part of this book shall be directed in writing to Access Copyright, the Canadian Copyright Licensing Agency. To contact them call 1-800-893-5777 (extension 235) or go to their website, www.accesscopyright.ca, for more information.

Self-Counsel Press acknowledges the financial support of the Government of Canada through the Canada Book Fund (CBF) for our publishing activities.

First edition: 2011

Library and Archives Canada Cataloguing in Publication

Swais, Nishan, 1963-Canadian Business Contracts Handbook / Nishan Swais.

ISBN 978-1-55180-840-6

1. Contracts. 2. Contracts — Popular works. I. Title.K840.S83 2008 346.02 C2008-906739-8

Self-Counsel Press(a division of)

International Self-Counsel Press Ltd. 1481 Charlotte Road 1704 North State Street North Vancouver, BC V7J 1H1 Bellingham, WA 98225 Canada USA

iii

Preface xi

Introduction xii

Part I: Understanding Contracts 1

1 What Is a Contract? 3 1. TheOriginoftheWordContract 3 2. TheThreeComponentsofaContract 4 2.1 Offer 4 2.2 Acceptance 6 2.3 Consideration 10 3. Exceptions 12 3.1 Agreementscontrarytolaw 12 3.2 Lackofcapacity 13 3.3 Lackofmutuality 13 4. Summary 13

2 What Does a Contract Do? 16 1. Performance 16 2. Privity 17 2.1 Capacity 18 2.2 Attestation 20 2.3 Privityandadutyofcare 20 3. Breach 21 3.1 Compensation 22 3.2 Contributorybehaviour 23 3.3 Specificperformance 23 3.4 Anticipatorybreach 25 4. Exceptions 25 4.1 Mistake 26 4.2 Misrepresentation 26 4.3 Frustration 28 4.4 Unconscionability 28

Contents

iv Canadian Business Contracts Handbook

5. Summary 28 5.1 Establishesyourrightsandobligations 28 5.2 Allocatesrisk 29 5.3 Providesalegalbasisforcompensation 29

3 What Does a Contract Look Like? 30 1. FormsofContract 30 1.1 Letteragreement 31 1.2 Formalagreement 31 1.3 Otherformsofagreement 32 2. Summary 33

Part II: the Formal elements of a Written Contract 45

4 the Date 47 1. WhyYouMustDateYourContract 47 2. HowtoDateYourContract 48 3. TheRelationshipbetweenSigningandDatingaContract 50 4. TheContractTerm 51 5. Summary 52

5 the Parties 53 1. WhyYouMustNamethePartiestotheContract 53 2. IdentifyingthePartiestotheContract 53 2.1 Howtoidentifytheotherparty 53 2.2 Whenmorethananameisneededtoidentifytheotherparty 54 2.3 Investigatingtheotherparty 55 3. NamingthePartiestotheContract 56 3.1 Whichpartiesshouldbenamed? 56 3.2 Usetheparties’legalnames 57 3.3 Whereinthecontractshouldthepartiesbenamed? 58 4. Attestation—SigningtheContract 59 5. Summary 60

6 the terms 67 1. WhatAretheTermsofaContract? 67 2. WhatKindsofTermsDoesaBusinessContractContain? 68 2.1 Background 69 2.2 WhatthePartiesWillDo 69 2.3 Time 70 2.4 Payment 70 2.5 Warranties 70 2.6 Conditions 73

Contents v

2.7 Termination 75 2.8 Otherterms 77 3. SchedulesandExhibits 78 4. Summary 79

7 Liability terms 83 1. WhatAretheLiabilityTerms? 83 2. LimitingtheRemediesAvailableforBreach 84 2.1 Wherelimitingremediesisnotappropriate 84 2.2 Limitingtheremediesavailableforbreachofwarranty 85 2.3 Servicecredits 86 2.4 Limitingtherighttoterminateforbreach 87 2.5 Protectingyourselffromlimitationsofavailableremedies 87 3. SettingaDamagesCap 88 3.1 Justificationsforadamagescap 89 3.2 Issuestoconsiderwhenincludingadamagescap 90 4. ExcludingTypesofDamages 91 4.1 Generaldamagesversusspecialdamages 92 4.2 Thepracticalapproachtoexcludingdamages 92 4.3 Exclusionsfromtheexclusionofdamages 94 5. Indemnities 94 6. LiabilityTermsandtheCourts 95 7. Insurance 96 8. Summary 97

8 the Boilerplate and What It Means 102 1. WhatIsMeantbytheBoilerplate? 102 2. PrinciplesofInterpretation 103 2.1 Termsconcerninghowthecontractisstructured 103 2.2 Termsconcerninghowthecontractiswritten 104 2.3 Termsconcerningfinancialandcommercialmatters 106 3. GeneralTerms 109 3.1 Termsconcerningtheenforcementofthecontract 109 3.2 Termsconcerningtherelationshipoftheparties 111 3.3 Termsconcerningattestation 114 4. Summary 114

Part III: the elements of style 117

9 Gather the Facts 119 1. WhyYouNeedtoGathertheFacts 119 2. WhyYouNeedtoWritetheFactsDown 120

vi Canadian Business Contracts Handbook

3. HowtoEnsureThatYouGathertheRelevantFacts 121 3.1 Who? 122 3.2 When? 122 3.3 How? 123 3.4 Where? 124 3.5 Why? 124 3.6 What? 125 4. GettheBigPicture 126 5. Summary 127

10 Work with the Law 130 1. WorkingwiththeSubstantiveLaw 130 1.1 Books 131 1.2 Casereports 132 1.3 Government 132 1.4 TheInternet 133 1.5 Lawyer 133 2. WorkingwithDraftingandInterpretationPrinciples 134 2.1 Languagetracing 134 2.2 Usingtemplates 136 2.3 Definingterms 137 2.4 Rulesofinterpretation 137 2.5 Boilerplate 138 3. Summary 138

11 Use Plain Language 139 1. WhatIsPlainLanguage? 139 1.1 Clarity 139 1.2 Conciseness 140 1.3 Readability 140 2. RulesofPlain-LanguageWriting 141 3. WhattoAvoidinPlain-LanguageWriting 142 4. KeepItPlainandSimple,butNotTooPlainandSimple 143 5. Summary 144

12 Define Keywords and Phrases 151 1. WhyShouldYouDefineWordsandPhrases? 151 2. HowDoYouKnowWhichWordsorPhrasestoDefine? 152 3. HowtoDefineKeywordsandPhrases 153 3.1 Rulesforconstructingdefinitions 153 3.2 Formalaspectsofpresentingadefinitioninacontract 155 4. Summary 157

Contents vii

13 Use (But Don’t Misuse) Modifiers 161 1. UsingModifiersinaContract:ProceedwithCaution 161 2. WhentoUseaModifier 161 3. HowtoChooseanAppropriateModifier 163 4. UsingModifiersStrategically 165 5. FalseAdvertisingandUnfairCompetitionLaws 166 6. Summary 166

14 Write with Authority 169 1. UsetheActiveVoice 169 2. LimittheUseofPronouns 170 2.1 Whatisapronounandwhenshouldyouuseone? 170 2.2 Pronounsandgender 171 2.3 Indefinitepronouns 172 3. FollowtheRule,“OneIdea:OneSentence.” 172 3.1 Avoidtherun-onsentence 172 3.2 Useconjunctionsproperly 172 3.3 Minimizetheuseofsubclauses 173 3.4 Keepusingtheactivevoice 173 4. MaintainConsistency 174 4.1 Achievingconsistency 174 5. Summary 176

Part IV: Final Considerations 177

15 Add the Finishing touches 179 1. WhatAretheFinishingTouches? 179 1.1 Proofreadyourcontract 180 1.2 Edityourcontract 180 1.3 Neatnesscounts 181 1.4 Useasecondpairofeyes 181 1.5 Sleeponit 182 2. WhytheFinishingTouchesAreImportant 182 3. DeliveringtheContracttotheOtherParty 183 3.1 Waysofdeliveringacontract 183 3.2 Thingstoconsiderwhendeliveringacontract 184 4. Summary 184

16 Reading Contracts 186 1. WhyItIsImportanttoLearntoProperlyReadaBusinessContract 186 2. HowtoProperlyReadaContract 187 3. RedliningaContract 187 4. Summary 190

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17 the Amending Agreement 193 1. WhatIsanAmendingAgreement? 193 2. WhatDoesanAmendingAgreementDo? 194 3. WhatDoesanAmendingAgreementLookLike? 194 4. WordsofCautionRegardingtheAmendingAgreement 196 4.1 Theneedtoreachagreement 196 4.2 Formsofamendingagreement 196 4.3 Estoppel 197 5. Summary 197

Conclusion 204 1. PartI:UnderstandingContracts 204 2. PartII:TheFormalElementsofaWrittenContract 205 3. PartIII:TheElementsofStyle 205 4. PartIV:FinalConsiderations 206 5. BeCreative 207

samples 1 LetterAgreement 34 2 FormalAgreement 37 3 StandardFormAgreement 61 4 MultipartyAgreement 63 5 LetterofIntent 80 6 LiabilityTerms 98 7 InsuranceTerms 100 8 PresentingtheBoilerplate 116 9 Plain-LanguageWordsandPhrases 14710 LegalWordsandPhrases 14811 CommonlyUsedDefinitions 15812 UsingModifiers 16713 Redline 19114 AmendingAgreement(Formal) 19815 AmendingAgreement(Letter) 201

Worksheets 1 Quiz:ContractorNoContract 14 2 FactGathering 128 3 Plain-LanguagePracticeSheet 145 4 FinishingTouchesChecklist 185

ix

Laws are constantly changing. Every effort is made to keep this publication as current as pos-sible. However, the author, the publisher, and the vendor of this book make no representa-tions or warranties regarding the outcome or the use to which the information in this book

NOTICE TO READERS

is put and are not assuming any liability for any claims, losses, or damages arising out of the use of this book. The reader should not rely on the author or the publisher of this book for any pro-fessional advice. Please be sure that you have the most recent edition.

I wish to thank my son, Kai, for his help in preparing this book. As well, my daughter, Julia, deserves thanks for her heartfelt encouragement.

This book is dedicated, with love, to my wife, Masae.

“A good lawyer is one who, before crossing a one-way street, looks both ways.”

xi

Imagine being able to write your own business contracts with the skill and confi dence of a trained commercial lawyer. This book is designed to help you do that. By guiding you through the principles and practices employed by lawyers whenever they put pen to paper, you will be able to fulfi ll many of your most important needs concerning the day-to-day operation of your busi-ness. What’s more, you will be able to — • develop an appreciation for the thought

processes employed by lawyers when writing business contracts,

• understand how the use of language — and its misuse — can affect the rights and obligations of your business, and

PREFACE

• discover how language works in a legal context to create certainty in your busi-ness affairs.

This book was written with you, a business-person, in mind. No knowledge of the law or any legal training is required in order for you to obtain the full benefi t of the pages to fol-low. We start with the basics — the things you need to know about contracts before you even pick up your pen — and then, in a practical, straightforward manner, lay out the principles and practices that go into writing contracts.

Our goal is a simple and useful one for any-one who owns, operates, or manages a business: Learn to write your own business contracts.

xii Canadian Business Contracts Handbook

Contracts are the backbone of every business relationship. If you own or operate a business, you know that contracts arise on a daily basis in any number of situations. Yet even the most confi dent and accomplished businesspersons will balk at the thought of actually writing a contract. Reading one can also be intimidating. As a result, the prevailing attitude among most businesspersons is simply to go without a writ-ten contract or just leave it for the lawyers.

However, it doesn’t have to be that way. This book was written to help remove the fear and mystery of writing business contracts by teaching you how to write your own.

1. Why Learn to Write Your Own Business Contracts?

Why is it important to you, as a businessperson, to learn how to write your own business contracts?

INTRODUCTION

1.1 Running a business means working with contracts

Business people are required to work with con-tracts all the time. From issuing purchase orders to dealing with customer complaints; from fi ll-ing out order forms to responding to landlord notices; from agreeing with suppliers to dis-agreeing with competitors; from hiring to fi ring; and from suing to settling; contracts pervade every aspect of what you, as a business owner, operator, or manager do. If you’re in business, you’re involved with contracts. It’s that simple.

It is important, therefore, that every busi-nessperson know something about this element of business affairs. Learning to write your own business contracts is the best way to accomplish this. Even a basic understanding of the doctrine of contractual “privity” — the legal way of saying that only those persons that agree to a

Introduction xiii

contract are bound by its terms (see Chapter 2: What Does a Contract Do?); the use and abuse of modifiers (see Chapter 13: Use (But Don’t Misuse) Modifiers; and, the benefit of writing in the active voice (see Chapter 14: Write with Au-thority), can go a long way toward helping you to better ensure the smooth and successful conduct of those affairs.

1.2 Controlling your business costsLearning how to write your own business con-tracts can also help you to better control your business costs.

Consider you are someone who operates a residential roofing business. By writing your own contracts, you can take direct control over your business obligations to your customers. For instance, you could write a contract that says that the customer is responsible for the se-lection of the roofing tiles. That way, if the tiles are deficient, the customer will not be able to claim that you, the roofer, are at fault and seek a refund from you on that basis.

As well, because a roofing business provides essentially the same service to every customer, it may be possible for the owner to create a “standard form” contract that he can use for all of his customers. This can save both the time and expense of repeated visits to a lawyer, a tax advisor, or other professional.

If you are in a highly specialized industry, say auto parts manufacturing or herbal remedies supply, you will have no choice but to obtain the assistance of a lawyer to help you navigate the complex statutory and regulatory framework governing your industry. In the case of the auto parts manufacturer, this might relate to safety standards. In the case of herbal medicines, cor-rect package labelling might be the issue.

Yet, as you know, lawyers can be expensive, especially for a small- or mid-sized business.

However, if you can meet a lawyer halfway by doing the lion’s share of the contract writing — specifically, creating a first draft of a contract and focusing on what you can contribute to its contents — it will allow your lawyer (tax advi-sor, etc.) to focus on the specialized input he or she must provide, rather than also having him or her spend time on the more general matters you have already included. That can go a long way to further reducing your business costs.

1.3 Bringing the law “onside”Much of how the law affects you and your busi-ness depends on what you say and, just as impor-tantly, how you say it. The law expresses itself in language. More than that, language is the source of the law’s authority. After all, whether you’ve breached a contract, violated a bylaw, properly dismissed an employee, or committed a crime it all comes down to what you did (or plan to do) and what the law says you can do. Therefore, knowing what to say in a contract and how to say it is key to determining whether you will have the law on your side, and this will directly af-fect the success of your business.

1.4 Ensuring certainty in your business affairs

Perhaps the most important reason to learn how to write your own business contracts is to ensure certainty in managing your business af-fairs. By writing your own contracts, you control the language that sets the terms according to which others will be legally obligated to deal with you and your business. In turn, this will enhance the success of your business by helping you to avoid disputes and ensure your business needs — as you have defined them in the con-tract — are met.

Consider the following example. Suppose you are a caterer and you are expecting delivery of

xiv Canadian Business Contracts Handbook

have now clearly established what the baker will be doing, where, and when. Simply by describ-ing the events of delivery more precisely, you have gone a long way to ensure greater certainty in the conduct of your business affairs. As well, a court will have a solid basis on which to decide any dispute with the baker in your favour. It is in this way that knowing how to write your own business contracts can contribute to the success of your business.

2. What Will This Book Teach You?The goal of this book is to teach you how to write your own business contracts. For easy ref-erence, it is divided into four parts.

2.1 Part I: Understanding contractsWe begin by teaching you what a contract is, what it does, and what it looks like. Our focus will be on business or commercial contracts (as they are also commonly referred to) and the law concerning how they are formed and what makes them enforceable. This will help to take the mystery out of writing your own contracts, which for most businesspersons is the largest psychological hurdle to overcome.

Although Part I presents a good deal of contract law and theory, it remains practical by giving many examples and straightforward explanations. Concepts such as performance, privity, and breach, which may be unfamiliar to you now, will become important for you as you take the first steps toward learning how to write your own business contracts.

2.2 Part II: The formal elements of a written contract

In Part II, you will learn the formal elements of every written business contract and how to properly make use of them when writing your own. These elements include the date, the

a cake from a baker. The cake is for a wedding you are catering. The wedding date arrives but you have not received the cake. The bride is beginning to get nervous. You check your contract with the baker. There it is in black and white: a) Cake to be delivered on June 11, 2012.

You decide that the situation merits a call to the baker: “Where is the cake you were sup-posed to deliver to me today?” Surprised, the baker responds, “It’s right here waiting for you. You were supposed to come and pick it up.”

“But,” you respond, “you were supposed to deliver it to me.”

“I am delivering it to you,” the baker might say, “ … at the store. Come and get it.”

Or the baker might respond, “I thought you were going to hire someone else to deliver it to you. Look at the contract. Where does it say that I would be delivering the cake?

The fact is, the contract doesn’t say that. Who is responsible for getting the cake to the wedding?

That question is as difficult for us to an-swer as it is would be for a judge if the dispute ever went to court. This is because, as you will learn, the law enforces agreements and, in this case, there is no agreement. The unfortunate outcome is an unhappy bride, a stain on your business reputation, and the beginning of a siz-able ulcer for you — all of which you might have avoided with a good contract.

You can write that contract. Consider the much better position you would have been in had you drafted the contract to say: b) The baker will deliver the cake to the caterer

at the reception hall located at 123 Mont-gomery Street, Salmon Arm, at 10:00 a.m. on June 11, 2012.

There is not a lot of room for misunder-standing here. Through the use of language, you

Introduction xv

business contract. This includes taking the steps of editing and proofreading your contracts so that they are ready for delivery and signature.

We then consider the flip side of everything that has come before in looking at how to read a contract as a commercial lawyer would. This skill is important because you may not always be in a position to write the first draft of the con-tract you want to sign. Reading a contract is also the first step in changing a contract by rewriting it to say what you want it to say.

We also consider how to formally change or amend a contract that is already in effect. For example, the services contract you signed last year lists your hourly consulting rate at $200. If you want to amend that contract to reflect your new hourly rate of $250, you will need to pre-pare and sign an Amending Agreement. This book shows you how to do so.

We conclude Part IV and, with it, the book, by briefly touching on the creative element pres-ent in writing contracts. Many lawyers will tell you that what is not said in a contract is often just as important as what is said. Learning to read between the lines — and write between them — is an important skill to acquire for those who truly want to “take it to the next level.”

3. Who Is This Book for?This book is written specifically for you, as a business owner, operator, or manager. It is de-signed to address your needs and is intended for you to use in your day-to-day business affairs. By reading this book and adopting its principles, you will be taking a step to ensure the ongoing success of your business.

In addition to teaching you how to write your own business contracts, this book can also be useful to you in your other business com-munications:

parties to the contract, and what are known as the contractual terms, which refer to the rights and obligations set out in the contract.

As part of our consideration of the terms, we will take a special look at “limits of liability” in order to consider how they operate to con-tractually reduce or eliminate your exposure to certain kinds of legal claims.

Finally, we will consider those terms that are often derisively referred to as the boilerplate. The boilerplate, as you will learn, is simply language that, because of its broad legal appli-cability and significance, can be found in almost every contract. We discuss what the boilerplate is, provide examples, and show you why the deri-sion is misplaced.

2.3 Part III: The elements of styleIn Part III, you will learn the elements of style that you will need to follow in order to produce a contract that best enhances and protects your business interests. These elements of style are the practical rules of writing business contracts that are second nature to a commercial lawyer and well worth learning by any well-prepared businessperson. How well you follow these rules will often determine how good a contract you will have written and, hence, how well you have addressed your business interests.

We illustrated the use of one such rule earlier in this chapter: namely, write in the ac-tive voice. To the untrained eye, there is little difference between the phrases, “The cake will be delivered.” and “The baker will deliver the cake.” As you saw, that subtle difference can make all the difference in the world where the success of your business is concerned.

2.4 Part IV: Final considerationsThe fourth part of this book begins by looking at the finishing touches that go into any well-written

xvi Canadian Business Contracts Handbook

unrelated to you. The point is, the judge is interested in what you have to say, and what you have to say (or what you may have already said) must often appear in written form.

No one will ever win a literary award for writing a great contract, and no contract will ever be mistaken for a great book. However, a great contract can definitely contribute to the success of your business. That, ultimately, may one day be worth writing a book about.

A final note of caution: This book is not intended to serve as a substitute for sound legal advice, particularly with respect to substantive issues of law. It is a book about learning to write contracts and not the law per se. You should con-sult with a qualified lawyer regarding any legal matter that may arise in connection with you or your business. It should also be noted that the views expressed in this book are for assistance purposes only and should not be taken as bind-ing on any court, governmental authority, or other administrative organization. As such, the contents of this book are intended for informa-tional purposes only and do not purport to be a complete statement of the law or any aspect of it.

• Correspondence: Letters, email, and simi-lar types of communications to and from clients, customers, suppliers, and others, frequently contain information and state-ments of legal significance. It is important to you and your business that your words clearly and accurately communicate your intentions.

• Communications with government: Every business, regardless of size, will have extensive dealings with governmental authorities and agencies. From simple government filings to complicated ad-ministrative proceedings, it is important for you to know how to communicate with government in a way that protects your business interests. As anyone who has had to navigate the murky waters of bureaucracy knows, one wrong word can cost you significant time and money.

• Judicial proceedings: At some point, al-most every business finds itself dealing in one way or another with our court system or other judicial or administrative body. You may sue; you may be sued. You may simply be asked to serve as a witness in connection with a legal proceeding