Question

Question 1

For several years Tom had managed Nick's Place, a restaurant/tavern owned by Nick. As a result of Tom’s efforts, profits increased from $20,000.00/year to $200,000.00/year during the term of his management. Nick, as a result of his failing health and advancing age (he was now 80), had slowly withdrawn from the daily operations. He had come to rely on Tom not only to manage the business, but as his friend who looked after Nick, did all of his banking and personal errands and invited Nick over 3 times a week for dinner. Nick had few other friends and celebrated all holidays with Tom’s family.

One day, Tom presented Nick with an ultimatum. Either Nick sold Tom 50% of the restaurant for $100,000.00 or he would hand in his immediate resignation and seek employment elsewhere. Nick felt he had little choice. He had become totally dependent on Tom to run the business. As well, if he refused he felt that the friendship would be over. Nick had no idea what the business was worth, but signed the contract that Tom presented without reading it.

Nick's children had never trusted Tom, although they rarely visited. Six months later, Nick told them he had sold 50% of the business to Tom. The children investigated and determined that restaurant businesses were usually valued at twice the annual profit which would mean the business was worth $400,000.00. The children were adamant that Tom had taken advantage of Nick and, at their insistence, Nick reluctantly commenced an action to set aside the agreement.

Required: Discuss the issues which will be raised and the basis, if any for Nick to have the contract set aside. Be certain to explain the applicable principles as part of your answer

Answer 1

In the court of law, set aside of a contract is possible if it is proven that the contract was made under compulsion / intimidation.

The issues which will be raised and the respective bases are as follows:

1. Use of force / intimidation by Tom to Nick : This is a strong point in the court of law if the agreement was made to be signed under force / compulsion. Hence, Nick will raise the same in court of law
2. Was the contract signed by Nick in his conscience : Second principle which would be brought upon is whether Nick was in his conscience when the agreement took place. This is essential to prove that he was in his full senses when the agreement took place
3. What was the basis of valuation : Court of law will ask the basis of valuation of the 50% of the business at $ 100,000/ Once it is proved that in the above industry, valuation is 2 times the annual profilts, the valuation would come under question