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Question 1

Andy was the President of Topical Inc., a pharmaceutical company which was developing a pain relieving medical cream. All clinical trials had been completed over a three (3) year period and Topical Inc. was awaiting final approval from Health Canada to produce and market the product. At the annual shareholders meeting on June 1st Andy had told the shareholders that all studies had been completed and submitted to Health Canada and final approval should come "any day".

There were 25 million shares of Topical Inc. outstanding which were trading at $2.00 per share on the Toronto Stock Exchange.

Despite Andy's upbeat message to the shareholders, Topical Inc. was in dire financial straits. Although the product was extremely promising, no money was coming in to the company. The money raised from the initial share offering had been spent over the past three (3) years developing the product and constructing a manufacturing facility. The bank would not loan the company any further funds.

On June 15th, Andy received a letter from the company's lawyers, Smarter and Smarter (SS) demanding immediate payment of $200,000.00 for overdue accounts. SS knew of the company's financial position and wanted to ensure they were paid prior to numerous other creditors.

Andy was distraught and had no idea what to do. An outstanding lawsuit, particularly if issued by the company's own lawyers would be disastrous. The publicity and effect of a lawsuit on the company's reputation would be fatal.

Andy contacted SS and requested further time to pay since final approval would be received any day. SS refused. The next morning, after a sleepless night, Andy decided to send an email to SS, offering to settle the account by having Topical Inc. issue 100,000 shares to SS. Unfortunately, the email incorrectly set out the number of offered shares as 1,000,000. SS replied accepting the offer.

On June 25th, Health Canada approved the sale of Topical Inc.'s product. Shares of Topical Inc. trading on the Toronto Stock Exchange rocketed to $10.00 on the news. Topical Inc.s bank immediately increased its credit lines.

On July 4th, SS requested the issuance of 1,000,000 shares. Andy refused, indicating that the offer had only been intended to be 100,000 shares. He then delivered a cheque for $200,000.00 in full payment of the outstanding legal accounts. SS commenced legal action for specific performance to compel the issuance of the 1,000,000 shares by Topical.

Required:

(i) Discuss the defence(s) that will be raised by Topical Inc. and the likelihood of success. Be certain to discuss the applicable legal principles in detail as part of your answer.

(ii) If SS successfully establishes that there was a contract for 1,000,000 shares could Topical Inc. raise a defence of undue influence or economic duress?

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