Contracts Final Outline
Katie Duke
Contract law ought to:

Improve commercial dealings by not making it possible to go back on a deal

Protect the reasonable expectations of contracting parties;

Protect the reasonable reliance on a promise by another;

Avoid imposing unfair surprise (e.g. liability for damages) on a party to a
contract; and

Develop (and apply) rules that promote commercial efficiency.

Generally supports economic efficiency and efficient breaches. Some tension with
fears of unjust enrichment
Contract Formation
Offer and Acceptance
Offer
An offer must include all the terms necessary to complete the K so there is a discernible
intention to be bound by the next communication of the other party. Before an offer is
accepted the offer can be changed (Johnston Brothers). The Offerer may stipulate the
mode of acceptance and is not required to accept an offer that does not meet these
stipulations (Eliason). An acceptance must be communicated to the offerer before it is
binding (Larkin). Once an offer has been accepted parties cannot change the specifications
of the offer (Lefkowitz).

Quotations of price without further specifications do not constitute an offer
(Johnston Brothers)

Before an offer is accepted the offer can be changed (Johnston Brothers)
o
The seller said offer could change
o
There is also the possibility that too many people would request the offer
o
An ad made to the general public is an offer if it is clear, definite and
explicit and states the manner of acceptance. Must generally be clear that
the number of people that can be accepted is limited (Lefkowitz)
o
In some cases, courts will imply terms, such as limited supply, into the
communication in order to characterize it as an offer (Denton)

Once there is offer and acceptance parties cannot negotiate new terms
(Lefkowitz)
Acceptance

Offerer may put limits on the mode of acceptance (Pharmaceutical Society)

Self-serve items in a store are an “invitation to treat”, the offer is when the buyer
brings item to cashier with money

When an offer is made, at a reasonable point afterwards the offer is considered
refused (Manchester)
o
An objective assessment of the facts will determine, if in fairness to both
parties, the offer has been considered to be refused
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
An acceptance is not complete until the acceptance has been communicated to
the vendor. Before then the vendor can change the offer (Larkin)

Generally, silence cannot be imposed as a mode of acceptance (Eliason)
o
“Return wagon” interpreted as a requirement that the acceptance be
communicated within the period of time a wagon would normally take to
return.

The offerer can stipulate the manner of acceptance and the contract is not
considered complete until it is accepted by the vendor in the mode required
(Eliason)
o
The manner does not have to be the exclusive manner of acceptance
unless that is clearly expressed

An acceptance made in a different mode than specified is considered a new offer
(Eliason)
Time Limit

A promise to leave the offer open for a fixed period of time does not qualify as a
firm offer (Dickinson)
o
Vendor gave promise to hold offer but offeree did not give anything in
return so therefore it is unenforceable
o
When the Pl learnt of the sale to a 3rd party through his agent he was no
longer in a position to accept the offer
Battle of the forms

The traditional offer and acceptance rule is that the contract is created on the last
document that has modified terms before acceptance (Butler Machine).
o
The tear off slip sent back with different terms was determined to be a
new offer on the part of the buyer that was then accepted by the seller

Dissent (Denning): the details of the contract should be
determined from looking at all the documents as a whole and
deciding what the intention of the k was. The Uniform Commercial
Code in the United States takes a similar approach to that
suggested by Lord Denning.
Call for Tenures

The request for proposal that is put out constitutes an offer. The submission of
the bid forms contract A. The terms of contract a are that the contractor cannot
change the bid after its submissions and must be bound by terms of the proposal.
Courts have implied a term in this contract a that all bidders will be treated fairly
and be given fair consideration. (MJB)

When the winning bid is chosen another contract (contract b) is formed between
the winning bidder and the organization that put out the tender (MJB)

The standard privilege clause typically allows no bid to be chosen or sometimes
allows a bid that is not the lowest priced one to be chosen (MJB)
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o
The SCC has suggested in a Turcon that a privilege clause likely cannot be
worded sufficiently broadly to allow for a non-compliant bid to be chosen

However, there remains the implied term that the bidders must be treated fairly
o
The choosing of a non-compliant bid violates this term of Contract A (MJB)
o
If a party can prove on a balance of probabilities that their bid would have
been selected in absence of the non-compliant bid then the plaintiff party
will be able to collect expectancy damages (MJB)
Post Box Rule

If acceptance by post is within the reasonable contemplation of both parties then
acceptance is complete when the acceptance is posted (Henthorn)
o
Policy reason: Since the offeror has the ability to stipulate the terms of
acceptance it is reasonable for them to assume the risks associated with
correspondence by mail.

A revocation of an offer made by post is not complete until it has been received
by the offeree (Byrn).

The postbox rule will not apply if there is an express statement that the
traditional offer and acceptance rule is to be applied instead (Holwell).
o
“notice to” is read strictly to mean delivery to the defendant
o
contract was an option to buy, the exercise of options are interpreted very
narrowly by the courts (Holwell)

In instantaneous forms of communication, like faxes and emails, the traditional
offer and acceptance rule applies (Eastern Power).
o
With instantaneous forms of communication the offeree will usually realize
if there has been a technical failure (Eastern Power)
o
For email, the contract is formed when it is presumed that the other party
could access the acceptance through email (Electronic Commerce Act)

If a material error is made but the party who made it informs the
other right away then the error is not binding (s.21)

s. 19: A binding contract can be formed through electronic means,
including pressing a button
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Certainty in Contract Formation
Agreement to Agree
If a critical part of the agreement is left undetermined there is no contract because the
terms are not sufficiently certain (May and Butcher).

Agreement to buy “tentage” that came available

Since price, date of payment and period of delivery had yet to be agreed on the
agreement was only a framework document and was not a binding contract(May)
o
Since document explicitly stated that price was to be agreed on between
the parties the court could not imply a term of “reasonable” (meaning
market) price
o
The arbitration clause was to settle disputes arising out the agreement,
therefore it did not apply if there was not a contract first
o
There was no past history of the parties operating as if there was an
agreement

Where a mechanism for price determination is specified, even if the specific price
is not, the agreement will likely be sufficiently certain (May and Butcher)
Contrasting case: Hillas:

Option to renew agreement to buy timber, price, quantity, and quality left
unspecified but the House of Lords found that the contract was sufficiently certain
o
Commercial context, in this context business people often create flexible
contracts (Hillas)
o
Parties behaved as if they had binding contract under this agreement for a
year before disputes arose.
o

In the past the parties were able to solve the vagueness of the contract
When parties are operating as if there is a contract the court will attempt to
determine there is a binding contract if the terms allow it to (Hillas)

Past practice can be a mechanism for determining details (Hillas)
An agreement to negotiate, in the hope of entering into an effective contract, is only a
contract to negotiate (May and Butcher).

Courts may imply terms in an agreement to agree that the negotiation be done in
good faith (Empress Towers)
o
Agreement was for price mutually agreed upon and market price,
therefore the landlord had very little flexibility from negotiating away from
market price.

Implying this term of little flexibility from the market price likely
pushes the limits of terms courts will imply.

Bad faith on the part of the defendant may have been a
background factor.
Missing Terms:
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If a contract does not specifically define price, or another important detail, but there is a
mechanism to determine it, like arbitration, then the courts will often imply terms that the
undetermined quality is “reasonable” (Foley)

The fact that the contract was partially performed already, the defendant had
received the land on the expectation that they would buy petrol from the plaintiff,
weighed in favour of the finding of a binding contract.

They had been operating as if they had a contract for three years.

“The officious bystander test”: Court determines a reasonable price and industry
norms

Not a restriction of trade because the price was reasonable and the contract was
already partially performed (through the benefit of giving the land)

Courts may imply terms in an agreement to agree that the negotiation be done in
good faith (Empress Towers)

Consideration
For an agreement to be a binding contract there must be consideration (White).

Since the son had no legal right to complain to his father that he was not
favoured as much as the other children, the giving up of this right is not valid
consideration.
o
Evidence issue (father was dead)
o
Family arrangements are less likely than agreements in the commercial
context to be interpreted as formal contracts
What Qualifies as Consideration
Valid consideration consists of a right, interest, or benefit transferred to one party in
exchange for some sort of detriment or loss suffered by the party receiving the benefit
(Hamar).

It is irrelevant whether what was given up actually benefited the party asking for
the loss to be suffered (Hamar)

The giving up of something that a person has a legal right to do can qualify as
valid consideration (Hamar)
o
The nephew had a legal right to smoke and gamble, therefore this was
valid consideration
o
Promise was made in front of large group of family members (evidence)
o
More of a commercial context, third party is now relying on the original
contract between the uncle and his nephew
Nominal consideration

An exchange involving nominal consideration is still binding (Thomas)
o
Parties had been operating as if there was a binding contract. This was
evidence of an intention of the parties to enter into a commercial
agreement.
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
The ground rent went directly to the executors of the estate rather
than the superior landlord. It was not merely a gift with burdens
attached.

The written document served as good evidence of a contract
Seems like a one way street

An agreement that confers an exclusive right to one party without obligations on
that party will not be binding because of a lack of consideration (Tobias).
However, if there is an implied term that confers an obligation for the benefiting
party to make reasonable efforts to further the other party’s interests there is
valid consideration (Wood)
o
Tobias:

The plaintiff had the exclusive right to buy the machines at a set
price and sell in a very broad area. No obligation on Tobias to sell

Would have been difficult to imply an obligation in the contract

Also, plaintiff did not try very hard to sell machines and now seeks
to rely on agreement
o
Wood:

More formalized arrangement, the plaintiff had a business whereby
he did this for a living.

It appears he was making reasonable efforts

the plaintiff was working on commission

The defendant was getting the benefit of the plaintiff’s established
business
Charitable Donations

Generally, an unfulfilled promise to make a charitable donation is regarded as an
incomplete gift (Dalhousie College)
o
The exception to this is if the Donor promised to donate a large sum in
exchange for a specific act on the part of the donee, in that case there
may have been valid consideration (Dalhousie).
o
If the expenditure would not have been made “but-for” the promised
donation then there may have been valid consideration.

“In subscription of others” was not valid consideration, there was
no exchange of promises between subscribers

The promise that Dalhousie would maintain and improve teaching
and buildings was very broad and did not require Dalhousie to do
anything specific.

The subscriber never asked Dalhousie to do anything specific
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Pre-existing Obligation
The traditional position has been that a promise to do what one was already obliged to do is
not valid consideration (Stilk).

This rule developed out British sailing cases where it was held to be against
public policy for the sailors to demand more out of the captain during an
emergency (Harris)

However, an undertaking of additional liability is valid consideration
An agreement to alter an original contract, if not supported by additional consideration, will
not be enforceable because of a lack of consideration for this new executory agreement
(Gilbert Steel, Ontario Court of Appeal).

If original contract was meant to be rescinded, then it must be explicitly done

An agreement under seal or an agreement where nominal consideration was
given could have supported this new agreement as consideration, estoppel is a
shield not a sword
o
The defendant in the case did get more credit, but this was not valid
consideration because the parties had not actually bargained for it.
o
The promise to give a good price in the future was too vague to be valid
consideration.
This doctrine has been relaxed in Great Britain in limited circumstances (Williams). These
circumstances are: in a classic commercial bargain, party b seriously believes that party A
will not or cannot complete so B promises A additional benefits so that A will continue to
perform contract. B’s promise must not be given as a result of economic duress or fraud and
B must in practice receive a benefit or avoid a detriment, which can come from the
surrounding circumstances.

The general contractor promised to pay the subcontractor more money so they
would finish on time. GC benefit: avoided paying penalty for finishing late
Canadian Application

The law in this area is still under development in Canada. In NAV, not binding in
BC, the Court suggested that if a modification, unsupported by consideration, is
made after the formation of the contract, it may be enforceable so long that
there was no economic duress
o
Modification to pay extra costs of new system would have been valid if
there was not economic duress

The BC Supreme court in RiverWinds in obiter reasoned that NAV had
overextended the Williams doctrine. The BCSC suggested that it would find that
there was a binding contract if there was a practical benefit or detrimental
reliance on the part of the plaintiff.
o
This application however, would essentially be a way of using estoppel as
a sword rather than a shield.
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Agreement to take less
Partial performance of an obligation, if expressly accepted by a creditor, shall be a valid new
agreement (s.46 of the Law and Equity Act)

S. 46 applies even if the original agreement was very unlikely to be held to be
valid, so long as the parties had a genuine belief that it was (Fairgrief)
o
Oral agreement for house after death to ladies would have failed because
of statute, 1,000 promised instead was still valid contract

This doesn’t cover wholly executory contracts, so there is a possibility that the
old common law rule would apply:
o
Paying the lesser sum instead of a greater sum is not valid consideration
unless something else is given (Foakes)
Performance before acceptance
Past Consideration
A promise in recognition of a benefit received from the promisee will generally not be
binding because of a lack of consideration. The consideration is considered “past” (Roscoria)

An exception exists however if:
o
It is a situation where payment is reasonably expected
o
The promise would have been enforceable had it been made before the
work was done
o
And the action or work was done on the other party’s request (Lampleigh)


Plaintiff worked hard to secure pardon from king for murderer
A later promise cannot be implied into the original contract if there is no way to
assume that the parties would have implied this in the original contract
(Roscaria).
o
A promise post-sale of a horse that it was sound failed for lack of
consideration. There was no way to imply this term into the original
contract for sale.
Performance as Acceptance
Unilateral Contracts

In certain circumstances, an enforceable contract is created where notice of
acceptance is not required before performance (Carbolic). In this case
performance of the contract also serves as valid acceptance (Carbolic). There is a
preference to interpret a contract as bilateral rather than unilateral, if this
presumption is possible given the facts (Dawson)
o
Defendant company had to do a lot before prospector performed, so
bilateral exchange of promises (Dawson)

An enforceable offer may be made to an unknown member of the public
(Carbolic).
o
Carbolic:
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
Notice of money in bank was sign that guarantee was not mere
“puffery”

Offer to the world, nature of circumstances made it unreasonable
to infer that acceptance was required before performance (buying
and using product)

when a party brings themselves within the terms of a unilateral contract through
performance, regardless of the reason for performance, the contract is binding
(Williams)
o
Women provided info on murder in order to clear conscience, not collect
reward. Still binding on defendant to pay reward.

A binding unilateral contract may be formed between the principal and the other
party if it was objectively reasonable to infer that the principal’s agent had the
authority to make the unilateral offer (Dale).
o
University program personnel did not have the authority to promise that
funding would continue if students stayed in program, reasonable to all
that they did so binding unilateral contract

In determining whether conduct amounts to a unilateral offer an objective test
will be applied (Grant)
o
Key is in defining requested performance

no express statement that government would purchase all potatoes
but:

Implied promise that if potatoes were approved they would be
purchased


No reserved right not to purchase all potatoes
Partial Performance
o
A term may be implied by the court that once performance has been
partially performed the offer cannot be revoked if it is reasonable based
on the facts (Errington)

Partial payment of mortgage, father’s intention that son and
daughter-in-law should have house if paid mortgage, offer can’t be
revoked by estate

Family situation, intention of father important

Contrast: Dale: had to find express statement that offer would not
be revoked
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Intention
Family relationships

For a contract to be legally enforceable there must be objective intent, meaning
that an ordinary person, in the circumstances, would have thought that it was a
legally binding contact (Jones)
o
There is the presumption that family arrangements are not intended to be
legally binding contracts (Jones).

Salmon L.J., one judge on the court of appeal reasoned that there
was necessary intention

The plaintiff gave up a lucrative career in exchange for
support while studying for the bar

Mother wanted daughter to study for bar for her own,
personal reasons

Mother’s attorney wrote to the plaintiff to confirm the
mother’s offer.
Umbrella Arrangements

The presumption in business arrangements that there is an intention to form
legally binding contracts may be rebutted by a clear intention to the contrary
(Rose)
o
The exception to this would if there is also a contrary intent and one
apparent intention has to be rejected as repugnant.

An agreement put under seal necessarily has the intention to make
it a legally binding arrangement (Ellison)
Contracts Under Seal

The seal does not replace consideration (Brudner)

The seal serves an evidentiary function, cautionary function and channelling
function (marks and signals that this is an enforceable promise) (Fuller)
o
An agreement put under seal necessarily has the intention to make it a
legally binding arrangement (Ellison)
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Problems Before Contract
Innocent Misrepresentation
Material misrepresentation about the contract is made by one party without knowing that it
is untrue
Result

If the contract has not yet been executed the party who has suffered may obtain
the equitable remedy of rescission (returned to original position) (Heilbut)

No action in damages for innocent misrepresentation (Heilbut)

Party that made misrepresentation cannot attempt to enforce contract
(Redgrave). Type of moral fraud, having obtained benefit from statement that
was known to be false cannot now insist on enforcing it.
o
Also equitable remedy:

Must be possible to return parties to original position

Third party must not have intervened

Redgrave: Def. only bought house because wanted law
practice, turned out that it was “worthless”. Pl. can’t sue for
specific performance

In order to receive a remedy of rescission the action must be brought promptly
(Leaf)
o
5 years too late to return painting, at some point deemed to accept
contract, did plaintiff really not receive a benefit?

Policy: commercial certainty, how important was representation if
didn’t find out for five years?
Collateral Contract induced entry into contract: Modern Approach

If a representation that turns out to be false is made for the purpose of inducing
the other party into entering the contract it is prima facie a collateral contract.

The party that made this representation can rebut this if they can show that the
misrepresentation was made without fault and it would not be reasonable for the
defendant to be bound by it (Bentley).

o
Commercial seller, could have easily found out history of car
o
He “ought to have known better”- but still less than reckless (Bentley)
If sufficiently certain, a misleading advertisement can be characterized as a
unilateral collateral contract (Murray)
o
Manufacturer and dealer liable for breach of collateral contract for
guarantee of tractor

Dealer: represented certain level of performance, induced Pl.

Manufacturer: Brochure- offer, Purchase: Acceptance/consideration

Note: rarely applied as generally advertising not specific enough,
not expected to be seriously relied on “mere” puffery
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Strict view: Statement may be considered collateral contract, must have had the necessary
intention to be binding (Heilbut). IF so parties may be returned to original position, no
action for damages.

Strict view, attempt to limit collateral contract

Statement “was rubber company” didn’t have contractual force

Evidential difficulty: what shows contractual intent?
Negligent Misrepresentation

A person representing to have special skill or knowledge, that gives advice which
they know or ought to have known will be relied on to form a contract, may be
held liable in tort if they acted negligently (Hedley). The misrepresentation must
have induced the party to enter into a contract.
o
Can apply to a situation where there is no contract between the parties
(Hedley)
o
Can apply to a contractual relationship (Esso)

Representation of gas station forecasts was negligent

Defendant would not have been induced into lease had forecast
been accurate
o

Discrepancy of knowledge between Esso EE and defendant

Issue of damages: Torts: reliance, Contracts: Expectancy
IF remedy may be sought in contract or tort the plaintiff may seek the
most advantageous cause of action. However, liability in tort cannot be
used
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Interpretation of Contracts
General Rules

When interpreting a contract, Courts will consider the factual background and
circumstances, the business realities as well as the express words that were used
(Prenn)
o
Evidence of negotiations should not be considered (Prenn). The exception
is in a claim for rectification

contra proferentem
o
Principle of contract interpretation, if the contract has two possible
meanings, the one that is least favourable to the party that drafted it will
be applied (Photo Production)
Parol Evidence Rule Exceptions

The general rule is that oral or other types of negotiations that took place before
the agreement was reduced to writing will not be considered by the courts when
contracts are interpreted (Hawrish)
o
Plaintiff (lawyer) said he didn’t read document, and relied on bank
representation, Court: no, not collateral contract
List of exceptions
However, in limited circumstances parol evidence can add to or vary written contracts.
There is a strong presumption against this, especially when the oral representations seem
contrary to the written document. But the presumption may be rebutted in a number of
exceptions (Tilden Ont CA)

Partial list of ways parol evidence may be considered (Gallen):
o
Ambiguities in contract
o
Consider term that is implied by the contract
o
Rectification
o
Establish condition precedent
o
Establish collateral contract
o
Allege that written document was only part of the agreement
o
Support claim for equitable remedy
o
Establish tort duty of care
o
To show that contract was invalid because of fraud, misrepresentation,
mistake, incapacity, lack of consideration, or lack of contracting intention
Collateral Contract – Can it be considered?
Onerous Provision-More liberal position

When a written contract contains a particularly onerous provision the offeror may
be required to bring the acceptor’s attention to it (Tilden ONT CA)
o
Situation where party not expected from reading contract, and would have
been discouraged from doing so, clerk knew he didn’t read agreement and
Page 14 of 29
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didn’t encourage him to, didn’t instruct on more onerous provision,
situation of haste
Hard Approach: Carmen Construction

The parol evidence rule is near absolute, it is generally unreasonable to think that
parties would intend terms that contradict or are inconsistent with the written
document
“Logical Approach”- Gallen

Steps:
o
In order for the parol evidence to be considered a valid collateral
agreement, the representation must have been both intended and
understood to be a part of the binding contract (Gallen).
o
Is there a contradiction between the parol evidence and the written
agreement?

The Court will attempt to read the collateral agreement and the
written document harmoniously

If there is a contradiction:

The presumption against parol evidence is strongest when
the representations are contrary to the written document

The presumption is less strong when the oral representation
only adds to the written document

When the parol evidence varies or modifies the written
document the presumption will be somewhere between the
first two positions.

Ultimately, if the collateral contract was clearly intended to be part
of the contract courts should consider it

Gallen:

Sufficient evidence that the promises about the
weeds was made

Read harmoniously: crop read in light of seed so it
only refers to yield, doesn’t exclude liability for
weeds
Clauses Excluding Liability
The old doctrine of fundamental breach is no longer applicable, whether an exclusion clause
applies is a matter of contract interpretation (Tercon) Consider:

Whether, by objectively assessing the contract and the circumstances, the parties
intended the exclusion clause to apply

Whether the exclusion clause was unconscionable at the moment it was made

Even if the exclusion clause was intended to apply and it was not unconscionable
the Court retains a residual power to not enforce the exclusion clause if to do so
would be against public policy
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o
Tercon: (Majority): clause- “participating in RFP” Gov’t didn’t meaningfully
participate so exclusion clause doesn’t apply, (Minority): participation
included submitting proposal
o
Hunter: (Earlier case, SCC split over fund breach): all agree that warranty
that limited liability to 24 months applied. Expensive Gearboxes poorly
designed, needed repairs after end of warranty
o
Photo Production (UKHL): security company had exclusion clause for loss
suffered for employee negligence or “injurious acts,” EE burnt down
building. Exclusion clause applies

Sophisticated parties, reasonable allocation of risk

Modest price of security
Page 16 of 29
Contract Enforceability
Parties to the Contract

Generally, third parties to a contract cannot sue for the enforcement of that
contract (Tweddle). The exceptions to this are agency, trustee, or assignment

Only parties who have rights and obligations under a contract can sue for its
enforcement, privity of contract. Attaining a benefit under the contract is not
enough. (Tweddle)
o
Father-in-law not bound by mutual love and affection, consideration has
to move from party trying to enforce

The executor of an estate may sue to enforce provisions that benefit a third party
even if the estate would only have been entitled to nominal damages, it may still
recover large damages for a third party beneficiary (Beswick)
Third Parties and Consideration

In order for a party to sue to enforce obligations under a contract, consideration
must have flowed from the party attempting to enforce the contract and the
party being sued (Dunlop)
o
Manufacturer only contracted with wholesaler who contracted with
retailer. M cannot enforce obligation that was made for its benefit between
W and R.
Agency Exception

Agency: Consideration is valid in this triangular situation

If there is an express intention in the contract of establishing an agency
relationship evidence of consideration may be found through the device of a
unilateral contract (Eurymedon)
o
Since consignor knew that a stevedore would be employed to unload the
ship, the bill of ladee was a unilateral offer to stevedore to unload ship
that became a binding contract through performance
o
Stevedore was already bound in contract to unload ship but through
unilateral contract took on extra liability to another party, therefore valid
consideration
o
Agency relationship: parent company, history of stevedore always
unloaded ships
Exceptions

The doctrine of privity of contract has been limited in some commercial contexts,
when to strictly enforce it would go against the reasonable expectations of the
parties (London Drugs).
Employee Exception

This limited exception exists where:
o
The limitation of liability clause expressly or impliedly extended its benefit
to the employee seeing to use it as a shield
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18
o
The employee was acting in the course of their employment and providing
the services of the contract when the loss occurred.
o
Still allows for freedom of contract, company does not have to
extend protection to employees

Limited liability clause that said that company couldn’t be sued,
cannot now sue the employees when it was obvious that they
would be the ones handling the products

Court unhappy that the insurer was trying to get around the
allocation of risk provided for in the agreement.

Contrast: Greenwood
o
Not overruled but likely limited to facts. K was for lease, doesn’t involve
employees directly.
Extension of London Drugs

Third parties may seek protection under a contract in limited situations:
o
The contracting parties must have intended to extend the benefit to the
third parties and
o
The activities that the third party seeks protection under the contract for
must be within the scope of the type of activities the contracting parties
envisioned would be included under the contract (Fraser River)

Contract between vessel and insurer waived subrogation rights
against a Charterer. Vessel sunk because of C’s negligence, C is
protected by waiver from action by Insurer

Once a benefit of a third party has crystallized into a right the contracting parties
may not contract out of providing this benefit (Fraser River)

This exception may only be used as a shield and not as a cause of action
(Kitimat)
Other Exceptions

Assignment: Contract rights, other than strictly personal ones, can be transferred
to another party. Assignment is subject to accounts and defences the original
debtor may have

Trusts: a beneficiary has a direct action against a trustee, even though the
contract was between the settlor and the trustee
Estoppel
Equitable doctrine, one party is stopped from retreating from a representation they have
made.
Fact Estoppel

Representation of a fact that turned out to be untrue. Example: Husband implied
that wife had the authority to sell their house. She didn’t, and the couple used
this to try to get out of the bargain they had made. The court used estoppel to
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19
enforce the contract because the other party relied on the fact that the wife could
sell the house.
Waiver

If one party is led by the other to believe that strict rights under the contract
would not be enforced, the second party cannot then enforce the contract based
on these strict rights later (Hughes)
o
Hughes:

Terms of the lease were that the landlord (pl.) had the right to
demand repairs or force eviction. Pl. demanded repairs but then
parties entered into talks about the pl. buying out the tenant’s
interest. Implied that defendant could wait on repairs. Plaintiff had
waived rights to enforce strict obligations of the contract.
Promisory Estoppel

Occurs when one party makes a promise, intended to be binding and acted on
and was partially acted upon (Central Trust). It only applies to promises made in
reference to existing contractual obligations (NM). The party who made the
promise cannot now attempt to enforce strict obligations the other party would
have had if it wasn’t for this promise. It only operates as a defence if the promise
is broken, it does not operate as an independent cause of action (Combe)
o
Central Trust: Pl. leased block of flats to defendants during war, agreed to
reduced rent. Promise intended to be binding until the end of war, can
enforce original rent from time when war no longer an issue for renting
o
Combe: promise to pay support through letters, wife cannot know seek
enforcement absence consideration

Since estoppel is an equitable concept, the party attempting to rely on it must
have behaved equitably (D&C Builders)
o
Pl. agreed to take less, due to threat “or you’ll get nothing,” because
otherwise company would go bankrupt, defendant cannot now use
estoppel to enforce agreement to take less (D&C Builders)

Unlike in the US, in Canada and the UK there is not currently protection from
enforcement of the law for parties who relied on a promise (absent consideration)
when that promise was not one made under or subsequent to a binding contract
(NM v ATA)
o
Promise to pay off mortgage didn’t have contractual force, wife still has to
pay off debt
Intention to make binding promise

There must be more than indulgences granted and acted upon. There must be
evidence that the one party intended to affect the legal relations between the
parties and led the other to suppose that the strict rights would not be enforced
(John Burrows)
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20
o
Parties had friendly and personal relationship before a falling out, personal
conduct did not amount to an implied intention to relax legal obligations
o
Contrast: In Owen Sound: Library failed to pay because of the promise
Estoppel can be relied on in a cause of action

where the plaintiff is alleging that the defendant breached the contract and the
estoppel invalidates the reason the defendant had for originally breaching the
contract (Owen Sound)
o
Conduct alone is sufficient ground a claim in estoppel if it was reasonable
for the other party to infer that the legal obligations would not be enforced
(Owen Sound)
Effect of Void Contract
Void vs Voidable

Void
o
Defect so significant that contract didn’t exist. Third party cannot enforce
rights gained as a result of a subsequent transaction. Nemo dat quod non
habet: The first contract never existed so there is no entitlement to pass
objects on


Non est factum

Forgery

Mistake of Identity
Voidable
o
Defect in contract, party has ability to set the contract aside but it can be
relied upon by subsequent bfps if it was not set aside first

Fraudulent misrepresentation
Mistake of Identity

Traditionally a distinction has been made as to contracts where there was a
fundamental mistaken identity and those where there was only a fraudulent
misrepresentation as to an attribute of the contract. If the identity of the
contracting party was key to the essence of the contract, the contract is void
(Ingram). However, if the mistaken identity was not that key to the contract and
was only a fraudulent misrepresentation than the contract is only voidable
(Phillips). This fine distinction has been criticized. In Lewis Lord Denning
reasoned that Phillips and Ingram are virtually indistinguishable. He held that the
innocent third party should always be given priority. The law in this area is
unsettled. Lord Devlin’s dissent in Ingram may provide a suitable middle ground
in the modern context. His position was that there is a presumption, which may
possibly be rebutted, that there is an intention to contract with the person
present.
o
Ingram:
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21

Rogue’s identity as person in phonebook was key to agreeing to
make contract.

Contract was not formed until after Rogue pulled out chequebook

Dissent (Devlin): There is a presumption that there is an intention
to contract with the person present. Relies on policy decision that it
is the first innocent party who is best able to protect against
rogues

Contrast:(Phillips):
o
Pretended to be well-known community member. Contract possibly
formed for ring before representation as to identity was made

Contrast: Lewis:
o
(Denning decision):Phillips and Lewis are virtually indistinguishable.

Sold car to person with movie pass that said Richard Green (spelt
wrong) innocent third party given priority
Non est Factum

The plea of non est factum renders the contract void ab initio (Saunders). It is
rarely pleaded successfully.
o
Pleading party must establish that they:

Signed the document without carelessness (Marvco)

The document was substantially different from what the party
thought they were signing

The document was signed through the fraudulent
misrepresentation by another party

Old woman: broken glasses, but document wasn’t radically
different in effect (Saunders)

Husband had experience with mortgages, wife welleducated, careless in relying on acquaintance (Marco)
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Setting Contracts Aside
Appeals to Conscience
Unconscionability

Courts may set aside contracts that are unconscionable. This means that there is
a gross disparity in bargaining power such that one party is not capable of
protecting their interests, and the bargain was substantively unfair (Marshall).

It is not necessary for the benefiting party to have knowingly taken advantage of
the vulnerability of the other party (Marshall)
o
Medical evidence of Walsh being unable to conduct business after stroke
but sometimes appeared capable. Trust took after his affairs soon after
deal

o
Other party was business man
o
Land valued at 10 year old price
Where a contract appears prima facie unconscionable, the party seeking to
enforce the bargain must prove that their behaviour was considerate and that the
contract was not unconscionable (Mundinger)
o
W had nervous breakdown, hospitalized, H plied with alcohol. Signed
unfair deal
Undue Influence

Vitiates consent, rescission may be granted.

Actual: Plaintiff must prove that a degree of pressure was applied such that
consent was overwhelmed

Presumed: Parties are in a relationship of trust and confidence. Once the
relationship is established the stronger party bears the onus of proving that
undue influence was not applied. This includes established categories of
relationships (solicitor-client) and other relationships where a relationship of trust
or confidence exists (Lloyds Bank).
o
Consideration from bank was grossly in adequate, son’s company very
likely to fail, only bought the son a bit more time but didn’t increase
overdraft
o
Trust and confidence relationship, conflict of interest. Bank should have
realized that father was relying on bank to advise him.
o
Note: Denning’s attempt to merge categories hasn’t been adopted, but
recognized overlap between unconscionability, undue influence, duress
Effect of presumption of trust and confidence relationship (Etridge)

Puts the bank on notice when one party seeks to guarantee the debts of the
other partner

Bank must then take reasonable attempts to ascertain that the guarantor
obtained independent legal advice. Bank can proceed on the presumption that
the legal advice was satisfactory
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23
o
Presumption rebutted, wife was not unduly influenced by husband when
guaranteeing her debts
Merging of concepts

Lower courts often merge concepts, often focus on general unfairness (Pridmore)
o
Unequal footing with insurance company, limited intelligence, release was
signed within 48 hours of accident
Economic Duress
A contract may be set aside where because of economic duress one of the parties did not
truly consent (NAV)


Traditional View:
o
pressure must have been illegitimate and
o
No real choice otherwise
NAV- rational framework, not binding in BC yet
o
o
Two condition precedents:

Promise must have been extracted under pressure

Exercise of pressure lead to no practical alternative
If these are met, whether consent really existed depends on the
consideration of three factors

Whether the promise was supported by consideration

Whether the coerced party made the promise “under protest”

If it was not made under protest, whether the party attempted to
rescind promise as soon as it was practicable.
o
Independent legal advice may be a factor, but will not necessarily negate
a claim of economic duress
Penalties
Equity may intervene if damages are penal in nature (HF Clarke)

Payment of damages for a breach are set so that the nature of the clause is in
terrorem

The court must determine, judged at the time of the making of the contract,
whether the damages were a penalty or a legitimate estimate of damages
(Dunlop)
o
Must look beyond the language (Dunlop)
o
“amount equal to gross trading profits” as penalty grossly excessive (HF
Clarke)

But court looked at actual losses (not supposed to do this)

Issue of interference where damages are difficult to estimate
Forfeitures
When one party on a breach of contract, forfeits a benefit that already been paid to the
other party (example: deposit)
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24

Contractual stipulations as to forfeiture will generally govern (pay by date or else
forfeiture), unless the stipulations are grossly unfair:

These stipulations may be held invalid in equity (Stockloser)
o
Forfeiture clause of a penal nature, grossly disproportionate
o
It would be unconscionable for the seller to retain the benefit

Stockloser: legitimate allocation of risk that company would forfeit
machines if they were not repaid

Distinction between unconscionable situations and a deposit that is securement of
performance and it is reasonable that the deposit cannot be recovered
Common Law Illegality
Under this doctrine A court will refuse to enforce a contract because if it is contrary to public
policy (Holman)

Contract itself was legal since plaintiff did not participate in smuggling, so it was
enforceable
Contracts in Restraint of Trade
There is a presumption that restrictive covenants are prima facie unenforceable

This presumption may be rebutted if the restraint is reasonable (Shafron)

Important distinction between employment relationship and business context

Employee: imbalance of power, therefore courts will be less likely to declare the
restrictive covenant enforceable
o
“Metropolitan City of Vancouver” unclear and uncertain, therefore
presumption is not rebutted
o
Blue pencil test: struck out offending provision from the rest of the
otherwise enforceable contract (Shafron)
Contracts conferring benefits achieved through crime
If the benefit must go through the hands of the criminal party the courts will not enforce the
provison of the benefit (Brissette)

Insurance party had Husband and wife listed as benefit would go to survivor. As
initial survivor would be H (murderer) court would not enforce insurance benefit
and constructive trust

Criticism: depends on semantics most people not aware of
A party that is named as a beneficiary under a policy will be able collect despite criminal act
of the insured (Oldfield)

Distinguishes Brissette: money didn’t have to go through hands of wrongdoer

3rd party should not be unentitled from collecting benefit because insured died
while committing criminal act
Statutory Illegality
The traditional approach is that courts will not enforce contracts which involve criminality,
including regulatory offences (Kingshot)

Straightforward and sensible contract between producers
Page 24 of 29
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
Purpose of regulation was to protect consumers, contract didn’t affect consumers
but this didn’t matter
A more modern approach has been followed in Doherty. It is not always against public
policy to enforce a contract that is contrary to a statute. The court considered whether,
considering the purpose of the statute and the effects on the contract whether the contract
is actually against public policy. (No definitive SCC application though)

Not enforcing contract would allow municipality to take advantage of their own
wrong doing (not abiding by notice requirement) to avoid a reasonable contract

Notice probably wouldn’t have made a difference

Nothing in the statue said that contract made in violation of it would be
unenforceable
Mitigating Consequences of illegality
Restitution
Courts will intervene and grant restitution even if the contract is void for illegality in several
types of situations (Outson):

Not in pari delicto: The parties are not equally guilty

Locus poenitentiae: One party repents before contract has been substantially
carried out
o
restitution granted, ignorance of law is no excuse but since parties had
not tried hard to recruit others before scheme was abandoned; locus
poenitentiae
o
repents: in this context means not proceeding
o
Although ignorance of law is no excuse court does take into account
“moral turpitude”
Severance
When one part of a contract is void for illegality a court may use severance to render the
contract legal (New Solutions).

Blue-pencil test: involves striking out particular clauses of the agreement
o

In New Solutions would have meant interest knocked down to 30%
Notional severance: Available where the parties involved are sophisticated and
the legal standard is a bright-line test. It is not applicable where the standard is
reasonable (Shafron)
o
rewrote interest provisions to reduce the interest to the legal rate of 60%
Enforcement
A modern approach, but one that has not yet been applied by the SCC focuses on the policy
of the statue to determine whether it would actually be contrary to public policy to enforce
the contract (Still)

Purpose of policy was to prevent those who were not supposed to be working
from working. Pl. could have worked but didn’t know she needed to get work
permit
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26

Unjust for government to be able to keep money she had paid into
Residual Mistake Category
Residual categories when none the other categories apply. Can be categorized as two types:
mistake about contractual terms and assumptions: mistakes about the underlying reasons
for entering into the contract.
Mistakes about Terms

Parol evidence relevant and considered when resolving ambiguity in the contract
(Staiman)
When there is a misunderstanding about the meaning of a term in the contract the courts
will interpret the contract using the objective meaning a reasonable person would have
construed (Hobbs)

Term “land” given objective meaning not one used by defendant’s office

The limit to this approach is if the differing interpretations are equally reasonable.
In this case there may not be a contract (Raffles). This is an exceptional situation
(Staiman)
o
No way to determine the correct meaning of the proper name “pearless”
seems to mean there was no contract

Staiman:
o
picking up steel from the ground- might have been sharp practice to get
auctioneer to make broad statement: “all the steel in the yard”

o
decision to sell in bulk made right before auction
o
new steel wasn’t in the catalogue
o
New steel belonged to someone else, off to the side, different colour
If the non-mistaken party is aware that the other party is mistaken about a term
in the contract but does nothing to correct the mistake the court will generally
grant relief to the mistaken party (Smith)
o

If seller said “good oats” but knew buyer thought he was said “old oats”
If buyer made mistake about the quality of the product and the seller is aware of
this mistake they are under no legal duty to disclose all information if the buyer
has the opportunity to make their own judgment as to the quality of the product
(Smith). (mistake in assumption)
o
If seller was not aware of mistake and the buyer relied on own expertise
and make a mistake as to the quality of the oats then there would have
been a mistake about assumptions and no relief would be granted
Mistakes in Assumptions
General rule is that if the non-mistaken party is not aware of the mistake of assumption of
the quality of the contract subject matter, the contract is performed as written (Ron
Engineering)
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27
In the UK: There is not distinction between law and equity when dealing with a mistake in
assumptions. A contract is void only if the contract could not have been performed without
the assumption being true (Great Peace). In order for the contract to be void:

There must be a common assumption as to a particular state of affairs

The mistake must be in relation to either the existence or a vital component of
the subject matter

The mistaken assumption is not the fault of either party

There is no warranty as to the existence of the mistaken assumption

Performance of the contract is now impossible
o
Contract not void: distance was not so great that service was impossible

By providing for cancellation clause, the parties had already
allocated the risk of a mistake

Waited several hours before cancelling, tried to find someone
closer first
In Canada: it is unclear to what degree Great Peace is applicable. The Ontario Court of
Appeal decision in Miller did not approve of the strictness of the Great Peace test. The court
reasoned that there still remained some remedial flexibility for the courts to grant relief.
Approved that if the parties have allocated the risk of a mistake in the contract
then the contract will govern

Plaintiff signed agreement that they had been paid in full. Later realized that they
had forgotten to bill some products. Defendant successful in relying on
agreement and did not have to pay for unbilled products
Previous Approach:
A mistake in an assumption that is so fundamental that the contract subject matter is
radically different from what was assumed then the contract will be void.

Mistake in the identity of the contracting parties

Mistake in the existence of the subject matter

Unknown to the parties the buyer is already the owner of the contract subject
matter
However, a mistake about the quality of the contract subject matter will not void the
contract (Bell)

Difficult distinction, depends on semantics of the characterization of the subject
matter
o
Defendant still had to pay severance package even though had they not
been mistaken as to the quality of the employee they would not of had to
pay him severance
A court may have the ability to declare a contract voidable in equity if the mistaken party is
not at fault (Solle)

Mistake over whether rent controls applied was not the fault of the defendant.

Relied on plaintiff as agent
Page 27 of 29
28

Could have exempted from rent controls if they had taken certain steps

Rental price was reasonable market value
Tendering
If contract A has been formed containing a mistake in assumption on the part of the bidder
this contract is not voidable. Therefore, even if the other party discovers the mistake before
it accepts the bid (formation of contract B) contract A is still enforceable. Therefore the
bidding party can receive its deposit back (Ron Engineering)

Unclear if party that put out call for tenures can enforce contract B. In Imperial
Glass there was a mistake of an underlying assumption about the price. The
other party was allowed to “snap up” the deal even though they were aware of
the mistake before the formation of contract b (BCCA)
Fixing the Mistake
Rectification

Equitable remedy of changing some of the terms in the written document to
reflect the what both parties intended to contract (Bercovi).

Exception to the parol evidence rule: in claims for rectification the court wil look
at the negotiations and the conduct after the contract (Bercovi)
If one party disputes that one of the terms is incorrect rectification is available if (Sylvan
Lake):

There is the existence of an inconsistent prior oral agreement

The defendant party knew or ought to have known of the mistake (fraud or
equivalent to fraud)

The plaintiff can present the precise wording for that was intended

There is no requirement on the party arguing for rectification to perform due
diligence (Sylvan)
o
Made practical sense based on previous plans that strip of land was
intended to be 110 yards not feet, easy to change feet to yards. Didn’t
matter that plaintiff didn’t read written contract closely
Page 28 of 29
Problems After Contract Formation
Frustration
When, because of events occurring without fault of either party, future performance of the
contract becomes radically different then when had been envisioned by the contract, the
parties may be relieved of future performance (Capital Homes)

Will not be available if the parties provided for the risk of the event (either
explicitly or implicitly) in their contract (Sea Angel).

Courts must determine whether, viewed reasonably and objectively, there was
sufficient provision for the risk in the contract (Sea Angel).
o
Forseeability of the event is only one factor to be considered (Sea Angel)
o
The other factors include: the commercial circumstances (where risk is
generally placed), the factual matrix, objective calculations of the
possibility of future performance, what is just

Not here, but in some case delay may be sufficient to frustrate the
contract

3 days left in Charter time when ship seized (didn’t
obliterate object of contract)

20 day Charter exceeded by 108 days
Frustrated Contracts Act allows an accounting for benefits and expenses conferred before
the frustrating event.
Development of Doctrine
The starting rule was absolute, there is no excuse for non performance of future obligations
under a contract (Paradine)

Tenant bound to pay lease even though invading army occupied it
If, through fault of neither party, an event occurs that makes future performance of the
contract impossible, the parties are relieved from their future obligations if they had not
provided for the risk of the event in their contract (Taylor)

Hall ceased to exist (burnt down through fault of neither party) neither party can
attempt to enforce contract to hold concert in hall

Contract to rent room to watch coronation, therefore when the coronation was
cancelled the contract became impossible to perform and contract deemed
frustrated (Quell)

The doctrine applies to land (Capital Homes)
o
Change in by-laws that made the transfer of conveyances much more
difficult was a frustrating event
See also Exclusion Clauses
Page 29 of 29