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Contracts-Forbes-2017-1

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CONTRACT LAW – FORBES
Table of Contents
FORMATION OF THE CONTRACT
ОПРЕДЕЛЕНА.
ОШИБКА! ЗАКЛАДКА НЕ
FAMILY RELATIONSHIPS
COMMERCIAL RELATIONSHIPS
OFFERS
OFFER MECHANICS
DURATION OF THE OFFER
ACCEPTANCE
TIME AND PLACE
ACCEPTANCE OF UNILATERAL OFFERS
CONSIDERATION
GENERAL
SUFFICIENCY OF CONSIDERATION
PAST CONSIDERATION
PERFORMANCE OF EXISTING DUTY
PROMISSORY ESTOPPEL
3
3
4
4
4
6
7
7
8
8
8
8
9
9
CAPACITY TO CONTRACT
10
CERTAINTY OR ASCERTAINABILITY OF TERMS
10
COMPLETE CONTRACT, UNCERTAIN TERMS
INCOMPLETE CONTRACT, AGREEMENT TO NEGOTIATE
PRE-CONTRACTUAL DOCUMENT.
10
10
11
TERMS OF THE CONTRACT
12
INTERPRETING WRITTEN CONTRACTS
12
PAROLE EVIDENCE RULE
12
IMPLIED TERM OF CONTRACT
13
DUTY TO PERFORM IN GOOD FAITH
13
EXCLUSION CLAUSES
14
IMPORTANT
CASE
TEST
RULE
EXCEPTION
DEFECTS IN CONTRACTUAL RELATIONS
15
MISREPRESENTATION
15
VARIETIES OF MIREPREPRESENTATION
REMEDIES
(I) RESCISSION
(II) DAMAGES
1. COMMON MISTAKE
2. MUTUAL MISTAKE
3. UNILATERAL MISTAKE
4. MISTAKE AS TO DOCUMENTS (NON EST FACTUM)
15
16
16
16
17
17
18
18
ILLEGALITY
19
ENFORCEMENT, BREACH AND REMEDY
21
PRIVITY
21
REMEDY
22
A)
I.
II.
III.
IV.
V.
DAMAGES
INTERESTS PROTECTED
MEASUREMENT
MITIGATION
REMOTENESS
INTANGIBLE INJURIES/PUNITIVE DAMAGES
EQUITABLE REMEDIES
B) SPECIFIC PERFORMANCE
C) INJUNCTION
22
22
22
23
23
23
23
23
23
IMPORTANT
CASE
TEST
RULE
EXCEPTION
INTENTION TO CREATE LEGAL RELATIONSHIPS


Not a contract when the parties, in the inception of the arrangements, never intended that they should be
attended by any legal consequences (test: reasonable person)
Promises by politicians are not meant to have legal consequences (Canadian Taxpayer’s Federation1)
FAMILY RELATIONSHIPS




Presumption that family/close friends don’t intend for their bargains to have legal consequences (Balfour2)
o Rebuttable (Merritt3) – test is reasonable person
o Onus is on the person attempting to rebut the presumption (Balfour)
 Uncertainty v certainty of terms (Merritt)
 Formalities E.G. involvement of a lawyer (Jones) or documentation (Merritt)
 Living in amity v separated (Merritt)
 Severe detrimental reliance of one on the promise of the other (Parker v Clark4, Padavattan)
 Informal syndicate for profit i.e. financial in nature (Simpkins5)
 Demonstration of sincerity (Carlill)
o The weaker the connection the weaker the presumption
Presumption that family arrangements are not meant to have legal consequences is not one of law, but one
of fact (Padavattan6)
When family are involved in what is distinctly a commercial exchange or business interaction the
presumption can be rebutted (Brewster7)
When there are serious economic entitlements (E.G. employment) there is a presumption that there is a
contract (Ermogenous8)
COMMERCIAL RELATIONSHIPS


Presumption that parties dealing in a commercial relationship intend their bargains to have legal
consequences (Carlill9). Test: reasonable person
o Onus is on party disproving the contract (Rose and Frank)
Can put a clause in the agreement saying their bargain is not formal contract but rather a memorandum of
understanding – Rose and Frank Clause (Rose and Frank10)
o Doesn’t apply to everything – some agreements by nature are repugnant to this thought (E.G. seal)
o Very strong clause, courts are very willing to enforce (Vernon Pools11)
Canadian Taxpayer’s – promised to reduce taxes and he didn’t
Balfour – husband promised to pay his wife monthly sum; no intention or consideration (would overcrowd courts and create absurd cases) (D) ATKIN
3 Merritt – written agreement when separated that if she pays mortgage he will transfer property to her when it’s done (P) DENNING
4 Parker – husband and wife and wife’s aunt and uncle (you don’t sell your house and move in with someone if you don’t think you have a contract) (P)
5 Simpkins – grandmother refusing to share winnings of card-contest with boarder (took turns buying stamps) (P)
6 Padavattan – daughter relocated life and mother bought a house; 6 years later; arrangement was enforceable but reasonable time for studies had passed
7 Roufos – B owns motel son in law R owns store; R takes B’s truck to get it repaired but totals it and says no contract (P)
8 Ermogenous – church wouldn’t pay Bishop severance; D said relationship between P and community is spiritual and not intended to be contractual (P)
9 Carlill – ad in newspaper that if you get flu after using device we’ll pay you; said it was “mere puff” (P)
10 Rose – commercial relationship over a number of years but document said it wasn’t legal or formal (D)
11 Vernon Pools – football pool with ticket, P says he won (court suspected he is lying) but D had a Rose clause (D)
1
2
IMPORTANT
CASE
TEST
RULE
EXCEPTION
OFFERS
OFFER MECHANICS





Invitation to treat – an invitation to enter into negotiations
o Quotations that both client and the person who made the quote would have to accept
 A display is an invitation to treat (Boots12)
 A price quote or price list (Boyer v Duke13, Harvey v Facey)
o Exception: a price list is an offer where it includes an order form (T Eaton14)
 May be an offer if it looks to reasonable person to be an offer
Offer – test: reasonable person (interpretation of the communication) (Harvey v Facey15)
o Volatility of market more likely to point to invitation (Johnston Bros16)
o Nature of the product (land or something perishable)
o Offer to the world at large is a valid offer (Carlill)
o Certainty of terms (Johnston Bros)
Offers of unilateral contract – promise for a performance; acceptance through performance (Carlill; Shuey)
Offers of bilateral contract – a promise for a promise (Johnston Bros); acceptance must be communicated
Collateral contract – comes into existence as a result of a main contract (The Satanita17)
o Can be unilateral or bilateral
o Can have a collateral contract that you won't damage the product before you buy it (Boots)
DURATION OF THE OFFER
1. Revocation – before acceptance, general rule: revocation must be communicated to offeree
o Sufficient if offeree gets information that would lead a reasonable person to believe that the offer
was no longer available for acceptance (Dickinson v Dodds18)
 Can be revoked even if there is a provision/promise to hold it open (Dodds; Petterson19)
 Exception: if consideration is given for keeping an offer open until stipulated date
o Revocation of offers of unilateral contract
 Can be revoked up until performance is done and contract exists (Shuey) – bad law
 An implied term that it cannot be revoked once performance has commenced (Errington20)
 This is a collateral contract – promissory estoppel
o Offer to the world at large can be revoked the same manner in which it was published (Shuey21)
 Exception to the general rule that revocation of offer has to be communicated to offeree
2. Rejection – kills the offer (to protect offeror) – would probably survive if stated to withstand rejection
o If rejection is sent but offeree changes mind, communicated acceptance more quickly acceptance
Boots – offer is when customer takes product to cash, not when they put item in their cart; display is invitation to treat (D)
Boyer – business could not be carried on if each recipient of a priced catalogue… could accept an offer
14 Quebec v T Eaton – a catalogue could be an offer depending on nature of order form, whether all terms are present, whether there is a disclaimer (P)
15 Harvey – D selling land, P sells telegram asking for lowest price, D responds with $ never says he is willing to sell (D)
16 Johnston Bros – P bakers sent D telegram advertising rising prices; quote in a volatile market is not offer (P)
17 Satanita – yacht competition, boats have contract with club but collateral with each other; mutual terms for mutual benefit (P)
18 Dodds – P finds out D is selling land to someone else and goes and accepts his offer; too late, revoked (D)
19 Petterson – D offers discount for mortgage if paid in 5 years, P goes to pay D says he sold the mortgage (D) – bad law
20 Errington – father told son and DIL to pay mortgage and he will transfer house. Separate, DIL lives there, father dies (P) Denning
21 Shuey – reward for info leading to arrest of suspect. Was revoked but P didn’t know (D)
12
13
IMPORTANT
CASE
TEST
RULE
EXCEPTION
3. Counter offer – an implied rejection; effective once received by offeror
o Offeror can re-offer OR state offer in a way that would withstand the counter offer (Livingstone22)
4. Time lapse – could be specified or implied
o If offeree doesn’t accept within a reasonable time, it is seen as rejection of the offer after time lapse
(Manchester DC23); more accepted theory is that after lapse, offer is revoked (Barrick)
 Must look at what existed at the time of the offer
 I.e. under Manchester if offeree’s conduct shows they haven’t rejected, doesn’t lapse
 Based on (Barrick v Clark24)
1. Nature of the contract (land; perishable)
2. Circumstances of the offer (possession of land months away)
3. Conduct of the parties (communication indicating urgency)
o Unilateral contract time lapse – if offeree commences the performance, offeror agrees not to
interfere with their capacity to perform the contract as long as they perform it within a reasonable
period of time (Loring v City of Boston25)
Livingstone – P counter-offered D said cannot reduce price then P accepted; court said it was a contract (P)
Manchester – non-traditional theory of time lapse
24 Barrick – telegram back and forth, P goes on trip, wife says 10 days, D sells, set out test for reasonable lapse (D)
25 Loring – reward for arsonist, P finds him 4 years later, circumstances had changed (D)
22
23
IMPORTANT
CASE
TEST
RULE
EXCEPTION
ACCEPTANCE
COMMUNICATION OF ACCEPTANCE
 Generally: acceptance is good when received; silence is not acceptance (Felthouse v Bindley26)
o Exception: course of conduct may amount to acceptance (Cole McIntyre27)
1. Customs known to both parties (Cole)
2. Past conduct between parties (Cole)
3. Wording of offer is supreme over other factors – it says it doesn’t need acceptance (Felthouse)
4. Postal acceptance rule
 Offer does not impose upon offeree to respect or otherwise be bound by contract
o Exception: when offeree’s conduct is acceptance
 Fault on the side of offeror when sender reasonably believes communication went through
(Entores28) – unless Electronic Commerce Act applies
 E.G. offeror’s fax machine out of paper
 Postal acceptance rule – an exception to the general rule of acceptance: a contract formed through post is
complete as soon as the letter accepting the offer is put in the mail (Household Insurance29)
a) Applies to situations where an intermediary is involved (mail, courier, messenger) and
communication is non-instantaneous
b) When parties have agreed this is their means of acceptance
c) When offer was sent by post
d) When parties have used this means of acceptance before
o Limitations
 Fault analysis exception – if acceptance is not communicated due to fault of offeree and they
are aware of it, does not apply
 Can be overridden
 Express terms of contract
 Would result in manifest inconvenience and absurdity
 Parties could not have intended a binding agreement until notice of acceptance was
communicated
 Electronic Commerce Act, 2000 – instantaneous electronic communication
o 22(3) s. 22(3) Electronic information or document is presumed to be received when:
 SENT, if the recipient indicated the precise mode of communication/ they use it regularly; or
 RECEIVED (i.e. when they become aware of info/doc not when they open it or read it), if
the recipient did not indicate precise method of communication
o Presumption is rebuttable. Onus is on offeror to prove that it was not received and not his fault.
o If instantaneous but not electronic: instantaneous communication is good when received (Entores)
Felthouse – uncle misunderstood nephew’s price but nephew was not bound to reject the offer; no contract
Cole – can’t sit on an offer and by your conduct indicate acceptance then later say you don’t accept (P)
28 Entores – if offeree knows acceptance wasn’t communicated he has to try again to be sure, but if fault of offeror then he is bound DENNING
29 Household Insurance – D made an application for shares in P’s company, company sent letter but it was never received (P)
26
27
IMPORTANT
CASE
TEST
RULE
EXCEPTION
TIME AND PLACE


Place of acceptance
o General rule: a contract is made in the location where offeror received notification of acceptance
 Exception: when offeror stipulates a location/manner in which contract is to be accepted, an
acceptance communicated elsewhere/otherwise is not binding (Eliason v Henshaw30)
Manner of acceptance
o Where offeror prescribes a method of acceptance, acceptance made by any other method which does
not disadvantage the offeror will be deemed communicated
 To rebut this, offeror would have to show they were inconvenienced (Manchester DC31)
 Exception: offeror can insist that acceptance is only binding if a specific method of
acceptance is used (Holwell Securities32) – contract out of postal acceptance rule this way
 PAR does not apply to revocation: if acceptance received before revocation was
received by offeree in the post, acceptance is good (Henthorn v Fraser33). Test:
a. Accepted by ordinary usage (reasonable to use that type of communication)
b. Acceptance by post is stipulated in contract
c. Offer is given through mail
d. Posts no less advantageous for offeror (no absurdity; Holwell)
 Postal rule doesn’t apply general rule: acceptance good when received (Felthouse)
o Doesn’t apply if express terms of offer say acceptance must reach offeror
ACCEPTANCE OF UNILATERAL OFFERS

Generally: in a unilateral contract, the offer is accepted when the offeree performs the conditions of the
contract
o Notice of acceptance does not have to precede performance of the offer (Carlill)
o Acceptance requires (R v Clark34)
a) Knowledge of the offer when performing in order for acceptance to be good
b) Acting on the offer (performing) with at least partial intention or motivation for the reward
Eliason – P offered to purchase flour and wanted it delivered at a particular time and place, D did not do this so they did not accept (P)
Manchester DC – what is reasonable depends on circumstances existing and likely to arise during the circumstances; disadvantages neither party
32 Holwell – offeror said acceptance had to occur by notice in writing before lapse date; P mailed but not received until after – no postal rule (D)
33 Henthorn – offeror hand delivers offer for sale of land, P accepts in a letter; D posts a letter for revocationP posts acceptancereceives revocation;
postal acceptance rule applies: acceptance good when sent but revocation only good when received (P)
34 R v Clark – P gave up another individual in order to clear his own name then claimed the reward (D)
30
31
IMPORTANT
CASE
TEST
RULE
EXCEPTION
CONSIDERATION
GENERAL

In order for a promise to be enforceable, promisor must have gotten something in exchange for the promise
or the promisee has to have incurred a detriment (Dalhousie)
o To be turned into a contract, bargain needs mutuality (Tobias35; Reed36)
o Exception:
 Seal (formal consideration) – a bare promise entered into under seal is good (Linton37)
 Mercantile Law Amendment Act (s 16) – if part performance has been performed, this
satisfies the obligation even though there was no consideration given
 E.G. if I owe 100 and you agree to take 50 and 50 is given (but not before)
SUFFICIENCY OF CONSIDERATION

1.
2.
3.
4.
5.
6.
7.
8.
Consideration has to be…
Real; not illusory (move from promisee to promisor) (Thomas38)
A condition is not consideration (consideration needs to happen before the contract) (Thomas)
A promise for a promise provided it is certain enough to be enforceable (Dalhousie39)
o Therefore it’s not the promise that’s consideration but the ability to enforce it
A moral obligation is not good consideration (Eastwood40)
A promise not to do something you have no legal right to do (tort/crime) is not good (Bluett41)
An agreement to do what you’re already bound in contract to do is not good (Stilk42)
o Amending agreement only good if both parties got something new
o Unless it is agreed to a third party – good consideration (New Zealand Shipping43)
Promise not to do what you have a legal right to do is good consideration (Hamer44)
o Not the usual rule of mutuality but foregoing a right (detriment)
Does not have to be adequate/proportionate/fair (a peppercorn)
PAST CONSIDERATION

Past consideration is not good: consideration must be contemporaneous between the parties (Roscorla45)
o Exception to consideration having to not be past: where promisor requests an action of promisee
under circumstances where compensation is accepted (Lampleigh46)
Tobias – P made D sign a contract that he would only let P sell his machines but P was not obligated to; standing offer (D)
Colonial Ammunition v Reed – same situation as Tobias but the government could but didn’t have to buy (P)
37 Linton – “signed, sealed and delivered” or “seal” in parenthesis means you meant it to be legally binding
38 Thomas – giving widow X in consideration of “wishes” of her husband is not consideration; promise to pay nominal rent to maintain the house is (P)
39 Dalhousie – in consideration of “enforcing teaching efficacy” – what would this look like to a court? (D)
40 Eastwood – Kenyon promised when she got married she would pay Eastwood for her upbringing moral obligation (D)
41 Bluett – father agrees to discharge son from debt in consideration of natural love and affection and so son ceases to bore him (P)
42 Stilk – sailors told they will get more money when a few desert the ship but already under contractual obligation to return it to port – BAD LAW
43 New Zealand Shipping – additional obligation is giving third party the right to sue you in case of breach
44 Hamer – nephew agrees to not drink/smoke/gamble until 21 in exchange for money; actually beneficial to him but foregoing his rights (P)
45 Roscorla – P bought a horse, only after did D make promises about qualities which it didn’t have (D)
46 Lampleigh – D asked P to go get him a pardon from the king, when he did he promised him money (P)
35
36
IMPORTANT
CASE
TEST
RULE
EXCEPTION
PERFORMANCE OF EXISTING DUTY


Generally: performance of an existing duty is not sufficient consideration (Stilk)
Exceptions
o Contractual duties can be considered valid consideration for a future contract if the duties change to
the extent that the original contract is discharged (Hartley47)
o Agreement to do the same act (under existing obligation) for a third party (NZ Shipping; Scottson)
o If amendment confers a practical benefit or averts a disbenefit for the promisor (Roffey Bros48)
 Either P relied to detriment (estoppel) or D must have gained a benefit from it (Wind River49)
 Payment of a lesser sum unless under seal or with consideration doesn’t stand (Foakes50)
 If debtor pays early, pays differently or pays a different place than originally
stipulated, that is consideration (Pinnel’s Case)
 If creditor accepts the part payment and doesn’t say they expect the rest, can't later
sue (Mercantile Law Amendment Act, s 16)
 Seems to go against Stilk (practical benefit i.e. of guaranteed performance/not having to sue
isn't actually flowing from promisee but it seems to be okay)
 Only if amending agreement was not created under duress (NAV Canada51)
PROMISSORY ESTOPPEL


Common law estoppel – if your conduct constitutes acceptance, it is binding (Cole-McIntyre)
o Does not apply to representations of future contracts
Promissory/equitable estoppel – if you (1) make a promise, without consideration, to amend an agreement
and (2) the promise is intended to be acted upon and (3) is in fact acted upon to detriment, you are estopped
from going back and insisting on the terms of the original agreement (High Trees52)
o Equitable defence estops person from insisting on their strict legal rights under the original contract
o Doesn’t create a new contract, can’t use to bring an action (~ sword); to defend (shield) (Coombe53)
 Exception: proprietary estoppel – exclusively promises to convey interest in land (Crabb54)
 If there is active encouragement of assumption of intention to create a future contract
is relied upon to detriment, estopped from not creating contract (Walton55)
o Canadian courts will probably never go this way
o If there isn’t detrimental reliance then can insist on original agreement after giving notice
o Has to be negotiated contract intended with legal consequences, not mere forbearance (Burrows56)
o In order to bring about the defence, had to have acted equitably (D&C Builders57)
Hartley – similar facts to Stilk but so many of the crew left that it was dangerous; original contract discharged
Roffey Bros – P doing renovations for flats for D at a loss, D worries they won't finish and promises more money – court says they are refining Stilk
(but really changing it) to consider practical benefit (P)
49 Wind River – if promissor gets an advantage from the amending agreement it has to be a real one
50 Foakes – she agreed not to charge him interest but then sued him on it; practical benefit of not having to sue is illusory
51 NAV – tells airport that unless they amend the agreement they’ll stop performing; court said amending agreement not enforceable because of duress but
also said they liked the Williams argument (didn’t apply)
52 High Trees – DENNING; P leased flats from D, only 1/3 rented WWII can’t pay rent, D says he will accept half rent during war (P)
53 Coombe – DENNING; can’t use the promise to create a new legal obligation; not nature of equitable defence
54 Crabb – DENNING; city tells landowner they will get a path to land but change their minds; must bring cause of action exception; problems in Cad
55 Walton – department store demolish then change their mind; has to be unfair and peculiar; WOULD PROBABLY NOT BE ADOPTED IN CANADA
56 Burrows – saw other friend’s business was in trouble, didn’t collect, fell out – SCC: not a negotiated amending agreement meant to be binding (D)
57 D&C – D finds out contractor is in financial trouble, says he needs to accept less or get nothing; tries to estop him from OG agreement; DENNING
47
48
IMPORTANT
CASE
TEST
RULE
EXCEPTION
Capacity to contract
 In order to have an enforceable contract, both parties must have capacity to bargain (one may be bound)
a) Minors – anyone under age of 18 (non-rebuttable)
o Contract is voidable including after reaching age of majority (can exercise rescission rights)
 18: ratify (continue to act on it, not void in reasonable time) may be bound (Tonelli58)
o Contract for goods is valid when goods provided under contract are necessities (Nash59)
 Necessities – goods suitable to (1) condition of life of child and (2) current requirement
o Services valid when (1) beneficial to minor for entire duration and (2) benefit is apparent (Tonelli)
o Sale of Goods Act, s 3: not enforceable unless affirmed/ratified upon reaching age/mental capacity
 May have obligation to pay reasonable value if it a necessity (not contract price)
b) Mentally-incapacitated (same rules of necessity for goods and services as minors)
o Lack ability to bargain permanently (because of mental illness) or temporarily (intoxicated)
o If other party to contract reasonable knows of incapacity
o Could be ratified if incapacity was temporary (can be set aside within reasonable time)
Certainty or ascertainability of terms

Courts will make the effort to make the contract certain and enforceable where the terms are (a) certain or
ascertainable or (b) complete or complete-able… pursuant to a mechanism that works
o However, they will not create entire contracts for parties unenforceable (Scammell60)
COMPLETE CONTRACT, UNCERTAIN TERMS


Generally, courts will interpret the meaning from the document – parole evidence rule
o Only when there is genuine ambiguous language will they go “behind” the contract
o Contract is not enforceable where terms are not ascertainable pursuant to mechanism
Factors that will be considered in ascertaining terms (Hillas61)
o Past dealings between the parties
o Industry standards or meanings known to both parties
o Correspondence and circumstances between the parties in coming to an agreement
o Plain meaning of the language
INCOMPLETE CONTRACT, AGREEMENT TO NEGOTIATE



Agreement to agree – if mechanism fails (i.e. parties don’t agree on terms) unenforceable (Walford62)
Agreement to negotiate in good faith – like agreement to agree, if it fails unenforceable (Empress63)
o Obligation to negotiate in good faith only enforceable when obvious one did in bad faith (Edpar64)
Where determination of terms is to be done by 3rd party, enforceable if 3rd party is available (Calvin65)
Tonelli – contract for service when he is 16 saying he will play until 20; rescinds at 18, if he hadn’t it would be ratification; not beneficial to him (D)
Nash – son leaves school and buys expensive clothing; clothing is a necessity but it was not required at the time; has to pay fair value
60 Scammell – court says they need to figure out what parties meant when using certain language contract fails (there was no mechanism in place)
61 Hillas – presumption that words used by the parties have meaning; courts try to preserve them (agreement to agree isn’t an agreement at all)
62 Walford – agreement not to negotiate with anyone else/negotiate in good faith fails if there is no mechanism for finalizing or termination date
63 Empress – landlord doesn’t negotiate; court says there was an implied obligation to negotiate in good faith – BAD LAW (ON courts)
64 Edpar – overturned Empress Towers or rather confined it to its specific facts
65 Calvin – terms were uncertain but ascertainable pursuant to a mechanism (arbitration) which works – must at least try mechanism
58
59
IMPORTANT
CASE
TEST
RULE
EXCEPTION
PRE-CONTRACTUAL DOCUMENT.



Memorandums of understanding or letters of intent (embryonic agreements)
Generally, if a pre-contractual agreement is complete (contains all elements of a contract) it may be held to
be an enforceable contract (British American Timber66)
o Can include a Rose and Frank Clause or clause saying, “subject to formal contract” (Ainsmore67)
o The more complicated or unique the agreement, the less likely it will be binding (Bawitko68)
Can put in memorandum that agreement is binding but will be memorialized in a formal contract
o Or say terms are preliminary in nature and not binding BUT clause X is (confidentiality provisions)
BA Timber – nothing left to negotiate from the informal to formal agreement; memorandum may be contract even if formal agreement never reached
Ainsmore – something in contract saying enforceability is subject to/conditional upon the agreement of a formal contract
68 Bawitko – Kernels Popcorn (ON); purchase of a franchise; no complete contract but a draft document – complicated and unique contract
66
67
IMPORTANT
CASE
TEST
RULE
EXCEPTION
TERMS OF THE CONTRACT
INTERPRETING WRITTEN CONTRACTS

If allegation not in writing, hearing judge listens to evidence, decides on findings of (1) credibility, (2) fact
PAROLE EVIDENCE RULE


A written contract is a memorialization of the bargain; in (1) what constitute the contract & (2) interpreting
it, must look exclusively to the words to figure out terms/clauses of contract (“four corners” doctrine)
o Not a rule of evidence; rule of substantive contract law – applies to written or oral agreements
o Excludes both oral and written evidence outside the contract (policy considerations)
 Pre-contractual agreements, correspondence only relevant if written terms are ambiguous
Exceptions
1. Document isn’t a memorialization of an agreement i.e. not a contract (Pym v Campbell69)
 Would not work if parties have signed the document
2. Document is void (mistake) or voidable (duress, misrepresentation)
 Parole evidence rule wouldn’t apply here – not interpreting contract, saying it doesn’t exist
3. Words are ambiguous –permit evidence that clarifies terms of contract using Hillas (Techomin70)
 Patent ambiguity – no distinct meaning in language (Hillas: (a) find meaning or (b) fails)
 Latent ambiguity – language is clear but party alleging there’s more to know (Techomin)
 Can lead extrinsic evidence ONLY to identify subject matter of contract
 Even with clear language should use factual matrix – but can’t overwhelm words (Sattva71)
 This only applies to negotiated contracts, not standard form ones (Ledcor72)
4. There is a collateral contract – must not be inconsistent with written terms of contract (Morgan73)
 Exceptions
 Collateral contract cannot be used if terms conflict with contract (Hawrish74)
 An “entire agreement” clause sets the presumption that the entire agreement is within
the contract; rebuttable if clear collateral contract to satisfaction of court (Gallen75)
Pym –PER but oral evidence of condition precedent to contract (engineer’s approval); court: not a contract – expressly stated that it wasn’t a contract
Techomin – can lead evidence of ambiguity (and use Hillas factors) as exception to PER BUT plain meaning may be unambiguousused
71 Sattva - SCC changed PER area after confirming arbitrator’s use of factual matrix to interpret without ambiguity (interpretation is mix facts and law)
72 Ledcor – no factual matrix standard form contract; interpretation of factual matrix is finding of fact (reasonableness) not a finding of law (correctness)
73 Morgan – rabbits on property; promised he would get rid of them as condition to renew lease; collateral contract is good, not inconsistent with contract
74 Hawrish – inconsistency between collateral and main contract; guarantor promised different thing by bank manager; no collateral contract – PER
75 Gallen – after Hawrish, becomes smarter to put an entire agreement clause BUT standard form contracts (no negotiation) don’t stop collateral contract
69
70
IMPORTANT
CASE
TEST
RULE
EXCEPTION
IMPLIED TERM OF CONTRACT

In the PER, courts are saying they find the terms within the document of the parties
o Saying we do not create contracts but only interpret the words – what about implied terms?
 Very rare – say they're interpreting parties’ intentions, not adding to existing contract
A. Terms implied in fact – a term that should be added to the contract to reflect the obvious intention of parties
o In order to imply a term in a contract, the following conditions have to be met – difficult (Codelfa76)
1. Term implied must be reasonable and equitable
2. Term must be necessary to give business efficacy to the contract  the contract would not function
without the implied term (Gabriel v Hamilton Tiger-Cats77)
3. The term must be so obvious as to go without saying (The Moorcock78)
4. The term must be capable of clear expression
5. The term cannot conflict with the written words of the contract (E.G. not a fixed price/term contract)
B. Terms implied in law – if a contract is of a certain type and an issue was not addressed, then by the nature
of the contract certain terms have to be included (regardless of intentions), unless explicitly excluded
o Court may imply terms necessary to give business efficacy to the contract, even where the parties
clearly did not intend such terms (Liverpool City Council v Irwin79)
 E.G. unless explicitly excluded, all employment contracts have the implied term that if
you're dismissed without cause you get reasonable notice of pay in lieu of notice
C. Terms implied by statute – as a matter of policy/legislation, terms are implied in a contract of this type
o Sale of Goods Act – for every contract of sale of goods (NOT services) statutorily-implied warranty
1. Vendor warrants title (that they have the right to sell the good)
2. Vendor warrants that the goods are of merchantable quality (i.e. work)
3. If purchaser makes purpose of good known, vendor warrants goods are fit for that purpose
o Consumer Protection Act – a transaction bw non-commercial consumer & business for sale of goods
 Anything that attempts to negative the implied warranties (above) in the contract is void
DUTY TO PERFORM IN GOOD FAITH




General organizational law of contract (common law duty) to perform contract in good faith (Bhasin80)
1. Not an implied term of contract (cannot contract out of this; can be relaxed with explicit language)
2. Doesn’t require positive disclosure (but cannot lie or act maliciously or capriciously or arbitrarily)
3. Doesn’t require person to act against their own interest (even if it means acting against another)
Not about negotiating (Walford) but about the performance of the contract – broad; was read down a bit
Does not apply to a party’s legitimate interests – only to legitimate contractual interests (Wastech81)
o Informed by the context of the contractual terms (i.e. higher duty if one party has vulnerability)
Exercising discretion (especially against employee) can't be arbitrary – must have good reason (Styles82)
Codelfa – construction company building a subway, injunction set them back but court said there was no implied term to extend (#2, 3, 5 not met)
Tiger Cats – when he signed contract there was 14 games, changed to 16 – not implied that he is getting paid per game but for season
78 Moorcock – tide goes out, ship sinks and snaps hull; PROBABLY implied warranty that won't be unsafe if tide goes out (CONJENCTURE)
79 Liverpool – dreadful condition of apartments, D refuses to pay rent, court: city has implied duty to keep the property in reasonable repair (not perfect)
80 Bhasin – agent of a company; explicit term that company had right to terminate relationship BUT acted in bad faith
81 Wastech – informed by contractual relationship and interests that arise out of it; not a license to invent obligations NOT what you think you should get
82 Styles – Aimco could, at its discretion, choose not to give him lucrative package; ABCA: not good faith. Special circumstances here but in general
application in commercial relations equal onus on parties, more likely outcome will be Wastech (unless can be shown someone lied/intentionally misled)
76
77
IMPORTANT
CASE
TEST
RULE
EXCEPTION
EXCLUSION CLAUSES

Any clause that restricts a remedy for the breach of contract
a) Could completely exclude liability (McCutcheon)
b) Could limit liability (limitation of liability clause) or restrict the remedy in case of breach (Parker83)
c) Could exclude right to pursue a certain type of remedy (E.G. injunction, implied S of Gs warranties)
d) Could set a limited period of time to pursue a remedy after breach/completion of performance
 Courts have special rules for when an exclusion clause is part of contract (special rules of interpretation)
o E.G. Consumer Protection Act doesn’t allow S of G warranties exclusion bw business and consumer
o Reasonable and fair if equal bargaining power, negotiating and assigning risks (who gets insurance)
1. Is exclusion clause part of the contract?
o If you sign the contract, you cannot claim ignorance of the exclusion clause (L’Estrange v Graucob)
o Not signed, need proof that there was assent to agreement  irrelevant whether it was read (Parker)
 If PER applies to agreement (i.e. it is a memorialization) and there is an exclusion clause, it
will apply whether the party read it or not (in the absence of fraud)
o If there has been a written contract before but not this time  no clause (McCutcheon84)
 Unless there was actual knowledge of the exclusion clause in past dealings
 You are bound if (i) reasonably knew there were terms, even if not (ii) other party took
reasonable precautions to bring terms to public’s attention (Union85)
2. If so, how do we deal with the exclusion clause? Special rules and contract interpretation
o Exclusion clause has to be brought to attention of the person prior to formation of contract – must
have contemporaneity (past dealings may constitute knowledge) (Thornton86, Olley87, Dillon88)
o Denning’s fundamental breach analysis (Karsales89) was overturned by H of Ls
o In Canada (Tercon) we changed the law but used Denning’s factors from George Mitchell
 Construe the exclusion clause strongly against the party relying on it to determine whether it
should apply to the facts that have occurred (in absence of explicit language)
 Is it “unconscionable” (unfair/unreasonable) for the person relying on the clause to do so?
 Was there an inequality of bargaining power?
 Was it the nature of risk/reward?
 Was there an intentional/contemptuous breach?
 Was it a standard form contract?
 Minority judgment (not a dissent) by Binnie: analysis is a traditional unconscionability
analysis; lower courts have since actually been applying this instead (therefore exclusion
clauses will generally be enforced by the courts)
Parker – deposited a bag in a cloakroom, on ticket and on a sign said no liability; held for D, said he gave reasonable notice of the condition
McCutcheon – car on ferry many times, this time didn’t sign a contract, didn’t know about exclusion clause; court said no exclusion clause
85 Union v Barnes – bought a ticket on ship, pitch dark, walked down and fell into hole; D (Denning hated this)
86 Thornton – sign at the back of the parking lot to be seen after buying the ticket TERMS WERE NOT ON THE TICKET – DENNING
87 Olley – pay for motel, sign on the door of their room saying we’re not liable for items, coat goes missing – DENNING
88 Dillon – buys her cruise ticket, then a week later gets a document with an exclusion clause (no contemporaneity)
89 Karsales – Denning: can only enforce an exclusion clause if performing contract in fundamental respects; H of Ls (Photo Productions) overturned this
and said this was a matter of construction and we should construe the exclusion clause in the context of the contract as a whole to see whether parties
meant for the clause to apply in their specific situation (Denning in George Mitchell said this is a pretense for only enforcing when fair and reasonable)
Note: Warsaw convention and Haig protocol – statute (all contracts for carriage of goods) $300/10k
83
84
IMPORTANT
CASE
TEST
RULE
EXCEPTION
DEFECTS IN CONTRACTUAL RELATIONS
MISREPRESENTATION


1.
2.
3.
4.
Representations made in the course of the formation of the contract may be part of the contract
o Sale of X and seller represents that X is in Y condition and that is put into the contract as a term
o But when representations are material to, induce formation of contract but are not part of contract
Misrepresentations make contract voidable (not void); good until set aside (property can pass under it)
A representation is a statement; as a general rule: a positive statement (i.e. not failure to speak)
 Exception: a fiduciary relationship or a contract of utmost good faith (insurance)
Misrepresentation must be material test: would misrepresentation have induced a reasonable person to
enter into contract? (Doesn’t need to be only factor); yes  presumption misrepresentation induced person
o Rebutted if D shows that P (a) knew the falsehood OR (b) clearly didn’t rely on it (Redgrave90)
Representation must have been false when acted upon
Representation must be of fact, not opinion (Bisset); statement about law by a non-lawyer is an opinion
VARIETIES OF MIREPREPRESENTATION
a) Fraudulent misrepresentation – a tort
o Damages: tort damages, rescission, collateral contract
o If (1) knowingly false statement OR (2) statement made recklessly without care to whether it is true
or false AND not with a genuine belief that it is true (Redgrave)
a) Negligent misrepresentation – a tort (Denning’s creation)
o Damages: tort damages, rescission, collateral contract
o Someone makes a representation and other relies on it to their detriment (i.e. enters into contract)
o Person is in a special relationship OR has special knowledge and skill and makes a representation to
plaintiff/class of plaintiffs with the expectation that they would reasonably rely on it, which they do,
to their detriment – duty to exercise reasonable care/skill to ensure information is correct (Esso91)
o Collateral contract – contractual damages (damages in respect to representation)
 In consideration of one party agreeing to enter into the contract, other party warrants that the
representation they made was correct/reasonable (Esso; Morgan v Griffith92)
a) Innocent misrepresentation – not a tort
o Damages: rescission, collateral contract (more common)
o If a representation is neither fraudulent nor negligent (i.e. not in a special relationship/skill)
o The only way to get damages is by collateral contract (cannot conflict with actual; Hawrish) –
rescission doesn’t work for you because there is a bar or rescission doesn’t help you
Redgrave – when misrepresentation is fraudulent; damages in contracts is rescission, in torts it is $
Esso – if negligent misrepresentation induces the formation of the contract, have tort remedy if party had special knowledge/skill and wasn’t reasonable
92 Morgan v Griffith – a verbal contract can be proven and is not barred by PER but it cannot conflict with the terms of the written contract
90
91
IMPORTANT
CASE
TEST
RULE
EXCEPTION
REMEDIES
(i) RESCISSION
 Equitable remedy; upon discovery of actionable defect, innocent party can set contract aside
 Subject to the bars to rescission:
i. Inability to make restitution
o If parties cannot be restored to their original positions (O’Flaherty93)
 Rescission possible if one party can grant substantial restitution
o Unless there is fraud – courts will allow rescission but with compensation
ii. Intervening third party rights
o Intervening 3rd party in property (i.e. property was passed) removes right to rescission (O’Flaherty)
iii. Executed contract for a conveyance of land (Redican94)
o Finality in a deal for land (can search title, have inspectors, etc. before closing)
o Exception: if the misrepresentation was fraudulent, may be able to rescind (Redgrave)
iv.
Passage of reasonable period of time after closing a contract for the sale of a good (i.e. delivery)
o If right to rescission is not exercised within reasonable time, in which seller has the opportunity to
investigate – this is a collateral contract when the representation is not in the contract (Leaf95)
 If term was in the contract, S of G Act would apply (passage of reasonable time after
acceptance leaves only remedy in damages, not repudiation)
o Doesn’t require you to know problem, just that you inspected goods and you were good with it
v. Affirmation
o A decision to keep the goods, express or implied through conduct, despite the knowledge of
misrepresentation removes the right to rescission
vi.
Delay in exercising remedy after discovering misrepresentation
(ii) DAMAGES
a) When rescission is not possible or appropriate, damages are possible if misrepresentation can be converted
into term of a collateral contract (means of obtaining damages for innocent misrepresentation)
 Must show real intention to create two contracts (Heilbut96)
o At the time of the contract, did parties intent that X is Y? Not to be automatically assumed (Heilbut)
 Collateral contract must not conflict with/contradict the main contract (Hawrish)
o If contract has entire agreement clause a presumption that no collateral contract (All-State)
 If standard form contract and/or clear proof of material representation, still prove collateral
 Easier to prove if representation was made to a third party
o A collateral contract can exist when A represents to C that they should get B to use a specific
product that A sells – in consideration of C getting B to use A’s product, A represents that the
product will be effective (Shanklin97) – no contradiction
O’Flaherty – no rescission unless parties can be restored to their original positions OR party can receive substantial restitution
Redican – inability to make restitution bars rescission unless misrepresentation was fraudulent
95 Leaf – if contract is for the sale of goods, cannot rescind after reasonable period of time has passed from ability to inspect
96 Heilbut – to get damages under collateral contract, P must show parties had a real intention to create two contracts (clear and separate)
97 Shanklin – collateral contract when A represents to B and gets B to get C to use A’s product; in consideration of B getting C to use A’s product, A
represents that the product will be effective (easier because it CAN’T contradict with terms of main contract because C isn’t part of it)
93
94
IMPORTANT
CASE
TEST
RULE
EXCEPTION
MISTAKE


If someone enters into a contract under an actionable mistake, view it as never having contractual intention
o Contract is void (title cannot be passed – people pursue this when third party has the property)
Mistake has to be fundamental – the fundamental nature being that there was no contract
1. COMMON MISTAKE





Both parties share the same mistake (Courturier98)
Very narrow test – rationale (Atkin in Bell99) we want to ensure certainty in selling property to third party
Actionable common mistake needs fundamental mistake to substance of contract, not quality (Sherwood100)
o Mistake as to the existence of the subject matter of the contract goes to the substance (Cooper101)
Equitable common mistake – parties are fundamentally mistaken on the basis that if they didn’t have the
shared mistake they wouldn’t have made the contract – remedy is a voidable contract (Solle102)
o Was affirmed by ONCA in obiter, but no existing case using it (Miller103) – voidable
Test for common law common mistake (Great Peace Shipping104)
1. A mistake that goes to the existence of a vital attribute of a subject matter of the contract;
2. The mistake has to have rendered performance impossible (very limiting);
3. Must not be fault of party pleading it (can't have caused it, even if you believe it) (McCrae105); AND
4. As a matter of construction of the contract, neither party accepted the risk of the mistake
2. MUTUAL MISTAKE

Two parties have a different view of fundamental facts/terms, etc., are not aware of each other’s differing
views, each view is reasonable there was never consensus for contract, it is void (Raffles106)
o Unless the circumstances are such that one party is denied from precluding that he was agreeing to
different facts because his view of the facts were unreasonable (Smith v Hughes107)
Courturier – corn rotten and thrown off ship when they contracted; if it was rotten but on ship (i.e. it existed) mistake would be quality
Bell – very limiting test by Atkin
100 Sherwood – American, developed differently, Rose, cow was sold with mistake that she was barren; court allowed D to get her back, exactly what
Atkin was trying to avoid in Bell: people running around and taking their property back from third party
101 Cooper – bought a boathouse he thought was on his neighbour’s land, turned out to be on his own; mistake to substance
102 Solle – DENNING created another type of common mistake, overturned in Great Peace Shipping; subject to bars it’s not bad
103 Miller – ONCA saying they don’t mind Denning’s equitable common mistake
104 Great Peace Shipping – said Denning was wrong in Solle, redefined Atkin’s test; still very limiting
105 McCrae – commission told boat to go over to point but there was no sunken asset; court said it was their fault, even if they believed it was be there
106 Raffles – two ships with name Bombay; one thought it was his other thought it was the other, two different assumptions to the subject matter
107 Smith v Hughes – farmer sold new oats other thought they would be old; but there was a sample there when he bought them
98
99
IMPORTANT
CASE
TEST
RULE
EXCEPTION
3. UNILATERAL MISTAKE




One party knows of other’s mistaken view (can be fraudulent misrep but if property passed can't rescind)
o Other party either caused the mistake OR they know the contract is so good that they had to have
realized that other party was mistaken OR they actually knew of the mistake (Ron Engineering108)
Cannot “snap up” a mistaken offer (Hartog109) – not an objective standard but you “had to have known”
o Terms such that you “had to have known” there was a mistake, this is subjective (Imperial Glass110)
Fraudulent misrepresentation in correspondence leading to unilateral mistake (Cundy111)
o Mistake about who you are dealing with in correspondence if fundamental to contract
Face-to-face correspondence leading to unilateral mistake – very difficult to prove
o Presumption that you must have intended to contract with person standing before you (Lewis112)
 Only if the mistake was truly fundamental to the creation of the contract (Ingram113)
 Higher chance if you did due diligence to ensure person was who they say they were but still
induced identity of the person must have been fundamental to creation of contract
4. MISTAKE AS TO DOCUMENTS (NON EST FACTUM)



Someone who signs a document may be able to claim that they should not be bound (very narrow)
o Generally PER: by signing representing they understand and agree regardless of whether you read it
Essentially person who signed had no idea what they were signing
o If you did due diligence and were not careless (asked for it to be read aloud) (Thoroughgood114)
o Only if mistake was to the class of documents you were signing, not to the content (Gallie v Lee115)
 Denning would prefer to ask whether mistake was fundamental and make it voidable
o Later court agreed with Denning and CHANGED –look to whether document is radically or
fundamentally different from what was intended, not whether it was of the same class (Saunders116)
 Person signing it can't have been reckless – remedy is still void contract
 Carelessness can be immaterial if party didn’t owe a DoC to third party (Harris)
As between the innocent but negligent person and the innocent third party, the negligent person should bear
the loss (Marvco117) – SCC followed Gallie but did not decide on class v radically and fundamentally
o Carelessness will stop you from pleading non est factum
Ron Engineering –RFP tender, realized mistake, notified crown, crown said too bad and accepted – can't force them to perform but can keep deposit
Hartog – were negotiating for $X/lb but suddenly changed to $X/kg – offer was so good that offeree should have known there was a change
110 Imperial Glass – not allowed out of their contractual obligation when they forgot to include a cost in their RFP bid
111 Cundy – Lindsay wouldn’t have sold items to X if X had not misrepresented to be Y whom Lindsay knew; Cundy sold them but had to pay Lindsay
112 Lewis – would have accepted cheque from anyone but not transferred title until cashed it, induced to do so earlier; mistake not fundamental
113 Ingram – would not have accepted cheque from anyone, wanted cash but was induced; check phone book to confirm his address; unilateral mistake
114 Thoroughgood’s Case – Sir Edward Cook; farmer couldn’t read, thought he was singing a release of back rent but it was release of the land
115 Gallie – signed gift for nephew but it was release of her land to Lee; either is benefit of nephewsame class of document, no material difference
116 Saunders – Gallie dies, executor says estate should get money of house when bank sold it foreclosure; she meant it to benefit nephew, it did
117 Marvco – daughter’s fiancé lies and says there was a typo in mortgage to get more money
108
109
IMPORTANT
CASE
TEST
RULE
EXCEPTION
ILLEGALITY

A contract that is illegal is not an enforceable contract (voidable) – i.e. property passes
o Lose right to recover property unless not blameworthy and the illegality arises to protect you  able
to get property back – E.G. law for protection of tenants (Singh118)
A. Common law illegality (based on public policy; 5 recognized heads but not closed)
o E.G. contracts which are in restraint of trade  provisions restraining trade may be unenforceable
1. Contracts to commit a crime or tort (causes benefit out of commission of a crime/tort)
 Insurance policy cannot benefit (Oldfield119)
2. Contracts to defraud revenue (disguise taxable revenue)
 If contract is structured in a way to accomplish tax fraud, it is unenforceable (Rayson120)
3. Contracts to promote corruption in public office
 If you pay money for this purpose, can’t get it back if there’s a breach (Parkinson121)
4. Contract for an immoral purpose (immorality changes as society changes (Andrews122)
 Heads of public policy aren’t closed (heads change with public perception, but grounds too)
 Public policy an “unruly” course (Richardson) but can be used for justice (Enderby)
 Test: public policy, which court can apply as a test of validity of contract, is in relation to
defined and governing principle which community as a whole has already adopted formally
or tacitly by its general course of life – societal conception of right, not judges’ (Wilkinson)
 While public policy is supposed to be a reflection of society, the determination is in
the eyes of the judge (Baby M123); E.G. intersection of law and science
5. Some clauses which are a restraint of trade are contrary to public policy (not the whole contract)
 Non-competes: clause in contract saying if you ever quit/leave/are fired you join/make a
business OR seller buys your business, you can’t compete (restrain in time and geography)
 Not automatically enforceable but some may be fine (Shafron)
a) First, construe provision strictly against the party that is relying on them (i.e. is what
is happening more than what the non-compete was trying to catch?)
b) Then ask if clause is reasonable as between the parties (does the person trying to
enforce it have a valid business interest to protect?
o Non-competes are easier to enforce in sales contracts (you paid for a
business, part of what you’re paying for is to ensure seller doesn’t compete)
c) Not more broad than necessary to protect valid business interest (time/geography)
o Courts don’t like them so they do not read them down, they strike them out
o Prove that person could hurt you at any time within X years and Y geography
d) Not contrary to public interests (Ferguson124)
 Can have a non-solicitation agreement and confidential clause
 Tied selling agreements (I loan you money to refurbish bar if you exclusively sell my beer)
 Reasonable between the parties to get something in exchange, but has to be protected
by legitimate business interests (not broader) and can't be contrary to public policy
Singh – Uganda case that goes to Privy Council
Oldfield – he dies in the commission of a crime, but insurance still has to pay his family who had nothing to do with the crime
120 Rayson – landlord tells tenant to declare rent differently so he pays less property tax
121 Parkinson – a member told him to pay a large amount of charity who would use its influence to get him a knighthood
122 Andrews – for a man and woman to live out of wedlock used to be unenforceable; “drapes on the legs of tables for the sake of decency”
123 Baby M – surrogate changes her mind, wants her baby and goes to press; S sue her for specific performance – judge initially says contract isn’t
contrary to public policy but considers best interests of baby and grants specific performance to S; appeal judge says it is contrary to public policy
124 Ferguson – doctor’s non-compete, Halifax too broad, even if not, would have to consider if it’s contrary to public policy
118
119
IMPORTANT
CASE
TEST
RULE
EXCEPTION
A. Statutory illegality (formation or performance)
1. Contracts specifically prohibited by statute – indirectly says you should not (void)  easy
2. Contracts indirectly prohibited by statute – a certain activity that includes the making of the contract
is prohibited (i.e. contract itself not illegal but means parties used to perform contract are illegal)
 With the level of regulations, almost no contract could be enforced if any violation (St John)
a) Contracts statutorily illegal in their formation – illegal if intention/penalty was to prohibit/protect
 Statute suggests entering into contract is an offence (i.e. not void, but an offence) (Yango125)
1. What is the purpose of statute? Was it meant to prohibit contracts of this type?
2. Who is the statute meant to protect?
3. What is the penalty – for making the contract?
Hard – if purpose & penalty then unenforceable, particularly if statute meant to protect party
b) Contracts statutorily illegal in their performance – unenforceable if illegality was intended/agreed
 If illegality is in enforcement then unenforceable if parties knowingly agreed to an illegal
performance (St John126) – illegality in agreement of illegal performance (not performance)
 Denning: enough if 1 knows about illegality & other must have known (Ashmore127)
UNCONSCIONABILITY AND UNDUE INFLUENCE


Historically contracts (as bargains) only unenforceable if a party did not have capacity. Two exceptions:
o Duress – threats of physical violence to party/family member (voidable – subject to bars)
 Threat be physical violence left a huge gap of economic duress (fixed by unconscionability)
o Undue influence – special relationship such that law presumes there was going to be influence in
person’s ability to form an independent judgment to enter into a contract – presumed voidable
 Test: if relationship falls into category (doctor, clergy, parent, spouse) OR it is a nature by
which trust and confidence is placed onto one party, presumed undue influence (voidable)
 To rebut: for P to enforce it, P has to show either that (a) D was able to look after themselves
notwithstanding the undue influence relationship (Rowatt128) OR (b) the bargain was fair
Unconscionability – new doctrine to fill in the gaps of duress and undue influence (voidable, subject to bar)
o Whereas for undue influence there is a presumption that contract is void (other party must rebut),
for unconscionability onus on P to show there was a gross inequality of bargaining power (harder)
o (1) an inequality of bargaining power; (2) an overreach by the person in the stronger relationship;
and (3) an unfair bargain (Marshall129; Mundinger130) – subject to bars of rescission (Pridmore131)
 Once gross inequality of bargaining power is established we assume it is an unfair deal, and
the onus is on the stronger party to show that it is fair (Macauly – young artist)
o Denning: independent legal advice can balance gross inequality of bargaining power (Bundy132)
 Lawyer has to explain documents after they have all the relevant information; explain risk
and consequences of default; advice in absence of other party, give you choice (Etridge)
 Is not independent if it comes from lawyer who is the partner of the lawyer representing the
other party EVEN IF it is good legal advice; must be different law firm (Bartoli)
o Doesn’t cure unconscionability/undue influence if there is has actual knowledge of undue influence
o But it may not be needed if other party has experience/knowledge in situation (Rowatt)
Yango – statute: shall not carry on business of banking unless licensed; purpose was to regulate banking, was not meant to protect D (P)
St John – unlawfully heavy freighter; only illegal if we both know moving truck driver is unlicensed, not if he goes above speed limit
127 Ashmore – P lots of experience with shipping, D brings truck clearly not sturdy enough for item; D knows and P must have known (not perfect proof)
128 Rowatt – wife guaranteed husband’s debt and says undue influence BUT she was a real estate agent with lots of experience dealing with guarantees
129 Marshall – elderly man in nursing home talked into selling his land at an unfair price; meets the three steps – clear disproportionate bargaining power
130 Mundinger – husband leaving, wife on verge of nervous breakdown, taking sedatives and drinking, gets her to sign an unfair separation agreement
131 Pridmore – poorly-educated woman in accidence, adjustor gets her to sign a release to get some money but it was grossly disproportionate to needed
132 Bundy – DENNING; Bundy, elderly farmer; bank taking security from him to support his son’s debt was unconscionable; volunteered security
125
126
IMPORTANT
CASE
TEST
RULE
EXCEPTION
ENFORCEMENT, BREACH AND REMEDY
PRIVITY


Only those who have given consideration to the contract can enforce it
o Even if third party made the contract, only immediate parties to it who gave consideration are privy
 But sometimes the immediate parties don’t have damages (Tweddle133)
 Specific performance may be allowed – no damages but unfair to not perform (Beswick134)
o Most of our cases are how courts get around this general rule
Privity doesn’t just apply to the benefit of the contract (New Zealand Shipping135)
o In order for a third party to rely on the benefit on an exclusion clause in contract between others
a) Contract must have clear intent for the benefit to a third party
b) Contract must make it clear that the parties to the contract are contracting on two capacities
(as principals on their own behalf, and as agents for someone else)
c) Third party has to later ratify contract OR have given authority for it to be made on its behalf
d) Third party has to give consideration to the owner
 Consideration for what you’re already bound in contract to do is not good
consideration UNLESS it’s to a different party (Scottson)
e) SCC: impliedly intended third-party beneficiaries to limitation/exclusion clause if (1) clause
expressly/impliedly extends to other party (intention) AND (2) third party acting in the course of
their employment and providing the very services intended under the contract (London Drugs136)
FRUSTRATION



Mistake did not occur in the formation of the contract, but something that happened after entering into the
contract so fundamentally changes the contractual situation that performance is excused (i.e. breach is ok)
o A term implied at common law that the contract does not have to be performed if performance
becomes impossible (Taylor137; Krell138); Lord Reid in Davis said it is not about an “implied term”
o Can't about intention (i.e. imply a term) if frustration by definition is what was outside the intention
of the parties – must look at the event itself (Davis139) – if unsuccessful then argue implied contract
Contracts do not get frustrated because performance is difficult or even impossible
o Must take terms and surrounding circumstances into account at time of formation of contract
o Is the result of the event that occurred the making of a new and different obligation entirely outside
the intention of the parties when the contract was formed? If so, performance is excused
 Not if parties intended that one party should bear this risk
Frustrated Contracts Act (doesn’t tell you how frustration happens but what the result is)
o Rules only apply in the absence of express rules in the contract (i.e. force majeure clause)
a) If deposits or sums were paid – give money back less the amount spent on expenses of contract
b) If benefits conferred – receiver should pay fair value of the benefit
c) If performance is severable – pay contract price for everything performed
 E.G. if three machines are to be delivered for $X/machine but only one was  pay $X
Tweddle – third party cannot sue if they didn’t give consideration to the contract even if the contract was made for their benefit
Beswick – DENNING; Tweddle situation is good for specific performance; no damages to privity party (dead) but unfair if one just stops performing
135 NZ Shipping – contract must make it clear that they meant for the third party to be protected under provisions
136 London Drugs – PRINCIPLED EXCEPTION TEST to the law of privity
137 Taylor – P rented music hall to D for four days for concert but it burns down before, P still wants to be paid says D can still use property (D)
138 Krell – rented balcony to D to overlook coronation of Edward, Edward got sick coronation was postponed (D)
139 Davis – P can't find enough skilled workmen to complete block of flats for D on time and incurs a penalty; what matters is whether at time of
construction of contract labour was generally scarce and labourer should have been aware of this (if so, not frustration)
133
134
IMPORTANT
CASE
TEST
RULE
EXCEPTION
REMEDY



Goal: put non-breaching party into position they would have enjoyed had there been no breach (Victoria140)
Liquidated damages clause – parties make a genuine attempt to pre-estimate their damages at the time of
the formation of the contract
o If the attempt is genuine, doesn’t matter whether that is actually the amount at breach
Law does not enforce penalties if they're unconscionable/unfair – and no punitive damages
o Exception – Whiten v Pilot Insurance Co [2002] SCC – exceptional; malicious, egregious
a) DAMAGES

i.

ii.




Money – substitutionary remedy (not performance)
INTERESTS PROTECTED
Onus is on P to establish and quantify the value of their damages
o Restitution interest – party in breach has to make good on any deposits/sums already received
o Reliance interest – money spent in anticipation of performance of contract, if without value without
the contract, has to be reimbursed (if not limited by remoteness)
o Expectation interest – lost profits/value of a benefit/expectation of performance  value of
difference between contract price and market price (if not limited by remoteness)
MEASUREMENT
If contract is for the sale of goods and there is a continuous market for the product, may have no damages if
reselling the goods can give you the same amount of money, but may have damages (Thompson141)
o Sale of Goods Act, s 48
If the contract is for services = contract price for services – market price for services
If performance is not commercial/regular but person to one of the parties (i.e. expectation)
o Damages = value of performance – value of property without performance (Ruxley142)
 Important to consider what performance was needed for (E.G. pool for leisure v profession)
 Value of what P lost changes depending on why they had the contract
o In the U.S.: damages = cost of putting non-breaching party in situation of performance (Groves143)
 Forbes does not agree with how this was decided
o If performance is a commercial performance (no personal interest that someone has) then damages
are measured from the economic value of what person has lost – what did you lose out of the failure
of performance? Commercial venture doesn’t have to be a trade – it just means you're buying it but
don’t have a personal interest in it
o If performance is personal (so that it is likely that P will use the money from breach of contract to
complete the performance) then we have to be able to give them that sum of money
Simply being unable to establish the value of damage does not disentitle you from damages
o Have to evaluate the loss – P puts forth the facts they can, court assesses (Howe144)
Victoria – P buys boiler from D and says they want it ASAP; not delivered for 20 weeks; P argued for damages and damages of losing a government
contract; court says D should have known they would lose profit but not contract (P partially)
141 Thompson – damages from lost profits can be recovered even if product can later be sold (damages = contract price – market price)
142 Ruxley – if breach is in a personal contract, loss = money to complete the performance UNLESS that is unreasonable
143 Groves – US case; said it’s not unreasonable because of the personal expectation of P and the likelihood that they would actually use the money to get
to expected performance
144 Howe – even if P can’t exactly calculate their damages, they put forth all evidence they can and court estimates (damages for loss of chance)
140
IMPORTANT
iii.

iv.




v.



CASE
TEST
RULE
EXCEPTION
MITIGATION
Once there is a breach of contract, P is required to take reasonable steps to limit the amount of damages
o If they don’t, damages will be limited to what they should have been had P taken reasonable steps
o This includes an obligation to re-contract with D as a way to limit the damages (Payzu145)
 Exception: Do not have to try to re-contract with D to mitigate damages if there are…
 (1) continuous defaults,
 (2) good reason to believe in the inability to D to perform the next time,
 (3) prior breaches have resulted in a complete lack of trust, OR
 (4) an employment contract and employer has treated the employee reprehensively
o Exception: P doesn’t have to stop their performance in order to mitigate damages (i.e. damages do
not stop when D notified P of breach) if P legitimately has a valid interest to protect (McGregor146)
REMOTENESS
Can't be too remote – must have been foreseen at the bargain
The damages to which a non-breaching party is entitled are those arising naturally from the breach itself or
those that are in the reasonable contemplation of the parties at the time of contracting (Hadley v Baxendale)
The two legs of Hadley v Baxendale147
a) Should D have reasonably foreseen damage at time of formation of contract (natural damages)?; OR
b) Were special circumstances communicated to D at the time of the formation of the contract?
Can depend on what D actually knew including their own special knowledge (Victoria Laundry)
INTANGIBLE INJURIES/PUNITIVE DAMAGES
Damages for mental distress (Fidler148)
o Can have in contracts (already have in torts), amount of money is subject to Hadley
Loss of enjoyment (Jackson) – nature of contract is such loss is expected from breach; subject to Hadley
Punitive damages (outside the theory of why we award damages in contract)
o Need more than a mere breach of contract… need two breaches (Whiten)
 Breach of duty to perform in good faith; AND
 Breach of contract in an egregious manner (“marked departure from standards of decency”)
o Bhasin: performing in good faith is a general organizational principle (lying/intentionally deceiving)
EQUITABLE REMEDIES


Equitable remedies – granted in circumstances when damages are not the appropriate remedy
o E.G. unique subject matter/object (Falke v Gray – specific performance)
(1) party asking for it is engaging in equitable practice and (2) clause in contract is helpful but not definitive
b) SPECIFIC PERFORMANCE

Compelling the performance of positive obligations
o Will not grant for a contract of personal services, contrary to public policy (Warner Bros149)
o Will not grant to compel the performance of a contract to run a business (Argyll150)
o In English law, each piece of land is special; breach of contract for sale of land  Specific P
c) INJUNCTION

Enforcing the negative covenants in contract
o May not grant if effect would be to absolutely compel performance of prohibited positive obligation
Payzu – P must take reasonable steps to mitigate their losses, including (in a commercial context) re-contracting with D upon default, unless…
McGregor – P does not stop working when D tells him of likely breach because if he does he will have to lay off ERs and the best ones will leave
147 Hadley – delay of delivering product resulted in lost profits (factory closed); D says they didn’t know (D)
148 Fidler – damage for loss of enjoyment/mental distress is allowed but is subject to Hadley test (reasonably foreseeable at formation OR communicated)
149 Warner Bros – actress; allow injunction to keep her from acting elsewhere until end of contract but will not force her to perform (akin to slavery)
150 Argyll – mall owner wants D to honour their lease and run their business for 3 years; court: how would we police that?
145
146
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